Difference Between Total Debits and Total Credits
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Difference Between Total Debits and Total Credits
PERIODIC PROCESSING
Several steps related to production are completed periodically during the process. Periodic processing is also known as period-end closing. Companies defi ne specifi c periods, such as months or quarters, when they complete certain accounting steps to update the data in fi nancial statements. Periodic process- ing includes overhead allocation, work-in-process determination, and order settlement.
The production order accumulates the direct costs associated with pro- duction. Other costs that are not directly associated with production are labeled indirect costs or overhead costs. Examples are the costs associated with the facil- ity such as utilities and maintenance, and the salaries of people, such as supervi- sors and managers, who are not directly involved in the production in the work centers. These costs are accumulated in specifi ed cost centers and are periodi- cally allocated to the production orders based on preestablished rules.
When materials are issued to production, a reduction in the inventory of these materials is recorded. However, the fi nished goods are not completed and placed in inventory until a later point in time (at the time of good receipt). During this interim period, neither the component materials nor the fi nished goods appear as inventory items in the balance sheet. Rather, they are clas- sifi ed as work-in-process (WIP) inventory. WIP is not a signifi cant issue if the production process is relatively short and the value of the materials is not high, as in the case of GBI. However, for products such as aircraft and build- ings, production can take months or even years, and the value of the inventory involved in production is quite substantial. In such cases, the materials used in production are considered WIP inventory and must be properly accounted for in the general ledger. To accomplish this task, a company will periodically calculate the value of WIP and make postings to the general ledger so that the fi nancial statements accurately refl ect the current inventory. A company can use several techniques to determine WIP. However, a discussion of these tech- niques is beyond the scope of this book.
We noted earlier that the difference between total debits and total cred- its in the production order is called a variance. Either periodically or when the production order is completed, these variances must be settled, meaning they must be posted to appropriate general ledger accounts. The manufacturing output settlement account is credited by the variance amount. Recall that this account was credited during the goods receipt step and therefore refl ects the full cost of production. An offsetting entry is made to a variance account, such as a manufacturing output settlement variance account or a price difference
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Reporting 215
account. In our example, the variance of $508.33 was settled using the accounts indicated in Figure 6-34.
COMPLETION
The fi nal step in the production process, order completion, can be viewed from both a logistics perspective (technically complete) and an accounting perspec- tive (closed). A production order is set to a technically complete (TECO) status when it is no longer necessary or possible to continue with the production. At this point no further execution of the production process steps is possible. All resource reservations that are still open are deleted. Any consequences to other processes, such as purchase requisitions for material needed for production, are also removed. The materials in the order are not expected to be produced and are no longer included in any planning. However, fi nancial postings related to the order, such as those associated with settlement, can still be made.
After a production order has been completed and settled, it is set to a sta- tus of closed (CLSD). Before this step can occur, the order must be in released or technically complete status, and it must be fully settled. After the order is closed, no further processing or fi nancial postings are possible.
Periodically, production orders are archived for record-keeping purposes and deleted from the system. Archived orders can be retrieved as needed.
REPORTING Reporting options for the production process are similar to those available for the other processes. A variety of lists, reports, and analytics are available via the production information system, which is a component of the logistics information system. Recall that work lists identify tasks to be completed, whereas online lists display documents for specifi c combinations of organizational levels and master data. Production reports can be generated to identify the status of planned orders and production orders, capacity availability and utili- zation, material consumption, and so on. The report illustrated in Figure 6-35 displays the status of component (material) utilization for several orders. Note
Figure 6-34: Financial impact of settlement
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216 CHAPTER 6 The Production Process
that the materials have been withdrawn for order number 1000002 but not for order number 1000003. Figure 6-36 shows the operations for the same orders. It indicates that all the operations for order number 1000002 have been con- fi rmed and therefore shows start and end dates for the operations in the order. It also shows that order number 1000003 has a status of released, although the work has not yet started.
One of the most important reports in production is the stock /require- ment list (Figure 6-37), which identifi es all of the activities in the system that can potentially impact the quantity of material in inventory. Figure 6-37 shows the stock / requirements list for the deluxe touring bike (DXTR1000) in the Dallas plant (DL00). The list indicates that there are no deluxe touring bikes in inventory. It further shows that there are three independent requirements for the material. These are the rows with the abbreviation “IndReq” in the column labeled “MRP e.” We will discuss independent requirements in the material plan- ning chapter. For the purposes of this discussion, think of independent require- ments as a need to increase inventory, which is one of the triggers for production that we discussed earlier. To address this need, the company has created three planned orders (PldOrd). As these orders are processed, the stock / requirements list will indicate their current status until production has been completed. At that point, the quantity available in inventory will increase. Although not illustrated in the fi gure, a stock / requirements list also includes activities that consume the materials, such as sales orders from the fulfi llment process.
