CHAPTER 7: THE CONVERSION CYCLE Materials Requisition
TRADITIONAL MANUFACTUTING - Authorizes the storekeeper to release
ENVIRONMENT materials (and subassemblies) to
individuals or work centers in the
DIFFERENT PRODUCTION METHODS
production process
1. Continuous Processing - Usually specifies only standard
2. Custom or make-to-order processing quantities
3. Batch processing - Materials needed in excess of standard
amounts require separate requisitions
that may be identifies explicitly as
DOCUMENTS IN THE BATCH PROCESSING excess materials requisition
SYSTEM
FOUR BASIC PROCESSES OF BATCH
Production Schedule PROCESSING SYSTEM
- Formal plan and authorization to begin Production Planning and Control
production
- Consists of two main activities:
- Describes the specific products to be
a. Specifying materials and operation
made, the quantities to be produced in
requirements
each batch, and the manufacturing
b. Production Scheduling
timetable for starting and completing
production Work Centers and Storekeeping
Bill of Materials - Involves day-to-day performance of
production activities including
- Specifies the types and quantities of the
monitoring related costs, time, and
raw material and subassemblies used in
quality
producing a single unit of finished
product Inventory Control
- The RM requirements for an entire batch
- Responsible for managing and
are determined by multiplying the BOM
recording the movement of inventory in
by the number of items in the batch
many different directions that it may go
Route Sheet throughout the conversion process
- Objective: minimize total inventory cost
- Shows the production path that a
while ensuring that adequate
particular batch of product follows
inventories exist to meet current
during manufacturing
demand
- Similar to conceptually to BOM
o Achieving this objective help
- Specifies the sequence of operation
answer two fundamental
(machining or assembly) and the
questions:
standard time allocated to each task
When should inventory be
Work Order purchased?
- Production order How much inventory
- Draws from BOM and route sheets to should be purchased?
specify the material and production
(machining, assembly, and so on), for
ECONOMIC ORDER QUANTITY
each batch
- These, together with move tickets, - Based on simplifying assumptions that
initiate manufacturing process in the may not reflect the economic reality
production departments - Assumptions:
o Demand for product is constant
Move Ticket
and known with certainty
- Records work done in each work center o The lead time – the time between
and authorizes the movement of the job placing an order for inventory
and its arrival – is known and Segregation of Duties
constant
- The following separation apply:
o All inventories in the order arrive
o Production planning and control
at the same time
department is separate from the
o The total cost per year of placing
work centers
orders is a variable that decrease
o Inventory control is separate
as the quantities ordered
from materials storeroom and
increases
finished goods warehouse
o The total cost per year of holding
o Cost accounting function
inventories is a variable that
accounts for Work in Process
increase as the quantities ordered
should be separate from the work
increases
centers in the production process
o There are no quantity discounts
- Objective: reduce total inventory costs Supervision
- Significant parameters:
- The following supervision procedures
o Carrying costs
apply to the conversion cycle:
o Ordering costs
o The supervisors in the work
Reorder Point centers oversee the usage of RM
in the production process
- Triggers the placement of a purchase
o Supervisors also observe and
order for additional units of materials
review timekeeping activities
Safety Stock
Access Control
- Estimated quantity of materials
- Direct Access to Assets
maintained to avoid running out of
o The nature of physical product
stock
and the production process
CONTROL IN THE TRADITIONAL influences the type of access
ENVIRONMENT controls needed
o Limit access to sensitive areas
Transaction Authorization
(storerooms, production work
- Formal Work Order centers, and FG warehouses)
o The production planning and o Control methods used:
control authorize the production identification badges, security
activity via this document guards, observation devices, and
o Reflects the production various electronic sensors and
requirements, which are alarms
difference between the expected o Use of standard costs provides a
demand for products (based on type of access control
sales forecast) and the FG o By specifying the quantities of
inventory on hand material and labor authorized for
- Move Tickets each product, the firm limits
o Signed by the supervisor in each unauthorized access to those
work center authorize activities resources
for each batch and for the o To obtain excess quantities
movement of products through requires special authorization
various work centers and formal documentation
- Materials requisition and excess materials - Indirect Access to Assets
requisition o Assets like cash and inventories
