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Dynamics GP – Production Cycle Applications

Production control, inventory control, inventory control, cost accounting are typical functions in the production cycle of manufacturing firms.  Few if any production-cycle activities exist as separate functions in non manufacturing firms, but to same existent moat organization hold some inventories and manage some type of production control are relevant to most organizations. This section discusses accounting applications systems found in an organization’s production cycles.  The central feature of the illustrated applications is the segregation of duties to achieve organizational independence.

Production Control

Cost accounting system focus on the management of manufacturing inventories: materials, work-in process (WIP), and finished goods. Internal control over inventories and production is based on separation of functions and basic records and documentation, such as production orders, material requisition forms, and labor time cards. Protection of inventories from physical theft involves security and access provisions as well as periodic physical counts and tests against independent records.

File and Reports

Production control involves planning which products to produce and scheduling production to make optimal use of resources. Basic production requirements are provided by the bill of materials and master operations list. Detailed materials specifications for a product are recorded on the bill of materials. The bill of materials lists all required parts and their descriptions in subassembly order. The bill can be used as a ready reference for replacement parts, as an aid in troubleshooting subassemblies, or as a parts list for the end user. By distributing copies of bills to all affected departments, management can ensure uniform access to accurate, up-to-date information at every operation, their sequencing, and their related machine requirements are specified in the master operations list for a product. The bill of materials and the master operation list are used extensively in the production control function. In a standard cost system, the standard material and labor costs might be included on the bill of materials and master operations list.

Determining what products to manufacture requires an integration of the demand for a product, the product requirements, and the production resources available to the firm. Resources available for production are communicated to the production control function through inventory status reports and factor availability reports. A few material status report details the material resource in inventory that are available for production. A factory availability report communicates the availability of labor and machine resources. Demand requirements for a product depend on whether it is custom-manufactured per customer order or routinely manufactured for inventory. If the product is manufactured for inventory, production requirements depend on a sales forecast, which may be sent to production control from the sales or marketing department. Sales forecast must be related to the amount of a product held in inventory. This information is provided in a finished goods status report, which lists the quantities of products plan lists.

Transaction Flows

The production order serves as authorization for the production departments to make certain products. Materials requisitions are issued for each production order to authorize the inventory department to release materials to the production department. The items and quantities shown on a materials requisition are determined from the specifications in the product’s bill of materials requisition are determined from the specifications in the products bill of materials. Note the flow of the materials requisition and production order in figure 1 the cost accounting function receives a copy of the production order directly from producer is complete. In similar fashion, cost accounting receives copies of materials requisitions from both the inventory control function and the production departments. This distribution of documents implements an adequate segregation of duties and provides accountability for the production departments.

Labor operations are recorded on job time cards. These cards are posted to production orders and forwarded to the cost accounting department. The periodic reconciliation of time cards to production labor reports is an important internal control function. This function was detailed in the discussion of payroll processing.

Production status reports are periodically sent from the production department to the production control function. A production status report details the work completed on individual production orders as they move through the production process. It is used to monitor the status of open production orders and to revise the departmental production schedules as necessary.

The central document in the foregoing process is the production order. A copy of the production order is sent to the cost accounting function to establish a WIP record for each job.

Cost Accounting

The cost accounting department is responsible for maintaining a file of WIP cost records. New records are added to this file upon receipt of new production orders. Initiated by production control, materials costs are posted to this file from copies of materials requisition. Direct labor costs are posted from job time tickets. Overhead costs are often applied on the basis of direct labor hours or direct labor costs and, therefore, are posted at the same time as labor costs. Cost accounting initiates a journal voucher reflecting each batch of job time tickets posted that contains a debit to WIP and credits to payroll and manufacturing overhead. This journal voucher is transmitted and posted to the general ledger.

As production orders are completed and goods are transferred to inventory, several documents must be update. Productions control the production order from its file of open production orders. Cost accounting closes the related WIP record , summarizes this activity, and communicates a completed production cost summary to various managers. The finished goods inventory records are updated to reflect the availability of the product.

Control of production efficiency requires comparisons of actual production with scheduled production and an analysis of related variances. Production control also requires a comparison and analysis of other factors, including budgeted cost versus actual cost for individual production order and /or departments, and facility usage versus facility availability by department. The control of inventory loss and the maintenance of optimal inventory levels are also important to overall production control.

