romney_ch12.ppt

C

HAPTER 12

INTRODUCTION

• Questions to be addressed in this chapter

include:

– What are the basic business activities and data

processing operations that are performed in the

production cycle?

– What decisions need to be made in the production

cycle, and what information is needed to make these

decisions?

– How can the company’s cost accounting system help

in achieving the entity’s objectives?

INTRODUCTION

• The production cycle is a recurring set of

business activities and related data

INTRODUCTION

• Information flows

to

the production cycle

from other cycles, e.g.:

– 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.

INTRODUCTION

• Information also flows

from

the expenditure

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.

INTRODUCTION

• Decisions that must be made in the

production cycle include:

– What mix of products should be produced?

– How should products be priced?

– How should resources be allocated?

– How should costs be managed and

performance evaluated?

• These decisions require cost data well

INTRODUCTION

• We’ll be looking at how the three basic AIS

functions are carried out in the production

cycle, i.e.:

– How do we capture and process data?

– How do we store and organize the data for

decisions?

PRODUCTION CYCLE ACTIVITIES

• The four basic activities in the production cycle

are:

– Product design

– Planning and scheduling

– Production operations

– Cost accounting

• Accountants are primarily involved in the fourth

activity (cost accounting) but must understand

the other processes well enough to design an

AIS that provides needed information and

PRODUCTION CYCLE ACTIVITIES

• The four basic activities in the production cycle

are:

–

Product design

– Planning and scheduling

– Production operations

– Cost accounting

• Accountants are primarily involved in the fourth

activity (cost accounting) but must understand

the other processes well enough to design an

AIS that provides needed information and

PRODUCT DESIGN

• The objective of product design is to

design a product that strikes the optimal

balance of:

– Meeting customer requirements for quality,

durability, and functionality; and

– Minimizing production costs.

PRODUCT DESIGN

• Key documents and forms in product

design:

–

Bill of Materials:

Lists the components that

are required to build each product, including

part numbers, descriptions,and quantity.

–

Operations List

: Lists the sequence of steps

required to produce each product, including

PRODUCT DESIGN

• Role of the accountant in product design:

– Participate in the design, because 65−80% of

product cost is determined at this stage.

– Add value by:

• Designing an AIS that measures and collects the

needed data.

•

Information about current component usage.

•

Information about machine set-up and

materials-handling costs.

PRODUCT DESIGN

• Role of the accountant in product design:

– Participate in the design, because 65−80% of

product cost is determined at this stage.

– Add value by:

• Designing an AIS that measures and collects the

needed data.

•

Helping the design team use that data to

improve profitability.

•

Compare current component usage with projected

usage in alternate designs.

•

Compare current set-up and handling costs to

projected costs in alternate designs.

PRODUCTION CYCLE ACTIVITIES

• The four basic activities in the production cycle

are:

– Product design

–

Planning and scheduling

– Production operations

– Cost accounting

• Accountants are primarily involved in the fourth

activity (cost accounting) but must understand

the other processes well enough to design an

AIS that provides needed information and

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

PLANNING AND SCHEDULING

• There are two common approaches to

production planning:

PLANNING AND SCHEDULING

• There are two common approaches to

production planning:

–

Manufacturing Resource Planning (MRP-II)

PLANNING AND SCHEDULING

• MRP-II is an extension of MRP inventory

control systems:

– Seeks to balance existing production capacity

and raw materials needs to meet forecasted

sales demands.

PLANNING AND SCHEDULING

• There are two common approaches to

production planning:

– Manufacturing Resource Planning (MRP-II)

PLANNING AND SCHEDULING

• Lean manufacturing is an extension of the

principles of just-in-time inventory

systems:

– Seeks to minimize or eliminate inventories of

raw materials, work in process, and finished

goods.

– Theoretically, produces only in response to

customer orders, but in reality, there are

short-run production plans.

PLANNING AND SCHEDULING

• Comparison of the two systems:

– Both plan production in advance.

