Chapter 7 The Conversion Cycle physical product through the

manufacturing process
Most apparent in manufacturing firms, review of the  Production is triggered by customer orders
traditional batch production model examines from the revenue cycle and or by sales forecasts
manufacturing techniques and technologies in from marketing
world-class companies.  Inputs trigger:
 set a production target
Philosophy of Lean Manufacturing  prepare a production plan
 Purchase requisitions(purchases
 evolved from the Toyota Production System
procedures), Labor (payroll),
(TPS)
Manufacturing costs WIP & FG (GL &
 Purpose : to improve efficiency and FS)
effectiveness in product design, supplier
 Production methods {depende sa product na
interaction, factory operations, employee
immanufacture mo}
management, and customer relations
 Key to success : achieving manufacturing 1. Continuous processing - homogeneous product
flexibility (cement)
2. Make-to-order processing
Manufacturing Flexibility
 discrete products
 physical organization of production  initiated by sales orders rather than
facilities depleted inventory levels
3. Batch processing
 employment of automated technologies
a) computer numerical controlled (CNC)  Each item in the batch is similar
machines,  most common (cars, household appliances,
b) computer integrated manufacturing canned goods, tires, and books)
(CIM)
c) automated storage and retrieval BATCH PROCESSING SYSTEM
d) systems (AS/RS)
 batch processing system, which consists of
e) robotics
four basic processes
f) computer-aided design (CAD)
1. plan and control production
g) computer-aided manufacturing (CAM)
2. perform production operations
3. maintain inventory control
 Examines problems associated with
4. perform cost accounting
applying standard cost accounting
techniques in a highly automated Documents in the Batch Processing System
environment.
 The key features of two alternative 1. Production schedule
accounting models are discussed:  formal plan and authorization to begin
(1) activity-based costing (ABC) production
(2) value stream accounting  describes the specific products to be made,
 Discussion of the information systems the quantities to be produced in each batch,
commonly associated with lean and the manufacturing timetable for
manufacturing and world-class companies starting and completing production
a. Materials requirements planning 2. Bill of materials
(MRP) systems  specifies the types and quantities of the raw
 to determine how much material (RM) and subassemblies used in
raw materials are required producing a single unit of finished product
to fulfill production orders o RM requirements for entire
batch = BOM x number of items
The Traditional Manufacturing Environment in the batch
 The conversion cycle consists of 3. Route Sheet
o physical activities  shows the production path that a
o information activities particular batch of product follows
 The Production system. Involves the during manufacturing
planning, scheduling, and control of the
 sequence of operations (machining or o It ends with the completed product
assembly) & standard time to each task. being sent to the finished goods
4. Work order (or production order) (FG) warehouse .
 draws from BOMs and route sheets to
specify the materials and production  Many organizations today, however, make
(machining, assembly, and so on) for this data transfer digitally via computerized
each batch. These, together with move systems that use data entry screens or
tickets (described next), initiate the capture data by scanning bar code tags
manufacturing process in the  we examine three of the four conversion
production departments. cycle processes
5. Move Ticket 1. PRODUCTION PLANNING AND CONTROL-
 records work done in each work center consists of two main activities:
and authorizes the movement of the job  Specifying Materials and Operations
or batch from one work center to the Requirements.
next.  RM requirement for a batch = Inventory
6. Materials Requisition Need – Inventory Available
 authorizes the storekeeper to release  info comes from analysis of
materials (and subassemblies) to inventory on hand, the sales
individuals or work centers in the forecast, engineering specifications
production process and BOM
 specifies only standard quantities
 separate requisitions - Materials needed  operations requirements for the batch
in excess of standard amounts require involve the assembly and/or manufacturing
