THE

CONVERSI
ON
CYCLE
Objectives
• Elements and procedures of a traditional production
process.
• Data flows and procedures in a traditional cost
accounting system.
• Accounting controls in a traditional environment.
• Principles, operating features, and technologies of lean
manufacturing.
• Shortcomings of traditional accounting methods in the
world class environment.
• Key features of activity based costing and value stream
accounting.
• Information system of lean manufacturing and world
class companies.
Conversion
Cycle
 The Conversion
•
Cycle
Transforms input resources, raw materials, labor,
and overhead into finished products or services for
sale.
• Consist of 2 subsystems:
- Physical Activities- the production system.
- Information Activities- the cost accounting
system
• Central role is the conversion cycle and interacts
with other cycles.
 Production Methods
• Continuous Processing- creates a homogeneous
product through a continuous series of standard
procedures.
• Batch Processing- produces discrete groups
(batches) of products.
• Make-to-Order Processing- involves the fabrication
of discrete products in accordance with customer
specifications.
 Production System
• Involves the planning, scheduling, and control of the physical
product through the manufacturing process.
- Determining raw materials requirement
- 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
Traditional Batch
Production Model
 FOUR BASIC
• PROCESSES:
Plan and Control Production
• Perform production operations
• Maintain inventory control
• Perform cost accounting
 Document in the Batch
•Sales Forecast- expected demand for the finished goods.
•Production Production
Schedule- productionSystem
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.
• Route Sheet- details the production path a particular batch will take in the
manufacturing process.
-Sequences of operations
- Time alloted at each station.
• Work Order- uses the BOM and route sheet to specify the exact materials and
production processes for each batch.
• Move Ticket- records work done in each work center and authorizes the movement of
the batch.
• Material Requisition- authorizes warehouses to release raw materials for use in the
production process.
Batch Production
Activities
 • Production Planning and Control
- Materials and operations requirements
- Production scheduling
• Materials and Operations Requirements
-Materials requirement is the difference between what is needed
and what is available in inventory.
-Operations Requirements is the assembly and/or manufacturing
activities to be applied to the product.
 • 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.
• Inventory Control
-Objective: minimize total inventory cost while ensuring that
adequate inventories exist for production demand.
-Provides production planning and control with status of finished
goods and raw materials inventory.
-Continually updates the raw materials inventory during the
production process.
-Upon completion of production, updates finished goods inventory.
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 inventort increases as quantity
of orders increases.
• No quantity discounts.
 Cost Accounting
•
System
Records the financial effects of the events occuring 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.
• Receipts of last move ticket signals completion of the production
process.
 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 workstation
authorize the movement of the batch through the
work centers.
• Materials requisitions- authorize the warehouse to
release materials to the work centers.
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.
Supervision
• Work center supervisors oversee the usage of raw
materials are used in production and waste is
minimized.
• Employee time cards and job tickets are checked for
accuracy.
Access Control
• Direct Access to Assets- controlled access to
storerooms, production work centers, and finished
goods warehouses.
• Indirect Access to Asset- controlled use of materials
requisitions, excess materials requisitions and
employee time cards.
Accounting Records
• Pre-numbered documents
• Work orders
• Cost sheets
• Move tickets
• Job tickets material requisition
• WIP and finished goods
Independent Verification
• Cost accounting reconciles material usage (material
requisition) and labor usage (job tickets) with
standards.
• GL dept. verifies movement from WIP to FG by
reconciling journal vouchers from cost accounting and
inventory subsidiary ledgers from inventory control.
• Internal and extenral auditors periodically verify the
raw materials and FGs inventories through physical
count.
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
 Principles of Lean
• Manufacturing
Pull Processing- products are pulled from the
customer end, not pushed from the production
end.
• Perfect Quality- pull processing requires zero
defects in raw materials, 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
• Production Flexibility- reduce setup to a minimum, allowing
for a greater diversity of products without sacrificing