– They differ in the length of the planning horizon.

• MRP-II develops plans for up to 12 months ahead.

• Lean manufacturing uses shorter planning horizons.

– Consequently:

• MRP-II is more appropriate for products with

predictable demand and a long life cycle.

PLANNING AND SCHEDULING

• Key documents and forms:

–

Master production schedule

•

Specifies how much of each product is to be produced during the

period and when.

•

Uses information about customer orders, sales forecasts, and finished

goods inventory levels to determine production levels.

•

Although plans can be modified, production plans must be frozen a few

weeks in advance to provide time to procure needed materials and

labor.

•

Scheduling becomes significantly more complex as the number of

factories increases.

PLANNING AND SCHEDULING

• Key documents and forms:

– Master production schedule

–

Production order

•

Authorizes production of a specified quantity of a

product. It lists:

–

Operations to be performed

–

Quantity to be produced

–

Location for delivery

PLANNING AND SCHEDULING

• Key documents and forms:

– Master production schedule

– Production order

–

Materials requisition

•

Authorizes movement of the needed materials

from the storeroom to the factory floor.

•

This document indicates:

–

Production order number

–

Date of issue

PLANNING AND SCHEDULING

• Key documents and forms:

– Master production schedule

– Production order

– Materials requisition

–

_{Move ticket}

PLANNING AND SCHEDULING

• How can information technology help?

– Improve the efficiency of material-handling

activities by using:

• Bar coding of materials to improve speed and

accuracy,

• RFID tags can eliminate human intervention in the

scanning process,

•

Up to 40 times faster than using bar-code scanners.

•

Not impeded by dirt.

•

Not limited to reading only those items in line of sight.

PLANNING AND SCHEDULING

• Role of the accountant:

– Ensure the AIS collects and reports costs in a

manner consistent with the company’s

PRODUCTION CYCLE ACTIVITIES

• The four basic activities in the production cycle

are:

– Product design

– Planning and scheduling

–

Production operations

– Cost accounting

• Accountants are primarily involved in the fourth

activity (cost accounting) but must understand

the other processes well enough to design an

AIS that provides needed information and

PRODUCTION OPERATIONS

• Production operations vary greatly across

companies, depending on the type of product

and the degree of automation.

• The use of various forms of IT, such as robots

and computer-controlled machinery is called

computer-integrated manufacturing (CIM)

.

– Can significantly reduce production costs.

• Accountants aren’t experts on CIM, but they

must understand how it affects the AIS.

– One effect is a shift from mass production to

custom-order manufacturing and the need to accumulate

PRODUCTION OPERATIONS

• In a lean manufacturing environment, a

customer order triggers several actions:

– System first checks inventory on hand for sufficiency.

– Calculates labor needs and determines whether

overtime or temporary help will be needed.

– Based on bill of materials, determines what

components need to be ordered.

• Necessary purchase orders are sent via EDI.

PRODUCTION OPERATIONS

• Sharing information across cycles helps

companies be more efficient by timing

purchases to meet the actual demand.

• Although the nature of production processes and

the extent of CIM vary, all companies need data

on:

– Raw materials used

– Labor hours expended

– Machine operations performed

PRODUCTION CYCLE ACTIVITIES

• The four basic activities in the production cycle

are:

– Product design

– Planning and scheduling

– Production operations

–

Cost accounting

• Accountants are primarily involved in the fourth

activity (cost accounting) but must understand

the other processes well enough to design an

AIS that provides needed information and

COST ACCOUNTING

• The objectives of cost accounting are:

– To provide information for planning,

controlling, and evaluating the performance of

production operations;

– To provide accurate cost data about products

for use in pricing and product mix decisions;

and

COST ACCOUNTING

• The objectives of cost accounting are:

–

To provide information for planning,

controlling, and evaluating the

performance of production operations;

– To provide accurate cost data about products

for use in pricing and product mix decisions;

and

– To collect and process information used to

calculate inventory and COGS values for the

financial statements.

