THE PRODUCTION BUSINESS PROCESS

1. PRODUCTION BUSINESS PROCESS

The production business process is a component appearing under the operating plan of
the overall business plan. The production business process is the process a product or service
takes in order for it to become ready for customers to buy. Production will certainly depend
on the type and nature of proposed business. Generally, a manufacturer will have a more
sophisticated production process compared to a retailer or service provider. This is not to say
that retail and service based businesses are simple, but rather, these types of businesses
usually require fewer "processes".
2. TRANSACTION CYCLE CONTROL IN THE PRODUCTION BUSINESS
PROCESS

Production control, inventory control, cost accounting, and property accounting are
typically functions in the production business process of manufacturing firms. Few if any
production activities exist as separate functions in nonmanufacturing firm, but to some extent
most organizational, hold some inventories and manage some types of productivity activity,
such as selling goods or services. Thus, the principles of production control are relevant to
most organizations.

Production Control

Cost accounting system focus on the management of manufacturing inventories:

materials, work-in process (WIP), and finished goods. Job costing requires a production
order control system. Job costing is a procedure in which cost are distributed to particular job
or production order. In process costing, cost are compiled in process or department account
by period (day, week, or month). At the end of each period, the cost of process is divided into
units produced to determine the average cost per unit. Process costing is used where it is not
possible or desirable to identify successive jobs or production lots. Control inventories and
production control is based on the separation of functions and basic records and
documentation, such as production orders, material request forms, and labor work cards.

File and Reports

Basic production requirement are provided by the bill of materials and master
operations list. The bill of materials lists all required parts and their descriptions in sub-
assembly orders. A master operations list is similar to a bill of materials. Detailed labor
operations, their sequencing, and their related machine requirements are specified in the
master operations list for a product. A factor availability report communicates the availability
of labor and machine resources. Demand requirement for a product depend on whether it is
custom-manufactured per custom order or routinely manufactured for inventory. If the
product is manufactured for inventory, production requirements depend on a sales forecast,
which may be sent to production control for the sales or marketing department. Sales forecast
must be related to the amount of a product held in inventory. This information is provided in
a finished goods status report, which lists the quantities.

Transaction Flow

The production order serves as authorization for the production department to make
the certain product. Material requisitions are issued for each production order to authorize
the inventory department to release materials to the production departments. The cost
accounting function receives copies of production order directly from production control and
also production department when the production order is complete.

Labor operations are recorded on job time cards. These cards are posted to
production orders and forwarded to the cost accounting department. The periodic
reconciliation of time cards to production labor reports is an inportant internal control
function

Production status reports are periodically sent from the production depaetment to
the production control function. A production status report details the work completed on
individual production orders as they move through the production process. This report is used
to monitor the status of open production orders and, to revise department production
schedules as necessary
Cost Accounting

The cost accounting department is responsible for maintaining a file of WIP cost
records. New records are added to this file upon receipt of new production orders, initiated by
production control. As production orders are completed and the goods are transferred to
inventory, several documents must be updated. Production control removes production orders
from its file of open production orders. Production control also requires comparison of
production and analysis from other factors, including budgeted costs at actual costs. Control
of inventory loss and maintenance of optimal inventory levels is also an important to overall
production control.

Inventory Control

Inventory control is accomplished through a series of inventory records and reports that
provide such information about inventory use, inventory balances, and maximum and
minimum levels of stock. A reorder point is the level inventory at which it is desirable to
order or produce additional item to avoid an out stock-of stock condition. Because the
purpose of inventory control is to minimize total inventory costs, the important decision to be
made is the size of each purchase order quantity (EOQ). Formula for calculating the EQQ is:

EQQ = Economic Order Quantity (units)

R = Requirements for the item this period (units)

S = Purchasing cost per order

P = Unit cost
 I = Inventory carrying cost per period, expressed as a percentage of the period
inventory value

Then

√2𝑥𝑅𝑥𝑆
EQQ= 𝑃𝑥𝐼

Once the EOQ has been calculated, then the timing of the order must be decided. An
important part of inventory control is the evaluation of inventory turnover to determine the
age, condition and status of stock. Special controls should be established to write down
obsolete and slow-moving inventory items and to compare the balance to an appropriately
established inventory level. A stock status report showing detail used by period is especially
helpful in maintaining the inventory at a proper level and controlling slow-moving items.
Inventory control includes methods for handling and storage. Storage and handling of items
must provide security against embezzlement, protection, against damage, avoid expiration
and confidence control.

