9-1 chapter 9 production cycle “there is one rule for industrialists and that is: make the best...
TRANSCRIPT
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9-1
Chapter 9
Production Cycle
“There is one rule for industrialists and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible.”—Henry Ford
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9-2
Presentation Outline
I. Files and Reports in a Production System
II. Production Control Application System
III. Control Risk Assessment
IV. Substantive Procedures
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9-3
I. Files and Reports in a Production System
A. Production Order
B. Bill of Materials
C. Master Operations List
D. Materials Requisitions
E. Job Time Cards
F. Resource Availability Reports
G. Production Status Reports
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9-4A. Production Order
Production control issues production orders to authorize production departments to make
certain products.
We are ready to begin this
order.
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B. Bill of Materials
A bill of materials is a listing of the
ingredients that go into making a product.
It lists of all the required parts and their descriptions.
What materials do we need to make this product?
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9-6
C. Master Operations List
A master operations list specifies the
sequencing of all labor and/or machine
operations that are necessary to produce a
product.
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9-7
D. Materials Requisitions
Production control prepares materials
requisitions to authorize the release of raw materials from inventory for use in
production.
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9-8
E. Job Time Cards
Job time cards are used to document the
amount of labor time that is spent on each production order or
job.
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9-9F. Resource Availability Reports
Inventory status reports detail the material
resources available in inventory for production.
Factor availability reports communicate the
availability of labor and machine resources for
production.
We have the materials, but may have to schedule some
overtime for this job.
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9-10G. Production Status Reports
Production status reports detail the work completed on individual production
orders as they move through production.
Open production orders are monitored and
departmental production schedules are revised as
necessary.
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9-11II. Production Control Application System
A. The Role of Production Control
B. Accounting for the Factors of Production
C. Completion of the Production Order
D. Overview of Production Cycle Control Procedures
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9-12A. The Role of Production Control
1Production
Order 3
2
Production Departments
Production Control
Inventory Control
Cost Accounting
General Ledger
1Production
Order
2Production
Order
N
InventoryStatusReport
Finished Goods Raw Materials
InventoryStatusReport
FactorAvailability
Report
FactorAvailability
Report
2 1ProductionSchedule
D
1ProductionSchedule
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9-13B. Accounting for the Factors of ProductionProduction
DepartmentsProduction
ControlInventory Control
Cost Accounting
General Ledger
3 2
1Materials
Requisition
N
2 1
MaterialsRequisition
1Materials
Requisition
NPost to WIP
Records
JournalVoucher
JournalVoucher
Materials Placed in Production
ProductionStatus
ProductionStatus
Job Time Cards Job Time Cards
Post to WIP Records
JournalVoucher
JournalVoucher
Conversion Costs
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9-14C. Completion of the Production Order
3 2
Production Departments
Production Control
Inventory Control
Cost Accounting
General Ledger
1Production
Order
1Production
Order 2Production
Order
N Completed 2
ProductionOrder
Post to Inventory Records
Completed 2Production
Order
Summarize Production
JournalVoucher
JournalVoucher
Cost of Goods Manufactured Completed
ProductionCost Report
To Management
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9-15D. Overview of Production Cycle Control Procedures
• Physical Controls– Production Order and Materials Requisition.– Physical inventories reconciled to perpetual inventory
records.– Restrict access to inventories
• Segregation of Duties– Authorization– Recording– Custody– Reconciliation
• Performance Reviews– Scrap reports– Variance analysis
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9-16III. Control Risk Assessment
In the event that control risk is deemed to be high, an auditor could lower detection risk by:
Sampling more inventory production reports for valuation calculations
Scheduling inventory observation closer to year end
Making a larger number of test counts
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9-17
IV. Substantive Procedures
A. Analytical Procedures
B. Physical Inventory Observation
C. Pricing and Compilation
D. Purchase Cutoffs
E. Accounting Firm Tips
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9-18
A. Analytical Procedures
• Verify REASONABLENESS of COGS– Gross Profit Margin
– Compare to prior year, industry averages
• Verify REASONABLENESS of ending inventory– Days Sales in Inventory
– Inventory Turnover
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9-19
B. Physical Inventory Observation
1. A Required Procedure
2. Client Count Instructions
3. Inventory Count and Measurement Challenges
4. Audit Program for Inventory Count
5. Inventory Count Sheet
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9-20
1. A Required Procedure
• “…it will always be necessary for the auditor to make, or observe, some physical counts of the inventory and apply appropriate tests of intervening transactions" (AU 331.12).
• May make test counts at a time other than year-end. – test roll-forward.
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9-21
2. Client Count Instructions
• Names of client personnel and dates and times of count• Instructions for recording inventory descriptions and
counts (measuring physical quantities)• Noting obsolete or worn items• Tag control—compilation of counts• Shutting down production to avoid double counting• Controlling movement• Making changes and corrections to counts• Review and approval of supervisory personnel
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9-22
Examples Challenges/ Special procedures.
Lumber Problem identifying quality or grade. /Employ a specialist
Piles of sugar, coal, scrap steel Geometric computations, aerial photos./ Employ a specialist
Items weighed on scales Accuracy of scales./Examine certification.
Bulk materials (oil, grain, liquids in storage tanks)
Measuring volume, ensuring composition of content/Climb the tanks Dip measuring rods. Sample for assay or chemical analysis.
Diamonds, jewelry Identification and quality determination problems/ Hire a specialist.
Pulp wood Quantity measurement estimation/Examine aerial photos.
Livestock Movement not controllable/Use chutes to control animals.
3. Inventory Count and Measurement Challenges
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9-23
4. Audit Program for Inventory Count
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9-24
5. Inventory Count Sheet – Exhibit 9.6
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9-256. Observation Considerations
• Control tags or count sheets• Be wary of "hollow squares" and "empty boxes”
• Tour shipping and receiving areas• Watch for OBSOLETE and SLOW-MOVING
inventory • CONFIRM inventory on CONSIGNMENT and
at other locations• Consider the use of SPECIALISTS
• Confirm inventory in transit.
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9-26
C. Pricing and Compilation Tests
• Valuation (Price Tests) – VENDOR INVOICES– COST FLOW ASSUMPTION (FIFO, LIFO,
average, specific identification)– LOWER OF COST OR MARKET for
inventory
• Check Extensions and Footings. • Agree to G/L
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9-27
D. Purchase Cutoffs
• Verify CUT-OFFs for purchases and sales– Examine Receiving Reports and Vendor Sales
Invoices occurring around year-end.– Examine bills of lading and sales invoices– Agree to inclusion/exclusion from inventory
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9-28
E. Accounting Firm Tips
• Focus test counts on high value items.• Advise client as late as possible about locations for inventory observation and do
not be predictable about approach.• Be skeptical of large test count differences.• Beware of client interest in procedures and
test counts.• Be alert for slow moving or obsolete
inventory.
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9-29
Summary
• Documents in Production Cycle
• Segregation of Duties in Production Cycle
• Control Risk Assessment
• Substantive Procedures including Observation of Physical Inventory