•

To accomplish the first objective, the AIS must collect real-time

data on the performance of production activities so

management can make timely decisions.

•

RFID technology can be especially helpful, e.g.:

–

Broadcasting repair needs proactively.

COST ACCOUNTING

• The objectives of cost accounting are:

– To provide information for planning,

controlling, and evaluating the performance of

production operations;

–

To provide accurate cost data about

products for use in pricing and product

mix decisions; and

–

To collect and process information used to

calculate inventory and COGS values for

the financial statements.

•

To accomplish the second and third objectives, the AIS must

collect costs by various categories and assign them to specific

products and organizational units.

COST ACCOUNTING

• Types of cost accounting systems:

–

Job order costing

•

Assigns costs to a specific production batch or job.

•

Used when the product or service consists of discretely

identifiable items.

COST ACCOUNTING

• Types of cost accounting systems:

– Job order costing

–

Process costing

•

Assigns costs to each process or work center in the

production cycle.

•

Calculates the average cost for all units produced.

•

Used when similar goods or services are produced in

mass quantities and discrete units can’t be easily

identified.

COST ACCOUNTING

• Accounting for fixed assets:

– The AIS must collect and process information

about the property, plant, and equipment used

in the production cycle.

COST ACCOUNTING

• The following information should be

maintained about each fixed asset:

• ID number

• Serial number

• Location

• Cost

• Acquisition date

• Vendor info

• Expected life

• Expected salvage value

• Depreciation method

• Accumulated depreciation

• Improvements

COST ACCOUNTING

• The purchase of fixed assets follows the same

processes as other purchases in the expenditure

cycle (order



receive



pay).

• But the amounts involved necessitate some

modification to the process:

–

Competitive bidding

COST ACCOUNTING

• The purchase of fixed assets follows the same

processes as other purchases in the expenditure

cycle (order



receive



pay).

• But the amounts involved necessitate some

modification to the process:

– Competitive bidding

–

Number of people involved

COST ACCOUNTING

• The purchase of fixed assets follows the same

processes as other purchases in the expenditure

cycle (order



receive



pay).

• But the amounts involved necessitate some

modification to the process:

– Competitive bidding

– Number of people involved

–

Payment

COST ACCOUNTING

• The purchase of fixed assets follows the same

processes as other purchases in the expenditure

cycle (order



receive



pay).

• But the amounts involved necessitate some

modification to the process:

– Competitive bidding

– Number of people involved

– Payment

–

Controls

•

The cost of fixed assets justifies more elaborate

controls to safeguard them, including:

–

Maintenance of detailed records of each item.

COST ACCOUNTING

• The purchase of fixed assets follows the same

processes as other purchases in the expenditure

cycle (order



receive



pay).

• But the amounts involved necessitate some

modification to the process:

– Competitive bidding

– Number of people involved

– Payment

– Controls

–

Disposal

COST ACCOUNTING

• A typical AIS would look something like

the following:

–

Product design

•

Engineering specifications result in new records

for both the bill of materials and the operations

list file.

•

To create these lists, engineering accesses both

files to view designs of similar products.

•

They also access the general ledger and

COST ACCOUNTING

• A typical AIS would look something like

the following:

– Product design

–

Production planning

•

The sales department enters sales forecasts and

customer special order information.

•

Production planning uses that information and

data on current inventory levels to develop a

master production schedule.

COST ACCOUNTING

• A typical AIS would look something like

the following:

– Product design

– Production planning

–

_{Cost accounting}

COST ACCOUNTING

• A typical AIS would look something like

the following:

– Product design

– Production planning

– Cost accounting

–

Production operations

•

The list of operations to be performed is displayed at

workstations.

•

Instructions are also sent to the CIM interface to guide

operation of machinery and robots.

COST ACCOUNTING

• Such a system can be used for a job-order or

process costing system.

