Professional Documents
Culture Documents
HAPTER 12
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INTRODUCTION
Questions to be addressed in this chapter
include:
What are the basic business activities and data
processing operations that are performed in the
production cycle?
What decisions need to be made in the production
cycle, and what information is needed to make these
decisions?
How can the companys cost accounting system help
in achieving the entitys objectives?
What are the major threats in the production cycle
and the controls that can mitigate those threats?
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INTRODUCTION
The production cycle is a recurring set of
business activities and related data
processing operations associated with the
manufacture of products.
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INTRODUCTION
Information flows to the production cycle
from other cycles, e.g.:
The revenue cycle provides information on
customer orders and sales forecasts for use
in planning production and inventory levels.
The expenditure cycle provides information
about raw materials acquisitions and
overhead costs.
The human resources/payroll cycle provides
information about labor costs and availability.
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INTRODUCTION
Information also flows from the expenditure
cycle:
The revenue cycle receives information from the
production cycle about finished goods available for
sale.
The expenditure cycle receives information about raw
materials needs.
The human resources/payroll cycle receives
information about labor needs.
The general ledger and reporting system receives
information about cost of goods manufactured.
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INTRODUCTION
Decisions that must be made in the
production cycle include:
What mix of products should be produced?
How should products be priced?
How should resources be allocated?
How should costs be managed and
performance evaluated?
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INTRODUCTION
Well be looking at how the three basic AIS
functions are carried out in the production
cycle, i.e.:
How do we capture and process data?
How do we store and organize the data for
decisions?
How do we provide controls to safeguard
resources, including data?
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Product design
Planning and scheduling
Production operations
Cost accounting
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Product design
Planning and scheduling
Production operations
Cost accounting
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PRODUCT DESIGN
The objective of product design is to
design a product that strikes the optimal
balance of:
Meeting customer requirements for quality,
durability, and functionality; and
Minimizing production costs.
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PRODUCT DESIGN
Key documents and forms in product
design:
Bill of Materials: Lists the components that
are required to build each product, including
part numbers, descriptions,and quantity.
Operations List: Lists the sequence of steps
required to produce each product, including
the equipment needed and the amount of time
required.
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PRODUCT DESIGN
Role of the accountant in product design:
Participate in the design, because 6580% of
product cost is determined at this stage.
Add value by:
Designing an AIS that measures and collects the
needed data.
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PRODUCT DESIGN
Role of the accountant in product design:
Compare
current
component
usage6580%
with projected
Participate
in the
design,
because
of
usage in alternate designs.
product
cost is determined at this stage.
Compare current set-up and handling costs to
projected
Add value
by: costs in alternate designs.
Provide
how
design trade-offs
affect the
total
Designing
an info
AISon
that
measures
and collects
production cost and profitability.
needed data.
Helping the design team use that data to
improve profitability.
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Product design
Planning and scheduling
Production operations
Cost accounting
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Consequently:
MRP-II is more appropriate for products with
predictable demand and a long life cycle.
Lean manufacturing more appropriate for products with
unpredictable demand, short life cycles, and frequent
markdowns of excess inventory.
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Product design
Planning and scheduling
Production operations
Cost accounting
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PRODUCTION OPERATIONS
Production operations vary greatly across
companies, depending on the type of product
and the degree of automation.
The use of various forms of IT, such as robots
and computer-controlled machinery is called
computer-integrated manufacturing (CIM).
Can significantly reduce production costs.
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PRODUCTION OPERATIONS
In a lean manufacturing environment, a
customer order triggers several actions:
System first checks inventory on hand for sufficiency.
Calculates labor needs and determines whether
overtime or temporary help will be needed.
Based on bill of materials, determines what
components need to be ordered.
Necessary purchase orders are sent via EDI.
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PRODUCTION OPERATIONS
Sharing information across cycles helps
companies be more efficient by timing
purchases to meet the actual demand.
Although the nature of production processes and
the extent of CIM vary, all companies need data
on:
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Product design
Planning and scheduling
Production operations
Cost accounting
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COST ACCOUNTING
The objectives of cost accounting are:
To provide information for planning,
controlling, and evaluating the performance of
production operations;
To provide accurate cost data about products
for use in pricing and product mix decisions;
and
To collect and process information used to
calculate inventory and COGS values for the
financial statements.
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COST ACCOUNTING
The objectives of cost accounting are:
To provide information for planning,
controlling, and evaluating the
performance of production operations;
To
Toaccomplish
provide the
accurate
cost data
products
first objective,
the AISabout
must collect
real-time
data
thein
performance
of production
so
for on
use
pricing and
product activities
mix decisions;
management can make timely decisions.
andtechnology can be especially helpful, e.g.:
RFID
Broadcasting
repair
needs proactively.