Just- in-Time (JIT) Production

Just-in-time production (JIT) is a term used to describe a production system in

which parts are produced only as they are required in subsequent operations. Inventories
serve as a buffer between different operations. Inventories are eliminated by carefully
analyzing operations to yield a constant production rate that will balance input and output at
various stages of production. JIT production emphasizes quality control. Because inventory is
minimized, defective production has to be corrected immediately if the constant flow of
production is to be sustained

Property Accounting Application

Property accounting applications concern an organization’s fixed assets and

investment. An important element of effective internal control is the accurate and timely
processing of information relating to fixed assets and investments.
a. Fixed Assets
  Maintain adequate records that identify assets with description, cost and physical
location
 Provide for appropriate depreciation and/or amortization calculation for book and tax
purposes
 Provide for reevaluation for insurance and replacement cost purposes
 Provide management with reports for planning and controlling the individual assets
items
Fixed assets are tangible properties such as land, buildings, machinery, equipment and
furniture that are used in normal conduct of a business. These items are relatively permanent
and often represent the largest investment of the company. When each asset is acquired, it
should be tagged and entered in the fixed asset register. For this reason, entries must be made
in the fixed assets register, not only to record additions, but also to record asset sales and
other dispositions. A fixed asset register functions as a subsidiary ledger to the corresponding
general ledger control account.

b. Investment
Investment liked fixed assets, require separate records: typically, an investment
register is used to provide accounting control over investments. As with all other assets,
custody of investments should be separate and distinct from record keeping. The investment
registered should contain all relevant information, such as certificate numbers and the par
value of securities, to facilitate identification and control. All investment transactions should
be duly authorized and documented. A common control practice with respect to the physical
handling of investment securities is to require two people to be present when the firm’s safe
deposit box or other depository is entered

3. QUICK-RESPONSE MANUFACTURING SYSTEMS.

The computer-integrated manufacturing system (CIM) integrates the physical

manufacturing system and the manufacturing resource planning (MRP II). A quick-response
manufacturing systemis a CIM system in which the physical manufacturing system and
MRP II is integrated with more advanced technologies. Advanced integration technologies
includes EDI (electronic data interchange), automatic identification, and distributed
processing.

A. Components Of The Quick-Response Manufacturing System

There are two subsystems that directly support physical manufacturing systems, namely
computer-aided design and drafting (CADD) and computer-aided manufacturing (CAM)
systems.

1. CADD

Use computer software

to perform engineering
functions and is expected to
increase the design engineer
productivity. Increased
productivity makes
organizations must be more
responsive to market demand
for new product offerings and
improved products. CADD
systems also allow automation
of repetitive design tasks so that
productivity is increased and accurate. This CADD system also provides a different type of
support. First, Solid Modeling is a mathematical description of solid object parts in computer
memory. This system can be used to predict the final product, such as weight, stability, or
moment of inaction. Second, finite element analysis is a mathematical method used to
determine mechanical characteristics, such as the stress of a structure under load.

2. CAM

Includes software to define manufacturing processes, tools to improve process

productivity, decision-making systems to help control and control the production process,
several implementation elements for controlling shop-floor processes such as robotic,
programmable logic controllers (PLC) and machine vision systems. Industrial robots are tools
designed to move special materials, parts, tools or tools by using motion variables
programmed for various tasks performed.

Some CAM systems, called flexible manufacturing systems (FMS), are combined
with production processes that can be programmed that can be configured quickly to produce
different types of products. FMS can contribute significantly to all the speeds at which the
system responds, and that can increase the retooling speed that takes a lot of time.

3. The Manufacturing Resource Planning (MRP II) System

The MRP II system comprises the materials requirements planning (MRP)

systems and the related system for sales, billing, and purchasing, but the MRP system is the
heart of the MRP II system. Consists of a raw material needs planning system (MRP) and a
system related to sales, billing, and purchases. The MRP system uses the computing
capability of a computer to process large amounts of data needed for planning and scheduling
the need for raw material usage.

