CONVERSIO

N
CYCLE
 LEARNING OBJECTIVES

 Understand the basic elements and procedures encompassing a

 traditional production process.
 Understand the data flows and procedures in a traditional cost accounting system.
 Be familiar with the accounting controls found in a traditional environment such as in
batch production.
 Understand the principles, operating features, and technologies that characterize
 lean manufacturing.
 Understand the shortcomings of traditional accounting methods in a
 world-class environment.
 Be familiar with the information systems commonly associated with
 lean manufacturing and world-class companies.
 THE CONVERSION
CYCLE
 Transforms input resources, raw materials, labor, and
overhead into finished products or services for sale

 Consists of two subsystems:

1. Physical activities - the production system
2. Information activities - the cost accounting system
CONVERSION CYCLE IN RELATION
TO OTHER CYCLES
 PRODUCTION
Continuous Processing
METHODS Make-to-Order Processing
Creates a
homogeneous product
Involves the fabrication
through a continuous
of discrete products in
series of standard
accordance with
procedures.
customer specifications.
Batch Processing

Produces discrete
groups (batches) of
products.
 PRODUCTION SYSTEM
 Involves the planning, scheduling, and control of the
physical product through the manufacturing process

• Determining raw materials requirements

• Authorizing the release of raw materials into production
• Authorizing work to be conducted in the production process
• Directing the movement of work through the various stages
of production
OVERVIEW: TRADITIONAL BATCH
PRODUCTION MODEL

Consists of four basic processes:

1.Plan and control production
2.Perform production operations
3.Maintain inventory control
4.Perform cost accounting
 INFORMATION: DOCUMENTS IN
THE BATCH PRODUCTION SYSTEM

1. Sales Forecast - expected demand for the finished goods

2. Production Schedule - production plan and authorization
to produce
3. Bill of Materials (BOM) - specifies the types and
quantities of the raw materials and subassemblies used to
produce a single finished good unit
 INFORMATION: DOCUMENTS IN
THE BATCH PRODUCTION SYSTEM

4. Route Sheet - details the production path a particular batch

will take in the manufacturing process
4.a. Sequence of operations
4.b. Time allotted at each station
5. Work Order - uses the BOM and route sheet to specify the
exact materials and production processes for each batch
 INFORMATION: DOCUMENTS IN
THE BATCH PRODUCTION SYSTEM

6. Move Ticket - records work done in each work center and

authorizes the movement of the batch
7. Materials Requisition - authorizes the inventory warehouse
to release raw materials for use in the production process
BATCH PRODUCTION ACTIVITIES

PRODUCTION PLANNING AND CONTROL

1. Materials and operations requirements

2. Production scheduling
BATCH PRODUCTION ACTIVITIES

MATERIALS AND OPERATIONS

REQUIREMENT
1. Materials requirement - the difference between
what is needed and what is available in inventory

2. Operations requirements - the assembly and/or

manufacturing activities to be applied to the product
BATCH PRODUCTION ACTIVITIES

PRODUCTION SCHEDULING

 Coordinates the production of multiple batches

 Influenced by time constraints, batch size, and other
specifications
BATCH PRODUCTION ACTIVITIES

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.
BATCH PRODUCTION ACTIVITIES

INVENTORY CONTROL
• Objective: minimize total inventory cost while ensuring that
adequate inventories exist of production demand
Provides production planning and control with status of
finished goods and raw materials inventory
Continually updates the raw material inventory during
production process
Upon completion of production, updates finished goods
inventory
BATCH PRODUCTION ACTIVITIES

EOQ INVENTORY MODEL

 Very simple to 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
BATCH PRODUCTION PROCESS
 BATCH PRODUCTION PROCESS

e d
inu
nt
Co
 UPON COMPLETION OF THE PRODUCTION
Finished Product and Finished Goods
Closed Work Order PROCESS Warehouse

Closed Work
Order

Inventory Control

Production, Planning,
Status Report of Raw Materials
and Control
And Finished Goods

