Recalling the Make-to-Stock production process in Production Accounting

In Production Accounting, understanding the nuances between the different manufacturing scenarios is crucial. You already know that we can generally identify three different production scenarios: make-to-stock (MTS), make-to-order (MTO), and engineer-to-order (ETO).

In this course, please note that we focus on the make-to-stock (MTS) scenario.

This lesson aims to outline the differences between lot-based and repetitive manufacturing in make-to-stock scenarios and clarify the distinction between production accounting methods Product Cost by Order and Product Cost by Period, using the event-based approach.

First, let’s recall what a make-to-stock production is. In make-to-stock production scenarios, products are manufactured based on anticipated customer demand or for mass production, not for a specific need. When it is produced, materials are stored in the anonymous inventory until they are needed for subsequent production processes or sales.

In lot-based manufacturing (MTS), a certain quantity of finished or semi-finished products is manufactured, based on predicted customer demand to the anonymous inventory. Lot-based production includes discrete as well as batch-based process manufacturing.

Products from discrete manufacturing can be pumps, bikes, or smartphones. For example, you estimate how many framesets (semi-finished products) you need to assemble to get a certain number of bikes (finished products). Then, you launch the production of these framesets through production orders and store them in the anonymous inventory until you need them for subsequent production processes in which the bikes are assembled. In discrete manufacturing a certain quantity of unique items is produced lot-based that can be counted and often disassembled into their original components. This approach is characterized by flexible production rates, varied inputs, and the ability to start or stop processes as needed.

In batch-based process manufacturing, products are undifferentiated, like gas, yogurt, or paint. They result from physical transformation, more than assembly. When you launch, for example, the paint production through process orders, the produced quantity is sent to the anonymous stock and then withdrawn from the stock for subsequent production processes as well.

Alternatively, in repetitive manufacturing (REM), finished or semi-finished products are produced over an extended period of time within mass production. For instance, you produce standard handlebars (semi-finished product) for bikes and store them in the anonymous inventory until they are used to assemble bikes (finished product).

REM is typically used for high demand items and involves highly standardized processes with minimal variability. Utilizing assembly lines and automation, this method focuses on efficiency and precision to maintain consistent quality and minimize human intervention.

In lot-based make-to-stock (MTS) production, the production accounting method known as Product Cost by Order is often employed. This method is advantageous in lot-based environments where the focus is on a specific quantity of production. Typical applications of Product Cost by Order are in order-related production or batch-based process manufacturing. It is ideal for environments where production runs are distinct and varied.

During production, the incurring costs are collected in an event-based manner and analyzed on the manufacturing order specific to that quantity. Manufacturing orders can either be production orders or process orders.

For example, when producing a lot of bicycle framesets, the costs of each lot are meticulously tracked (material costs, costs from production activities, and overhead costs) and analyzed to ensure accurate cost management.

Product Cost by Period is mainly suited to repetitive make-to-stock manufacturing scenarios. Instead of focusing on individual production lots, costs are collected on a generic product cost collector over defined periods and analyzed periodically (not by lot), providing a comprehensive overview of production expenses over time. This method is suitable for environments where production is continuous and standardized. In repetitive manufacturing (REM), a separate product cost collector for each production version is used to collect the production costs and analyze the costs in each period.