o Authorize the storekeeper to can be manipulated through the
release materials to the work access of source documents
centers o Method of control: use of
prenumbered documents
Accounting Records more with less, eliminating waste, and
reducing production cycle time
- Work orders
- Cost sheets PRINCIPLES OF LEAN MANUFACTURING
- Move tickets
- Lean Manufacturing evolved from the
- Job tickets
Toyota Production System (TPS) which
- Material requisitions
is based on the JIT production level
- WIP records
- The goal of lean production is improved
- FG inventory file
efficiency and effectiveness in every
Independent Verification area, including product design, supplier
interaction, factory operations,
- Cost accounting functions reconciles all
employee managements, and customer
cost of production
relations
- General ledger reconciles overall system
Pull processing
- Involves pulling products from the
WORLD-CLASS COMPANIES AND LEAN
consumer end (demand), rather than
MANUFACTURING
pushing system from their production
WORLD-CLASS COMPANY end (supply)
- Avoids creation of batches of semi-
- The term world class manufacturer is
finished inventories at bottlenecks
popularly used to denote a standard of
excellence Perfect Quality
- The best of the best manufacturers at the
- success of the pull processing model
international level
requires zero defects in Raw Materials,
These features characterize the world-class WIP, and FGI
company
Waste Minimization
1. Must maintain strategic agility and be
- All activities that do not add value and
able to turn on a dime. Top
maximize the use of scarce resources
management must be intimately aware
must be eliminated
of customer needs and not become rigid
- Following are examples of waste in
and resistant to paradigm change
traditional environments which lean
2. Motivate and treat employees like
manufacturing seek to minimize:
appreciating assets. To activate the
o Overproduction of products
talents of everyone, decisions are
o Transportation of products
pushed to the lowest level in the
o Bottlenecks of products waiting
organization. The result is a flat and
to move to the next production
responsive organizational structure
step
3. Profitably meets the needs of its
o Idle workers waiting for work to
customers. Its goal is not simply to
do as production bottlenecks
satisfy customers, but to positively
clear
delight them. This is something that
o Inefficient motion of workers
cannot be done once and then forgotten.
who must walk more than
With competitors aggressively seeking
necessary in the completion of
new ways to increase market share, a
their assigned task
world-class firm must continue to
o Islands of technology created by
delight its customers
stand-alone processes that are not
4. The philosophy of customer satisfaction
linked to upstream or
permeates the world-class-firm. Each
downstream processes
activity is dedicated to serving its
o Production defects that require
customer
unnecessary effort to inspect
5. Following a philosophy of lean
and/or correct
manufacturing. This involves doing
o Safety hazards that cause injuries - Computer numerical controlled (CNC) can
and lost work hours and perform multiple operation with little
associated expense human involvement
Inventory reduction Computer-integrated Manufacturing
- The hallmark of lean manufacturing - A completely automated environment
firms is their success in inventory with the objective of eliminating non-
reduction value-added activities
- Three common problems outlined why A. Automated Storage and Retrieval
inventory reduction is important System
o Inventories cost money o A computer-controlled conveyor
o Inventories camouflage systems that carry raw materials
production problems from stores to the shop flows and
o Willingness to maintain finished products to the
inventories can precipitate warehouse
overproduction B. Robotics
o Manufacturing robots are
Production Flexibility
programmed to do specific task
- Long machines set up procedures cause over and over with a high degree
delay in production and encourage of precision ad can perform jobs
overproduction such as welding and riveting
C. Computer-aided Design (CAD)
Established Supplier Relations
o Usually used by engineers
- Lean Manufacturing firms must have o This helps them design better
established and cooperative relationship products faster
with vendors o This allows the firm to be more
Team Attitude responsive to the market demand
D. Computer-aided Manufacturing (CAM)
- Lean manufacturing relies heavily on o The use of computer assists the
the team attitude of all employees manufacturing process
involved in the process o It focuses on the shop floor a
- This includes those in purchasing, control of physical
receiving, manufacturing, shipping manufacturing process
Value Stream Mapping
TECHNIQUES AND TECHNOLGIES THAT - Includes all the steps in the process that
PROMOTE LEAN MANUFACTURING are essential to producing a product
AUTOMATION OF THE MANUFACTURING - These are the step for which the
PROCESS customer is willing to pay
- Value Stream Map