Journal General Ledger

Voucher
 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
 ELEMENTS OF THE COST ACCOUNTING
SYSTEM Work Centers
Inventory Control Job Tickets
Materials Requisition Completed Move Tickets

COST ACCOUNTANTS
Update WIP accounts
STANDARDS DL
DM
FOH
Compute Variances
COST ACCOUNTING SYSTEM

 Receipt of last move ticket signals completion

of the production process

o Clerk removes the cost sheet from WIP file

o Prepares a journal voucher to transfer balance to
a finished goods inventory account and forwards
to the General Ledger department
INTERNAL CONTROL

Transaction authorizations
1.Work orders - reflect a legitimate need based on
sales forecast and the finished goods on hand
2.Move tickets - signatures from each work station
authorize the movement of the batch through the
work centers
3.Materials requisitions - authorize the warehouse
to release materials to the work centers
INTERNAL CONTROL

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
INTERNAL CONTROL

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
INTERNAL CONTROL

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
INTERNAL CONTROL

Accounting records
1. Pre-numbered documents work orders
2. Cost sheets
3. Move tickets
4. Job tickets
5. Material requisitions
6. WIP and finished goods files
INTERNAL CONTROL: SUMMARY
WORLD CLASS COMPANIES

 Continuously pursue Leanimprovements

manufacturing improvesin efficiency
all
and effectiveness in product design,
aspects of their operations, including
supplier interaction, factory operations,
manufacturing procedures
employee management, and customer
 Are highly customer relations.
oriented
 Have undergone fundamental changes
from the traditional production model
 Often adopt a lean manufacturing model
LEAN MANUFACTURING: PRINCIPLES

1. Pull Processing - products are pulled from the

consumer end (demand), not pushed from the
production end (supply)
2. Perfect Quality -pull processing requires zero
defects in raw material, WIP, andcost
1. Inventories FGmoney
inventories
3. Waste Minimization -2.activities
Inventoriesthat
can mask
do notproduction
add problems
3. Inventories can precipitate overproduction
value or maximize the use of scarce resources are
eliminated
4. Inventory Reduction - hallmark of lean
manufacturing
LEAN MANUFACTURING: PRINCIPLES

5. Production Flexibility - reduce setup time to a

minimum, allowing for a greater diversity of products,
without sacrificing efficiency
6. Established Supplier Relations - late deliveries,
defective raw materials, or incorrect orders will shut
down production since there are inventory reserves
7. Team Attitude - each employee must be vigilant of
problems that threaten the continuous flow of the
production line
LEAN MANUFACTURING MODEL

Achieve production flexibility by means of:

 Changes in the physical organization of production
facilities
 Employment of automated technologies
●CIM, AS/RS, robotics, CAD, and CAM
 Use of alternative accounting models
●ABC and value stream accounting
 Use of advanced information systems
●MRP, MRPII, ERP, and EDI
PHYSICAL REORGANIZATION OF THE
PRODUCTION FACILITIES

 Inefficiencies in traditional plant layouts increase

handling costs, conversion time, and excess
inventories.
 Employees tend to feel ownership over their stations,
contrary to the team concept.
 Reorganization is based on flows through cells which
shorten the physical distance between activities.
●This reduces setup and processing time, handling
costs, and inventories.
 PROGRESSION OF AUTOMATION
IN THE MANUFACTURING PROCESS

Traditiona Islands of Computer

l Technolog Integrated
y Manufacturin
g

Progression of Automation toward World-Class Status

AUTOMATING MANUFACTURING

1. Traditional Approach to Automation

o Consists of many different types of machines
which require a lot of setup time
o Machines and operators are organized in
functional departments
o WIP follows a circuitous route through the
different operations
AUTOMATING MANUFACTURING

2. Islands of Technology
o Stand alone islands which employ computer numerical
controlled (CNC) machines that can perform multiple
operations with less human involvement
 Computer Numerical Controlled (CNC ) Machines
o Reduce the complexity of the physical layout
o Arranged in groups and in cells to produce an entire part
from start to finish
o Need less set-up time
AUTOMATING MANUFACTURING

