GROUP 4

THE
CONVERSION
CYCLE
Chapter 7

Accounting Information sytem

 THE TRADITIONAL MANUFACTURING
ENVIRONMENT
The conversion cycle includes both physical and informational activities
involved in manufacturing products for sale. Production is triggered by
customer orders (from the revenue cycle) or sales forecasts (from
marketing). These inputs help set production targets and create a
production plan, which drives production activities.
Key interactions with other business cycles include:
Purchase Requisitions → Sent to the expenditure cycle for raw material
procurement.
Labor Costs → Sent to the payroll system for processing.
Manufacturing Costs → Sent to the general ledger for financial
reporting.
 ATCH
B The batch processing system includes four

PROCESSING key processes:

SYSTEM 1. Plan and control production

2. Perform production operations
3. Maintain inventory control
4. Perform cost accounting

The system is designed to be

technology-neutral, meaning tasks can
be performed manually or using
computers. Information flows between
these processes are facilitated by
system documents, which can be either
hard copy or digital.
DOCUMENTS IN
THE BATCH
PROCESSING
SYSTEM
 PRODUCTION SCHEDULE
The production schedule is the
formal plan and authorization to
begin production. This document
describes the specific products to
be made, the quantities to be
produced in each batch, and the
manufacturing timetable for
starting and completing production
BILLS OF MATERIALS (BOM)
The bill of materials (BOM)
specifies the types andquantities of
the raw material (RM) and
subassemblies used in producing a
single unit of finished product. The
RM requirements for an entire
batch are determined by
multiplying the BOM by the number
of items in the batch.
 ROUTE SHEET
A route sheet shows the production
path that a particular batch of product
follows during manufacturing. It is
similar conceptually to a BOM.
Whereas the BOM specifies material
requirements, the route sheet
specifies the sequence of operations
(machining or assembly) and the
standard time allocated to each task.
 WORK ORDER
The work order (or production order)
draws from BOMs and route sheets to
specify the materials and production
(machining, assembly, and so on) for
each batch. These, together with move
tickets(described next), initiate the
manufacturing process in the
production departments.
 MOVE TICKET
A move ticket, shown in Figure
7-7, records work done in each
work center and authorizes the
movement of the job or batch
from one work center to the
next.
MATERIALS REQUISITION
A materials requisition authorizes the
storekeeper to release materials (and
subassemblies) to individuals or work
centers in the production process. This
document usually specifies only
standard quantities. Materials needed
in excess of standard amounts require
separate requisitions that may be
identified explicitly as excess materials
requisitions.
 BATCH
PRODUCTION
ACTIVITIES
PRODUCTION PLANNING AND CONTROL.

We first examine the production planning and control function. This

consists of two main activities: (1) specifying materials and operations
requirements and (2) production scheduling.

MATERIALS AND OPERATIONS REQUIREMENTS.

The RM requirement for a batch of any given product is the difference

between what is needed and what is available in the RM inventory. This
information comes from analysis of inventory on hand, the sales forecast,
engineering specifications (if any), and the BOM. A product of this activity
is the creation of purchase requisitions for additional RMs .
PRODUCTION SCHEDULING.

The second activity of the planning and control function is production

scheduling. The master schedule for a production run coordinates the
production of many different batches. The schedule is influenced by time
constraints, batch size, and specifications derived from BOMs and route sheets.
The scheduling task also produces work orders, move tickets, and materials
requisitions for each batch in the production run.

WORK CENTERS AND STOREKEEPING:

Production starts when workers obtain raw materials from storekeeping using
materials requisitions. Materials, machining, and labor are applied according to
the work order. Once a task is complete at a work center, a supervisor signs the
move ticket, allowing the batch to proceed. A copy of the move ticket is sent to
production planning to update the open work order file.
I NVENTORY CONTROL
The inventory control function consists of three main activities. First, it
provides production planning and control with status reports on finished
goods and raw materials inventory. Second, the inventory control
function is continually involved in updating the raw material inventory
records from materials requisitions, excess materials requisitions, and
materials return tickets.

Finally, upon receipt of the work order from the last work center,
inventory control records the completed production by updating the
finished goods inventory records.

A commonly used inventory model is the economic order quantity

(EOQ) model. This model, however, is based on simplifying assumptions
that may not reflect the economic reality. These assumptions are:
1. Demand for the product is constant and known with certainty.
2. The lead time—the time between placing an order for inventory and its arrival
—is known and constant.
3. All inventories in the order arrive at the same time.
4. The total cost per year of placing orders is a variable that decreases as the
quantities ordered increase.
Ordering costs include the cost of preparing documentation, contacting
vendors, processing inventory receipts, maintaining vendor accounts, and
writing checks.
5. The total cost per year of holding inventories (carrying costs) is a variable
that increases as the quantities ordered increase. These costs include the
opportunity cost of invested funds, storage costs,
property taxes, and insurance.
6. There are no quantity discounts. Therefore, the total purchase price of
inventory for the year is constant
How much inventory should
be purchased?
 