Traditional Manufacturing
o Graphically present the business
- Consists of a range of different types of processes to identify aspects of
machines, each controlled by a single that are wasteful and should be
operator removed
- These machines require a great deal of o It identifies all of the actions
setup time, so this is costly required to complete processing
on a product, along with key
Islands of Technology
information about each action
- An environment which modern item
automation exists in the form of islands
that stand alone within the tradition
setting
ACCOUNTING IN A LEAN - Activities – work performed in a firm
MANUFACTURING ENVIRONMENT - Cost Objects – reasons for performing
activities
NEW ACCOUNTING METHODS AND NEW
INFORMATION THAT: ADVANTAGES DISADVANTGES
More accurate Time-consuming
1. Shows what matter to its customers
costing of
(such as quality and service)
products/services
2. Identifies profitable products Identifying the most Complicated for
3. Identifies profitable customers profitable products practical applications
4. Identifies opportunities for Accurate costs of Complex
improvement in operation and products activities and bureaucracies within
5. Encourages the adoption of value-added processes organization
activities and processes within the Equipping managers
organization and identifies those that do with cost intelligence
not add value to dive continuous
6. Efficiently supports multiple users with improvements
both financial and nonfinancial Facilitating better
information marketing mix
Identifying waste
WHAT’S WRONG WITH TRADITIONAL and non-value-added
ACCOUNTING INFORMATION activities
1. Traditional standard costing techniques
emphasize financial performance than VALUE STREAM ACCOUNTING
manufacturing performance
- This method captures cost by value
2. The techniques and convention used do
stream rather than by department or
not support the objectives of lean
activity
manufacturing firm
- Based on value stream mapping, using
MOST COMMON DEFICIENCIES IN the principles of lean manufacturing to
STANDARD ACCOUNTING SYSTEM discover the real cause and cost of waste
- Includes all the costs associate with the
1. Inaccurate cost allocation
product family, but makes no
2. Promotes nonlean behavior
distinction between direct and indirect
3. Financial orientation
costs
4. Time lag
- Raw material costs are calculated base
don how much material has been
purchased for the value stream. Thus
ACITIVTY-BASED COSTING
the total value stream material cost in
- Methods of allocating costs to products the sum of everything purchased for the
and service to facilitate better planning period
and control - Labor costs are not allocated to
- It is accomplished by assigning cost to individual products in the traditional
activities based on their use of resources way. Instead, the sum of the wages and
and assigning costs to cost objects based direct benefits paid to all individuals
on their use of activities working in the value stream is charged
- ABC approach primarily determine the to the stream
cost of the activity - This simplified (lean) accounting
- The activity cost is then assigned to the approach works because RM and WIP
relevant cost object by means of an inventories on hand are low,
activity driver. This factor measures the representing perhaps only one or to
activity consumption by the cost object days of stocks
- Firms using ABC may have dozens of
activity cost pool, each with a unique
activity driver
INFORMATION SYSTEM - Composed of function-specific modules
that reflect industry best practices.
MANUFACTURING REQUIREMENT
Designed to interact with the other
PLANNING (MRP)
modules
- An automate production planning and - Can calculate resource requirement,
control system used to support schedule production, mange changes to
inventory management product configurations, allow for future
- Operational objectives: planned changes in products, and
o Ensure that adequate raw monito shop floor production
materials are available to the
production process
o Maintain the lower possible level
of inventory on hand
o Produce production and
purchasing schedules and other
information needed to control
production
MANUFACTURING RESOURCE PLANNING
(MRP II)
- an extension of MRP that has evolved
beyond the confines of inventory
management
- It is both system and philosophy for
coordination a wide range of
manufacturing activities
- Integrates product manufacturing,
product engineering, sales order
processing, customer billing, human
resources, and related accounting
functions
- Manufacturing firms can realize
considerable benefits
o Improved customer service
o Reduced inventory investment
o Increase productivity
o Improved cash flow
o Assistance in achieving long-term
strategic goals
o Help in managing change
o Flexibility in the production
process
ENTERPRISE RESOURCE PLANNING (ERP)
SYSTEM
- Integrates department and function
across a company into one system of
integrated applications that is connected
to a single common database
- This enables various departments to
share information and communicate
with each other