4. Advanced Integration Technologies

Flexibility and speed of response of the manufacturing system depend very much on
the level of integration of the related components. Automatic identification increases
integration because products and materials that are tagged / e-tagged effectively make them
readable by machines and therefore become a physical part of a computer-based organization
information system. Automatic identification of various production activities is important
for finished factory automation andmachines that can read barcodes.EDIin manufacturing, as
in most environment, a typical EDI application links a vendor and a customer electronically.

B. Transaction Processing In Quick-Response Processing System

1. Production planning

Determination of the products to be produced and production scheduling so that the

use of production resources becomes optimal. Determination of products to be produced
requires integration between product demand and production needs and production resources
available in the company.Implementation of production plan. Master production planning
is processed for production status, material list, and master operating files. This process
produces file production orders, material requests, and routing and also updates the
production status file. The production status file contains accounting data and operational
data that are in production order status.

Material data files, containing barcodes for each product produced. The master
operating file contains the same data that relates to each detail of the workforce needs and
operation of the product machine and its sequence through the production process. Routing
(RTG) to help production flow.

2. Production Scheduling

RTG data contains the production status collected in the factory department as a work
process. RTG data can be collected in various ways, RTG can be used as output documents
for production planning applications. RTG is entered by the factory department as a work
process on special production orders. Each RTG contains the production order number and
format to carry out the job specifications that have been completed on an order.

3. Cost accounting

The outputs of the cost accounting program include the following items;

 An updated production status file

 A completed production order file
 A resource usage file
 A summary report.

The updated production status file contains current information on the status of all
open production orders. This file is used in the next cycle of production planning and
scheduling.

4. Reporting

The completed production order file contains all the production order costs that have
been completed. This file is used to update the finished goods inventory file. The output of
this process includes updated finished goods inventory files, finished goods inventory status
reports, a summary of finished production order costs, and a summary report that includes
batch and application control information, as well as concise entry data with finished goods
and credit debit goods in process for standard costs for finished goods.

5. Activity-based costs

Traditional cost accounting techniques are no longer sufficient in the CIM

environment. Three main elements are included in the cost of manufacturing products,
namely direct raw materials, direct labor, and overhead. Overhead is a part of manufacturing
costs in addition to direct raw materials and direct labor.
CIM Changes Cost—Behavior Pattern

The term applied overhead describes the familiar cost accounting techniques where
the overhead charge to a product is calculated using a predetermined overheadapplication
rate. t

Activity-Based Costs (ABC)

Calculates several overhead rates, one for each manufacturing activity, and use these
rates to calculate product costs from the costs of specific activities that occur during
production.

Cost Driver

Elements that affect the total cost of an activity. In particular, several cost drivers
influence the total cost of an activity.

6. MRP II Vs MRP

The MRP II system includes various MRP modules. The material listing module (bill-
of-material) is used to communicate the structure of a product, as in the MRP. The expansion
of material list processing in MRP II can include maintenance of the design / product
description of the CADD system. As with MRP, the inventory control module contains
accurate information and the status of the provisions of the balance held. To remain accurate,
techniques such as obsolescence analysis and calculation cycles should be implemented to
ensure accuracy on a sustainable basis.

7. JIT implementation in the MRP II / CIM environment

In a batch production environment, manufacture of specific product is sporadic.

Batches of similar products are periodically assembled to satisfy present and planned future
needs.Setup costs usually occur when a batch is produced, and these costs are usually the
same regardless of the size of the batch production to be carried out.

A just in time (JIT) manufacturing environment is a continuous—flow environment.

A JIT environment requires economical production of small lots-essentially the operation of
production on a continuous basis to minimize or totally eliminate inventories.

C. Special Internal Control Considerations

 Quick-response manufacturing systems, like other computer systems, increase certain
internal control problems. Transactions can be carried out without approval or human
intervention, which means reducing conventional controls related to the separation of tasks in
the transaction. Therefore, the main consideration is ensuring that controls or their equivalent
is an integral part of the quick-response manufacturing system.
 Bibliography

Bodnar, George H. and Hopwood,William S. 2001. Accounting Information Systems. New

Jersey: Prentice-Hall
ACCOUNTING INFORMATION SYSTEM
THE PRODUCTION BUSINESS PROCESS
EKA 440 B1*

I GUSTI AYU AGUNG TATA INTAN TAMARA (1607531009)

ALIT WAHYUNINGSIH (1607531041)

FACULTY OF ECONOMIC AND BUSINESS

UDAYANA UNIVERSITY
2018