The Production Cycle

Chapter 14

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 Learning Objectives
• Describe the major business activities and related
information processing operations performed in
the production cycle.
• Identify major threats in the production cycle and
evaluate the adequacy of various control
procedures for dealing with those threats.
• Explain how a company’s cost accounting system
can help it achieve its manufacturing goals.
• Discuss the key decisions that must be made in
the production cycle and identify the information
required to make those decisions.
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 Production Cycle Process
• Product Design
▫ Source documents: bill of materials and operations
list
• Planning and Scheduling
▫ Source documents: Master production schedule,
production order, and materials requisition
• Production Operations
• Cost Accounting

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 Production Cycle Process

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 1. Product Design
2. Planning and Scheduling
Threats
1. Poor product design
resulting in excess costs
2. Over and under production
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Controls
1 a. Analysis of costs arising from
product design choices
b. Analysis of warranty and
repair costs
2 a. Production planning systems
b. Review and approve
production orders and
schedules
c. Restrict access to orders and
schedules
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 3. Production Operations
Threats
1. Inventory theft
2. Fixed asset theft
3. Poor performance
4. Suboptimal investments in
fixed assets
5. Loss of inventory or fixed
assets due to fire or disasters
6. Disruption of operations
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Controls
1 a. Restrict physical access
b. Document movement of
inventory
c. Segregation of custody duties
from authorization and
recording
2 a. Restrict access to fixed assets
b. Keep detailed records of fixed
assets including disposals
3 a. Performance reporting
4 a. Solicit competitive bids
5 a. Insurance and physical
safeguards
6 a. Backup and disaster recovery
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 4. Cost Accounting

Threats
1. Inaccurate cost data
2. Inappropriate allocation of
overhead costs
3. Misleading reports
Controls
1 a. Source data automation
b. Data processing integrity
controls
2 a. Time-driven activity-based
costing
3 a. Performance metrics

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 Cost Accounting Systems

• Provide information for planning, controlling,

and evaluating the performance of production
operations
• Provide accurate cost data about products for
use in pricing and product mix decisions
• Collect and process the information used to
calculate the inventory and cost of goods sold
values that appear in organization’s financials

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