Professional Documents
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ECTURE 11
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INTRODUCTION
The production cycle is a recurring set of business activities and related data processing operations associated with the manufacture of products.
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INTRODUCTION
Information flows to the production cycle from other cycles, e.g.:
The revenue cycle provides information on customer orders and sales forecasts for use in planning production and inventory levels. The expenditure cycle provides information about raw materials acquisitions and overhead costs. The human resources/payroll cycle provides information about labor costs and availability.
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INTRODUCTION
Information also flows from the expenditure cycle:
The revenue cycle receives information from the production cycle about finished goods available for sale. The expenditure cycle receives information about raw materials needs. The human resources/payroll cycle receives information about labor needs. The general ledger and reporting system receives information about cost of goods manufactured.
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INTRODUCTION
Decisions that must be made in the production cycle include:
What mix of products should be produced? How should products be priced? How should resources be allocated? How should costs be managed and performance evaluated?
These decisions require cost data well beyond that required for external financial statements.
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INTRODUCTION
Well be looking at how the three basic AIS functions are carried out in the production cycle, i.e.:
How do we capture and process data? How do we store and organize the data for decisions? How do we provide controls to safeguard resources, including data?
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Accountants are primarily involved in the fourth activity (cost accounting) but must understand the other processes well enough to design an AIS that provides needed information and supports these activities.
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Accountants are primarily involved in the fourth activity (cost accounting) but must understand the other processes well enough to design an AIS that provides needed information and supports these activities.
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PRODUCT DESIGN
The objective of product design is to design a product that strikes the optimal balance of:
Meeting customer requirements for quality, durability, and functionality; and Minimizing production costs.
Simulation software can improve the efficiency and effectiveness of product design.
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PRODUCT DESIGN
Key documents and forms in product design:
Bill of Materials: Lists the components that are required to build each product, including part numbers, descriptions,and quantity. Operations List: Lists the sequence of steps required to produce each product, including the equipment needed and the amount of time required.
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PRODUCT DESIGN
Role of the accountant in product design:
Participate in the design, because 6580% of product cost is determined at this stage. Add value by:
Designing an AIS that measures and collects the needed data.
Information about current component usage. Information about machine set-up and materialshandling costs. Data on repair and warranty costs to aid in future modification and design.
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PRODUCT DESIGN
Role of the accountant in product design:
Compare current component usage with projected Participate in the design, because 6580% of usage in alternate designs. product cost is determined at this stage. Compare current set-up and handling costs to projected Add value by: costs in alternate designs.
Provide AIS that measures and collects total Designing an info on how design trade-offs affect the production cost and profitability. needed data. Helping the design team use that data to improve profitability.
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Accountants are primarily involved in the fourth activity (cost accounting) but must understand the other processes well enough to design an AIS that provides needed information and supports these activities.
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Consequently:
MRP-II is more appropriate for products with predictable demand and a long life cycle. Lean manufacturing more appropriate for products with unpredictable demand, short life cycles, and frequent markdowns of excess inventory.
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Accountants are primarily involved in the fourth activity (cost accounting) but must understand the other processes well enough to design an AIS that provides needed information and supports these activities.
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PRODUCTION OPERATIONS
Production operations vary greatly across companies, depending on the type of product and the degree of automation. The use of various forms of IT, such as robots and computer-controlled machinery is called computer-integrated manufacturing (CIM).
Can significantly reduce production costs.
Accountants arent experts on CIM, but they must understand how it affects the AIS.
One effect is a shift from mass production to customorder manufacturing and the need to accumulate costs accordingly.
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PRODUCTION OPERATIONS
In a lean manufacturing environment, a customer order triggers several actions:
System first checks inventory on hand for sufficiency. Calculates labor needs and determines whether overtime or temporary help will be needed. Based on bill of materials, determines what components need to be ordered.
Necessary purchase orders are sent via EDI.
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PRODUCTION OPERATIONS
Sharing information across cycles helps companies be more efficient by timing purchases to meet the actual demand. Although the nature of production processes and the extent of CIM vary, all companies need data on:
Raw materials used Labor hours expended Machine operations performed Other manufacturing overhead costs incurred
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Accountants are primarily involved in the fourth activity (cost accounting) but must understand the other processes well enough to design an AIS that provides needed information and supports these activities.
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COST ACCOUNTING
The objectives of cost accounting are:
To provide information for planning, controlling, and evaluating the performance of production operations; To provide accurate cost data about products for use in pricing and product mix decisions; and To collect and process information used to calculate inventory and COGS values for the financial statements.
