cost management system

8/14/2019 Cost Management System

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Production cycle BusinessProduction cycle Business

activitiesactivitiesThe Production cycle consists ofThe Production cycle consists of

production planning, productionproduction planning, productionscheduling, inventory control and costscheduling, inventory control and cost

accounting.accounting.


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The Production Cycle

Production generally includes the following activities andProduction generally includes the following activities and

related transactions.related transactions.

Production planningProduction planning

Sales forecastSales forecast Inventory status report (details the resources availableInventory status report (details the resources available

in inventory)in inventory)

Factor availability report (a report that communicatesFactor availability report (a report that communicatesthe availability of labor and machine resources)the availability of labor and machine resources)

Production schedulingProduction scheduling

Bills of materialBills of material

Master o erations listMaster o erations list


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Production Control

Production controlProduction controlinvolves planning whichinvolves planning which

products to produce and scheduling production toproducts to produce and scheduling production to

make optimal use of resources.make optimal use of resources.

Basic production requirements are providedBasic production requirements are providedby theby the

bill of materialsbill of materials (a list of all components and their(a list of all components and their

quantities used to make a finished good) and aquantities used to make a finished good) and a

master operationmaster operationlistlist(identifies and specifies the(identifies and specifies the

sequencing of all labor operations and/or machinesequencing of all labor operations and/or machine

operations that are necessary to produce a product)operations that are necessary to produce a product)


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Production Control

Determining what products to manufactureDetermining what products to manufacture

requires an integration of the following:requires an integration of the following:

demand for a productdemand for a product

product requirementsproduct requirements

production resources availableproduction resources available


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Inventory Control

The control of inventories is accomplishedThe control of inventories is accomplished

through a series of inventory records andthrough a series of inventory records and

reports.reports.

These reports provide the followingThese reports provide the following

information:information:

inventory useinventory use

inventory balancesinventory balances

minimum and maximum levels of stockminimum and maximum levels of stock


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Inventory Control

What is aWhat is a reorder pointreorder point??

It is the level of inventory at which it isIt is the level of inventory at which it is

desirable to order or produce additional itemsdesirable to order or produce additional itemsto avoid an out-of-stock condition.to avoid an out-of-stock condition.

What is theWhat is the economic order quantityeconomic order quantity (EOQ)?(EOQ)?

It is the order quantity that minimizes totalIt is the order quantity that minimizes total

inventory order costs and inventory carryinginventory order costs and inventory carrying

costs.costs.


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Inventory Control

EOQ = economic order quantityEOQ = economic order quantity

R = requirements for the item per period (inR = requirements for the item per period (in

number of units)number of units)

S = purchasing cost per order (fixed costs that areS = purchasing cost per order (fixed costs that are

incurred each time an item is ordered)incurred each time an item is ordered)

P = inventory carrying cost per unit (insurance,P = inventory carrying cost per unit (insurance,

taxes, interest, storage costs)taxes, interest, storage costs)

EOQ =EOQ = 22 RR SSPP


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Inventory Control

What isWhat is lead timelead time??

It is the time between placing an orderIt is the time between placing an orderand the receipt of the goods.and the receipt of the goods.

TheThe inventory usage rateinventory usage rate is the quantityis the quantity

of the goods used over a period of time.of the goods used over a period of time.

Reorder pointReorder point = Lead time in days= Lead time in days

Average inventory usage rate/dayAverage inventory usage rate/day


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Inventory Control

An important part of inventory control isAn important part of inventory control is

the evaluation of inventory turnover tothe evaluation of inventory turnover to

determine the age, condition, and statusdetermine the age, condition, and status

of stock.of stock.

Control over inventory includes methodsControl over inventory includes methods

of storing and handling.of storing and handling.


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Just-in-Time (JIT) Production

Just-in-timeJust-in-time production is a term used toproduction is a term used to

describe a production system in which partsdescribe a production system in which parts

are produced only as they are required inare produced only as they are required in

subsequent operations.subsequent operations.

