Production cycle definition
/What is a Production Cycle?
The production cycle is comprised of all activities related to the conversion of raw materials into finished goods. The cycle has several distinct components, involving the design of products, their incorporation into a production schedule, manufacturing activities, and a cost accounting feedback loop. These four areas are usually managed by four different departments – the engineering, materials management, production, and accounting departments, respectively. The full production cycle contains the following activities.
Related AccountingTools Courses
Accounting Information Systems
Step 1 - Design the Product
The engineering department uses an iterative process to develop product designs. This process requires input from the accounting department concerning the costs of proposed product components, while the marketing department advises on the product features needed. The industrial engineering group provides input about how new products can be designed to make them easier and less expensive to manufacture. The engineering staff incorporates a targeted selling price and profit margin into its design work, in a process called target costing, to design new products that will be assured of earning a reasonable profit.
Step 2 - Develop a Bill of Materials
Once a product design has been finalized, the engineering staff creates a bill of materials, which itemizes every component in the product. It also works with the industrial engineering group, typically through several production runs, to develop a labor routing, which states the estimated amount of labor that will be required at each production workstation in order to complete the product.
Step 3 - Develop a Sales Forecast
A sales forecast from the sales department is used as an input to the development of a production plan, which states the number of units to be produced, as well as the timing for when each batch of the product will be initiated. Based on this schedule, the system issues purchase requisitions to the purchasing department to obtain the necessary raw materials.
Step 4 - Produce Goods
The materials management staff releases job orders into the production department in accordance with the requirements of the production plan, and schedules direct labor staffing based on the labor routing information for each product on the shop floor. Completed goods are either shipped immediately to customers or stored in the warehouse as finished goods.
Step 5 - Compile Cost Summaries
The cost accounting staff compiles cost summaries for each batch completed by the production group, which it provides to both the engineering manager and production manager. This information is needed to spot variances from expectations, which could lead to design changes or alterations in the work instructions used on the shop floor. These cost summaries may incorporate activity-based costing, which does a better job of allocating overhead to products.