Chapter 7
The Conversion Cycle
Principles of Accounting Information
Systems, Asia Edition
James A. Hall
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The Conversion Cycle
Transforms input resources, raw materials,
labor, and overhead into finished products
or services for sale
Consists of two subsystems:
Physical activities – the production system
Information activities – the cost
accounting system
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Conversion Cycle in Relation to Other Cycles
Marketing
System
Sales
Forecast
Purchase Requisitions
Revenue Cycle Sales Orders
Conversion Expenditure
Cycle Cycle
Labor Usage
Work
Finished
In
Goods
Process
General Ledger
and Financial
Reporting
System
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Production System
Involves the planning, scheduling, and control
of the physical product through the
manufacturing process
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Production Methods
Batch Processing
Make-to-Order Processing
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Overview: Traditional Batch
Production Model…
consists of four basic processes:
plan and control production
perform production operations
maintain inventory control
perform cost accounting
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Batch Production System
Production Planning and Control
Materials and operations requirements
Production scheduling
Materials and Operations Requirements
Materials requirement – the difference between what
is needed and what is available in inventory
Operations requirements – the assembly and/or
manufacturing activities to be applied to the product
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Batch Production System
Production Scheduling
Coordinates the production of multiple batches
Influenced by time constraints, batch size, and
other specifications
Work Centers and Storekeeping
Production operations begin when work centers
obtain raw materials from storekeeping.
It ends with the completed product being sent to
the finished goods (FG) warehouse .
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Batch Production System
Inventory Control
Objective: minimize total inventory cost while
ensuring that adequate inventories exist of
production demand
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EOQ Inventory Model
Very simple too use, but assumptions are not always
valid
demand is known and constant
ordering lead time is known and constant
total cost per year of placing orders decreases as
the order quantities increase
carrying costs of inventory increases as quantity of
orders increases
no quantity discounts
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EOQ Inventory Model
INVENTORY LEVEL
Inventory Cycle Daily Demand
EOQ
Reorder
Point
Lead Time Time (days)
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Information: Documents in the
Batch Production System
Sales Forecast - expected demand for
the finished goods
Production Schedule - production plan
and authorization to produce
Bill of Materials (BOM) - specifies the
types and quantities of the raw materials
and subassemblies used to produce a
single finished good unit
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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Information: Documents in the
Batch Production System
Route Sheet - details the production path a
particular batch will take in the manufacturing
process
sequence of operations
time allotted at each station
Work Order - uses the BOM and route sheet
to specify the exact materials and production
processes for each batch
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Information: Documents in the
Batch Production System
Move Ticket - records work done in each
work center and authorizes the movement
of the batch
Materials Requisition - authorizes the
inventory warehouse to release raw
materials for use in the production process
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Production Planning and Control
Sales Forecast Raw Materials Requirements
Inventory Status Report (Purchase Requisitions)
Engineering Specifications
BOM and Route Sheets Operations Requirements
Production Scheduling
Work Orders
Move Tickets
Materials Requisitions
Open Work Orders
Work Centers
Job Tickets Cost Accounting
Time Cards Payroll
Completed Move Tickets Prod. Plan. and Control
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Upon Completion of the Production Process…
Finished Product Finished Goods Warehouse
and Closed Work Order
Closed Work Order
Inventory Control
Status Report of Raw Materials
and Finished Goods Prod. Plan. and Control
Journal Voucher General Ledger
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Cost Accounting System
Records the financial effects of the
events occurring in the production
process initiated by the work order
Cost accounting clerk creates a new
cost record for the batch and files in
WIP file
The records are updated as materials
and labor are used
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Elements of the Cost Accounting System
Inventory Control Work Centers
materials requisitions job tickets
completed move tickets
COST ACCOUNTANTS
Update WIP accounts
STANDARDS DL
DM
Mfg. OH.
Compute Variances
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Cost Accounting System
Receipt of last move ticket signals
completion of the production
process
clerk removes the cost sheet from
WIP file
prepares a journal voucher to transfer
balance to a finished goods inventory
account and forwards to the General
Ledger department
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Summary of Internal Controls
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Internal Controls
Transaction authorizations
work orders – reflect a legitimate need
based on sales forecast and the finished
goods on hand
move tickets – signatures from each work
station authorize the movement of the
batch through the work centers
materials requisitions – authorize the
warehouse to release materials to the work
centers
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Internal Controls
Segregation of duties
production planning and control
department is separate from the work
centers
inventory control is separate from materials
storeroom and finished goods warehouse
cost accounting function accounts for WIP
and should be separate from the work
centers in the production process
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Internal Controls
Supervision
work center supervisors oversee the usage
of raw materials to ensure that all released
materials are used in production and waste
is minimized
employee time cards and job tickets are
checked for accuracy
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Internal Controls
Access control
direct access to assets
• controlled access to storerooms, production
work centers, and finished goods
warehouses
• quantities in excess of standard amounts
require approval
indirect access to assets
• controlled use of materials requisitions,
excess materials requisitions, and
employee time cards
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Internal Controls
Accounting records
pre-numbered documents
work orders
cost sheets
move tickets
job tickets
material requisitions
WIP and finished goods files
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Internal Controls
Independent verification
cost accounting reconciles material usage (material
requisitions) and labor usage (job tickets) with
standards
• variances are investigated
GL dept. verifies movement from WIP to FG by
reconciling journal vouchers from cost accounting and
inventory subsidiary ledgers from inventory control
internal and external auditors periodically verify the
raw materials and FGs inventories through a physical
count
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World-Class Companies…
continuously pursue improvements in all
aspects of their operations, including
manufacturing procedures
are highly customer oriented
have undergone fundamental changes
from the traditional production model
often adopt a lean manufacturing model
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Principles of Lean Manufacturing
Pull Processing – products are pulled from the consumer
end (demand), not pushed from the production end
(supply)
Perfect Quality –pull processing requires zero defects in
raw material, WIP, and FG inventories
Waste Minimization – activities that do not add value or
maximize the use of scarce resources are eliminated
Inventory Reduction – hallmark of lean manufacturing
Inventories cost money
Inventories can mask production problems
Inventories can precipitate overproduction
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Principles of Lean Manufacturing
Production Flexibility – reduce setup time to a
minimum, allowing for a greater diversity of
products, without sacrificing efficiency
Established Supplier Relations – late deliveries,
defective raw materials, or incorrect orders will
shut down production since there are inventory
reserves
Team Attitude – each employee must be vigilant
of problems that threaten the continuous flow of
the production line
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