Chapter 7

Accounting Information Systems

The Conversion Cycle

Chapter
7-1
 The Conversion Cycle

 Transforms input resources, raw materials,

labor, and overhead into finished products or
services for sale

 Consists of two subsystems:

 Physical activities – the production system
 Information activities – the cost accounting system

Chapter
7-2
 Conversion Cycle in Relation to
Other Cycles

Marketing
System

Sales
Forecast

Purchase Requisitions
Revenue Cycle Sales Orders
Conversion Expenditure
Cycle Cycle
Labor Usage

Work
Finished
In
Goods
Process

General Ledger
and Financial Chapter
Reporting System 7-3
 The Conversion Cycle

 Depending on the type of product being manufactured, a

company will employ one of the following production
methods:
 Continuous processing creates a homogeneous product
through a continuous series of standard procedures. Cement
and petrochemicals are produced by this manufacturing
method.
 Make-to-order processing involves the fabrication of
discrete products in accordance with customer
specifications
 Batch processing produces discrete groups (batches) of
product. Each item in the batch is similar and requires the
Chapter
same raw materials and operations 7-4
 The Conversion Cycle

Batch Processing System

consists of four basic processes: plan and control

production, perform production operations, maintain

inventory control, and perform cost accounting

Chapter
7-5
 The Conversion Cycle

Documents in the Batch Processing System

The production schedule
Is the formal plan and authorization to begin production. This

document describes the specific products to be made, the quantities

to be produced in each batch, and the manufacturing timetable for
starting and completing production.
The bill of materials (BOM),
Specifies the types and quantities of the raw material (RM) and
subassemblies used in producing a single unit of finished product.

Chapter
7-6
 The Conversion Cycle

Documents in the Batch Processing System

A route sheet
the route sheet specifies the sequence of operations
(machining or assembly) and the standard time allocated to
each task.
The work order
(or production order) draws from BOMs and route sheets to

specify the materials and production (machining, assembly,

and so on) for each batch. These, together with move tickets
(described next), initiate the manufacturing process in the
production departments
Chapter
7-7
 The Conversion Cycle

Documents in the Batch Processing System

A 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.
A materials requisition
authorizes the storekeeper to release materials (and subassemblies)

to individuals or work centers in the production process.

This document usually specifies only standard quantities.

Chapter
7-8
 The Conversion Cycle

Batch Production System

Production Planning And Control
This consists of two main activities:
specifying materials and operations requirements

production scheduling

Chapter
7-9
 The Conversion Cycle

Batch Production System

Materials And Operations Requirements
is the difference between what is needed and what is available in

the RM inventory.
 This information comes from analysis of inventory on hand, the

sales forecast, engineering specifications

Operations requirements
the assembly and/or manufacturing activities to be applied to the
product

Chapter
7-10
 The Conversion Cycle

Batch Production System

Production Planning And Control
Coordinates the production of many different batches.
The schedule is influenced by time constraints, batch size, and
specifications derived from BOMs and route sheets
The scheduling task also produces work orders, move tickets,
and materials requisitions for each batch in the production run.
A copy of each work order is sent to cost accounting to set up a
new work-in-process (WIP) account for the batch

Chapter
7-11
 The Conversion Cycle

Batch Production System

Work Centers and Storekeeping
 Production operations begin when work centers obtain raw
materials from storekeeping.
 When the task is complete at a particular work center, the
supervisor or other authorized person signs the move ticket,
which authorizes the batch to proceed to the next work center.
 To evidence that a stage of production has been completed, a
copy of the move ticket is sent back to production planning and
control to update the open work order file
 The finished product along with a copy of the work order isChapter
sent
to the finished goods (FG) warehouse 7-12
 The Conversion Cycle

Batch Production System

Work Centers and Storekeeping
Also, a copy of the work order is sent to inventory control to
update the FG inventory records

Chapter
7-13
 The Conversion Cycle

Batch Production System

Inventory Control.
The inventory control function consists of three main activities
First, it provides production planning and control with status
reports on finished goods and raw materials inventory.
Second, the inventory control function is continually involved in
updating the raw material inventory records from materials
requisitions, excess materials requisitions, and materials return
tickets.
Finally, upon receipt of the work order from the last work center,
inventory control records the completed production by updating
Chapter
the finished goods inventory records 7-14
 The Conversion Cycle

Batch Production System

Inventory Control
An objective of inventory control
is to minimize total inventory cost while ensuring that adequate
inventories exist to meet current demand.

Chapter
7-15
Designing Reports

Chapter
7-16
Chapter
7-17
 Production Planning and Control
Sales Forecast
Inventory Status Report
Engineering Specifications
BOM and Route Sheets
Raw Materials Requirements
(Purchase Requisitions)
Operations Requirements

Production Scheduling
Work Orders
Move Tickets
Materials Requisitions
Open Work Orders
Work Centers
Job Tickets Cost Accounting
Time Cards Payroll
Completed Move Tickets Prod. Plan. and Control
Chapter
7-18
Upon Completion of the Production Process…
Finished Product Finished Goods Warehouse
and Closed Work Order

Closed Work Order

Inventory Control
Status Report of Raw Materials
and Finished Goods Prod. Plan. and Control

Journal Voucher General Ledger

Chapter
19 7-19
 The Conversion Cycle

Cost Accounting Activities

begins when the production planning and control department sends a

copy of the original work order to the cost accounting department

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.

Receipt of last move ticket signals completion of the production

process
 clerk removes the cost sheet from WIP file

 prepares a journal voucher to transfer balance to a finished goods

inventory account and forwards to the General Ledger departmentChapter

7-20
Elements of the Cost Accounting System

Inventory Control Work Centers

materials requisitions job tickets
completed move tickets

COST ACCOUNTANTS
Update WIP accounts
STANDARDS DL
DM
Mfg. OH.
Compute Variances Chapter
21 7-21
 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 work station
authorize the movement of the batch through the
work centers
 materials requisitions – authorize the warehouse to
release materials to the work centers

Chapter
7-22
 Internal Controls

Segregation of duties
Inventory control maintains accounting records for RM and FG

inventories. This activity is kept separate from the materials

storeroom and from the FG warehouse functions, which have
custody of these assets.
the cost accounting function accounts for WIP and should be

separate from the work centers in the production process

Chapter
7-23
 Internal Controls

Supervision
The supervisors in the work centers oversee the usage of RM in
the production process. This helps to ensure that all materials
released from stores are used in production and that waste is
minimized. Employee time cards and job tickets must also be
checked for accuracy
Supervisors also observe and review timekeeping activities.
This promotes accurate employee time cards and job tickets

Chapter
7-24
 Internal Controls

Access Control
Direct Access To Assets.
 controlled access to storerooms, production work
centers, and finished goods warehouses
 Control methods used include identification badges,
security guards, observation devices, and various
electronic sensors and alarms
 quantities in excess of standard amounts require
approval
Chapter
7-25
 Internal Controls

Indirect Access To Assets

Assets, such as cash and inventories, can be manipulated
through access to the source documents that control them
 controlled use of materials requisitions, excess materials
requisitions, and employee time cards
Accounting Records

Chapter
7-26
 Internal Controls

 the objective of this control technique is to establish an

audit trail for each transaction
 work orders
 cost sheets
 move tickets
 job tickets
 material requisitions
 WIP and finished goods files

Chapter
7-27