AIS13

Accounting
Information
Systems
9th Edition
Marshall B. Romney
Paul John Steinbart
13-1
The Production Cycle
Chapter 13
13-2
Learning Objectives
1. Describe the major business activities a

nd related data processing operations p
erformed in the production cycle.
2. Explain how a company’s cost accounti
ng system can help it achieve its manuf
acturing goals.
3. Identify major threats in the production
cycle, and evaluate the adequacy of var
ious control procedures for dealing with
those threats.
©2003 Prentice Hall Business Publishing, 13-3

Accounting Information Systems, 9/e, Romney/Steinbart
Learning Objectives
4. Discuss the key decisions that must b

e made in the production cycle, and i
dentify the information needed to mak
e those decisions.
5. Read and understand an REA data m
odel of the production cycle.
6. Develop an REA data model for the p
roduction cycle.

Introduction
 LeRoy Williams, VP of manufacturing for Al

pha Omega Electronics (AOE), is concerne
d about problems associated with AOE’s co
st accounting system.
 Elizabeth Venko, AOE’s controller, and Ann
Brandt, AOE’s vice president of information
systems, agreed to undertake a study of ho
w to modify the system.

Introduction
 This chapter is organized around the

three major functions of the AIS in th
e production cycle.
1. The description of production cycle a
ctivities and cost accounting
2. Introduction of major control objectiv
es in the production cycle
3. Showing how the AIS can store and
organize information needs

Learning Objective 1
Describe the major business

activities and related data pro
cessing operations performed
in the production cycle.

Production Cycle Activities
 The production cycle is a recurring set

of business activities and related data
processing operations associated with
the manufacturing of products.

 Accurate and timely cost accounting

information is essential input to decis
ions about:
• Product mix
• Product pricing
• Resource allocation and planning
• Cost management

 There are four basic activities in the

production cycle:
1. Product design
2. Planning and scheduling
3. Production operations
4. Cost accounting

Product Design (Activity 1)
 The first step in the production cycle is

product design.
 The objective of this activity is to desig
n a product that meets customer requi
rements for quality, durability, and fun
ctionality while simultaneously minimiz
ing production costs.

 Documents and procedures:

 The product design activity creates tw
o main documents:
1 Bill of materials
2 Operations list

 How can accountants be involved in product
design?
– by showing how various design trade-offs aff
ect production costs and thereby profitability
– by ensuring that the AIS is designed to collec
t and provide information about the machine
setup and materials handling costs associate
d with alternative product designs
– by providing data about repair and warranty
costs associated with existing products

Planning and Scheduling (A
ctivity 2)
 The second step in the production cyc
le is planning and scheduling.
 The objective of this step is a producti
on plan efficient enough to meet existi
ng orders and anticipate short-term de
mand without creating excess finished
goods inventories.

ctivity 2)
 What are two common methods of produc
tion planning?
1 Manufacturing resource planning (MRP-II)
2 Just-in-time (JIT) manufacturing systems
• MRP-II is an extension of materials resource pl
anning that seeks to match existing production
capacity and raw materials needs with forecast
ed sales demands.
• The goal of JIT is to minimize inventories of raw
materials, work in process, and finished goods.

ctivity 2)
 Documents, forms and procedures:
 The master production schedule (MPS) spec
ifies how much of each product is to be prod
uced during the planning period and when th
at production should occur.
 A materials requisition authorizes removal of
materials from the storeroom to the factory.
 Subsequent transfers of these materials are
documented on move tickets.

ctivity 2)
 How can accountants be involved in pl
anning and scheduling?
– by ensuring that the AIS collects and r
eports costs in a manner consistent wi
th the production planning techniques
used by the company
– by helping to choose whether MRP-II
or JIT is more appropriate

Production Operations (Ac
tivity 3)
 The third step in the production cycle i
s the actual manufacture of products.
 The manner in which this activity is ac
complished varies greatly across com
panies.
 What is computer-integrated manufact
uring (CIM)?
 It is the use of information technology i
n the production process.
Production Operations (
Activity 3)
 Computer-Integrated Manufacturing (CIM) is the use
of various forms of IT in the production process, suc
h as robots and computer-controlled machinery, to re
duce production costs.
 Every firm needs to collect data about the following f
our facets of its production operations:
1. Raw materials used
2. Labor-hours expended
3. Machine operations performed
4. Other manufacturing overhead costs incurred

Explain how a company’s cos
t accounting system can help
it achieve its manufacturing g
oals

Cost Accounting (Activity 4)
 The final step in the production cycle is cos
t accounting.
 What are the three principal objectives of t
he cost accounting system?
1. To provide information for planning, controll
ing, and evaluating the performance of pr
oduction operations
2. To provide accurate cost data about produc
ts for use in pricing and product mix decisio
ns
3. To collect and process the information used
to calculate the inventory and cost of goods
sold values
 What are two types of cost accounting syste

ms?
1 Job-order costing
2 Process costing
 Job-order costing assigns costs to specific pr
oduction batches or to individual jobs.
 Process costing assigns costs to each proce
ss, and then calculates the average cost for
all units produced.