To
collect and
process
information used to
Helping in the location of particular items.
calculate
inventory and COGS values for the
financial statements.
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COST ACCOUNTING
production operations;
To provide accurate cost data about
products for use in pricing and product
mix decisions; and
To collect and process information used to
calculate inventory and COGS values for
the financial statements.
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COST ACCOUNTING
Types of cost accounting systems:
Job order costing
Assigns costs to a specific production batch or job.
Used when the product or service consists of discretely
identifiable items.
Example: Houses.
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COST ACCOUNTING
Types of cost accounting systems:
Job order costing
Process costing
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COST ACCOUNTING
Accounting for fixed assets:
The AIS must collect and process information
about the property, plant, and equipment used
in the production cycle.
These assets represent a significant portion of
total assets for many companies and need to
be monitored as an investment.
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COST ACCOUNTING
The following information should be
maintained about each fixed asset:
ID number
Serial number
Location
Cost
Acquisition date
Vendor info
Expected life
Expected salvage value
Depreciation method
Accumulated depreciation
Improvements
Maintenance performed
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COST ACCOUNTING
The purchase of fixed assets follows the same
processes as other purchases in the expenditure
cycle (order receive pay).
But the amounts involved necessitate some
modification to the process:
Competitive bidding
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COST ACCOUNTING
The purchase of fixed assets follows the same
processes as other purchases in the expenditure
cycle (order receive pay).
But the amounts involved necessitate some
modification to the process:
Competitive bidding
Number of people involved
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COST ACCOUNTING
The purchase of fixed assets follows the same
processes as other purchases in the expenditure
cycle (order receive pay).
But the amounts involved necessitate some
modification to the process:
Competitive bidding
Number of people involved
Payment
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COST ACCOUNTING
The purchase of fixed assets follows the same
processes as other purchases in the expenditure
cycle (order receive pay).
But the amounts involved necessitate some
modification to the process:
Competitive bidding
Number of people involved
Payment The cost of fixed assets justifies more elaborate
controls to safeguard them, including:
Controls
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COST ACCOUNTING
The purchase of fixed assets follows the same
processes as other purchases in the expenditure
cycle (order receive pay).
But the amounts involved necessitate some
modification to the process:
Competitive bidding
Number of people involved
Payment
Controls Its critical to formally approve and
accurately record the sale or disposal
Disposal
of fixed assets.
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COST ACCOUNTING
A typical AIS would look something like the
following:
Product design
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COST ACCOUNTING
A typical AIS would look something like the
following:
Product design
Production planning
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COST ACCOUNTING
A typical AIS would look something like the
following:
Product design
Production planning
Cost accounting
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COST ACCOUNTING
A typical AIS would look something like the
following:
Product design
Production planning
Cost accounting
Production operations
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COST ACCOUNTING
Such a system can be used for a job-order or
process costing system.
Both require that data be accumulated about:
Raw materials
Direct labor
Machinery and equipment usage
Manufacturing overhead
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COST ACCOUNTING
Raw material usage data:
When production is initiated, the issuance of a
materials requisition triggers a debit (increase) to
work in process and a credit (decrease) to raw
materials inventory.
Work in process is credited and raw materials are
debited for any amounts returned to inventory.
Many raw materials are bar coded so that usage data
is collected by scanning.
RFID tags improve the efficiency of tracking material
usage.
Usage may be entered online for materials such as
liquids that are not conducive to tagging.
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COST ACCOUNTING
Direct labor costs:
Historically, job time tickets were used to
record the time a worker spent on each job
task.
Currently, workers may:
Enter the data on online terminals.
Use coded ID badges, which are run through a
badge reader at the beginning and end of each
job.
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COST ACCOUNTING
Machinery and equipment usage:
Machinery costs make up an ever-increasing
proportion of production costs.
Data about machinery and equipment are collected at
each production step, often with data about labor
costs.
Until recently, data was collected by wiring the factory
so all equipment was linked to the computer system.
Limits the ability to rearrange the shop floor.
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COST ACCOUNTING
Manufacturing overhead costs:
Includes costs that cant be easily traced to
jobs or processes, such as utilities,
depreciation, supervisory salaries.
Most of these costs are collected in the
expenditure cycle.
An exception is supervisory salaries, which
are collected in the HRM/payroll cycle.
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COST ACCOUNTING
Accountants help control overhead by
assessing how product mix changes will affect
overhead costs.
They should also identify the factors that drive
the changes in these costs.