• Both require that data be accumulated about:

– Raw materials

– Direct labor

– Machinery and equipment usage

– Manufacturing overhead

• The choice of method:

– Does not affect how data are collected

COST ACCOUNTING

• Raw material usage data:

– When production is initiated, the issuance of a

materials requisition triggers a debit (increase) to

work in process and a credit (decrease) to raw

materials inventory.

– Work in process is credited and raw materials are

debited for any amounts returned to inventory.

– Many raw materials are bar coded so that usage data

is collected by scanning.

– RFID tags improve the efficiency of tracking material

usage.

COST ACCOUNTING

• Direct labor costs:

– Historically, job time tickets were used to

record the time a worker spent on each job

task.

– Currently, workers may:

• Enter the data on online terminals.

COST ACCOUNTING

• Machinery and equipment usage:

– Machinery costs make up an ever-increasing

proportion of production costs.

– Data about machinery and equipment are collected at

each production step, often with data about labor

costs.

– Until recently, data was collected by wiring the factory

so all equipment was linked to the computer system.

• Limits the ability to rearrange the shop floor.

COST ACCOUNTING

• Manufacturing overhead costs:

– Includes costs that can’t be easily traced to

jobs or processes, such as utilities,

depreciation, supervisory salaries.

– Most of these costs are collected in the

expenditure cycle.

COST ACCOUNTING

– Accountants help control overhead by

assessing how product mix changes will affect

overhead costs.

– They should also identify the factors that drive

the changes in these costs.

• This information can be used to realign processes

and layout.

CONTROL: OBJECTIVES, THREATS,

AND PROCEDURES

• In the production cycle (or any cycle), a well-designed

AIS should provide adequate controls to ensure that the

following objectives are met:

– All transactions are properly authorized.

– All recorded transactions are valid.

– All valid and authorized transactions are recorded.

– All transactions are recorded accurately.

– Assets are safeguarded from loss or theft.

– Business activities are performed efficiently and effectively.

– The company is in compliance with all applicable laws and

regulations.

CONTROL: OBJECTIVES, THREATS,

AND PROCEDURES

• There are several actions a company can take

with respect to any cycle to reduce threats of

errors or irregularities. These include:

– Using simple, easy-to-complete documents with

clear instructions (enhances accuracy and

reliability).

– Using appropriate application controls, such as

validity checks and field checks (enhances

accuracy and reliability).

– Providing space on forms to record who completed

and who reviewed the form (encourages proper

CONTROL: OBJECTIVES, THREATS,

AND PROCEDURES

– Pre-numbering documents (encourages recording

of valid and only valid transactions).

– Restricting access to blank documents (reduces

risk of unauthorized transaction).

– Using RFID tags when feasible to improve data

entry accuracy.

• In the following sections, we’ll discuss the

threats that may arise in the four major steps

of the production cycle, as well as general

THREATS IN PRODUCT DESIGN

•

The major threats in the product design

process is:

–

_{THREAT 1: Poor product design}

•

You can click on the threat above to get more

information on:

–

The types of problems posed by each threat.

THREATS IN PLANNING AND

SCHEDULING

•

Threats in the planning and scheduling

process include:

–

_{THREAT 2: Over- or under-production}

–

THREAT 3: Suboptimal investment in fixed

assets

•

You can click on any of the threats above to get

more information on:

–

The types of problems posed by each threat

THREATS IN PRODUCTION

OPERATIONS

•

Threats in the production operations

process include:

–

_{THREAT 4: Theft of inventories and fixed a}

ssets

–

THREAT 5: Disruption of operations

•

You can click on any of the threats above to get

more information on:

–

The types of problems posed by each threat.

THREATS IN COST ACCOUNTING

•

Threats in the cost accounting process

include:

–

_{THREAT 6: Inaccurate recording and proc}

essing of production activity data

•

You can click on the threat above to get more

information on:

–

The types of problems posed by the threat.

GENERAL THREATS

•

_{Two general objectives pertain to activities}

in every cycle:

– Accurate data should be available when needed.

