Chapter 15:

Integrated Production
Processes (IPP)

Accounting Information Systems,

10th international edition
Gelinas ►Dull ► Wheeler
Learning Objectives
pAppreciate the forces that exist in the
contemporary production environment and the
trends that have emerged.
pUnderstand the role of enterprise systems (ES)
in the integration of the total manufacturing
environment.
pUnderstand the key inputs, outputs, data,
processes, and terminology included in modern
integrated production processes (IPP).

2
Learning Objectives (cont’d)
pUnderstand the relationship between
integrated production processes (IPP) and other
key business processes within a manufacturing
organization, including HR management,
purchasing, order entry/sales (OE/S) , and
inventory management.
pUnderstand the role of inventory management
systems and their relationship to integrated
production processes (IPP).

3
Global Manufacturing Environment
pManufacturing is a quick way for developing
countries to increase wealth and citizens’
wages.
pGlobal competition has forced domestic
companies to become more customer-focused
and efficient in order to survive.
pSuch efforts have led to marked improvements
in domestic productivity.
Key Drivers of Complexity & Key
Characteristics of Success
pThree key drivers of complexity in
manufacturing operations:
n Pressure to reduce costs throughout the value chain.
n Pursuit of new, lucrative markets and channels.
n Quickening pace of product innovation.
pKey characteristics of companies that
successfully manage global complexity:
n Improved internal business processes.
n Better use of technology to increase integration.
n Better general capabilities.
Product Innovation
pInnovative, quick to market products are key to
competition in a complex environment.
pCooperation is vital.
pEnterprise systems facilitate product design,
manufacturing and marketing.
pCompanies adopting a value chain approach
have achieved dramatic productivity gains.
Production Process Innovation
pThroughput time:
n (the time it takes from when authorization is made
for goods to be produced to when the goods are
completed) is reduced by switching from push to pull
manufacturing.
pPush manufacturing:
n sales forecast drives the production plan and goods
are produced in large batches.
Production Process Innovation
(cont’d)
pPull manufacturing:
n production is initiated as individual sales orders are
received and includes:
pShort production runs.
pContinuous flow operations.
pCellular manufacturing: machines are organized in clusters
or “cells” that contain all of the needed resources
(machines, tools, labor) to produce a family of products.
pReduced inventories and floor space.
Supply Chain Management (SCM)
pCombination of processes and procedures used
to ensure the delivery of goods and services to
customers at the lowest cost and highest value.
pChallenges of the manufacturer may be more
problematic than those of the merchandisers
because manufacturers must forecast demand,
determine lead times, monitor inventory levels
for numerous raw materials, and plan for the
manufacture of finished goods.
SCM Software
pSCM software provides for:
n Available to promise planning:
pdata on current inventories, sales commitments, and planned
production to determine whether the production of finished
goods will be sufficient to commit to additional sales orders.
n Capable to promise planning:
pdata on current inventories, sales commitments, planned
production and excess production capacity, or other planned
production capacity that could be quickly converted to
production of the desired finished goods necessary to fulfill a
sales order request.
Management Accounting Systems
pCost information is used for strategic
management of products and processes
throughout the value chain.
pActivity-based costing (ABC): costing approach
in which detailed costs to perform activities
throughout the value chain are computed and
can be managed or assigned to cost objects,
including products. Recognizes that cost
drivers, other than production volume or direct
labor, explain many activity costs.
Management Accounting Systems
(cont’d)
pUsing ABC information, product managers can
more effectively manage life-cycle costs (the
sum of the costs to design, produce, market,
deliver, and support a product throughout the
product’s life cycle from initial conception to
final discontinuance) and more precisely
predict product profitability.
Summary of Trends in Cost
Management/Cost Accounting
Level O DFD of the IPP
Key Manufacturing Terminology in
the IPP Steps
1.0 Design Product and Production
Processes
pIPP begins with the design of product and
production processes.
n The design process can be automated using
computer-aided design (CAD) and computer-aided
engineering (CAE):
pCAD/CAE is an application of computer technology that
automates the product design process, including but not
limited to the functions of geometric modeling, materials
stress and strain analysis, drafting, storing product
specifications, and mechanically simulating a product’s
performance.
CAD/CAE Output Data Stores and
Related Tools
pBill of materials (BOM):
n a listing of all the subassemblies, parts, and raw
materials that go into a parent assembly showing the
quantity of each that is required to make an
assembly.
pParts master:
n parts master, or raw material (RM) inventory
master, lists the detailed specifications for each raw
materials item.
pRouting master:
n specifies operations necessary to complete a
subassembly or finished good and the sequence of
these operations.
CAD/CAE Output Data Stores and
Related Tools (cont’d)
pComputer-aided process planning (CAPP):
n automated decision support system that generates
manufacturing operations instructions and routings
based on information about machining requirements
and machine capabilities.
CAD/CAE Output Data Stores and
Related Tools (cont’d)
pWork center master:
n describes each work center available for producing
products.
n Workstation: assigned location where a worker
performs his or her job; it could be a machine or a
workbench.
n A group of similar workstations constitutes a work
center.
2.0 Generate Master Production
Schedule
pMaster Production Schedule (MPS):
n is a statement of specific production goals developed
from forecasts of demand, actual sales orders, or
inventory information.
pGlobal inventory management approach:
n inventory needs and production capabilities are
matched across the entire global enterprise.
pProduction, planning, and control:
n process manages the orderly and timely movement of
goods through the production process.
3.0 Determine Needs for Materials
pAfter the Master Production Schedule is
determined, an important step in completing
production in a timely manner is identifying,
ordering, and receiving materials.
pMaterials Requirements Planning (MRP I):
n process that uses BOMs, raw material and work-in-
process (RM/WIP) inventory status data, open order
data, and the master production schedule to
calculate a time-phased order requirements
schedule.
3.0 Determine Needs for Materials
(cont’d)
pTime-phased order requirements schedule:
n shows the time period when a manufacturing order or
purchase order should be released so that the
subassemblies and raw materials will be available
when needed.
pExploding the BOM:
n extending a BOM to determine the total of each
component required to manufacture a given quantity
of an upper-level assembly or subassembly in the
MPS. Output is a time-phased order requirements
schedule.
Exploding the BOM
BOM for one mousetrap