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COST ACCOUNTING
The objectives of cost accounting are:
To provide information for planning, controlling, and evaluating the performance of production operations; To provide accurate cost data must collect real-time To accomplish the first objective, the AISabout products data on the performance of production activities so for use in pricing and product mix decisions; management can make timely decisions. and RFID technology can be especially helpful, e.g.: Broadcasting repair needs proactively. To collect and process information used to Helping in calculate the location of and COGS values for the inventory particular items. financial statements.
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COST ACCOUNTING
To accomplish the second and third objectives, the AIS must collect costs by various categories and assign are: The objectives of cost accountingthem to specific products and organizational units. To provide information for planning, Requires careful coding of cost data during collection because costs may be allocated in different ways for different reporting controlling, and evaluating the performance of purposes.
production operations; To provide accurate cost data about products for use in pricing and product mix decisions; and To collect and process information used to calculate inventory and COGS values for the financial statements.
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COST ACCOUNTING
Types of cost accounting systems:
Job order costing
Assigns costs to a specific production batch or job. Used when the product or service consists of discretely identifiable items. Example: Houses.
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COST ACCOUNTING
Types of cost accounting systems:
Job order costing Process costing
Assigns costs to each process or work center in the production cycle. Calculates the average cost for all units produced. Used when similar goods or services are produced in mass quantities and discrete units cant be easily identified. Example: Paint.
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COST ACCOUNTING
Accounting for fixed assets:
The AIS must collect and process information about the property, plant, and equipment used in the production cycle. These assets represent a significant portion of total assets for many companies and need to be monitored as an investment.
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COST ACCOUNTING
The following information should be maintained about each fixed asset:
ID number Serial number Location Cost Acquisition date Vendor info Expected life Expected salvage value Depreciation method Accumulated depreciation Improvements Maintenance performed
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COST ACCOUNTING
The purchase of fixed assets follows the same processes as other purchases in the expenditure cycle (order receive pay). But the amounts involved necessitate some modification to the process:
Competitive bidding
Machinery and equipment purchases almost always involve a formal request for competitive bids.
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COST ACCOUNTING
The purchase of fixed assets follows the same processes as other purchases in the expenditure cycle (order receive pay). But the amounts involved necessitate some modification to the process:
Competitive bidding Number of people involved
More people are likely to be involved in reviewing bids for fixed assets.
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COST ACCOUNTING
The purchase of fixed assets follows the same processes as other purchases in the expenditure cycle (order receive pay). But the amounts involved necessitate some modification to the process:
Competitive bidding Number of people involved Payment
Purchases of fixed assets are often paid for in installments, including interest.
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COST ACCOUNTING
The purchase of fixed assets follows the same processes as other purchases in the expenditure cycle (order receive pay). But the amounts involved necessitate some modification to the process:
Competitive bidding Number of people involved Payment The cost of fixed assets justifies more elaborate controls to safeguard them, including: Controls
Maintenance of detailed records of each item. RFID tags to:
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COST ACCOUNTING
The purchase of fixed assets follows the same processes as other purchases in the expenditure cycle (order receive pay). But the amounts involved necessitate some modification to the process:
Competitive bidding Number of people involved Payment Controls Its critical to formally approve and accurately record the sale or disposal Disposal
of fixed assets.
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COST ACCOUNTING
A typical AIS would look something like the following:
Product design
Engineering specifications result in new records for both the bill of materials and the operations list file. To create these lists, engineering accesses both files to view designs of similar products. They also access the general ledger and inventory files for info about alternate designs.
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COST ACCOUNTING
A typical AIS would look something like the following:
Product design Production planning
The sales department enters sales forecasts and customer special order information. Production planning uses that information and data on current inventory levels to develop a master production schedule. New records are added to the production order file to authorize the production of goods.
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COST ACCOUNTING
A typical AIS would look something like the following:
Product design Production planning Cost accounting
New records are added to the work-in-process file to accumulate cost data.
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COST ACCOUNTING
A typical AIS would look something like the following:
Product design Production planning Cost accounting Production operations
The list of operations to be performed is displayed at workstations. Instructions are also sent to the CIM interface to guide operation of machinery and robots. Materials requisitions are sent to inventory stores to authorize release of raw materials to production.
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COST ACCOUNTING
Such a system can be used for a job-order or process costing system. Both require that data be accumulated about:
Raw materials Direct labor Machinery and equipment usage Manufacturing overhead
COST ACCOUNTING
Raw material usage data:
When production is initiated, the issuance of a materials requisition triggers a debit (increase) to work in process and a credit (decrease) to raw materials inventory. Work in process is credited and raw materials are debited for any amounts returned to inventory. Many raw materials are bar coded so that usage data is collected by scanning. RFID tags improve the efficiency of tracking material usage. Usage may be entered online for materials such as liquids that are not conducive to tagging.
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COST ACCOUNTING
Direct labor costs:
Historically, job time tickets were used to record the time a worker spent on each job task. Currently, workers may:
Enter the data on online terminals. Use coded ID badges, which are run through a badge reader at the beginning and end of each job.