This information can be used to realign processes
and layout.
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Traditional cost accounting systems use
volume-driven bases such as direct labor
hours or machine hours to apply
overhead.
However, overhead does not vary with
production volume.
EXAMPLE: Purchasing costs vary with the
number of purchase orders processed.
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Allocating overhead based on output
volume:
Overstates the costs of products
manufactured in large quantities.
Understates the costs of products
manufactured in small batches.
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Example of two products:
Product one uses:
$5 of materials
1 hour of labor
5 minutes of machine time
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Example of two products:
Product one uses:
$5 of materials
1 hour of labor
5 minutes of machine time
Under a traditional
cost accounting
system, both
products will
appear to have the
same cost.
$5 of materials
1 hour of labor
42 hours of machine time on very expensive
equipment
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Solution to criticism 1: Activity Based
Costing (ABC)
ABC can refine and improve cost allocations
under either job-order or process costing
systems.
ABC traces costs to the activities that create them
and allocates them accordingly.
ABC aims to link costs to corporate strategy.
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Corporate strategy results in decisions about
what goods and services to produce.
These activities incur costs.
So corporate strategy determines costs.
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
ABC vs. traditional cost systems:
There are three significant differences between
ABC and traditional approaches.
Tracing of overhead costs
Number of cost pools
Identification of cost drivers
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
ABC vs. traditional cost systems:
There are three significant differences between
ABC and traditional cost accounting approaches.
Tracing of overhead costs
Number of cost pools
Identification of cost drivers
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
ABC directly traces a larger proportion of
overhead costs to products.
This tracing is made possible by advances
in IT.
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
ABC vs. traditional cost systems:
There are three significant differences between
ABC and traditional cost accounting approaches.
Tracing of overhead costs
Number of cost pools
Identification of cost drivers
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
ABC uses a greater number of cost pools
EXAMPLES: Setup, inspection, and material
to accumulate
indirect
handling
costs. costs
Accumulated
(manufacturing
overhead).
for a batch and allocated to the
products in that batch.
Most systems
lump all
overhead
together,
Consequently,
costs
per product will
be less
when products arethree
made incategories:
larger quantities.
but ABC distinguishes
- Batch-related overhead
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
environmental
regulations,
ABC uses aExamples:
greaterR&D,
number
of cost
pools and
purchasing costs.
to accumulate
indirect
These
costs are costs
related to the diversity of the
companys
product line.
(manufacturing
overhead).
ABC attempts to link these costs to the products
Most systems
allthem.
overhead together,
thatlump
generate
For example, purchasing
costs might be
but ABC distinguishes
three
categories:
allocated to products based on the number of
- Batch-related
purchase
orders generated for each product.
overhead
- Product-related overhead
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
ABC uses a greater number of cost pools
to accumulate indirect costs
(manufacturing overhead).
Most systems lump all overhead together,
but ABC distinguishes
three
EXAMPLE:
Rentcategories:
or depreciation.
These costs are applied to all products
- Batch-related overhead
and allocated according to departmental
- Product-related overhead
or plant rates.
- Company-wide overhead
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
ABC vs. traditional cost systems:
There are three significant differences between
ABC and traditional cost accounting approaches.
Tracing of overhead costs
Number of cost pools
Identification of cost drivers
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Benefits of ABC systems
ABC systems are more costly and complex.
But proponents argue two important benefits:
More accurate cost data result in better product
mix and pricing decisions.
More detailed cost data improve managements
ability to control and manage total costs.
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Benefits of ABC systems
ABC systems are more costly and complex.
But proponents argue two important benefits:
More accurate cost data result in better
product mix and pricing decisions
More detailed cost data improve managements
ability to control and manage total costs.
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Better decisions
ABC avoids problems of applying too much or
too little overhead to products and
consequently results in better price decisions.
ABC uses the data collected to improve
product design.
ABC provides management with the
information about the costs associated with
specific activities, resulting in better analysis
and decisions.
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Benefits of ABC systems
ABC systems are more costly and complex.
But proponents argue two important benefits:
More accurate cost data result in better product
mix and pricing decisions.
More detailed cost data improve managements
ability to control and manage total costs.
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Improved cost management
ABC measures the results of managerial
actions on overall profitability.
ABC measures both the amount spent to
acquire resources and the amount spent to
consume them.
ABC measures unused capacity:
Cost of activity capability = Cost of activity used +
Cost of unused capacity
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
EXAMPLE: A publishing company has five
employees who operate printing presses.
The employees each have annual salaries of
$25,000 for a total salary cost of $125,000.