When should Inventory be
purchased?
COST ACCOUNTING ACTIVITIES
Cost accounting activities of the conversion cycle record the
financial effects of the physical events that are occurring in
the production process. The cost accounting process for a
given production run begins when the production planning and
control department sends a copy of the original work order to
the cost accounting department. This marks the beginning of
the production event by causing a new record to be added to
the WIP file, which is the subsidiary ledger for the WIP control
account in the general ledger.
CONTROLS IN THE
TRADITIONAL
ENVIRONMENT
 WORLD-CLASS
COMPANIES AND LEAN
MANUFACTURING
 World-class company

.The following are features characterize the world class company:

Must maintain stability agility

World-class companies motivate and treat employees like appreciating assets
A world-class company profitably meets the needs of its customers
Customer Chain Philosophy
Lean manufacturing
Principles of Lean Manufacturing

Lean manufacturing evolved from the Toyota Production System (TPS), which is
based on the just-in-time (JIT) production model.

The goal of lean production is improved efficiency and effectiveness in every area,
including product design, supplier interaction, factory operations, employee
management, and customer relations.

Lean involves getting the right products to the right place, at the right time, in the right
quantity while minimizing waste and remaining flexible.
PRINCIPLES OF LEAN MANUFACTURING
Pull Processing
involves pulling products from the consumer end (demand), rather than pushing
them from the production end (supply). Under the lean approach, inventories
arrive in small quantities from vendors several times per day, just in time to go
into production. They are pulled into production as capacity downstream
becomes available. Unlike the traditional push process, this approach avoids the
creation of batches of semifinished inventories at bottlenecks.
PRINCIPLES OF LEAN MANUFACTURING
Perfect Quality
Success of the pull processing model requires zero defects in RM, WIP, and FG
inventory. Poor quality is very expensive to a firm. Consider the cost of scrap,
reworking, scheduling delays, and extra inventories to compensate for defective
parts, warranty claims, and field service.
In the traditional manufacturing environment, these costs can represent between
25 and 35 percent of total product cost. Also, quality is a basis on which world-
class manufacturers compete. Quality has ceased to be a trade-off against price.
Consumers demand quality and seek the lowest-priced quality product.
PRINCIPLES OF LEAN MANUFACTURING
Waste Minimization
All activities that do not add value and maximize the use of scarce resources
must be eliminated. Waste involves financial, human, inventory, and fixed assets.

Production Flexibility

Long machine setup procedures cause delays in production and encourage

overproduction. Lean companies strive to reduce setup time to a minimum, which
allows them to produce a greater diversity of products quickly, without sacrificing
efficiency at lower volumes of production.
PRINCIPLES OF LEAN MANUFACTURING
Established Supplier Relation
A lean manufacturing firm must have established and co-
operative relationships with vendors. Late deliveries, defective raw materials, or
incorrect orders will shut down production immediately because this production
model allows no inventory reserves to draw upon.
Team attitude
Lean manufacturing relies heavily on the team attitude of all employees involved
in the process. This includes those in purchasing, receiving, manufacturing,
shipping everyone. Each employee must be vigilant of problems that threaten the
continuous flow operation of the production line.
PRINCIPLES OF LEAN MANUFACTURING
Inventory Reduction

The hallmark of lean manufacturing firms is their success in inventory reduction.

Such firms often experience annual inventory turnovers of 100 times per year.
While other firms carry weeks and even months of inventories, lean firms have
only a few days or sometimes even a few hours of inventory on hand. The three
common problems outlined below explain why inventory reduction is important.

1. Inventories cost money.

2. Inventories camouflage production problems.
3. Willingness to maintain inventories can precipitate overproduction.
 TECHNIQUES AND
TECHNOLOGIES THAT
PROMOTE LEAN
MANUFACTURING
PHYSICAL REORGANIZATION OF THE PRODUCTION FACILITIES
PHYSICAL REORGANIZATION OF THE PRODUCTION FACILITIES
AUTOMATION OF THE MANUFACTURING PROCESS
Automation is at the heart of the lean manufacturing philosophy. By replacing
labor with automation, a firm can reduce waste, improve efficiency, increase
quality, and improve flexibility.
Islands of Technology

Islands of technology describes an environment in which modern automation exists

in the form of islands that stand alone within the traditional setting. The islands
employ computer numerical controlled (CNC) machines that can perform multiple
operations with little human involvement.

