Cost Management System

Production cycle Business activities ➤ The Production cycle consists of

production planning, production scheduling, inventory control and cost accounting.

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The Production Cycle ➤

Production generally includes the following activities and related transactions. – Production planning – Sales forecast – Inventory status report (details the resources available in inventory) – Factor availability report (a report that communicates the availability of labor and machine resources) – Production scheduling – Bills of material 2 – Master operations list

Production Control ➤ 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 (a list of all components and their quantities used to make a finished good) and a master operation list (identifies and specifies the sequencing of all labor operations and/or machine 3 operations that are necessary to produce a product)

Production Control ➤ Determining what products to manufacture – – –

requires an integration of the following: demand for a product product requirements production resources available

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Inventory Control ➤ The control of inventories is accomplished

through a series of inventory records and reports. ➤ These reports provide the following information: – inventory use – inventory balances – minimum and maximum levels of stock

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Inventory Control ➤ What is a reorder point? ➤It is the level of inventory at which it is

desirable to order or produce additional items to avoid an out-of-stock condition. ➤ What is the economic order quantity (EOQ)? ➤It is the order quantity that minimizes total inventory order costs and inventory carrying costs. 6

Inventory Control ➤ EOQ = economic order quantity ➤ R = requirements for the item per period

(in

number of units) ➤ S = purchasing cost per order (fixed costs that are incurred each time an item is ordered) ➤ P = inventory carrying cost per unit (insurance, taxes, interest, storage costs) EOQ = 2×R×S P 7

Inventory Control ➤ What is lead time? ➤ It 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. ➤ Reorder point = Lead time in days × Average inventory usage rate/day 8

Inventory Control ➤ An important part of inventory control is

the evaluation of inventory turnover to determine the age, condition, and status of stock. ➤ Control over inventory includes methods of storing and handling.

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Just-in-Time (JIT) Production ➤ Just-in-time 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 systems in that inventories of work in process, raw materials, and finished goods are minimized or totally eliminated. 10

Cost accounting ➤ Cost accounting focuses on the

management of three manufacturing inventories. ➤ What are these inventories? 1 Raw materials 2 Work in process (WIP) 3 Finished goods 11

Job/Process Costing ➤ What is job costing? ➤It is a procedure in which costs are

distributed to particular jobs or production orders. ➤It requires a production order control system. ➤ What is process costing? 12

Process costing ➤ It is a procedure in which costs are compiled

in process or department accounts by periods. ➤ At the end of each period, the cost of each process is divided by the units produced to determine the average cost per unit. ➤ “Costs” in either job or process costing may be actual or standard or normal costs. 13

Information Needs Operational/Strategic information needs ➤ Cost information ➤ Traditional Vs Activity based costing ➤ Total quality management ➤ Statistical process control. Defect rates, breakdown frequency, Machine utilization ➤ Amount of rework, outgoing quality level 14

Summary ➤Ideally, a production cycle

database should provide both the cost and operational information needed to mange the production process well. 15

Human Resource Management Business Process ➤ The business process that involves

management of human resources is concerned with establishing and maintaining an information system that processes human resources (HR) information.

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Human Resource Management Business Process ➤ The HR system should provide tools for

– – –

the setup and maintenance of information pertaining to the organizational structure. a listing of jobs that exist in an organization a listing of job descriptions a listing of any qualifications that are required for a job 17

Transactions in Payroll Processing ➤ Payroll processing is one of the most

complex procedures in operation. ➤All levels of government impose payroll taxes. ➤Regulations and rates are constantly changing. ➤The payroll system requires frequent modifications.

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Transaction in Payroll Processing ➤ Payroll processing is one area in which the

law imposes not only a fine but a jail sentence for willful negligence in maintaining adequate records.

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Transaction Cycle Controls in Payroll Processing Timekeeping Job Time Summary

Payroll Authorization, Notification

Personnel Authorization, Notification

Employee Time Cards

Employee Hiring, Terminations, Raises, Deductions

Reconcile

Employee Time Cards

Payroll Register Paychecks 20

Information Needs in Payroll Processing ➤ Numerous files must be maintained in a payroll

system. Examples: – basic employee information – payroll register or journal – government reports – tax tables (Social security and other tax legislation imposes four taxes based on payrolls: FICA, federal and state unemployment 21 insurance, and income taxes withheld)