Topic 3 – Accounting cycles

Study Unit 10: Inventory and Production cycle

Study Unit 10: Inventory and production cycle  – page 77

Step 1. Design the manufacturing process


  • A plan is required for scheduling the manufacturing
  • Determine which products to manufacture for selling
  • The timing of production
  • The raw materials we will need
  • The quantity required


Production planning…

A production plan will take a number of factors into account such as customer demand, labour and machine capacity and distribution and storage constraints.


Master production schedule…

Based on the planned production, a master production schedule (ie a detailed plan of which product must be manufactured, when and the quantity involved) is created.



After the planning has been done and the organisation has acquired the necessary raw materials, manufacturing can commence according to the master production schedule.

Computer-aided manufacturing (cam) and computer-integrated manufacturing (cim) software is used in the manufacturing process.


Step 2. Have a specialised system to handle the process


2 Inventory  – page 78

Inventory can be stored in different warehouses and sold from different locations (ie stores/ branches). Most AIS’s allow for the capture of different location data by capturing the store location and linking it to the inventory items and/or capturing the warehouse locations.


Inventory is affected by

The revenue and receipt cycle where inventory items are sold to customers

  • The acquisition and payments cycle where inventory items are bought from suppliers
  • The production cycle where inventory items are manufactured


This is not the same as…

  • A service organisation where there is no inventory to sell
  • A retail organisation where the finished inventory item is bought from a supplier during the acquisition and payments cycle


3 Production  – page 79


– What is production?

Production is unique to a manufacturing type of organisation. Also known as a conversion cycle.


– When products are manufactured what happens to the inventory?

The raw material inventory purchased during the acquisition and payments cycle (see study unit 9), is converted into finished goods inventory.

  • The raw materials inventory on hand quantities will decrease (-)
  • The WIP quantities on hand will then increase (+)


– When manufactured products are completed what happens to the inventory?

  • The work in progress quantities on hand will decrease (-)
  • The finished goods on hand and inventory will increase (+)


3.1 Product Design – page 79

The first step in the conversion cycle is the design of the products to be manufactured. This process may involve a number of specialists and software to support the design process such as computer-aided design (CAD) and computer-aided engineering (CAE).


3.2 Production planning and control – page 79

Each finished product is manufactured using different raw materials.

The bill of materials (BOM) specifies, for each finished goods inventory item, the type and quantities of raw materials needed in the manufacturing


3.3 Manufacturing – page 80

After the planning has been done and the organisation has acquired the necessary raw materials, manufacturing can commence according to the master production schedule. Nowadays, computer-aided manufacturing (CAM) and computer-integrated manufacturing (CIM) software is used in the manufacturing process.



You perform the manufacturing process, which uses a BOM to decrease quantities of the component items and increase the quantity of the manufactured item.

The cost of the manufactured item is the sum cost of the costs in the BOM.

We abbreviate “bills of materials” as BOM.


The manufacturing process is as follows:

  1. You specify the components or the raw materials which you require to manufacture the item.

This is done by creating a bill of materials for the manufactured item.

  1. The bill of materials contains a list of the component inventory item codes.
  2. You also specify the quantity of these components required to make one manufactured item.



You may need to reverse manufacturing (or un-manufacture) some or all of the manufactured items.

You do this if you manufacture with incorrect prices, or if you need some of the raw materials for other uses.

Pastel then decreases the quantity of the manufactured item and increases the quantities of the component items.

When you invoice a manufactured item, you treat it like any other inventory item.

Your customer does not see the component items.


– What does CAD stand for? – (mark 2)

Computer Aided Design

Software that is used by architects, engineers, drafters, artists, and others to create precision drawings or technical illustrations.


– What does CAE stand for? – (mark 2) 

Computer-aided engineering

Is a broad term used by the electronic design automation (EDA) industry for the use of computers to design, analyse, and manufacture products and processes.


– What does CAM stand for? – (mark 2)

Computer-aided manufacturing

Controls and coordinates all the machines used in the manufacturing process such as conveyor systems, cutting or welding machines and so forth.


– What does CIM stand for? – (mark 2)

Computer-integrated manufacturing

Is the manufacturing approach of using computers to control the entire production process. This integration allows individual processes to exchange information with each other and initiate actions. … It is also known as manufacturing.

From product design right through manufacturing, to quality control, storage of raw materials, WIP and finished goods, and ultimately, the shipment of the finished products. 


3.4 Costing

After the manufacturing process is completed, quantities available for selling will increase (+)

These changes in inventory quantities will be captured in the AIS at an amount determined during costing.

  • Whatever the method of determining costs, the costs must be recorded in the AIS.
  • It must adhere to IFRSs requirements


– What are the two (2) kinds of costing methods

  • Standard Costing
  • Activity-Based Costing


– What are the two (2) kinds of raw materials costing methods

  • Average Cost
  • Lastin first-out


– What types of reports can you get out of the AIS

  • Inventory activity reports will show all activities on an inventory item, including the movement of items from raw materials to WIP to ultimately finished goods.
  • Inventory quantity reports will show inventory quantities on order, available, and on hand.
  • General ledger accounts details reports will show the accounting entries for the applicable general ledger accounts.
Study Unit 9: Acquisition and payments cycle (Prev Lesson)
(Next Lesson) Study Unit 11: Payroll and Personnel cycle
Back to Topic 3 – Accounting cycles

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