3. Computer Integrated Manufacturing (CIM)

o A completely automated environment which employs
automated storage and retrieval systems (AS/RS) and
robotics
 Automated Storage and Retrieval Systems (AS/RS)
o Replaces traditional forklifts and their human operators
with computer-controlled conveyor systems
o Reduce errors, improved inventory control, and lower
storage costs
 COMPUTER-INTEGRATED
MANUFACTURING (CIM) SYSTEM
AUTOMATING MANUFACTURING

Robotics
oUse special CNC machines that are useful in
performing hazardous, difficult, and monotonous tasks
Computer-Aided Design (CAD)
oIncreases engineers' productivity
oImproves accuracy
oAllows firms to be more responsive to market demands
oInterfaces with CAM and MRPII systems
AUTOMATING MANUFACTURING

 Computer Aided Manufacturing (CAM)

o Uses computers to control the physical manufacturing
process
o Provides greater precision, speed, and control than
human production processes
ACHIEVING WORLD-CLASS STATUS
 The world-class firm needs new accounting methods and
new information systems that:
o Show what matters to its customers
o Identify profitable products
o Identify profitable customers
o Identify opportunities for improving operations and products
Encourage the adoption of value-added activities and
processes and identify those that do not add value
o Efficiently support multiple users with both financial and
nonfinancial information
WHAT’S WRONG WITH TRADITIONAL
ACCOUNTING INFORMATION?
o Inaccurate cost allocations - automation changes the
relationship between direct labor, direct materials, and
overhead cost
o Promotes non-lean behavior - incentives to produce large
batches and inventories, and conceal waste in overhead
allocations
o Time lag - data lag due to assumption that control can be
applied after the fact to correct errors
o Financial orientation - dollars as the standard unit measure
ACTIVITY BASED COSTING (ABC)

o An information system that provides managers with

information about activities and cost objects
o Assumes that activities cause costs and that
products (and other cost objects) create a demand
for activities
o It’s different from traditional accounting system since
ABC has multiple activity drivers, whereas traditional
accounting has only one, e.g. machine hours
ABC: ALLOCATION OF OVERHEAD
COSTS
 ABC: PROS AND CONS
Advantages
o More accurate costing of products/services, customers, and
distribution channels
o Identifying the most and least profitable products and customers
o Accurately tracking costs of activities and processes
o Equipping managers with cost intelligence to drive continuous
improvements
o Facilitating better marketing mix
o Identifying waste and non-value-added activities

Disadvantages
o Too time-consuming and complicated to be practical
o Promotes complex bureaucracies in conflict with lean
manufacturing philosophy
 VALUE STREAM
ACCOUNTING
o Value stream - all the steps in a process that
are essential to producing a product
o Value streams cut across functions and
departments
o Captures costs by value stream rather than
by department or activity
●Simpler than ABC accounting
VALUE STREAM ACCOUNTING:
COST ASSIGNMENT
INFORMATION SYSTEMS THAT SUPPORT
LEAN MANUFACTURING

 Material Requirement Planning (MRP)

o Ensures adequate raw materials for production process
o Maintains the lowest possible level of inventory on hand
o Produce production and purchasing schedules and other
information needed to control production

 Manufacturing Resource Planning II

o An extension of MRP
o More than inventory management and production scheduling
- it is a system for coordinating the activities of the entire firm
 THE INTEGRATION OF MANUFACTURING AND
FINANCIAL SYSTEMS WITHIN THE MRP ENVIRONMENT
INFORMATION SYSTEMS THAT SUPPORT
LEAN MANUFACTURING

 Enterprise Resource Planning (ERP) Systems

o Huge commercial software packages that support the
information needs of the entire organization, not just the
manufacturing functions
o Automates all business functions along with full financial
and managerial reporting capability
Electronic Data Interchange (EDI)
o External communications with its customers and
suppliers via Internet or direct connection
QUESTIONS?

MEMBERS:
AKILIT, CARRIE FAKEY, GRACE S.
ALIPIT, SPENCER M. MOKO, VANESSA A.
DULAY, IVY T. PALORAN, TRISHA T.
THANK
YOU!!