Conversion Cycle and Its Relationship To Other Cycles

AIS notes
CHAPTER 7 – Conversion Cycle
Conversion Cycle and its relationship to other cycles
Production Methods
1. Continuous Processing – Homogeneous product, standard procedures. Production goal,
to meet expected sales demand. (Trigger: Sales Forecast and Inventory level)
2. Make-to-order processing – Fabrication of discrete products in accordance with
customer specification (Trigger: Sales Orders)
3. Batch Processing – Produces discrete group of products in batches. Most commonly
used production method.
o produces discrete groups (batches) of products. (tracks outputs) based on standard
but still tracking by the job order
Traditional Batch Production Model - examples: cars, textbooks
Batch Processing System

 Four Basic Processes:
1) Plan and control production
2) Perform production operations
3) Maintain inventory control
4) Perform Cost Accounting
Note: A manufacturing process could be triggered either by individual sales orders from
the revenue cycle or by a sales forecast the marketing system provides.
 Documents in the batch processing System

1) Production Schedule – a formal plan and authorization to begin production
o A production schedule is the formal plan and authorization to begin production.
The receipt by cost accounting of the last move ticket for a batch from the work
center signals the completion of the production process.
2) Bill of Materials – Specifies types and quantities of raw materials on a single product
o A bill of materials (BOM) specifies the types and quantities of the raw material
and subassemblies used in producing a single unit of finished product.
3) Route Sheet – Production path of a particular batch, specifying sequences of

operations and standard time of each task
4) Work Order (production order) – Specify the materials and production for each batch
5) Move Ticket – Records work done on each work center, authorizes the movement of
the job or batch from one work center to another
6) Materials Requisition – Authorizes storekeeper to release materials to individuals in
the production process. (Must be in standard quantity, any excess in standard must
have separate requisition)
 Batch Production Activities

PRODUCTION PLANNING AND CONTROL
 MATERIALS and OPERATIONS REQUIREMENT
o Specify materials and operations requirements – Create a Purchase
Requisition for additional RMs based on analysis of inventory on hand,
sales forecast and BOM. (Enter Chapter 5 for purchase/expenditure
cycle)
o Study route sheet – identify assembly and or manufacturing activities to
plan the operations requirements
 PRODUCTION SCHEDULING
o Master Schedule – coordinate production of many different batches. What
dictates a schedule? – Time Constraints, Batch Size, BOM and Route
Sheet Specifications
o Each schedule produces – Work order, Move Tickets, Materials
Requisitions  Work Order Copy, sent to Cost accounting for setting up
WIP account for each batch.
 ACTUAL PRODUCTION OPERATION (Work Center)
1) Start of actual production – workers obtain raw materials from
storekeeping using materials requisition form.
2) Application of materials, labor, and overhead  must follow the
specifications in the Work Order
3) Move Ticket  Must be signed by authorized person to signify completion
of task in a particular work center and that a batch may now proceed to
the next.
4) Work Order File – Open/Close  Last move ticket will signal the closing
of the work order file.
5) Finished product + Copy of Work order  Sent to FG warehouse, and to
Inventory Control
Recording Labor Time Costs

1) Handled by Work center supervisors  report to submit every end of
week = Employee Timecard and Job Tickets to Payroll and Cost
Accounting Dept.
 INVENTORY CONTROL
o Involves the planning, controlling, and updating of records or Raw
Materials inventory and Finished Goods Inventory
o Objective: Minimize total inventory cost (but not compromising adequacy)
 EOQ and ROP  How many to order and when to order?
o An objective of inventory control is to minimize total inventory cost while
ensuring that adequate inventories exist to meet current demand.
Inventory models used to achieve this objective help answer two
fundamental questions:
1. When should inventory be purchased?
2. How much inventory should be purchased?
 COST ACCOUNTING
1) Work order Copy to be sent to Cost Accounting Department (creation of
Open Work Order File, to be added to the WIP file)
 Inventory Control functions – manages copies of materials
requisition, excess materials requisition, and materials returns
 Work Centers – Send job tickets and completed move tickets
** Documents must be accompanied with “Standard” figures to be able to monitor
variances
2) Closing a WIP account - the receipt of the cost accounting department of the
last move ticket for a batch signifies closing a WIP (and a physical transfer of
WIP goods to FG goods
3) SUMMARY of records – Journal vouchers and General Ledgers, must have
periodical summary of accounts
Note: Cost Accounting functions should be separate from the work centers in the
production process.
 Controls for Production Activities