– Activities should be performed efficiently and

effectively.

•

Threats in the process of ordering goods

include:

–

THREAT 7: Loss, alteration, or unauthorized discl

osure of data

–

THREAT 8: Poor performance

•

You can click on any of the threats below to get

more information on:

–

The types of problems posed by each threat.

PRODUCTION CYCLE INFORMATION

NEEDS

• In a manufacturing environment, the focus

must be on total quality management.

Managers need info on:

– Defect rates

– Breakdown frequency

PRODUCTION CYCLE INFORMATION

NEEDS

• In traditional systems, this type of data

was not well linked with financial data, and

cost accounting systems were separate

from production operations information

systems.

PRODUCTION CYCLE INFORMATION

NEEDS

• Two major criticisms have been directed at

traditional cost accounting systems:

– Overhead costs are inappropriately allocated

to products.

PRODUCTION CYCLE INFORMATION

NEEDS

• Two major criticisms have been directed at

traditional cost accounting systems:

–

Overhead costs are inappropriately

allocated to products.

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

• Traditional cost accounting systems use

volume-driven bases such as direct labor

hours or machine hours to apply

overhead.

• However, overhead does not vary with

production volume.

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

• Allocating overhead based on output

volume:

– Overstates the costs of products

manufactured in large quantities.

– Understates the costs of products

manufactured in small batches.

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

• Example of two products:

– Product one uses:

• $5 of materials

• 1 hour of labor

• 5 minutes of machine time

– Product two uses:

• $5 of materials

• 1 hour of labor

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

• Example of two products:

– Product one uses:

• $5 of materials

• 1 hour of labor

• 5 minutes of machine time

– Product two uses:

• $5 of materials

• 1 hour of labor

• 42 hours of machine time on very expensive

equipment

Under a traditional

cost accounting

system, both

products will

appear to have the

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

•

_{Solution to criticism 1: Activity Based}

Costing (ABC)

– ABC can refine and improve cost allocations

under either job-order or process costing

systems.

• ABC traces costs to the activities that create them

and allocates them accordingly.

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

– Corporate strategy results in decisions about

what goods and services to produce.

• These activities incur costs.

• So corporate strategy determines costs.

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

• ABC vs. traditional cost systems:

– There are three significant differences between

ABC and traditional approaches.

• Tracing of overhead costs

• Number of cost pools

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

• ABC vs. traditional cost systems:

– There are three significant differences between

ABC and traditional cost accounting approaches.

•

Tracing of overhead costs

• Number of cost pools

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

• ABC directly traces a larger proportion of

overhead costs to products.

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

• ABC vs. traditional cost systems:

– There are three significant differences between

ABC and traditional cost accounting approaches.

• Tracing of overhead costs

•

Number of cost pools

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

• ABC uses a greater number of cost pools

to accumulate indirect costs

(manufacturing overhead).

• Most systems lump all overhead together,

but ABC distinguishes three categories:

-

Batch-related overhead

•

EXAMPLES: Setup, inspection, and material

handling costs.

•

Accumulated for a batch and allocated to the

products in that batch.

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

• ABC uses a greater number of cost pools

to accumulate indirect costs

(manufacturing overhead).

• Most systems lump all overhead together,

but ABC distinguishes three categories:

- Batch-related overhead

-

Product-related overhead

•

Examples: R&D, environmental regulations, and

purchasing costs.

•

These costs are related to the diversity of the

company’s product line.

•

ABC attempts to link these costs to the products

that generate them.

•

For example, purchasing costs might be

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

• ABC uses a greater number of cost pools

to accumulate indirect costs

(manufacturing overhead).

• Most systems lump all overhead together,

but ABC distinguishes three categories:

- Batch-related overhead

- Product-related overhead

-

_{Company-wide overhead}

•

EXAMPLE: Rent or depreciation.

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

• ABC vs. traditional cost systems:

– There are three significant differences between

ABC and traditional cost accounting approaches.

