The Conversion Cycle Chapter 7
The Conversion Cycle Chapter 7
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