Computer-Integrated Manufacturing

Computer-integrated manufacturing (CIM) is a completely automated environment with

the objective of eliminating non–value-added activities.
AUTOMATED STORAGE AND RETRIEVAL SYSTEMS (AS/RS)
AS/RS are computer-controlled conveyor systems that carry raw materials from
stores to the shop floor and finished products to the warehouse.

ROBOTICS

Manufacturing robots are programmed to perform specific actions over and over
with a high degree of precision and are widely used in factories to perform jobs
such as welding and riveting.
COMPUTER-AIDED DESIGN (CAD)
CAD technology greatly shortens the time frame between initial and final design.
The CAD systems often have an interface to the external communication
network to allow a manufacturer to share its product design specifications with its
vendors and customers.

COMPUTER-AIDED MANUFACTURING (CAM).

Computer-aided manufacturing (CAM) is the use of computers to assist the
manufacturing process.
Value Stream Mapping
ACCOUNTING IN A LEAN
MANUFACTURING
ENVIRONMENT
ACCOUNTING IN A LEAN MANUFACTURING ENVIRONMENT

TRADITIONAL INFORMATION PRODUCED UNDER CONVENTIONAL ACCOUNTING TECHNIQUES

DOES NOT ADEQUATELY SUPPORT THE NEEDS OF LEAN COMPANIES. THEY REQUIRE NEW
ACCOUNTING METHODS AND NEW INFORMATION THAT:

1. Shows what matters to its customers (such as quality and service).

2. Identifies profitable products.
3. Identifies profitable customers.
4. Identifies opportunities for improvement in operations and products.
5. Encourages the adoption of value-added activities and processes within the organization
and identifies those that do not add value.
6. Efficiently supports multiple users with both financial and nonfinancial information.
WHAT'S WRONG WITH
TRADITIONAL ACCOUNTING
INFORMATION?
THE FOLLOWING ARE THE MOST COMMONLY CITED DEFICIENCIES
OF STANDARD ACCOUNTING SYSTEMS

INACCURATE COST ALLOCATIONS

PROMOTES NONLEAN BEHAVIOR
TIME LAG
FINANCIAL ORIENTATION
ACTIVITY-BASED COSTING (ABC)
This is a method of allocating costs to products and
services to facilitate better planning and control.

ACTIVITIES
- describe work performed in a firm

COST OBJECTS
- reasons for performing activities
ADVANTAGES OF ABC
More accurate costing of products/services, customers, and
distribution channels.
Identifying the most and least profitable products and customers.
Accurately tracking costs of activities and processes.
Equipping managers with cost intelligence to drive continuous
improvements.
Facilitating better marketing mix.
Identifying waste and non–value-added activities.
DISADVANTAGES OF ABC
Time consuming
Complicated for practical applications over a sustained period
Identifying activity costs and cost drivers can be a significant
undertaking that is not completed once and then forgotten
Cost assignments become inaccurate
Creates complex bureaucracies within organizations
VALUE STREAM ACCOUNTING
It captures costs by value stream rather than by department or activity.
INFORMATION SYSTEMS
THAT SUPPORT
LEAN MANUFACTURING
INFORMATION SYSTEMS SUPPORTING LEAN
MANUFACTURING:
MATERIALS REQUIREMENTS PLANNING (MRP)
MATERIALS RESOUCE PLANNING (MRP II)
ENTERPRISE RESOURCE PLANNING
MATERIALS REQUIREMENTS PLANNING (MRP)
MRP systems are limited in focus and geared toward determining how
much raw materials are required to fulfill production orders.

Operational objectives:

Ensure that adequate raw materials are available to the production process.
Maintain the lowest possible level of inventory on hand.
Produce production and purchasing schedules and other information
needed to control production.
MANUFACTURING RESOURCE PLANNING (MRP II)
MRP II is an extension of MRP that has evolved beyond the confines of
inventory management.
MRP II integrates product manufacturing, product engineering, sales
order processing, customer billing, human resources, and related
accounting functions.
MANUFACTURING RESOURCE PLANNING (MRP II)
Benefits that manufacturing firms can realize from MRP II system:

Improved customer service

Reduced inventory investment
Increased productivity
Improved cash flow
Assistance in achieving long-term strategic goals
Help in managing change
Flexibility inthe production process
ENTERPRISE RESOURCE PLANNING SYSTEM (ERP)

ERP integrates departments and functions across a company into one

system of integrated applications that is connected to a single common
database.
lean manufacturing company will have an ERP system that is capable of
external communications with its customers and suppliers through
electronic data interchange(EDI).
ENTERPRISE RESOURCE PLANNING SYSTEM (ERP)

Similarities in functionality between ERP and MRP II systems are quite

apparent. Some argue that very little real functional difference exists
between the two concepts.
A primary distinction, however, is that the ERP has evolved beyond the
manufacturing market place to become the system of choice among
nonmanufacturing firms as well.
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