• Tracing of overhead costs

• Number of cost pools

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

•

Benefits of ABC systems

– ABC systems are more costly and complex.

– But proponents argue two important benefits:

• More accurate cost data result in better product

mix and pricing decisions.

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

•

Benefits of ABC systems

– ABC systems are more costly and complex.

– But proponents argue two important benefits:

•

More accurate cost data result in better

product mix and pricing decisions

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

•

Better decisions

– ABC avoids problems of applying too much or

too little overhead to products and

consequently results in better price decisions.

– ABC uses the data collected to improve

product design.

– ABC provides management with the

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

•

Benefits of ABC systems

– ABC systems are more costly and complex.

– But proponents argue two important benefits:

• More accurate cost data result in better product

mix and pricing decisions.

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

•

Improved cost management

– ABC measures the results of managerial

actions on overall profitability.

– ABC measures both the amount spent to

acquire resources and the amount spent to

consume them.

– ABC measures unused capacity:

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

• EXAMPLE: A publishing company has five

employees who operate printing presses.

• The employees each have annual salaries of

$25,000 for a total salary cost of $125,000.

• Each employee should be able to print about 10,000

books per year.

• The total capacity, therefore is 50,000 books.

• The salary cost per book would be $125,000 /

50,000 books = $2.50 per book.

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

• EXAMPLE: A publishing company has five

employees who operate printing presses.

• The employees each have annual salaries of

$25,000 for a total salary cost of $125,000.

• Each employee should be able to print about 10,000

books per year.

•

The total capacity, therefore is 50,000 books.

• The salary cost per book would be $125,000 /

50,000 books =

$2.50 per book

.

• During the most recent year, the presses produced

47,000 books.

•

The cost of the activity capability is the total

book capacity for the year of 50,000 books times

the salary cost per book of $2.50.

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

• EXAMPLE: A publishing company has five

employees who operate printing presses.

• The employees each have annual salaries of

$25,000 for a total salary cost of $125,000.

• Each employee should be able to print about 10,000

books per year.

• The total capacity, therefore is 50,000 books.

• The salary cost per book would be $125,000 /

50,000 books =

$2.50 per book

.

• During the most recent year, the presses produced

47,000 books.

•

The cost of the activity used is the number of

books actually produced times the salary cost

per book of $2.50.

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

• EXAMPLE: A publishing company has five

employees who operate printing presses.

• The employees each have annual salaries of

$25,000 for a total salary cost of $125,000.

• Each employee should be able to print about 10,000

books per year.

• The total capacity, therefore is 50,000 books.

• The salary cost per book would be $125,000 /

50,000 books =

$2.50 per book

.

• During the most recent year, the presses produced

47,000 books.

•

The unused capacity is the difference between

the activity capability ($125,000) and the cost of

the activity used ($117,500).

•

$125,000 - $117,500 = $7,500 unused capacity.

•

Alternately, unused capacity can be calculated

as the cost per book of $2.50 times the

difference between the books that could be

produced and the books that were actually

produced.

CRITICISM 1: INAPPROPRIATE

ALLOCATION OF OVERHEAD COSTS

• Management may be able to improve

profitability by:

- Applying the unused capacity to other

revenue-generating activities; or

PRODUCTION CYCLE INFORMATION

NEEDS

• Two major criticisms have been directed at

traditional cost accounting systems:

– Overhead costs are inappropriately allocated

to products.

CRITICISM 2: REPORTS DO NOT ACCURATELY

REFLECT EFFECTS OF AUTOMATION

• When an organization transitions from a

traditional production system to a lean

manufacturing system, inventory levels are

depleted. Consequently, almost all

production costs of the year are expensed

that year.

• Although the effect is temporary,

managers will be concerned if their

CRITICISM 2: REPORTS DO NOT ACCURATELY

REFLECT EFFECTS OF AUTOMATION

• Solution to criticism two: Better reports

and measures

–

Produce reports based on lean accounting

principles.

