Transcription
Hi, good day!
For this topic, we'll be discussing the production cycle in relation to the operations of the company.
So, what are the learning objectives here? We have four:
1. To describe the major business activities and related information processing operations performed in the production cycle.
2. To identify major threats in the production cycle and evaluate the adequacy of various control procedures for dealing with those threats.
3. To explain how a company's cost accounting system can help it achieve its manufacturing goals.
4. To discuss the key decisions that must be made in the production cycle and identify the information required to make those decisions.
Now, let's dive into the production cycle.
How do we transform our set of raw materials into goods that will be delivered and marketed to the general public for profit generation?
There are several items or processes we need to consider in relation to this topic. We have four:
1. Product design.
2. Product planning and scheduling.
3. Production operations, which is the actual production.
4. Cost accounting.
What is product design? It involves building materials and operations lists. How do we create the specific product that will be sold to the market?
Next, for planning and scheduling demand, how do we integrate the process of transforming our set of materials into our final finished goods? What are the usual processes related to this?
Our source documents include the master production schedule, production order, and materials requisition.
Management personnel oversee production, including administration if applicable, and the utilization of raw materials for creating finished goods.
Next is the actual production itself, which involves the production of pairing shots.
Lastly, we have cost accounting. How do we apply or allocate costs? How do we subdivide the actual or standard costs to each inventory item that we will be selling to the market?
Before we proceed with the actual process related to the production cycle, let's look into the general concepts of the production cycle itself.
How does the production cycle work?
Before the production cycle starts, we first have the processing of customer inquiries or customer orders. From these orders, we will have production related to the requests made by clients. Afterward, we will manufacture and process from raw materials to finished goods.
Along with production, we also need labor management in the warehouse and overall business management. This includes the involvement of management and human resources.
What are their roles in the production cycle? Human resources supply manpower for production, which may include direct labor or overhead costs related to production, including supervision.
Management also wants reports associated with the production cycle to see the levels of production, which can be analyzed month-to-month, bi-weekly, or annually, including costs for decision-making purposes.
The purpose of our expenditure cycle is primarily procurement, which includes acquiring goods, raw materials, supplies, labor, or overhead. Overhead may include outside services needed for our production cycle, apart from what human resources supply.
Lastly, we have the general ledger and reporting system, which includes costing or cost accounting, allocation of selling prices, and the movement of our finished goods inventory and materials. All aspects related to the production cycle that pertain to accounting will be recorded under our general ledger account.
What documents are usually needed in the production system?
Be familiar with these documents needed under the production cycle:
1. Sales forecast. We cannot rely solely on actual sales because there can be excess inventory. To mitigate this, we need a sales forecast for the next year's projected revenue. For example, if you forecast a 25% increase in sales based on historical records, that forecast will indicate the level of production needed in the production cycle to meet market demand for finished goods.
2. Production schedule. This is the production plan and authorization to produce. Upon approval of the sales forecast, you will have a production schedule detailing what goods will be produced in a specific timeframe. For example, if you have a sales mix with multiple products, the production schedule will reflect which products need to be produced during that time.
3. Bill of materials (BOM). It specifies the types and quantities of raw materials and subassemblies used to produce a single finished good. It details the materials needed for one product or one batch of products, usually on a batch basis, or for high-value goods, for a specific item.
4. Route sheet. It details the production path a particular batch will take in the manufacturing process. This is the step-by-step process of converting materials into finished goods, including the sequence of operations from assembly to polishing.
5. Work order. It uses the BOM and route sheets to specify the exact materials and production process for each batch.
6. Move ticket. It records the work done in each work center and authorizes the movement of the batch.
7. Material requisition. It authorizes the inventory warehouse to release raw materials for use in the production cycle.
This presentation represents different approaches related to the manual presentation of the production cycle.
We have production planning and control in the work center. From marketing sales forecasts to checking reports needed for production or sales projections, this includes material requisition for raw materials needed for production, engineering for research and development, and checking inventory status.
The work orders, move tickets, and material requisitions for the work center involve checking the production itself, including labor in relation to the production of finished goods.
Storekeeping entails the materials that have been produced and stored in our warehouses, ready to be delivered or marketed to customers.
Lastly, inventory control involves the level of inventory, whether raw materials or supplies needed for production. This includes reviewing records, checking for material returns if needed, updating inventory records, and ordering via purchase acquisition if inventory is lacking.
What are the common processes in the production cycle?
1. Product design and product planning scheduling.
What are the usual threats in these two areas?
1. Poor product design resulting in excess costs.
What controls can mitigate this threat?
- Analyze the costs arising from product design choices, including thorough research for creating a prototype and the actual production process.
- Analyze warranty and repair costs. The company must have warranties for defects or goods that are not of the best quality, along with repair costs associated with produced finished goods.
2. Over and under production.
What controls can mitigate this?
- Implement a production planning system based on forecasts.
- Review and approve production orders and schedules.
- Restrict access to orders and schedules.
Now, regarding the actual production, what are the usual threats?
The most common threat is inventory theft.
How do we control this?
- Restrict physical access, similar to the expenditure cycle.
- Document inventory movement as much as possible. Implement a perpetual inventory system or a barcode system to track inventory movement from the production warehouse to accounting records.
- Segregate custody from authorization and recording.
Next, we have fixed asset theft.
What are the usual controls here?
- Maintain detailed records of fixed assets, including disposals.
- Implement a tracking system for fixed assets, including procurement and disposal.
Next is poor performance in production.
What controls can mitigate this?
- Check performance reporting, including quality reports and production efficiency.
- Supervise the production process.
Next, we have suboptimal investment in fixed assets.
What controls can mitigate this?
- Consider not just the price when purchasing fixed assets but also the quality, as it can boost production quantity and reduce costs.
Next, we have loss of inventory or fixed assets due to fire.
What are the controls for this?
- Obtain insurance and implement physical safeguards.
- Follow safety protocols implemented by local government and company policies.
- Assess and monitor safeguards in your production warehouse.
Lastly, we have disruption of operations due to man-made or natural causes.
What are the controls here?
- Have a backup and disaster recovery plan.
- Implement preventive, detective, and corrective controls, including recovery plans.
Now, regarding cost accounting, what are the usual threats?
1. Inaccurate cost data.
What controls can mitigate this?
- Automate cost accounting to ensure accurate data and generate reports.
2. Inappropriate allocation of overhead costs.
What controls can mitigate this?
- Use time-driven activity-based costing.
3. Misleading reports.
What controls can mitigate this?
- Implement performance metrics related to the production of financial reports.
What does a cost accounting system mean?
It provides information for planning, controlling, and evaluating the performance of production operations. It offers accurate cost data about products for pricing and product mix decisions.
It collects and processes information used to calculate inventory and cost of goods sold values for financial statements.
This concludes our discussion for Chapter 14.
In our next meeting, we will discuss other items related to the accounting information system.
Thank you so much, everyone, and have a great day!