JIT systems differ from conventionalJIT systems differ from conventional

systems in that inventories of work insystems in that inventories of work in

process, raw materials, and finished goodsprocess, raw materials, and finished goods

are minimized or totally eliminated.are minimized or totally eliminated.


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Cost accounting

Cost accounting focuses on theCost accounting focuses on the

management of three manufacturingmanagement of three manufacturing

inventories.inventories.

What are these inventories?What are these inventories?

1

Raw materialsRaw materials

2 Work in process (WIP)Work in process (WIP)

3 Finished goodsFinished goods


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Job/Process Costing

What isWhat isjob costingjob costing??

It is a procedure in which costs areIt is a procedure in which costs aredistributed to particular jobs ordistributed to particular jobs or

production orders.production orders.

It requires a production order controlIt requires a production order control

system.system.

What isWhat isprocess costingprocess costing??


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Process costing

It is a procedure in which costs are compiledIt is a procedure in which costs are compiled

in process or department accounts by periods.in process or department accounts by periods.

At the end of each period, the cost of eachAt the end of each period, the cost of each

process is divided by the units produced toprocess is divided by the units produced to

determine the average cost per unit.determine the average cost per unit.

CostsCosts in either job or process costing may in either job or process costing may

be actual or standard or normal costs.be actual or standard or normal costs.


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Information Needs

Operational/Strategic information needsOperational/Strategic information needs

Cost informationCost information

Traditional Vs Activity based costingTraditional Vs Activity based costing

Total quality managementTotal quality management

Statistical process control. Defect rates,Statistical process control. Defect rates,breakdown frequency, Machine utilizationbreakdown frequency, Machine utilization

Amount of rework, outgoing quality levelAmount of rework, outgoing quality level


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Summary

Ideally, a production cycleIdeally, a production cycle

database should provide both thedatabase should provide both the

cost and operational informationcost and operational information

needed to mange the productionneeded to mange the productionprocess well.process well.


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Human Resource Management

Business Process

The business process that involvesThe business process that involves

management ofmanagement ofhuman resourceshuman resources isis

concerned with establishing andconcerned with establishing and

maintaining an information system thatmaintaining an information system that

processes human resources (HR)processes human resources (HR)

information.information.


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Human Resource Management

Business Process

The HR system should provide tools forThe HR system should provide tools for

the setup and maintenance of informationthe setup and maintenance of information

pertaining to the organizational structure.pertaining to the organizational structure.

a listing of jobs that exist in an organizationa listing of jobs that exist in an organization

a listing of job descriptionsa listing of job descriptions

a listing of any qualifications that area listing of any qualifications that are

required for a jobrequired for a job


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Transactions in Payroll

Processing

Payroll processingPayroll processingis one of the mostis one of the most

complex procedures in operation.complex procedures in operation.

All levels of government impose payrollAll levels of government impose payroll

taxes.taxes.

Regulations and rates are constantlyRegulations and rates are constantly

changing.changing.

The payroll system requires frequentThe payroll system requires frequent

modifications.modifications.


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Transaction in Payroll Processing

Payroll processingPayroll processingis one area in which theis one area in which the

law imposes not only a fine but a jaillaw imposes not only a fine but a jail

sentence for willful negligence insentence for willful negligence in

maintaining adequate records.maintaining adequate records.


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Transaction Cycle Controls

in Payroll Processing

EmployeeTime Cards

Job Time

Summary

Authorization,Notification

Employee

Time Cards

PayrollRegister

Paychecks

Authorization,Notification

Timekeeping Payroll Personnel

Employee Hiring,Terminations,

Raises, Deductions

Reconcile


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Information Needs in Payroll Processing

Numerous files must be maintained in a payrollNumerous files must be maintained in a payroll

system. Examples:system. Examples:

basic employee informationbasic employee informationpayroll register or journalpayroll register or journal

government reportsgovernment reports

tax tables (Social security and other taxtax tables (Social security and other tax

legislation imposes four taxes based on payrolls:legislation imposes four taxes based on payrolls:

FICA, federal and state unemploymentFICA, federal and state unemployment

insurance and income taxes withheld)insurance and income taxes withheld)

cost management system

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