Inventory Control 

The control of inventories is accomplished through a series of inventory records and reports that provide such information as inventory use, inventory balances, and minimum and maximum levels of stock. Recorder points and procedures are established. A reorder point is the level of inventory at which it is desirable to order or produce additional items to avoid an out-or-stock condition. The development of reorder points requires an analysis of product demand, ordering or production lead time, inventory holding costs, and the costs associated with an out-of-stock condition such as lost sales or inefficient use of production facilities.

Because inventory control aims at minimizing total inventory cost, an important decision to be made is the size of each purchase order quantity, that is, the most economic order quantity (EOQ). The reorder quantity must balance two system costs- total carrying costs and total ordering costs. A formula for calculating the EOQ is

where

EOQ = economic order quantity (units)

R= requirements for the item this period (units)

S= purchasing cost per order

P= unit cost

I = inventory carrying cost per period, expressed as a percentage of the period inventory value

Once the EOQ has been calculated, the timing of the order must be decided; that is, the reorder point must be determined.  If the order lead time and the inventory usage rate are known, determining the reorder point is straightforward. Lead time is the time between placing an order and the receipt of the goods.  The inventory usage rate is the quantity of the goods used over a period of time.  The reorder point should be where the inventory level reaches the number of units that would be consumed during the lead time.  In a formula:

Reorder point = lead time x average inventory usage rate

Perpetual inventory records are the best source of the inventory information necessary to calculate the EOQ.  The units in the beginning inventory, on order, receipts, issues, and balance on hand, should be included in these records.  Appropriate control over inventories requires periodic verification of items on hand.  This can be done on a rotating basis when perpetual inventory records exist, or it can be done with a periodic physical count.

An important part of inventory control is the evaluation of inventory turnover to determine the age, condition, and status of stock. Special controls should be established to write down obsolete and slow-moving inventory items and to compare the balance to an appropriately established inventory level. A stock status report showing detailed use by period is especially helpful in maintaining the inventory at a proper level and controlling slow-moving items.

Control over inventory includes methods of storing and handling. Items need to be classified and properly identified so that they can be located appropriately and so that proper verification and reporting are possible.  The storage and handling of items must provide security against embezzlement, protection against damage or spoilage, avoidance of obsolescence, and assurance of proper control.

Inventory is a substantial investment.  An inventory control system should provide status reports on each active product so that the company can reasonably meet customer demands.  Because of the large number of inventory items and the variety of transactions affecting them, it is difficult to keep inventory and production information up-to-date with manual systems.  A computerized inventory control system can result in a substantial reduction in inventory investment.  These savings include a reduction in inventory without a corresponding decrease in service, determination of economic order quantities and order points, establishment of adequate safety stocks, and forecasts of future demand based on current and past information.  Usage records, turnover and obsolescence analyses, reorder cult to generate in purely manual systems.

Just-in time (JIT) Production

Just-in time (JIT) production is a term used to describe a production system in which parts are produced only as they are required in subsequent operations. JIT systems differ from conventional productions systems in the inventories of Work In process, raw materials, and finished goods are minimized or totally eliminated. The raw materials inventory, work –in process inventory, and finished goods inventory are shown within dash-line boxes to indicate that they are eliminated to the extent possible in JIT production.  The terms minimum inventory production system (MIPS), material as needed (MAN), and zero inventory productions system (ZIPS) also describe this concept of minimizing inventories.

Inventories serve as a buffer between different operations.  Inventories are eliminated by carefully analyzing operations to yield a constant production rate that will balance input and output at the various stages of production. JIT production also emphasizes quality control.  Because inventories are minimized, defective production has to be corrected immediately if the constant flow of production is to be sustained.  Vendors guarantee timely delivery of defect-free parts that may be placed immediately into production rather than first being placed into raw materials inventory. 

The financial benefits of JIT production system is primarily from the overall reduction in inventory levels.  This reduces a firm’s total investment in inventories. Costs such as handling and storing materials, obsolescence, storage space, and financing charges on total inventory cost are reduced, perhaps significantly.  Other benefits include possible lower labor costs as operations are redesigned for constant-flow production, quantity discounts from vendors who in return receive long-term contracts, and increased emphasis on quality production and the corresponding reduction in the cost of waste and spoilage.

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