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Production & Inventory Cycle - Coggle Diagram
Production &
Inventory Cycle
Documentation used:
Customer Production Order;
Inventory Production Order;
Raw Material Issue Slip;
Customer Job Card (CJC) & Inventory Job Card (IJC);
Job Transfer/inventory movement sheet (Goods Received Note);
Inventory Master Files - RAW mat., WIP & Finished Goods;
Daily Production Report;
Completed Production Report;
Transfer to Finished Goods Report;
Picking Slip and Delivery Noted;
Inventory Count Sheet;
Inventory Adjustment Form
1. Production Planning and Design
- Design Items, production planning and control thereof
Start of the Production process - authorization by production planning department (CPO or IPO)
Based on established trends for the replenishment of finished goods inventory items - reached re-order levels or "out-of-stock"
Segregation of duties important, therefore production order authorized by planning department before acceptance by processing department or factory manager
Daily production report produced
Copies sent to production planning and factory manager
Cost capturing - raw materials used, direct hours worked by production staff and machine hours
Once CPO or IPO accepted - CJC or IJC would be generated by production department
Goods move through production process - responsible persons sign off on specific part of production process as goods produced are transferred to next stage
Management to review daily production report
2. Production Processing
- Issue of raw materials, movement of goods, transfer from manufactured goods to finished goods
RMI prepared by production planning department/production department of factory manager
Pre-numbered raw materials issue slip (RMI) required for particular production run
All issues to production - accounted for as allocated to WIP CJC or IJC
All raw materials should be listed on daily production report. Copy sent to raw materials store staff - compare with raw material inventory master file.
Shift foreman or production manager - inspect that each stage of production process has been properly completed before goods pass onto next stage
If hours on job cards are incorrect - discrepancy should be corrected by production manager
Time spent on each stage - production employees or amchine time should be captured onto CJC or IJC
End of day - total time recorded on job cards should be reconciled to total hours worked by production staff
Raw materials, labour/machine hours + overhead allocations on completed job cards should be inspected by production manager
Variances/differences from standard costs + unexpected items (labour overruns) - authorized by production manager before goods are transferred to finished goods inventory store
Quality control inspection performed once production process is complete, detecting defects before transferred to finished goods store
Factory or production manager should authorize (by signature) the transfer of manufactured goods to inventory. Acceptance of goods into finished inventory - by signing completed production report by finished goods inventory staff
3. Inventory Management
- Receipt & Recording of manufactured/purchased goods and storage of inventory and maintenance of records
Relevant ledger accounts must be updated as cost of work in progress and completed manufactured goods are recorded in the manufacturing process
Accounting department has to monitor the production records and ensure that all amounts are recorded in the correct accounts, this will include the recording of:
Direct material costs of raw materials and consumables to work in progress
Direct payroll costs based on hours worked, allocated to the relevant job or production run
Overhead allocation for each job or production run, based on labour hours or machine hours worked, depending on the nature of the production process and practices of the entity in prior years
Transfer of accumulating costs between production stages or departments in work in progress
Transfer of the final cost of the finished goods manufactured to finished goods inventory
With standard costing - inventory should be recorded at standard cost and the various standard costing variances should be recorded in the accounting records and monitored by management
4.
Inventory management system is made up of four main controls:
Production entries must be supported by the relevant documents;
Storage and dispatch of manufactured inventory;
Maintenance of inventory master files;
Physical and monitoring controls
Main Components of Manufacturing Cycle
INPUTS -
Labour, Land, Machinery, Raw Materials
PRODUCTION PROCESS
OUTPUTS -
Finished Goods Services
Control Objectives:
Occurrence/Validity
Authorization;
Completeness;
Accuracy;
Classification;
Recording;
Cut-off
General Controls:
Supervision and Review;
Segregation of duties;
Rotation of duties;
Personnel take leave regularly;
Management control;
Internal Audit;
Sufficient stationary control;
Scrutinize ALL records and documents;
Test castings and calculations on ALL selected items, documents and ledger accounts
3 Control Functions:
Safegaurding;
Issuing of raw materials to production;
Recording
Safegaurding - Completeness, Existence (Objectives)
Inventory should be kept in a locked storeroom (access limited, key control, security guards, camera's etc);
Inventory susceptible to damage are safeguarded against elements (under shelter, fire extinguishers etc);
Inventory sufficiently insured
Issuing of raw materials to production - Completeness, Validity, Authorization (Objectives)
Issue notes are made out for issuing raw materials to production (after receipt of requisition, numerically accounted for & missing numbers followed up, signed by store man, signed by production foreman as proof of receipt);
No changes are allowed on the issuing notes;
W.r.t. sales to clients, no inventory may leave the storeroom without a delivery note
Recording - Completeness, Accuracy (Objectives)
Continuous inventory records are maintained by personnel independent from the safeguarding function of inventory & written up from GRN and DN or issue notes to production;
Regular inventory counts and comparison with inventory records (follow up of differences &adjustment of inventory records after proper management authorization);
Obsolete/slow-moving invetory identified timeously and systeatically written off according to company policy
Example: Weakness and Risk:
A weak control environment exists in regards to the production and inventory cycle when there's an insufficient "paper trail" to document the process from the production planning stages, to the actual production process, through to finished goods inventory. If for instance there is no Customer Job Cards (CJC) or Inventory Job Cards (IJC) to capture the actual time spent on each stage of production, by production employees or in machine time, the company runs the risk that incorrect cost allocation will be applied to finished goods, which will lead to incorrect selling prices and sub-standard profit margins. The company even runs the risk to sell inventory below cost which could lead to the inevitable downfall of the company.