The Conversion cycle

Chapter 7
Learning objectives
After studying this chapter, you should:

• 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.
• Understand the principles, operating features, and technologies that characterize
lean manufacturing.
Learning objectives
• Understand the shortcomings of traditional accounting methods in a world-class
environment.
• Be familiar with the key features of activity-based costing and value stream
accounting.
• Be familiar with the information systems commonly associated with lean
manufacturing and world-class companies.
Conversion Cycle

• Transforms (converts) input resources, such as raw materials, labor,

and overhead, into finished products or services for sale.
Traditional Manufacturing Environment
• Subsystems of Conversion Cycle:
a. Physical Activities – Production System
b. Information Activities – Cost Accounting System
Production methods
• Continuous Processing
- creates a homogeneous product through a continuous series of
standard procedures.
• Make-to-Order Processing
- involves the fabrication of discrete products in accordance with
customer specifications.
• Batch Processing
- produces discrete groups (batches) of product.
BATCH PROCESSING SYSTEM
• Consists of four (4) basic processes:
a. Plan and Control Production
b. Perform Production Operations
c. Maintain Inventory Control
d. Perform Cost Accounting
DOCUMENTS IN
BATCH PROCESSING SYSTEM
• Production Schedule
- formal plan and authorization to begin production.
• Bill of Materials (BOM)
- specifies the types and quantities of the raw material and
subassemblies used in producing a single unit of finished product.
• Route Sheet
- shows the production path that a particular batch of product follows
during manufacturing.
DOCUMENTS IN
BATCH PROCESSING SYSTEM
• Work Order
- draws from BOMs and route sheets to specify the materials and
production for each batch.
• Move Ticket
- 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
- authorizes the storekeeper to release materials (and subassemblies)
to individuals or work centers in the production process.
BATCH PRODUCTION ACTIVITIES

• The flowchart, which will be showed later, illustrates the organization

functions involved, the tasks performed in each function, and the
documents that trigger or result from each task.
Batch Production System
• Production Planning and Control

• Materials and operations requirements

• Production scheduling
Production Planning and Control
Batch Production System
• Materials and Operations Requirements

• Materials requirement – the difference between what is needed and what is

available in inventory
• Operations requirements – the assembly and/or manufacturing activities to
be applied to the product
Batch Production System
• Production Scheduling
• Coordinates the production of multiple batches
• Influenced by time constraints, batch size, and other specifications
Batch Production System
• 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 System
• 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
EOQ Inventory Model
• Very simple too 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
EOQ Inventory Model
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
COST ACCOUNTING PROCEDURES
INTERNAL CONTROL ACTIVITIES AS THEY APLLY TO
CONVERSION CYCLE

• TRANSACTION AUTHORIZATION
• SEGREGATION OF DUTIES
• SUPERVISION
• ACCESS
• ACCOUNTING RECORDS
• INDEPENDENT VERIFICATION
WORLD-CLASS COMPANIES AND LEAN MANUFACTURING

World-class company
• Maintain strategic agility and be able to turn on a dime
• Motivate and treat employees like appreciating assets
• Profitably meets the needs of its customers
• Philosophy of customer satisfaction permeates the world-class
firm
• Manufacturing firms that achieve world-class status do so by
following a philosophy of lean manufacturing
WORLD-CLASS COMPANIES AND LEAN MANUFACTURING

Lean manufacturing
• Involves doing more with less, eliminating waste, and
reducing production cycle time.
• The goal of lean production is improved efficiency and
effectiveness in every area.
PRINCIPLES OF LEAN MANUFACTURING
• PULL PROCESSING
• PERFECT QUALITY
• WASTE MINIMIZATION
• INVENTORY REDUCTION
• PRODUCTION FLEXIBILITY
• ESTABLISHED SUPPLIER RELATIONS
• TEAM ATTITIDE
TECHNIQUES AND TECHNOLOGIES THAT PROMOTE LEAN MANUFACTURING