this activities that will be applied to the product
 less than the standard amount material  determined by assessing route
is used, the work centers return the sheet specifications.
unused materials to the storeroom
accompanied by a materials return 2. PRODUCTION SCHEDULING
ticket  master schedule for a production run
coordinates the production of many
Batch Production Activities different batches
 influenced by time constraints,
 Production Planning and Control batch size, and specifications
o Materials and operations derived from BOMs and route
requirements sheets
o Production scheduling  produces work orders, move tickets, and
 Materials and Operations Requirements materials requisitions for each batch in the
o Materials requirement – the production run
difference between what is needed  copy of each work order is sent to
and what is available in inventory cost accounting to set up a new
o Operations requirements – the work-in-process (WIP) account for
assembly and/or manufacturing the batch
activities to be applied to the  enter the production process and
product flow through the various work
 Production Scheduling centers [in accordance with the
o Coordinates the production of route sheet]
multiple batches 3. WORK CENTERS AND STOREKEEPING
o Influenced by time constraints,  The actual production operations begin
batch size, and other specifications when workers obtain raw materials from
 Work Centers and Storekeeping storekeeping in exchange for materials
o Production operations begin when requisitions
work centers obtain raw materials  M,L, MOH – applied according to work order
from storekeeping.  When the task is complete at a particular
work center, the supervisor or other
authorized person signs the move ticket,
 which authorizes the batch to proceed to 1. Demand for the product is constant & known with
the next work center certainty.
o FOR EVIDENCE : copy of the move
ticket is sent back to production 2. The lead time is known and constant.
planning and control to update the
open work order file (ma-cclose ito  the time between placing an order for
kapag nareceive na ang last move inventory and its arrival
ticket)
3. All inventories in the order arrive at the same
o The finished product along with a
time.
copy of the work order is sent to
the finished goods (FG) warehouse 4. The total cost per year of placing orders is a
o copy of the work order is sent to variable that decreases as the quantities ordered
inventory control to update the FG
increase.
inventory records.
 Work centers also fulfill an important role  Ordering costs include the cost of preparing
in recording labor time costs. documentation, contacting vendors,
o is handled by work center processing inventory receipts, maintaining
supervisors who, at the end of vendor accounts, and writing checks.
each workweek, send
 employee time cards to 5. The total cost per year of holding inventories
payroll departments (carrying costs) is a variable that increases as the
 job tickets to cost quantities ordered increase.
accounting departments
 These costs include the opportunity cost of
INVENTORY CONTROL invested funds, storage costs, property
taxes, and insurance.
 OBJECTIVE : to minimize total inventory cost
while ensuring that adequate inventories 6. There are no quantity discounts
exist to meet current demand
 consists of three main activities  Therefore, the total purchase price of
 provides production planning & inventory for the year is constant.
control with status reports on FG  significant parameters in this model are
and RM inventory. the carrying costs and the ordering
 continually involved in updating costs.
the RM inventory records from o Parameters – sets the
materials requisitions, excess conditions of its operation.
materials requisitions, and o Pag mas marami ang order mo,
materials return tickets mabawasan ang times na mag
 upon receipt of the work order order ka, bale yung annual
from the last work center, ordering cost mo ay
inventory control records the mababwasan
completed production by updating o pagmas marami ang order mo,
the finished goods inventory mas marami kang inventory on
records. hand, bale magtaas yung
 Inventory models used to achieve objective annual inventory carrying cost
help answer two fundamental questions: mo
1. When should inventory be o Dahil yung PURCHASE price
purchased? natin ay constant, ang gagawin
2. How much inventory should be natin ay babawasan ang
purchased? ordering cost at carrying cost.