Figure 6-35: Production information system—components. Copyright SAP AG 2011
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Reporting 217
Figure 6-36: Production information systems—operations. Copyright SAP AG 2011
Figure 6-37: Stock/requirements list. Copyright SAP AG 2011
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218 CHAPTER 6 The Production Process
Demo 6.9: Review a stock / requirements list
C H A P T E R S U M M A R Y
The production process involves the various steps and activities necessary to manufacture or assemble fi nished goods and semifi nished goods. Organizations utilize different manufacturing strategies depending on the type of material being produced and the business model needed to sell those materials profi t- ably. The two most common production strategies are make-to-stock and make- to-order. In make-to-stock, the materials are produced and stored in inventory for sale at a later time. In make-to-order, production occurs only after the com- pany receives a sales order.
The most common types of production processes are discrete, repetitive, and process manufacturing. In discrete and repetitive manufacturing, each unit produced is distinct from other units, and the component materials from which the unit is made can be identifi ed. In repetitive manufacturing, the same mate- rial is produced repeatedly over an extended period of time at a relatively con- stant rate. In discrete manufacturing, the company produces different materials over time in batches, often alternating between materials on the same produc- tion line.
Process manufacturing refers to the production of materials in bulk vol- umes (liters, gallons, barrels, etc) rather than individual units. In process manu- facturing the component materials cannot be identifi ed because they are mixed together in the fi nal product.
The production process consists of eight key steps: request production, authorize production, release production order, raw materials and semifi nished goods issue, production, production confi rmation, fi nished goods receipt, and production order completion. Each of these steps is affected by many variables inside and outside the production process and creates or updates many docu- ments throughout its execution.
Key master data for the production process are contained in the bill of materials work centers, and product routings. The BOM identifi es the raw mate- rials or semifi nished goods needed to produce one or more units of a fi nished good. A BOM can have one level for simple goods or many levels of nested hierarchies for more complex goods. BOMs contain detailed information on the fi nished good as well as each of the component materials needed for production, warehouse management, and fulfi llment.
The physical operations in the production process are carried out in work centers. Data regarding the type of work center, the operations performed there, and the relevant scheduling needs appear in the product routing. A product routing contains all of the operations or tasks needed to produce a material, as well as the sequence in which those operations must be completed. Component
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Review Questions 219
assignment ties together the materials listed in the BOM that are needed for production, the work centers where the fi nal product will be manufactured, and the operations in the routing that the company will use to manufacture it.
The production information system provides detailed reports to monitor and manage the production process. Companies utilize a stock / requirement list to view the different activities that impact the quantity of materials in inventory.
K E Y T E R M S
Backfl ushing
Bill of materials (BOM)
Component assignment
Confi rmation
Goods issue
Goods receipt
Item category
Make-to-order
Make-to-stock
Operations
Order completion
Planned order
Product routing
Production capacity
Production order
Production resource tools
Stock/requirement list
Task list
Work center
Work-in-process (WIP)
R E V I E W Q U E S T I O N S
- Explain the function of a bill of materials in the production process.
- What is the signifi cance of item categories in a bill of materials?
- Explain the structure of a bill of materials.
- What is the function of a work center in production?
- Briefl y discuss the key data in a work center master record.
- What is a product routing? What is it used for?
- Explain the relationship between operations and sequences.
- Explain the relationship between bills of materials, work centers, and product routings.
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220 CHAPTER 6 The Production Process
- Which material master data are relevant in production?
- What are production resource tools?
- Briefl y describe the steps in the production process in terms of triggers, data, tasks, and outcomes.
- Explain the fi nancial impact of the steps in the production process.
- What are the different production order statuses? What is the signifi cance of the order status?
- Briefl y describe the structure of a production order.
- What are the different options for production order confirmations?
- What is a stock / requirements list? What information does it provide?
E X E R C I S E S
Exercises for this chapter are available on WileyPLUS.
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CHAPTER 4 The Procurement Process 221
221
LEARNING OBJECTIVES
After completing this chapter, you will be able to:
- Discuss the four goods movements associated with inventory management.
- Describe the organizational levels in warehouse management.
- Analyze the master data associated with warehouse management.
- Identify and explain the key steps in the warehouse manage- ment processes.
- Demonstrate how inventory and warehouse management pro- cesses are integrated with other processes.
- Effectively use SAP ® ERP to execute the key steps in the ware- house management process.
- Extract and analyze meaningful information about the ware- house management process utilizing SAP ERP.
In Chapter 1 we introduced inventory and warehouse management (IWM) processes, which are concerned with the storage and movement of materials within an organization. We indicated that IWM is closely related to the procurement, fulfi llment, and production processes. Then, in Chapter 4 we introduced the underlying activity in inventory management (IM), namely, goods movement. Specifi cally, we introduced the four goods movements—goods receipt, goods issue, stock transfer, and transfer posting— as well as specifi c movement types. In our discussion of material movement in the preceding chapters, we focused on the simpler processes associated with IM. In addition, we explained that warehouse management (WM) involves processes that enable companies to manage materials more effectively using sophisticated techniques. Business Processes in Practice 7.1 illustrates how a large global enterprise, Steelcase, Inc., uses inventory and warehouse management to effi ciently move materials across various facilities.
Inventory and Warehouse Management Processes
C H A P T E R 7C H A P T E R
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Difference Between Total Debits and Total Credits
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