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UNIT 3: Production and Inventory Cycle - Coggle Diagram
UNIT 3: Production and Inventory Cycle
Functions in the cycle
Production processing
Issue of raw materials to production process
Movement of goods through production process
Transfer of manufactured goods to finished goods
Inventory management
Receipt and recording of manufactured/purchased goods
Storage of inventory and maintenance of records.
Production planning and design
the design of items to be manufactured, production planning and control thereof.
Documents in the cycle
Inventory master files – Raw
mat., WIP & Finished Goods
Daily production report
Job transfer/ inventory
movement sheet (goods received note)
Completed production report
Customer Job card (CJC)/
Inventory Job card (IJC)
Transfer to finished goods note
Raw material issues slip
Picking slip and delivery notes
Inventory Production Order
Inventory Count Sheet
Customer Production Order
Inventory adjustment form
Control objectives and internal controls
Safeguarding
Control objectives
Existence
Completeness
Inventory should be safeguarded against theft and damage
Internal controls
Inventory susceptible to damage are safeguarded against the elements:
• under shelter, etc.
• fire extinguishers, etc.
Inventory should be kept in a locked storeroom:
• access should be limited to authorized personnel (store man and others)
• key control over doors, gates, etc.
• security guards, dogs, etc.
• camera's, etc.
Inventory sufficiently insured.
Issue of raw materials to production
Control objectives
Internal controls
No changes are allowed on the issuing notes.
With regards to sales to clients, no inventory may leave the storeroom without a delivery note.
Issue notes are made out for issuing raw material to production:
• it occurs only after receipt of a requisition, authorized by the production foreman/manager
• it is numerically accounted for and missing numbers are followed up
• it is signed by the store man
• it is signed by production foreman as proof of receipt of goods.
General Controls
1) Supervision and review
2) Segregation of duties
3) Rotation of duties
4) Personnel take leave regularly
5) Management control
6) Internal audit
7) Sufficient stationery control
8) Scrutinize all records and documents for extraordinary items
9) Test castings and calculations on all selected items, documents and ledger accounts
Recording
Internal controls
Regular inventory counts and comparison with inventory records:
• follow up of differences
• adjustment of inventory records after proper management authorization (inventory adjustments)
Obsolete/slow-moving inventory identified timeously and systematically written off according
to company policy
Continuous inventory records are:
• maintained by personnel independent from the safeguarding function of inventory
• written up from the GRN and delivery notes/or issue notes to production (frequently integrates with purchases and sales in a computerized system)
Control objectives
Accuracy
Completeness
Weaknesses and risks examples
Weakness:
Inefficient inventory management and inspection
Risk:
Overstocking or understocking of inventory may happen, leading to increased costs and reduced profitability for the a business entity. Damage to inventory may also be overlooked.
Weakness:
Poor production planning and scheduling
Risk:
Delays in production, resulting in missed delivery dates, dissatisfied customers, and lost sales opportunities, as well as possible brand reputation damage.
Substantive testing
Standard procedures
Inspect minutes of meetings for authorization of transactions
Test presentation & disclosure of transactions in Financial Statements
Agree total of the General Ledger to Trial Balance & Financial Statements
Test castings & calculations of the General Ledger, documents, recons etc.
Agree opening balances to prior year closing balance
Overall review for exceptions/unusual entries in General Ledger accounts
Obtain a management representation letter
Evaluate the effectiveness of internal control and the impact on the nature, timing and
extent of substantive procedures
Perform analytical procedures - comparisons with prior year balances/budgets and
follow up on any major fluctuations.
Substantive procedures
Completeness - There are no unrecorded inventory or undisclosed items at year-end
Cut-off - Inventory transactions are recorded in the correct
period.
Rights and Obligations - The entity has valid title to all inventory
at year-end.
Accuracy
Inventory has been determined through the allocation of
raw material, labour and overhead manufacturing
expenses to manufactured goods.
Existence - The inventory should physically exist at year-end.
Presentation &
Disclosure - Inventory is correctly classified and presented in terms of IFRS. Appropriate disclosures have been made about
inventory factored or pledged to secure liabilities of the
entity.
Valuation - Inventory should always be stated at the lower of cost or Net Realizable Value.