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Chapter 4
Thus, Production and Accounting must periodically compare standard costs with
actual costs and then adjust the accounts for the inevitable differences, which is always a
tedious and unpleasant job. The comparison should be done at each monthly closing, but
Fitter often puts it off until the closing at the end of each quarter, when its financial
backers require legitimate financial statements. The necessary adjustments are often quite
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large, depending on production volumes and costs during the quarter.

Exercise 4.1
a. A convenience store chain offers to buy a very large amount of its store brand
health bars (the NRG-B bars with a customized wrapper). The chain wants a
lower-than-normal price because the proposed order is quadruple the size of its
regular order. The marketing manager asks managers from Production,
Purchasing, and Accounting whether the terms of the proposed deal will be
profitable. Will the managers in these areas be able to provide a reliable answer
on short notice?
b. The production manager notes that current warehouse inventory levels are
fairly high, so the production line does not need to be run for a full eight
hours each day during the coming week. For several reasons, however, she
plans to run the line for eight hours a day anyway. If the line shuts down
workers would still need to be paid during the idle time and overhead costs
would continue to be incurred as well. Running the line full time decreases
the average cost of bars actually produced (indirect costs can be spread over
more bars). In addition, some warehoused raw materials will spoil if they
are not used soon. Is the production manager’s reasoning logical? Why, or
why not?

THE PRODUCTION PLANNING PROCESS

In this section, you will examine a systematic process for developing a production plan
that takes advantage of an ERP system. Spreadsheet calculations are presented to explain
and illustrate the key steps, and the corresponding screens in the SAP ERP system follow
the spreadsheet data.
Production planners are employees who interact with the inventory system and the
sales forecast to determine how much to produce. Planners follow three important
principles:
• Using a sales forecast, and taking into account current inventory levels,
create an aggregate (combined) production plan for all products. Aggregate
production plans help to simplify the planning process in two ways: First,
plans are made for groups of related products rather than for individual
products. Second, the time increment used in aggregate planning is
frequently a month or a quarter, while the production plans that will actually
be executed operate on a daily or weekly basis. Aggregate plans should
consider the available capacity in the facility.
• Break down the aggregate plan into more specific production plans for
individual products and then into smaller time intervals.
• Use the production plan to determine raw material requirements.

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