Each employee should be able to print about 10,000
books per year.
The total capacity, therefore is 50,000 books.
The salary cost per book would be $125,000 /
50,000 books = $2.50 per book.
During the most recent year, the presses produced
47,000 books.
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
EXAMPLE: A publishing company has five
employees who operate printing presses.
The cost of the activity capability is the total
The employees
each have annual salaries of
book capacity for the year of 50,000 books times
$25,000 for a total
salary cost of $125,000.
the salary cost per book of $2.50.
Each employee
should
be xable
about 10,000
50,000
books
$2.50to= print
$125,000.
books per year.
The total capacity, therefore is 50,000 books.
The salary cost per book would be $125,000 /
50,000 books = $2.50 per book.
During the most recent year, the presses produced
47,000 books.
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
EXAMPLE: A publishing company has five
employees who operate printing presses.
The employees each have annual salaries of
$25,000 for a total
salary cost of $125,000.
The cost of the activity used is the number of
Each employeebooks
should
be able
to print
about
10,000
actually
produced
times
the salary
cost
books per year.per book of $2.50.
47,000 books x $2.50 = $117,500.
The total capacity,
therefore is 50,000 books.
The salary cost per book would be $125,000 /
50,000 books = $2.50 per book.
During the most recent year, the presses produced
47,000 books.
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The unused
capacity is the difference between
CRITICISM
1: INAPPROPRIATE
the activity capability ($125,000) and the cost of
ALLOCATION
OF OVERHEAD
COSTS
the activity
used ($117,500).
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CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Management may be able to improve
profitability by:
- Applying the unused capacity to other
revenue-generating activities; or
- Eliminating the unused capacity.
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THROUGHPUT: A MEASURE OF
PRODUCTION EFFECTIVENESS
Throughput = Productive Capacity x
Productive Processing Time x Yield
Productive Capacity = Total Units
Produced / Processing Time
Can be improved by:
Improving machine or labor efficiency.
Improving factory layout.
Simplifying product design specifications.
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THROUGHPUT: A MEASURE OF
PRODUCTION EFFECTIVENESS
Throughput = Productive Capacity x
Productive Processing Time x Yield
Productive Capacity = Total Units Produced /
Processing Time
Productive Processing Time = Processing
Time / Total Time
The opposite of downtime.
Can be improved by:
Better maintenance to reduce machine downtime.
Better scheduling of deliveries to reduce wait time.
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THROUGHPUT: A MEASURE OF
PRODUCTION EFFECTIVENESS
Throughput = Productive Capacity x
Productive Processing Time x Yield
Productive Capacity = Total Units Produced /
Processing Time
Productive Processing Time = Processing
Time / Total Time
Yield = Good Units / Total Units
Can be improved by:
Using better raw materials.
Improving worker skills.
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THROUGHPUT: A MEASURE OF
PRODUCTION EFFECTIVENESS
Throughput = Productive Capacity x Productive
Processing Time x Yield
Productive Capacity = Total Units Produced / Processing Time
Productive Processing Time = Processing Time / Total Time
Yield = Good Units / Total Units
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QUALITY CONTROL
Information about quality control
Quality control costs can be divided
into four categories:
Prevention costs
Costs incurred to reduce product defect rates.
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QUALITY CONTROL
Information about quality control
Quality control costs can be divided
into four categories:
Prevention costs
Inspection costs
Costs incurred to ensure products meet quality
standards.
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QUALITY CONTROL
Information about quality control
Quality control costs can be divided
into four categories:
Prevention costs
Inspection costs
Internal failure costs
Costs of rework and scrap when products are
identified as defective prior to sale.
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QUALITY CONTROL
Information about quality control
Quality control costs can be divided
into four categories:
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QUALITY CONTROL
Information about quality control
Quality control costs can be divided
into four categories:
Prevention
Some companies
costs have found that the most
importantcosts
management decision involves
Inspection
switching from the traditional "management by
Internal
failure costs
exception" philosophy to a "continuous
External
failure costs
improvement"
viewpoint. Continuous
focuses
on comparing
The improvement
objective of
quality
control actual
is to
performance to the ideal (i.e., perfection).
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SUMMARY
Youve learned about the basic business
activities and data processing operations that
are performed in the production cycle, including:
Product design
Production planning and scheduling
Production operations
Cost accounting
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SUMMARY
Youve learned about decisions that need to be
made in the production cycle and the information
required to make these decisions.
Youve also learned about the major threats that
present themselves in the production cycle and
the controls that can mitigate those threats.
Finally, youve learned how the companys cost
accounting system can help in achieving the
entitys objectives.
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