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Unit 3: Production and inventory cycle - Coggle Diagram
Unit 3: Production and inventory cycle
Intoduction
Main functions
Production processing which is the:
Issue of raw materials to production process
Movement of goods through production process and
Transfer of manufactured goods to finished goods
Production planning and design, which is the design of items to be manufactured, production planning and control thereof
Inventory management which is the:
Receipt and recording of manufactured/purchased goods
Storage of inventory and maintenance of records
Documents used:
Customer Production Order:
A document produced for a specific order where the
manufacture is to customer specifications
Raw material issues slip:
Records raw material issued to production
Customer Job Card/ Inventory Job card:
Records machine & human hours for specific
customer
Inventory Production Order:
Document for bulk production
Inventory movement sheet:
Document authorizing the transfer of WIP to next
stage of production
Inventory master files:
Records detail of all inventory movements of different
classes of inventory.
Daily production report:
Detail of each job in process – Raw material, time and
accumulated costs
Completed production report:
Total costs of raw material, time, quantity of goods &
overheads allocated of completed jobs.
Transfer to finished goods note:
Records the transfer of manufactured goods from the
production department into the finished goods stores.
Inventory Count Sheet
Used during an inventory count.
Inventory adjustment form
Sequenced documents which is used to record
adjustments to inventory
3 Main components:
Production process
Outputs:
finished goods or services
Inputs:
Labour
land
machinery
raw materials
Production planning and designing
Cost capturing- raw materials used, direct hours worked and machine hours
Goods move through production process- responsible persons sign off on specific part of production process as goods produced are transferred to next stage
Once CPO or IPO accepted- Customer Job card (CJC) or Inventory job card (IJC) would be generated by the production department
Daily production report produced
Segregation of duties are vital, Production order authorized by planning department before acceptance by processing department or factory manager
Copies are sent to the production planning and factory manager
Bases on established trends for the replenishment of finished goods inventory items- reached re-order levels
Management to review daily production report
Authorisation by production planning department {Customer production order (CPO) or inventory production order (IPO)}
Production process
Production manager- inspect that each stage of production has been completed correctly
Quality control inspection preformed once production process is completed, detecting defects before transferred to finished goods store
If hours on job card are incorrect- discrepancy should be corrected by production manager
Raw materials, labour, machine hours, overhead allocations on completed hob cards should be inspected by the production manager
End of day- total time recorded to job cards should be reconciled to total hours worked by staff
Differences or unexpected items must be authorised by production manager before goods are transferred to finished goods inventory store
Time spent on each stage- production employees or machine time should be captured onto CJC or IJC
Production manager should authorize the transfer of manufactured goods to inventory by use of a signature. Acceptance of goods into finished goods- by finished goods inventory staff signing completed production report
All raw materials should be listed on daily production report. copy is sent to raw material store staff- compare with raw material inventory master file
3.All issues to production- accounted for as allocated to WIP CJC or IJC
RMI prepared by the production planning department or factory manager
Pre- numbered raw materials issue slip (RMI) required for particular production run
Inventory Management
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.
The accounting department, has to monitor the production records and ensure that all amounts are recorded in the correct accounts.
This would include the recording of:
an 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
the transfer of accumulating costs between production stages or departments in work in progress
direct payroll costs based on hours worked, allocated to the relevant job or production run
the transfer of the final cost of the finished goods manufactured to finished goods inventory
direct material costs of raw materials and consumables to work in progress
The inventory management system is made up of 4 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.
The relevant ledger accounts must be updated at cost of work in progress and completed manufactured goods are recorded in the manufacturing process.
Internal Controls, control objectives and test of controls in the cycle
Internal controls
refer to the control activities that the organisation should implement to ensure they achieve the desired objectives (as stated above). E.g. the organisation will implement internal controls that should be adhered to with regards to the authorisation of manufacturing goods.
Test of controls
refers to the way we test whether the internal controls are working as designed. You will thus take the internal control, and test the internal control through inspection (when it is a document), observation (when it is a process), and enquiry (about a control/process/policy). It is also important to remember that the test of controls are performed on a sample of documentation and not all the documents.
Control objectives
refer to certain objectives that the organisation wants to achieve with regards to every transaction. E.g. the organisation will want to make sure that there is supporting documentation is generated for each issue of raw materials to production. Thus the objective here is “validity”.
SUBSTANTIVE PROCEDURES:
Finished goods
Completeness
Inspect suppliers’ invoices for receipt of merchandise in finished goods
Inspect issue of finished goods to cost of sales (general ledger) and sales invoices.
Agree GTN (in finished goods warehouse) to completed job records for goods
transferred from manufacturing.
Existence
Observe the operation of security checkpoints in the warehouse.
Cut off
Select pre and post year-end:
GRN(merchandise purchased)
+Delivery notes (sales)
+Completed production reports (WIP transferred to finished goods)
and follow through to inventory master files and general ledger to ensure recorded in
the correct accounting period
Work in progress
Completeness
Inspect a sample of completed job records for specific customers for invoice numbers
and allocation to finished goods.
Inspect transfers from WIP to finished goods ensuring that accumulated costs have
been transferred completely.
inspect whether total cost of materials issued per the requisition notes is matched by
charge to WIP.
Accuracy/Validity:
Recalculate the overhead allocations and enquire about the basis of allocation and it
being consistent with that of the PY
Scrutinize job records to ascertain whether direct labour hours allocated have been
reconciled to underlying wage records
Inspect WIP account for jobs written off and the related authorisation for it.
Presentation and disclosure
Inspect the financial statements to ensure that amounts are classified and disclosed
correctly in terms of IFRS.
Inspect whether the financial statement notes reflect the rights and obligations of the
entity with regards to assets mortgaged,, pledged or leased to secure the bank overdraft
or liabilities of the entity, or others
Raw materials
Completeness
Inspect sequence tests & exception reports of unmatched pre-numbered raw material
requisitions & pre-numbered raw material issue slips.