efficiency.
• Established Supplies Relations- late deliveries, defective raw
materials, or incorrect orders will shut down production
since there are inventory reserves.
• Team Attitudes- each employee must be vigilant of
problems that threathen 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 (e.g
CIM, AS/RS, robotics, CAD and CAM)
Use of alternatives accounting models
• ABC and value stream accounting
Use of advance information systems (e.g MRP,
MRPII, ERP and EDI)
Physical Reorganization of the
Production Facilities
• Inefficiences in traditional plant layouts increase handling
costs, conversion time, and excess inventories.
• Employees tend to feel ownership over their stations,
ontrary to the team concept.
• Reorganization is based on flows through cell which
shorten the physical distance between activities.
 Automatic Manufacturing
Traditional Approach to Automation
• Consists of many different types of machines which require a
lot of set up time.
• Machines and operators are organized in functional
departments.
• WIP follows a circuitous routhe through the different
operations.
Islands of Technology
• Stand alone islands which employ computer numerical
controlled (CNC) machines that can perform multiple
operations with less human involvement.
Computer Numerical Controlled (CNC) Machines
• Reduce the complexity of the physical layout.
• Arranged in groups and in cells to produce an entire part from
start to finish.
• Need less set-up time.
Computer Integrated Manufacturing (CIM)
• A completely automated environment which employs
automated storage and retrieval systems (AS/RS) and robotics.
Automated Storage and Retrieval Systems (AS/RS)
• Replaces traditional forklifts and their human operators with
computer-controlled conveyor systems.
 • Reduce errors, improved inventory control, and lower storage
costs.
Robotics
• Use special CNC machines that are useful in performing
hazardous, difficult, and monotonous tasks.
Computer-Aided Design (CAD)
• Increase engineer’s productivity
• Improves accuracy
• Interfaces with CAM and MRP II systems
Computer-Aided Manufacturing (CAM)
• Uses computers to control the physical manufacturing process.
• Provides greater precision, speed, and control.
Achieving World
Class Status
The world class firm needs new accounting methods and new
information systems that:
• Show matters to its customers
• Identify profitable products
• Identify profitable customers
• Identify opportunities for improving operations and products
• Encourage the adoption of value-added activities and processes
and identify those that do not add value
• Efficiency support multiple users with both financial and
nonfinancial information
 Disadvantages of Traditional
Accounting Information
• Inaccurate Cost Allocations- automation changes the
relationship between direct labor, direct materials, and
overhead cost.
• Promotes non-behavior- incentives to produce large
batches and inventories, and conceal waste in overhead
collection.
• 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 projects.
• Assumes that activities cause costs and that products
(and other cost objects) create a demand for activities.
• Is different from the traditional accounting system since
ABC has multiple activity drivers, whereas traditional
accounting has only one e.g machine hours.
 ABC - Pros and Cons
Advantages:
• More accurate costing of products/services, customers, and
distribution channels.
• Identify the most and least profitable products and customers
• Accurately tracking costs of activitites and process
• Equipping managers with cost intelligence to drive continuous
improvements
• Facilitating better market mix
Disadvantages:
• Identifying waste and non-value-added activities
• Too time-consuming and complicated to be practical
• Promotes complex bureaucracies in conflict with lean
manufacturing philosophy.
 Value Stream Accounting

• Value Stream- all the steps in the process that are

essential to producing a product.
• Value streams cut acroos functions and deparments
• Captures costs by value stream rather that by
department or activity
• Makes no distinction between direct and indirect costs.
Information System that Support
Lean Manufacturing
Manufacturing Resources Planning (MRP)
• ensures adequate raw materials for production process
• maintains the lowest possible level of inventory on hand
• produce production and purchasing schedules and other
information needed to control production.
Manufacturing Resources Planning II
• an extension of MRP
• more than inventory management and production scheduling - it is the
system for coordinating the activities of the entire firm.
Enterprise Resources Planning (ERP) Systems
• Huge commercial software packages that support the information needs
of the entire organization, not just the manufacturing functions.
• Automates all the business functions along withfull financial and
managerial report capability.
Electronic Data Intercharge (EDI)
• External communications with its customer and suppliers via internet or
direct connection.