1. Chapter 7
The Conversion Cycle 1

2. The Continuum of Manufacturing Practices

3. The Conversion Cycle
The conversion cycle transforms input resources, raw materials, labor, and overhead into finished products or services for sale.
The conversion cycle consists of two subsystems:
the production system
the cost accounting system 4

4. 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 5

5. Production Methods
Continuous Processing creates a homogeneous product through a continuous series of standard procedures.
Batch Processing produces discrete groups (batches) of products. Each item in the batch is similar.
Make-to-Order Processing involves the fabrication of discrete products in accordance with customer specifications. 6

6. Documents in the Batch Production System
Sales Forecast - expected demand for the finished goods
Production Schedule - production 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 7

7. Documents in the Batch Production System
Route Sheet - details the production path a particular batch will take in the manufacturing process
sequence of operations
time allotted at each station
Work Order - uses information from the BOM and route sheet to specify the exact materials and production processes for each batch 8

8. Documents in the Batch Production System
Move Ticket - records work done in each work center and authorizes the movement of the batch
Materials Requisition - authorizes the inventory warehouse to release raw materials for use in the production process 9

9. 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 new batch and files in WIP file
The records are updated as materials and labor are used 15

10. Elements of the Cost Accounting System
Inventory Control
materials requisitions
Work Centers
job tickets
completed move tickets
COST ACCOUNTANTS
Update WIP accounts DL DM
Mfg. OH.
Compute Variances
STANDARDS 16

11. Summary of Internal Controls

12. Internal Controls Transaction authorizations
work orders reflect a legitimate need based upon sales forecast and the finished goods on hand
move tickets (with authorized signature from each work station) authorize the movement of the batch through the various work centers
materials requisitions authorize the warehouse to release materials to the work centers 18

13. Internal Controls Segregation of duties
production planning and control department is separate from the work centers
inventory control 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 19

14. Internal Controls Supervision
supervisors in the work centers oversee the usage of raw materials in the production process to ensure that all released materials are used in production and waste is minimized
employee time cards and job tickets are checked for accuracy 20

15. Internal Controls Access control direct access to assets
storerooms, production work centers, and finished goods warehouses
quantities in excess of standard amounts should require approval
indirect access to assets
materials requisitions, excess materials requisitions, and employee time cards 21

16. Internal Controls Accounting records pre-numbered documents
work orders
cost sheets
move tickets
job tickets
material requisitions
WIP and FGs files 22

17. Internal Controls Independent verification
cost accounting reconciles material usage (material requisitions) and labor usage (job tickets) with prescribed standards, and variances are investigated
GL dept. verifies the total movement from WIP to FG by reconciling journal vouchers from cost accounting and inventory subsidiary ledger summaries from inventory control
internal and external auditors periodically verify the raw materials and FGs inventories on hand through a physical count 23

18. The World-Class Environment and Manufacturing Flexibility
Customers:
want quality products
want them quickly
want variety
Achieving manufacturing flexibility incorporates four operational characteristics:
physical reorganization of the production facilities
automation of the manufacturing process
reduction of inventories
high product quality 24

19. Progression of Automation in the Manufacturing Process
Traditional
Islands of
Technology
Process
Simplification
(JIT)
Computer
Integrated
Manufacturing
Progression of Automation toward World-Class Status 26

20. Automating Manufacturing

21. Automating Manufacturing
Process Simplification:
reduces the complexity of the physical layout
groups of CNC machines are arranged in cells to produce an entire part from start to finish
no human involvement in a cell
Computer Integrated Manufacturing (CIM):
a completely automated environment which employs automated storage and retrieval systems (AS/RS) and robotics 28

22. Automating Manufacturing
Robotics:
use special CNC machines that are useful in performing hazardous, difficult, and 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 29

23. Automating Manufacturing
Computer Aided Manufacturing (CAM):
uses computers to control the physical manufacturing process
provides greater precision, speed, and control than human production processes
Manufacturing Resources Planning (MRP II):
an extension of materials requirements planning (MRP)
more than inventory management--it is a system for coordinating the activities of the entire firm 30

24. Automating Manufacturing
Enterprise Resource Planning (ERP) Systems:
huge commercial software packages that support the information needs of the entire organization, not just the manufacturing functions
automates all business functions along with full financial and managerial reporting capability
Electronic Data Interchange (EDI):
external communications with its customers and suppliers via Internet or direct connection 30

25. Accounting and MRP

26. How can inventories be reduced?
Just-in time (JIT) manufacturing is a model that fosters inventories reduction and even elimination. It is based on the following assumptions:
zero defects
zero setup time
small lot sizes
zero inventories
zero lead times and reliable vendors
team attitude 36

27. What’s Wrong with Traditional Cost Accounting Information?
Inaccurate cost allocations
Time lag in reporting
Financial orientation
Emphasis on standard costs 38

28. Allocation of Costs Using ABC

29. The World-Class Information System…
is the integration of all the system’s functional and technological components:
basic accounting applications
ABC
materials requirements planning
capacity planning
inventory control
bill-of-materials
master productions schedule
forecasting
order entry
computer-aided design
computer-aided manufacturing
EDI communications links 44

30. Control Issues in the WCIS
Paperless environment - no traditional audit trail
Automatic transactions - need assurance that:
the system places orders only when inventory is needed
inventory orders are placed only with approved vendors
the quantity of items ordered is correct for the needs of the organization
programmed procedures matching electronic controls data before initiating payment perform correctly
Networking considerations 45