 The choice of job-order or process co

sting affects only the method used to
assign costs to products, not the meth
od used for data collection.
 Raw Materials:
 When production is initiated, the issua
nce of a materials requisition triggers t
he journal entry.

 Assume that $15,000 of raw materials

were issued.
 What is the journal entry?
Work in Process 15,000
Raw Materials Inventory 15,000
To record issuance of raw materials
 Assume that $1,000 of raw materials
were returned to inventory.

 What is the journal entry?

Raw Materials Inventory 1,000
Work in Process 1,000
To record return of raw materials to in
ventory
 Most raw materials are bar-coded.
 Inventory clerks use online terminals t
o enter usage data for those items tha
t are not bar-coded.
 Direct Labor:
 A job-time ticket is a paper document used
to collect data about labor activity.
 This document records the amount of time a
worker spent on each specific job task.
 Workers can enter this data using online ter
minals at each factory workstation.

 Machinery and Equipment:

As companies implement CIM to auto
mate the production process, an even
larger proportion of product cost relate
to the machinery and equipment used
to make the product.

 Manufacturing Overhead:
 What is manufacturing overhead?
– all manufacturing costs that are not ec
onomically feasible to trace directly to
specific jobs or processes

 Accounting for Fixed Assets:

 The AIS also needs to collect and pro
cess information about investment in t
he property, plant, and equipment use
d in the production cycle.
 Fixed assets should be bar-coded.

What minimum information should orga
nizations keep about their fixed assets?
– identification number – expected salvage val

– serial number ue
– location – depreciation method
– cost – depreciation charges t
– date of acquisition o date
– vendor name and add – improvements
ress – maintenance services
– expected life performed

Identify major threats in the pr

oduction cycle, and evaluate th
e adequacy of various control
procedures for dealing with the
m.

Control: Objectives,
Threats, and Procedures
 The second function of a well-designed AI
S is to provide adequate controls to ensure
that the following objectives are met:
1. All production and fixed asset acquisitions
are properly authorized.
2. Work-in-process inventories and fixed asse
ts are safeguarded.
3. All valid, authorized production cycle transa
ctions are recorded.

4. All production cycle transactions are rec

orded accurately.
5. Accurate records are maintained and pr
otected from loss.
6. Production cycle activities are performe
d efficiently and effectively.

 What are some threats?
– unauthorized transaction
– theft or destruction of inventories and f
ixed assets
– recording and posting errors
– loss of data
– inefficiencies and quality control probl
ems
 What are some control procedures?
– accurate sales forecasts and inventory
records
– authorization of production
– restricted access to production plannin
g program and to blank production ord
er documents
– review and approval of capital asset e
xpenditures

– documentation of all internal moveme
nts of inventory
– proper segregation of duties
– source data automation
– online data entry edit controls
– backup and disaster recovery procedu
res
– regular performance reports
– cost of quality control measurement
Discuss the key decisions that

must be made in the productio
n cycle, and identify the inform
ation required to make those d
ecisions.

Information Needs
and Procedures
 The third function of the AIS is to provide inf
ormation useful for decision making.
 In the production cycle, cost information is n
eeded by internal and external users.
 Traditionally, most cost accounting systems
have been designed primarily to meet finan
cial reporting requirements.

Information Needs
and Procedures
 What are two major criticisms of tradi
tional cost accounting systems?
1. Inappropriate allocation of overhead
costs
2. Inaccurate performance measures

Information Needs
and Procedures
What is a potential solution to the first cr
iticism?
 Activity-Based Costing (ABC):
 ABC attempts to trace costs to the acti
vities that create them and only subse
quently allocates those costs to produ
cts or departments.

Information Needs
and Procedures
 ABC systems distinguish three separate ca
tegories of overhead.
1. Batch-related overhead
2. Product-related overhead
3. Company-wide overhead
 The bases used to allocate manufacturing
overhead are the cost drivers.
 What is a cost driver?
– anything that has a cause-and-effect relatio
nship on costs

Information Needs
and Procedures
 What are some benefits of ABC?
– better decisions
– improved cost management
 More accurate cost data results in bett
er product mix and pricing decisions.
 More detailed cost data improves man
agement’s ability to control and mana
ge total costs.

Information Needs
and Procedures
 What is the potential solution to the s
econd criticism?
– Integrated production cycle data mode
l

Read and understand a data

model (REA diagram) of the
production cycle.

Production Cycle Data Mode
l
 To maximize its usefulness for cost manage
ment and decision making, production cycle
data must be collected at the lowest possibl
e level of aggregation.
 The following diagram presents relationship
s between the work in process (resource en
tity) and raw materials, labor, and machine
operations (event entities) used to produce
a batch of goods.