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COST ACCOUNTING
Machinery and equipment usage:
Machinery costs make up an ever-increasing proportion of production costs. Data about machinery and equipment are collected at each production step, often with data about labor costs. Until recently, data was collected by wiring the factory so all equipment was linked to the computer system.
Limits the ability to rearrange the shop floor.
3-D simulations can be used to assess the impact of altering floor layout.
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COST ACCOUNTING
Manufacturing overhead costs:
Includes costs that cant be easily traced to jobs or processes, such as utilities, depreciation, supervisory salaries. Most of these costs are collected in the expenditure cycle. An exception is supervisory salaries, which are collected in the HRM/payroll cycle.
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COST ACCOUNTING
Accountants help control overhead by assessing how product mix changes will affect overhead costs. They should also identify the factors that drive the changes in these costs.
This information can be used to realign processes and layout.
Accurate and complete information about production cycle activities are required to perform these analyses.
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In the following sections, well discuss the threats that may arise in the four major steps of the production cycle, as well as general threats, EDI-related threats, and threats related to purchases of services.
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You can click on any of the threats below to get more information on:
The types of problems posed by GENERAL THREATSeach threat.
The controls that can mitigate the threats.
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Also, allocating overhead based on direct labor input can distort costs.
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By measuring the costs of the basic activities, ABC provides information to management for evaluating the consequences of their decisions.
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The 1: INAPPROPRIATE CRITICISMunused capacity is the difference between the activity capability ($125,000) and the cost of ALLOCATIONactivityOVERHEAD COSTS the OF used ($117,500).
books per year. The total capacity, therefore is 50,000 books. The salary cost per book would be $125,000 / 50,000 books = $2.50 per book. During the most recent year, the presses produced 47,000 books.
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$125,000 - $117,500 = $7,500 unused capacity. EXAMPLE: A publishing company has fivebe calculated Alternately, unused capacity can employees who operate printing of $2.50 times the difference as the cost per book presses. The employeesbetween the books that salaries produced and each have annual could be of the $25,000 for a totalbooks that were actually produced. salary cost of $125,000. $2.50 x (50,000 possible books 47,000 actual Each employee should$7,500 unused capacity. 10,000 books) = be able to print about
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When an organization transitions from a traditional production system to a lean manufacturing system, inventory levels are depleted. Consequently, almost all production costs of the year are expensed that year. Although the effect is temporary, managers will be concerned if their performance evaluations are based on the companys reported financial statements.
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EXAMPLE: Manster Co. produced 1,000 bottles of Zithmowash in a 10-hour period. During this period there was a total of 1 hour of machine downtime and waiting time for materials. One hundred of the bottles were defective.
PRODUCTIVE CAPACITY = 1,000 bottles / 9 productive hours = 111.11 bottles / hour. PRODUCTIVE PROCESSING TIME = 9 productive hours / 10 total hours = .90. YIELD = 900 good units / 1,000 total units = .90 THROUGHPUT = 111.11 x .90 x .90 = 90
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QUALITY CONTROL
Information about quality control
Quality control costs can be divided into four categories:
Prevention costs
Costs incurred to reduce product defect rates.
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QUALITY CONTROL
Information about quality control
Quality control costs can be divided into four categories:
Prevention costs Inspection costs
Costs incurred to ensure products meet quality standards.
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QUALITY CONTROL
Information about quality control
Quality control costs can be divided into four categories:
Prevention costs Inspection costs Internal failure costs
Costs of rework and scrap when products are identified as defective prior to sale.
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QUALITY CONTROL
Information about quality control
Quality control costs can be divided into four categories:
Costs when defective products are sold to Prevention costs customers, e.g., warranty and repair costs, Inspectionliability costs, costs of customer product costs dissatisfaction, and Internal failure costs damage to reputation.
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QUALITY CONTROL
Information about quality control
Quality control costs can be divided into four categories:
Prevention costs have found that the most Some companies important management decision involves Inspection costs switching from the Internal failure costs traditional "management by exception" philosophy to a "continuous External failure costs improvement" viewpoint. Continuous
The improvement of qualitycomparing actual objective focuses on control is to performance to the ideal (i.e., four costs. minimize the sum of theseperfection).
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SUMMARY
Youve learned about the basic business activities and data processing operations that are performed in the production cycle, including:
Product design Production planning and scheduling Production operations Cost accounting
Youve learned how IT can improve the efficiency and effectiveness of these processes.
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SUMMARY
Youve learned about decisions that need to be made in the production cycle and the information required to make these decisions. Youve also learned about the major threats that present themselves in the production cycle and the controls that can mitigate those threats. Finally, youve learned how the companys cost accounting system can help in achieving the entitys objectives.
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