Using a context diagram, the Production Cycle was shown as being linked to the Revenue Cycle by receiving customer orders and sales forecasts from the Revenue Cycle, and sending finished goods to the revenue cycle. It is linked to the Expenditure Cycle by sending purchase requisitions to order raw materials to the Expenditure Cycle, and the Expenditure Cycle then allocates overhead and raw materials costs to the Production Cycle. The Production Cycle is linked to the Human Resource/Payroll Cycle by requesting labor from HRP, which then allocates the labor costs to the Production Cycle. Management receives reports from the Production Cycle, which sends cost of goods produced information to the General Ledger and Reporting System.
The overall performance of the Production Cycle can be improved through technology. The entire process should be integrated, using relational databases linked to internal and external sources as part of an ERP (Enterprise Resource Planning) operation. CIM (Computer Integrated Manufacturing) using robots and on-line terminals can rapidly implement production plans, reducing costs. Data about the costs of production, stored in the work in process file and used in cost accounting, can be integrated with production operations information regarding the physical aspects of the manufacturing operation to give real time information to enable companies to monitor quality and correct defects before they drive up costs. This is a basis for the ABC (Activity Based Accounting) systems.
ABC cost systems allocate costs to the activities that create them, such as grinding and polishing, and then subsequently allocate those products to departments or products. An underlying objective of activity based costing is to link costs to corporate strategy. Corporate strategy results in decisions about what goods and services to produce. Activities must be performed to produce these goods and services, which in turn incur costs. Consequently, by measuring the costs of basic activities, such as materials handling or processing purchase orders, ABC provides information to management for evaluating the consequences of strategic decisions. As cost accounting is the basis of decision making in the organization, and detailed, relevant information used in its proper context is the basis of decision making, ABC costing can be a powerful tool.
The basic activities of the production cycle are product design, planning and scheduling, production operations, and cost accounting. Accountants’ input is extremely important in the design stage, where comparisons of various components and methods for quality and cost need accounting data and analysis. Similarly, accounting data is gathered at every stage to include in management reports and financial statements. The managerial reports can be wide-ranging, dealing with vendor quality and reliability, worker performance, inventory control, re-work and back-order issues among many others.
There are four symbols on the flowchart; documents are represented by a rectangle with an irregular bottom edge, input/output by a parallelogram, computer processing by a rectangle, and data storage by cylinder. The starting point of the flowchart depends on the type of product being produced. If demand is known and regular, the MRP11 (Materials Resource Planning) method would be used, where the purchase order on the upper left corner would be the starting point. This would be the system used for such products as cereal, where you would pre-order materials anticipating demand. If demand is unknown or...