ECONOMIC ORDER QUANTITY (EOQ) MODEL

 OBJECTIVE: to reduce total inventory costs

 is based on simplifying assumptions that
may not reflect the economic reality
Where: Q = economic order quantity o materials requisitions – authorize
D = annual demand in units the warehouse to release materials
S = the fixed cost of placing each order to the work centers
H = the holding or carrying cost per unit per  Segregation of duties
year o production planning and control
department is separate from the
work centers
When do we purchase? o inventory control is separate from
materials storeroom and finished
Reorder Point (ROP) goods warehouse
o cost accounting function accounts
ROP = Lead time x Daily Demand
for WIP and should be separate
Daily Demand = Total Demand/number of working
from the work centers in the
days
production process
 If the parameters DAILY DEMAND and
 Supervision
LEAD TIME are stable
o work center supervisors oversee
 organization should receive the
the usage of raw materials to
ordered inventories just as the
ensure that all released materials
quantity on hand reaches zero
are used in production and waste is
 If either or both DAILY DEMAND and LEAD
minimized
TIME are subject to variation
o employee time cards and job
o additional inventories called safety
tickets are checked for accuracy
stock must be added to the reorder
 Access control
point to avoid unanticipated
o direct access to assets
stockout events.
 controlled access to
 Stock-outs result in either lost
storerooms, production
sales or back-orders.
work centers, and finished
 back-order is a customer order
goods warehouses
that cannot be filled because of a
 quantities in excess of
stock-out and will
standard amounts require
remain unfilled until the supplier
approval
receives replenishment stock
o indirect access to assets
 When an organization’s inventory usage
 controlled use of materials
and delivery patterns depart significantly
requisitions, excess
from the assumptions of the EOQ model,
materials requisitions, and
more sophisticated models such as the
employee time cards
back-order quantity model and the
 Independent verification
production order quantity model may be
o cost accounting reconciles material
used.
usage (material requisitions) and
Cost Accounting Activities. Cost accounting activities labor usage (job tickets) with
of the conversion cycle record the financial effects of standards
the physical events that are occurring in the  variances are investigated
o GL dept. verifies movement from
production process.
WIP to FG by reconciling journal
CONTROLS IN THE TRADITIONAL ENVIRONMENT vouchers from cost accounting and
inventory subsidiary ledgers from
 Transaction authorizations inventory control
o work orders – reflect a legitimate o internal and external auditors
need based on sales forecast and periodically verify the raw
the finished goods on hand materials and FGs inventories
o move tickets – signatures from through a physical count
each work station authorize the
movement of the batch through the
work centers
World-Class Companies and Lean Manufacturing  Inefficiencies in traditional plant layouts
increase handling costs, conversion time,
 continuously pursue improvements in all and excess inventories.
aspects of their operations, including  Employees tend to feel ownership over
manufacturing procedures their stations, contrary to the team concept.
 are highly customer oriented  Reorganization is based on flows through
 have undergone fundamental changes from cells which shorten the physical distance
the traditional production model between activities.
 often adopt a lean manufacturing model o This reduces setup and processing
time, handling costs, and
Principles of Lean Manufacturing inventories.
 Pull Processing – products are pulled from Automating Manufacturing
the consumer end (demand), not pushed
from the production end (supply)  Traditional Approach to Automation
 Perfect Quality –pull processing requires  Consists of many different types of
zero defects in raw material, WIP, and FG machines which require a lot of
inventories setup time
 Waste Minimization – activities that do not  Machines and operators are
add value or maximize the use of scarce organized in functional departments
resources are eliminated  WIP follows a circuitous route
 Inventory Reduction – hallmark of lean through the different operations
manufacturing  Islands of Technology
 Inventories cost money  Stand alone islands which employ
 Inventories can mask production computer numerical controlled (CNC)
problems machines that can perform multiple
 Inventories can precipitate operations with less human
overproduction involvement
 Production Flexibility – reduce setup time to  Computer Numerical Controlled (CNC )
a minimum, allowing for a greater diversity Machines
of products, without sacrificing efficiency  Reduce the complexity of the
 Established Supplier Relations – late physical layout
deliveries, defective raw materials, or  Arranged in groups and in cells to
incorrect orders will shut down production produce an entire part from start to
since there are inventory reserves finish
 Team Attitude – each employee must be  Need less set-up time
vigilant of problems that threaten the
continuous flow of the production line  Computer Integrated Manufacturing
(CIM)
 A completely automated
Lean Manufacturing Model environment which employs
automated storage and retrieval
 Achieve production flexibility by means of: systems (AS/RS) and robotics
 Changes in the physical organization of  Automated Storage and Retrieval Systems
production facilities (AS/RS)
 Employment of automated technologies  Replaces traditional forklifts and
 CIM, AS/RS, robotics, CAD, and their human operators with
CAM computer-controlled conveyor
 Use of alternative accounting models systems
 ABC and value stream  Reduce errors, improved inventory
accounting control, and lower storage costs
 Use of advanced information systems  Robotics
 MRP, MRPII, ERP, and  Use special CNC machines that
EDIturing Model are useful in performing
hazardous, difficult, and
Physical Reorganization of the Production Facilities monotonous tasks
  Computer-Aided Design (CAD)
 Increases engineers’
productivity
 Improves accuracy
 Allows firms to be more
responsive to market demands
 Interfaces with CAM and MRPII
systems
 Computer Aided Manufacturing (CAM)
 Uses computers to
control the physical
manufacturing process
 Provides greater
precision, speed, and
control than human
production processes

What’s Wrong with Traditional Accounting

Information?

 Inaccurate cost allocations – automation

changes the relationship between direct
labor, direct materials, and overhead cost

 Promotes nonlean behavior – incentives to

produce large batches and inventories, and
conceal waste in overhead allocations

 Time lag – data lag due to assumption that

control can be applied after the fact to
correct errors

 Financial orientation – dollars as the

standard unit of measure

Activity Based Costing (ABC)

 is an information system that provides

managers with information about activities
and cost objects

 assumes that activities cause costs and that

products (and other cost objects) create a
demand for activities

 is different from traditional accounting

system since ABC has multiple activity
drivers, whereas traditional accounting has
only one, e.g. machine hours