The following figure depicts the four basic activities in the production cycle

which are:

I. Product design

II. Planning and scheduling

III. Production operations

IV. Cost accounting

Although accountants are involved primarily in the fourth step, cost

accounting, they also must understand the other three processes to be able to
design reports that provide management with the information needed to
manage the production cycle activities

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 I. Product Design
The objective is to create a Product that meets a customer’s
requirements in terms of Quality, Durability, and Functionality while
simultaneously Minimize production cost

Product design Creates two outputs:

- Bill of Materials
A document that Specifies part number, description, and
quantity of each component used in a finished product
- Operations List
A document that Specifies the sequence of steps to follow in
making the product, which equipment to use, and how long
each step should take

Tools such as product life-cycle management (PLM) software can help improve the
efficiency and effectiveness of the product design process

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PLM software consists of three key components:

- Computer aided design (CAD) software to design new products.

- Digital manufacturing software that simulates how those products

will be manufactured.

- Product data management software that stores all data

associated with products.

Product Design threats Product Design control

Poor product design resulting in Accounting analysis of costs arising from

excess costs product design choices
Analysis of warranty and repair costs

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 II. Planning and Scheduling
The objective is to develop a production plan efficient enough to
meet existing orders and anticipated short-term demand while
minimizing inventories of both raw materials and finished goods.

Two common methods of production planning

I- Manufacturing resource planning
- Balance existing production capacity and raw materials needs to
meet forecasted sales demands.
- Push Manufacturing :Goods are produced in expectations of
customer demand.
II- Lean Manufacturing
- Just in time inventory
- Goal is to eliminate inventories of raw materials, and finished goods
- Pull manufacturing: Goods are produced in response to customer
orders.

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Key Documents and Forms:

1- Master Production schedule (MPS)

- Contains information about customer orders, sales forecast, and
inventory levels of finished goods
- Specifies
 How much product to produce
 When to produce
- Used to develop a detailed timetable that specifies daily production,
and raw materials needed.

2- Production order
- Lists the operations to be performed
- Quantity to be produce
- Delivery location

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3- Materials requisition
- Authorizes the removal of the necessary quantity of raw materials
- Contains detailed information about the raw materials used
 Order number
 Date of issue
 Part numbers
 quantities

Planning and Scheduling threats Planning and Scheduling control

Over- or underproduction
Production planning systems
Review and approval of production
schedules and orders
Restriction of access to production
orders and production schedules
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 III. Production Operations
- Is the actual manufacture of products
- Varies greatly across companies, differing according to the type of product
being manufactured and the degree of automation used in the production
process.
- Using various forms of information technology (IT) in the production process,
such as robots and computer-controlled machinery, is referred to as computer-
integrated manufacturing (CIM).

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Production Operations Production Operations
Threats Control
1.1-Physical access control

1.2-Documentation of all inventory movement.

1.3-Segregation of duties-custody of assets from

1-Theft of inventory recording and authorization of removal

1.4-Restriction of access to inventory master data

1.5-Periodic physical counts of inventory and

reconciliation of those counts to recorded quantities

2.1-Physical inventory of all fixed assets

2.2-Restriction of physical access to fixed assets

2-Theft of fixed asset
2.3-Maintaining detailed records of fixed assets,
including disposal

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 3.1-Training
3-Poor performance 3.2-Performance reports

4-Suboptimal investment 4.1-Proper approval of fixed asset acquisitions,

in fixed assets including use of requests for proposals to solicit
multiple competitive bids
5-Loss of inventory or 5.1-Physical safeguards (e.g., fire sprinklers)
fixed assets due to fire or
other disasters 5.2-Insurance
6-Disruption of operations 6.1-Backup and disaster recovery plans

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 IV. Cost accounting
The three principal objectives of the cost accounting system are:
(l) 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 that appear in the company's financial statements.

To successfully accomplish the first objective, the cost accounting system must
be designed to collect real-time data about the performance of production activities.

To accomplish the other two objectives, the cost accounting system must classify
costs by various categories and then assign those costs to specific products and
organizational units. This requires careful coding of cost data during collection

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 Assigning Production Costs
1. Job-Order Costing
- Assigns costs to specific production batches, or jobs
 If the product or service is uniquely identifiable

2. Process Costing
- Assigns costs to each process, or work center, in the production cycle, and
then calculates the average cost for all units produced.
 If the product or service is similar and produced in mass quantities

3. Activity-Based Costing
- Traces costs to the activities that create them
- Uses a greater number of overhead pools
 Batch
 Product
 Organization
- Identifies cost drivers
 Cause-and-effect relationship

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 Data collection:

- Raw materials usage: bar-code, RFID tags, and online terminals

- Direct Labor cost: a paper document called Job-time ticket , online terminals
and coded identification cards

- Machinery and equipment usage: CIM automated production

- Manufacturing overhead costs costs of water, power, and other utilities;

miscellaneous supplies; rent, insurance, and property taxes for the factory
plant; and the salaries of factory supervisors. Most of these costs are
collected by the expenditure cycle information system with the exception of
supervisory salaries, which are processed by the human resources cycle
information system

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 Quality Control Measures

Quality control costs can be divided into four areas:

 Prevention costs – associated with changes to production process
designed to reduce the product defect rate.
 Inspection costs – are associated with testing to ensure that products
meet quality standards
 Internal failure costs – are associated with reworking, or scrapping,
products identified as being defective prior to sale.
 External failure costs – result when defective product are sold to
customers. They include such costs as product liability claims, warranty
and repair expenses, loss of customer satisfaction, and damage to the
company’s reputation.

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 Cost accounting Cost accounting
Threats Control

1.1-Source data automation

1-Inaccurate cost data
1.2-Data processing integrity controls

2-Inappropriate allocation 2.1-Time-driven activity-based costing

of overhead costs
3-Misleading reports 3.1-Innovative performance metrics (e.g.,
throughput)

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