o IT CONTROLS:
o PHYSICAL CONTROLS:
CHAPTER 7 HW NOTES
1. The fundamental EOQ model - focuses on the trade-off between production costs and
carrying costs
 The combined total cost curve is minimized at the intersection of the ordering-cost
curve and the carrying-cost curve.
2. Principle of Lean Manufacturing:

 A lean manufacturing firm must achieve high inventory turnover rates
 A lean manufacturing firm must have established and cooperative relationships with
vendors.
 All activities that do not add value and maximize the use of scarce resources must
be eliminated.
Note: The goal of lean production is improved efficiency and effectiveness in every area.
3. Move tickets authorize the movement of a batch from one department to another.
4. Which document triggers the cost accounting process for a given production run?
 The work order from the production planning and control department triggers
the cost accounting process.
o This document draws from BOMs and route sheets to specify needs for each
batch.
5. Essential activities add value; nonessential activities do not, and should be eliminated. A
company's value stream includes all of the steps in the process that are essential for
producing a product.
6. Inventory control should be a separate function from both the raw materials storeroom
and the finished goods warehouse.
 In order to segregate record keeping from asset custody, inventory control, which
maintains the records for the raw materials and finished goods inventories, should be
separate from both the raw materials storeroom and finished goods warehouse
functions.
7. Prenumbering source documents provides indirect access control in the production

process.
 By prenumbering source documents and referencing these in the WIP records, every
item of FG inventory can be traced back through the production process to its
source. This process is important for detecting errors in production and for tracking
batches through the production process.
8. Which statement describes the evolution of enterprise systems?

 MRP II evolved from MRP and MRP II evolved into ERP
9. Traditional Accounting:
a. The measurement principle tends to ignore standards other than money
b. Overhead allocations may lead to cost distortions.
c. Traditional accounting does not provide managers in a JIT setting with timely
information.
10. Creating a homogeneous product through a continuous series of standard procedures is

described as which type of processing approach? CONTINUOUS PROCESSING
11. Advantages of Activity-based costing (ABC)

 Facilitating a better marketing mix
 Identifying waste and non-value-added activities
 Simplicity in practical applications over a prolonged period
12. Which documents are needed in the cost accounting department to update work-in-
process accounts with standard charges?
 materials requisitions
 job tickets
 move tickets
 standard cost file
13. Computer-integrated manufacturing (CIM) is a completely automated environment with

the objective of eliminating non-value-added activities. Computer-aided manufacturing
(CAM) is the use of computers to assist the manufacturing process.
14. The general ledger department provides independent verification by reconciling WIP
journal vouchers from cost accounting and summaries of the inventory subsidiary ledger
from inventory control.

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AIS notes

CHAPTER 7 – Conversion Cycle

Conversion Cycle and its relationship to other cycles

Batch Processing System

 Documents in the batch processing System

3) Route Sheet – Production path of a particular batch, specifying sequences of

 Batch Production Activities

Recording Labor Time Costs

 Controls for Production Activities

2. Principle of Lean Manufacturing:

7. Prenumbering source documents provides indirect access control in the production

8. Which statement describes the evolution of enterprise systems?

10. Creating a homogeneous product through a continuous series of standard procedures is

11. Advantages of Activity-based costing (ABC)

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

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