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.
Traditional Manufacturing
The traditional manufacturing environment consists of a range of
different types of machines, each controlled by a single operator.
Because these machines require a great deal of setup time, the cost
of setup must be absorbed by large production runs. The machines
and their operators are organized into functional departments, such
as milling, grinding, and welding.
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.
It employs:
• Computer Numerical Controlled (CNC) - machines that can perform multiple
operations with little human involvement.
A particularly important benefit of CNC technology is, however, that little setup
time (and cost) is needed to change from one operation to another.
Computer-Integrated Manufacturing
• Computer-integrated manufacturing (CIM) is a completely automated
environment with the objective of eliminating non–value-added activities.
• A CIM facility makes use of group technology cells composed of various types of
CNC machines to produce an entire part from start to finish in one location.
• CIM supports flexible manufacturing by allowing faster development of high-
quality products, shorter production cycles, reduced production costs, and faster
delivery times.
AUTOMATED STORAGE AND
RETRIEVAL SYSTEMS (AS/RS).
• Automated Storage and Retrieval Systems (AS/RS) are computer-controlled
conveyor systems that carry raw materials from stores to the shop floor and
finished products to the warehouse.
• The operational advantages of AS/RS technology over manual systems include
reduced errors, improved inventory control, and lower storage costs.
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
• They are also useful in hazardous environments or for performing dangerous and
monotonous tasks that are prone to causing accidents.
COMPUTER-AIDED DESIGN (CAD).
• Engineers use computer-aided design (CAD) to design better products
faster.
• CAD systems increase engineers’ productivity, improve accuracy by
automating repetitive design tasks, and allow firms to be more responsive to
market demands.
• CAD technology greatly shortens the time frame between initial and final
design. This allows firms to adjust their production quickly to changes in
market demand. It also allows them to respond to customer requests for
unique products.
• . Thus, aided by CAD, management can evaluate the technical feasibility of
the product and determine its ‘‘manufacturability.’’
COMPUTER-AIDED MANUFACTURING
(CAM).
• Computer-aided manufacturing (CAM) is the use of computers to
assist the manufacturing process.
• . CAM focuses on the shop floor and the control of the physical
manufacturing process.
• The CAM system monitors and controls the production process and
routing of products through the cell.
• Benefits from deploying a CAM technology include improved process
productivity, improved cost and time estimates, improved process
monitoring, improved process quality, decreased setup times, and
reduced labor costs.
Value Stream Mapping
• Value Stream Map (VSM) – is a companies pursuing lean manufacturing often
use a tool to graphically represent their business processes to identify aspects of
it that are wasteful and should be removed.
• It identifies all of the actions required to complete processing on a product (batch
or single item), along with key information about each action item.
Accounting in a Lean Manufacturing
Environment
• The lean manufacturing environment carries profound implications for accounting.
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?
Traditional standard costing techniques emphasize financial performance rather than
manufacturing performance. The techniques and conventions used in traditional manufacturing
do not support the objectives of lean manufacturing firms. 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)
It is a method of allocating costs to products and
services to facilitate better planning and control
Activity-based costing (ABC)
It assigns cost to activities based on their use of resources and
assigning cost to cost objects based on their use of activities.

• Activities describe the work performed in a firm

• Cost objects are the reasons for performing activities. These include
products, services, vendors, and customers
• Activity-Based Costing
assumes that activities cause costs, and products create a demand
for activities

• Standard Cost Accounting (Traditional)

assumes that products cause costs
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
• creates complex bureaucracies within organizations
VALUE STREAM ACCOUNTING
• captures costs by value stream rather than by department or
activity

• includes all the costs associated with the product family, but
makes no distinction between direct costs and indirect costs
Product family is an essential aspect in implementing value stream accounting
Product families share common processes from the point of placing the
order to shipping the finished goods to the customer.
Information systems that support lean
manufacturing
• materials requirements planning (MRP)
limited in focus and geared toward determining how much raw materials
are required to fulfill production orders
• manufacturing resources planning (MRP II)
integrate additional functionality into the manufacturing process,
including sales, marketing, and accounting
• enterprise resource planning (ERP)
takes MRP II a step further by integrating all business functions into a core
set of applications that use a common database
MATERIALS REQUIREMENT
PLANNING (MRP)
an automated production planning and control system used to support
inventory management.

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)
an extension of MRP that has evolved beyond the confines of
inventory management.
both a system and a philosophy for coordinating a wide range of
manufacturing activities.
integrates product manufacturing, product engineering, sales order
processing, customer billing, human resources, and related accounting
functions
considerable benefits from a highly integrated
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 in the production process
ENTERPRISE RESOURCE PLANNING
(ERP) SYSTEMS
integrates departments and functions across a company into one system
of integrated applications that is connected to a single common database
enables various departments to share information and communicate
with each other
can calculate resource requirements, schedule production, manage
changes to product configurations, allow for future planned changes in
products, and monitor shop floor production
provides order entry, cash receipts, procurement, and cash disbursement
functions along with full financial and managerial reporting capability
electronic data interchange (EDI)
allow the firm to electronically receive sales orders and cash
receipts from customers, send invoices to customers, send purchase
orders to vendors, receive invoices from vendors and pay them, as
well as send and receive shipping documents.
Thank you!
Esteria, Colleen Jill
Garovillas, Polaine
Luzon, Cristalline
Pagayanan, Marrielle Leth
Velarde, Kristine Claire
BSA21KB4