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Business Process:
Production Cycle

Source: Romney & Steinbart (2008), Accounting Systems 11 ed.

Question
• What are some major activities in
production cycle?

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What is production cycle?

• In this cycle, raw materials and labor are transformed into finished
goods.

Give Get
Raw materials
& labor Finished goods

Flow of information to
• 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.

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Flow of information from

• 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.

Decision making
• 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?

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Basic AIS functions

• How do we capture and process data?
• How do we store and organize the data for decisions?
• How do we provide controls to safeguard resources, including data?

Four major activities

1. Product design
2. Planning and scheduling
3. Production operations
4. 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 supports these activities.

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Activity 1: Product design

• Design a product that,
 Meet customer requirements for quality, durability, and
functionality; and
 Minimize production costs
• Simulation software can improve the efficiency and effectiveness of
product design.

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Activity 1: 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; and
 Operations List: Lists the sequence of steps required to
produce each product, including the equipment needed and
the amount of time required

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Activity 2:
Planning and Scheduling
• Forecast, plan and schedule production & request raw materials for production.
• The objective is to develop an efficient production plan that is enough to meet
existing orders and anticipated shorter-term demand while minimizing
inventories of both raw materials and finished goods.
• Two approaches:
 Manufacturing Resource Planning (“Push” – based on forecast/ estimated sales demand)

 Lean Manufacturing (“Pull” – based actual demand)

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Activity 2:
Planning and Scheduling
• Key documents and forms in product design:
 Master Production Schedule: specifies how much of each product is to be
produced during the period and when.
 Production Order: authorizes production of a specified quantity of a product.
 Materials requisition: authorizes movement of the needed materials from the
storeroom to the factory floor.
 Move ticket: documents the transfer of parts and materials throughout the
factory

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Activity 3:
Production Operations
• Manufacture products & store finished products.
• 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.
• 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 and other manufacturing overhead costs incurred.

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Activity 4:
Cost Accounting
• Accumulate costs for products manufactured.
• The objective 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.

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Activity 4:
Cost Accounting
• Types of cost accounting system:
 Job order costing: different goods manufactured, and cost
assigned to a specific job.
 Process costing: similar goods produced, cost assigned to each
work center, and calculates the average cost.

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Activity 4:
Cost Accounting
• Accounting for fixed assets:
 The AIS must collect and process information about the
property, plant, and equipment used in the production cycle.
 The purchase of fixed assets follows the same processes as
other purchases in the expenditure cycle:
(order  receive  approve  pay)

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Activity 4:
Cost Accounting
• Accounting for fixed assets:
 The following information should be maintained about each
fixed asset: • ID number • Expected life
• Serial number • Expected salvage value
• Location • Depreciation method
• Cost • Accumulated depreciation
• Acquisition date • Improvements
• Vendor info • Maintenance performed

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