The Conversion Cycle Chapter 7

CHAPTER 7 : The Conversion Cycle
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
In this figure the production is triggered by customer orders from the revenue cycle
and/or by sales forecasts from marketing. These inputs are used to set a production target and
prepare a production plan, which drives production activities. Purchase requisitions for the raw
materials needed to meet production objectives are sent to the purchases procedures
(expenditure cycle), which prepares purchase orders for vendors. Labor used in production is
transmitted to the payroll system (expenditure cycle) for payroll processing. Manufacturing
costs associated with intermediate work-in-process and finished goods (FG) are sent to the
general ledger (GL) and financial reporting system.
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
 The conversion cycle consists of both physical and information activities related to
manufacturing products for sale.1
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.
Overview of Traditional Batch Production Model
consists of four basic processes:
 plan and control production
 perform production operations
 maintain inventory control
 perform cost accounting
BATCH PRODUCTION SYSTEM

Production Planning and Control
 Materials and operations requirements
 Production scheduling
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
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 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
Documents in the Batch Processing System
1. Product 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.3
2. Bill
of
materials(BOM)- The RM requirements for an entire batch are determined by

multiplying the BOM by the number of items in the batch.3
3. Route sheet- the route sheet specifies the sequence of operations (machining or
assembly) and the standard time allocated to each task.
4. Work sheet (or production order)- it draws from BOMs and route sheets to
specify the materials and production (machining, assembly, and so on) for each
batch3
5. 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.3
6. Materials requisition
3

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CHAPTER 7 : The Conversion Cycle

BATCH PRODUCTION SYSTEM

materials(BOM)- The RM requirements for an entire batch are determined by

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