Materials required for 500 mousetraps

4.0 Develop Detailed Production
Instructions
pInstructions showing exactly when goods will be
processed through each necessary work center
and labor necessary to complete the work.
pCapacity Requirements Planning (CRP):
n process uses information from the master production
and time-phased order requirements schedules to
develop detailed machine-use and labor-use
schedules that consider the feasibility of production
schedules based on available capacity in the work
center status records.
4.0 Develop Detailed Production
Instructions (cont’d)
pManufacturing Orders (MOs):
n convey authority for the manufacture of a specified
product or subassembly in a specified quantity and
describe the material, labor, and machine
requirements for the job.
n The MO is the official trigger to begin manufacturing
operations.
pMove tickets:
n accompany the MO to authorize and record
movement of a job from one work center to
another.
4.0 Develop Detailed Production
Instructions (cont’d)
pRaw materials (RM) requisition:
n accompanies the MO to authorize and identify the
type and quantity of materials to be withdrawn from
the storeroom and tracks the manufacturing order
being produced and the work center needing the raw
materials.
pManufacturing Resource Planning (MRP II):
n integrated DSS (Decision Support System) for
planning, executing, and controlling manufacturing
operations.
Manufacturing Automation
(Production Work Centers)
pFlexible manufacturing systems (FMS):
n automated manufacturing operations systems that
control the production of goods.
pComputer-Aided Manufacturing (CAM):
n application of computer and communications
technology to improve productivity by linking
computer numerical control (CNC) machines,
monitoring production, and providing automatic
feedback to control operations.
Manufacturing Automation
(Production Work Centers)
pAutomated storages and retrieval systems
(AS/RS):
n computer-controlled machines that store and
retrieve parts and tools.
pAutomated guided vehicle systems (AGVS):
n computer-based carts that are capable of delivering
parts and tools among multiple work centers.
pJust-In-Time (JIT):
n pull manufacturing philosophy or business strategy
for production processes that are more responsive to
precisely timed customer delivery requirements.
Manufacturing Automation
(Production Work Centers)
pTotal Quality Control (TQC):
n approach to manufacturing, a subset of JIT, places
responsibility for quality in the hands of the builder
rather than in those of the inspector.
pShop Floor Control (SFC) process:
n monitors and records the status of manufacturing
orders as they proceed through the factory.
The IPP Role in Generating
Managerial Information
Level 0 DFD—Cost Accounting:
Variance Analysis
Variance Analysis
pVariance analysis:
n compares actual input costs and usage to standards
for costs and usage for manufacturing inputs.
n Not perfect, but can be an important and beneficial
control tool.
n When computed in real time, variances help
manufacturing managers monitor production
processes to determine that they are performing as
expected.
Bubble 1.0 - Record Standard
Costs
pStandard cost master data contains quantity
and price standards.
pEach completed move ticket triggers an update
to work-in-process (WIP) for the standard cost
of labor and overhead allowed for the
completed operation.
pIssuance of raw materials updates the WIP for
the standard cost of materials.
Bubbles 2.0 – 3.0: Compute Raw
Material & Direct Labor Variances
pRaw Material Quantity Variance
n RM are issued in standard quantities.
pIf additional materials are issued – unfavorable variance.
pIf unused materials are returned – favorable variance.

n (Quantity used - quantity allowed) x standard cost.

pDirect Labor Variances
n Rate Variance:
p(Actual rate – standard rate) x standard hours.
n Efficiency Variance:
p(Actual hours – standard hours) x standard rate.
Bubbles 4.0 – 5.0: Close Orders &
Compute Overhead Variances
pClose Manufacturing Orders
n Triggered by final move ticket
pCloses the WIP cost record and computes the standard cost
of the goods completed.
pNotifies GL to make appropriate entries.
pCompute Manufacturing Overhead (MOH)
Variances
n Generally done at the end of the accounting period.
n Actual MOH:
p(Standard MOH rate per hour x standard hours charged for
all jobs).
Sample of Decision Making
Relative to Inventory
The Fraud Connection
pInventory is a primary domain for management
fraud.
pInventory manipulation — frequency and
materiality of financial statement
misstatement—is massive.
pMcKesson & Robbins in the 1920s was one of
the first such frauds and led to audit
procedures in effect today.
Examples of Inventory Fraud
pCounting as inventory items that should not be
included because they are obsolete, non-
existent, not as purported to be or not owned.
pDouble counting or increasing counts on items
not tested by the auditors.
pIncluding items for which the corresponding
payable has not been recorded.
pManipulating reconciliations or programming
the computer to produce false inventory
information.
Inventory Process Control Goals
and Controls
pEffectiveness of operations
n Maintain sufficient inventory to prevent stock-outs
n Maintain sufficient inventory to minimize
operational inefficiencies
n Minimize cost of carrying inventory
pPerpetual inventory records (know what inventory levels
exist)
pJIT materials acquisition (no overstocks)
pInternal transfer procedures
Inventory Process Control Goals
and Controls
pEfficient employment of resources
n JIT materials acquisition including vendor managed
inventory (VMI)
n Warehouse bin location (optimizes size and location
of inventory bins)
pResource security
n Periodic physical inventory counts
n Locked storerooms