Production Cycle Data Mode
l
Partial REA Diagram of the Production Cycle
Raw materials (1, 1) (1, N)

issuance
Work in
(1, N) process
(1, 1)
Job operations (1, N)
Machine
operations
(1, 1)
Develop an REA data mo

del for the production cy
cle.

Production Cycle
Customer orders Purchase Requisitions
Sales forec Overhead
Revenue ast Production Expenditure
cycle cycle cycle
Finished goods Raw materials

Production Cycle
Production
cycle
Cost of goods
manufactured Labor needs
Labor
Reports costs
General ledger Human resource

and Management
reporting system payroll cycle

Production Cycle
Bill of materials
Product Planning and
Operations list
design scheduling
WIP Orders,
Costs tickets and
requisitions
Finished goods
Cost Production
accounting Tickets and requisitions operations
Production Cycle
Data Model
 What are the relationships among work in pr
ocess and the three event entities?
– all are one-to-many
 What do they reflect?
 Each production run may involve a number o
f raw materials issuances, labor operations,
and machine operations.
 Each of those activities, however, is linked to
a specific production run.

Production Cycle
Data Model
Partial REA Diagram of the Production Cycle
Employees
(1, 1)
(1, N)
Supervisor

Production Cycle
Data Model
 What is the relationship between the t
wo agent entities?
– many-to-one
 What does it reflect?
 Each employee is assigned to a specif
ic supervisor.
 Each supervisor is responsible for ma
ny employees.
Case Conclusion
 What did Elizabeth Venko decide?

– Implement activity-based costing
– Change the reports produced
 She decided that two major changes were n
eeded in the reports produced by the AIS:
1 Quality control costs will be reported.
2 Nonfinancial as well as financial measures w
ill be included in the performance reports.

End of Chapter 13


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Accounting

1. Describe the major business activities a

©2003 Prentice Hall Business Publishing, 13-3

4. Discuss the key decisions that must b

©2003 Prentice Hall Business Publishing, 13-4

 LeRoy Williams, VP of manufacturing for Al

©2003 Prentice Hall Business Publishing, 13-5

 This chapter is organized around the

©2003 Prentice Hall Business Publishing, 13-6

Describe the major business

©2003 Prentice Hall Business Publishing, 13-7

 The production cycle is a recurring set

©2003 Prentice Hall Business Publishing, 13-8

 Accurate and timely cost accounting

©2003 Prentice Hall Business Publishing, 13-9

 There are four basic activities in the

©2003 Prentice Hall Business Publishing, 13-10

 The first step in the production cycle is

©2003 Prentice Hall Business Publishing, 13-11

 Documents and procedures:

©2003 Prentice Hall Business Publishing, 13-12

©2003 Prentice Hall Business Publishing, 13-13

©2003 Prentice Hall Business Publishing, 13-14

©2003 Prentice Hall Business Publishing, 13-15

©2003 Prentice Hall Business Publishing, 13-16

©2003 Prentice Hall Business Publishing, 13-17

©2003 Prentice Hall Business Publishing, 13-19

©2003 Prentice Hall Business Publishing, 13-20

 What are two types of cost accounting syste

©2003 Prentice Hall Business Publishing, 13-22

 The choice of job-order or process co

©2003 Prentice Hall Business Publishing, 13-23

 Assume that $15,000 of raw materials

©2003 Prentice Hall Business Publishing, 13-24

 What is the journal entry?

©2003 Prentice Hall Business Publishing, 13-26

 Machinery and Equipment:

©2003 Prentice Hall Business Publishing, 13-27

©2003 Prentice Hall Business Publishing, 13-28

 Accounting for Fixed Assets:

©2003 Prentice Hall Business Publishing, 13-29

– identification number – expected salvage val

©2003 Prentice Hall Business Publishing, 13-30

Identify major threats in the pr

©2003 Prentice Hall Business Publishing, 13-31

©2003 Prentice Hall Business Publishing, 13-32

4. All production cycle transactions are rec

©2003 Prentice Hall Business Publishing, 13-33

©2003 Prentice Hall Business Publishing, 13-35

Discuss the key decisions that

©2003 Prentice Hall Business Publishing, 13-37

©2003 Prentice Hall Business Publishing, 13-38

©2003 Prentice Hall Business Publishing, 13-39

©2003 Prentice Hall Business Publishing, 13-40

©2003 Prentice Hall Business Publishing, 13-41

©2003 Prentice Hall Business Publishing, 13-42

©2003 Prentice Hall Business Publishing, 13-43

Read and understand a data

©2003 Prentice Hall Business Publishing, 13-44

©2003 Prentice Hall Business Publishing, 13-45

Raw materials (1, 1) (1, N)

Develop an REA data mo

©2003 Prentice Hall Business Publishing, 13-47