•

Report for each product all costs incurred to

design, produce, sell, deliver, process customer

payments, and provide post-sale support for that

product.

•

Separate overhead costs from COGS.

CRITICISM 2: REPORTS DO NOT ACCURATELY

REFLECT EFFECTS OF AUTOMATION

• Solution to criticism two: Better reports

and measures

– Produce reports based on lean accounting

principles.

–

Develop resources to focus on issues

important to production cycle managers.

•

Examples:

–

Useable output produced per time period.

THROUGHPUT: A MEASURE OF

PRODUCTION EFFECTIVENESS

• Throughput = Productive Capacity x

Productive Processing Time x Yield

–

Productive Capacity = Total Units

Produced / Processing Time

•

Can be improved by:

–

Improving machine or labor efficiency.

–

Improving factory layout.

THROUGHPUT: A MEASURE OF

PRODUCTION EFFECTIVENESS

• Throughput = Productive Capacity x

Productive Processing Time x Yield

– Productive Capacity = Total Units Produced /

Processing Time

–

Productive Processing Time = Processing

Time / Total Time

•

The opposite of downtime.

•

Can be improved by:

–

Better maintenance to reduce machine downtime.

THROUGHPUT: A MEASURE OF

PRODUCTION EFFECTIVENESS

• Throughput = Productive Capacity x

Productive Processing Time x Yield

– Productive Capacity = Total Units Produced /

Processing Time

– Productive Processing Time = Processing

Time / Total Time

–

Yield = Good Units / Total Units

•

Can be improved by:

–

Using better raw materials.

THROUGHPUT: A MEASURE OF

PRODUCTION EFFECTIVENESS

• Throughput = Productive Capacity x Productive

Processing Time x Yield

– Productive Capacity = Total Units Produced / Processing Time

– Productive Processing Time = Processing Time / Total Time

– Yield = Good Units / Total Units

•

EXAMPLE: Manster Co. produced 1,000 bottles of Zithmowash in

a 10-hour period. During this period there was a total of 1 hour

of machine downtime and waiting time for materials. One

hundred of the bottles were defective

.

–

PRODUCTIVE CAPACITY = 1,000 bottles / 9 productive hours =

111.11 bottles / hour.

–

PRODUCTIVE PROCESSING TIME = 9 productive hours / 10 total

hours = .90.

–

YIELD = 900 good units / 1,000 total units = .90

QUALITY CONTROL

•

_{Information about quality control}

–Quality control costs can be divided

into four categories

:

•

_{Prevention costs}

QUALITY CONTROL

•

_{Information about quality control}

–Quality control costs can be divided

into four categories

:

• Prevention costs

•

Inspection costs

QUALITY CONTROL

•

_{Information about quality control}

–Quality control costs can be divided

into four categories

:

• Prevention costs

• Inspection costs

•

Internal failure costs

QUALITY CONTROL

•

_{Information about quality control}

–Quality control costs can be divided

into four categories

:

• Prevention costs

• Inspection costs

• Internal failure costs

•

External failure costs

QUALITY CONTROL

•

Information about quality control

–Quality control costs can be divided

into four categories

:

• Prevention costs

• Inspection costs

• Internal failure costs

• External failure costs

–

The objective of quality control is to

minimize the sum of these four costs.

•

Some companies have found that the most

important management decision involves

switching from the traditional "management by

exception" philosophy to a "continuous

improvement" viewpoint. Continuous

SUMMARY

• You’ve learned about the basic business

activities and data processing operations that

are performed in the production cycle, including:

– Product design

– Production planning and scheduling

– Production operations

– Cost accounting

• You’ve learned how IT can improve the

SUMMARY

• You’ve learned about decisions that need to be

made in the production cycle and the information

required to make these decisions.

• You’ve also learned about the major threats that

present themselves in the production cycle and

the controls that can mitigate those threats.

• Finally, you’ve learned how the company’s cost

accounting system can help in achieving the