Chapter 10

Production Cycle
Production Cycle
The production cycle is a recurring set of business activities and related data processing
operations associated with the manufacturing of products.
Information flows to the production cycle from other cycles:
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.
Information also flows from the production 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.
Functions of Production Cycle
o Performing production planning
o Managing the inventory level
o Maintaining and controlling production operations
o Recording resources used in production and completion of finished goods in the ledgers
o Preparing inventory analysis and production analysis
Activities in the Production Cycle
1.
Product design
2. Planning and scheduling
3. Production operations
4. Cost accounting
Product Design
The objective of this activity is to design a product that meets customer requirements for
quality, durability, and functionality while simultaneously minimizing production costs.
Two Main Documents Created by Product Design Activity
o
Bill of Materials lists the components that are required to build each product,
including part numbers, descriptions and quantity.
o
Operations List lists the sequence of steps required to produce each product,
including the equipment needed and the amount of time required.
Production Planning and Scheduling
The objective of the planning and scheduling activity is to develop a production plan that is
efficient enough to meet existing orders and anticipated shorter-term demand while minimizing
inventories of both raw materials and finished goods.
Approaches to Production Planning
o Manufacturing Resource Planning (MRP-II) seeks to balance existing production
capacity and raw materials needs to meet forecasted sales demands.
o Lean Manufacturing seeks to minimize or eliminate inventories of raw materials, work in
process, and finished goods.

Key Documents and Forms in Planning and Scheduling

o Master Production Schedule (MPS) specifies how much of each product is to be
produced during the planning period and when that production should occur.
o Production Order authorizes production of a specified quantity of a product. It lists:
Operations to be performed
Quantity to be produced
Location for delivery
o Materials Requisition authorizes removal of materials from the storeroom to the factory.
o Move Ticket documents the transfer of parts and materials throughout the factory.
Production Operations
Production operations vary greatly across companies, depending on the type of product and the
degree of automation.
Principal Objectives of the Cost Accounting System
1. To provide information for planning, controlling, and evaluating the performance of production
operations
2.
To provide accurate cost data about products for use in pricing and product mix decisions
3.
To collect and process the information used to calculate the inventory and cost of goods
sold values
Types of Cost Accounting
o Job Order Costing assigns costs to a specific production batch or job.
o Process Costing assigns costs to each process or work center in the production cycle.
Cost Accounting System Data
o
Raw materials
o
Direct labor
o
Machinery and equipment usage
o
Manufacturing overhead
Control: Objectives, Threats, and Procedures
In the production cycle (or any cycle), well-designed AIS should provide adequate controls to
ensure that the following objectives are met:
o All
transactions
are
properly
o Assets are safeguarded from loss or
authorized.
theft.
o All recorded transactions are valid.
o Business activities are performed
efficiently and effectively.
o All valid and authorized transactions
o The company is in compliance with all
are recorded.
applicable laws and regulations.
o All
transactions
are
recorded
o All disclosures are full and fair.
accurately.
o What are some threats?
o unauthorized transaction
o loss of data
o theft or destruction of inventories and
o inefficiencies and quality control
fixed assets
problems
o recording and posting errors
o What are some control procedures?
o accurate
sales
forecasts
and
o authorization of production
inventory records

o
o
o

restricted
access
to
production
planning program and to blank
production order documents
review and approval of capital asset
expenditures
documentation
of
all
internal
movements of inventory
proper segregation of duties

o
o
o
o
o

source data automation

online data entry edit controls
backup
and
disaster
recovery
procedures
regular performance reports
cost of quality control measurement