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ACCO 20153: Accounting Information System
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Module 6
TRANSACTION CYCLES: THE CONVERSION CYCLE
(PLAN TO INVENTORY PROCESS)
Overview:
The production cycle is comprised of all activities related to the conversion of raw
materials into finished goods. The cycle is comprised of several distinct components, involving
the design of products, their incorporation into a production schedule, manufacturing activities,
and a cost accounting feedback loop. These four areas are usually managed by four different
departments the engineering, materials management, production, and accounting
departments, respectively.
Module Objectives:
After successful Completion of this module, you should be able to:
Identify 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.
Know the principles, operating features, and technologies that characterize lean
manufacturing.
Identify the shortcomings of traditional accounting methods in a world-class
environment.
Learn 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.
Course Materials:
The Conversion Cycle is the series of events whereby the company converts inputs such
as raw materials, labor and factory overhead, places them into the process of work in order to
create outputs like different goods and services.
This is divided into two subsystems of activities, namely:
1. Physical Activities
2. Information Activities.
This cycle is one of the four cycles used in accounting systems, and in line with the other
transaction cycles, these cycles operates connectedly. Conversion Cycle starts from receiving
sales orders from the Revenue Cycle or sales forecasts from the Marketing Systems. Then,
processes the conversion of inputs into outputs and while everything is in the process, the
Expenditure Cycle also takes place subsequent to the purchase requisitions and labor usages
in the conversion cycle. All goods which are in process and those which are finished are being
recorded by the General Ledger and Financial Reporting System.

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ACCO 20153: Accounting Information System
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THE TRADITIONAL MANUFACTURING ENVIRONMENT
Depending on the type of product being manufactured, a company will employ one of the
following production methods:
1. Continuous processing creates a homogeneous product through a continuous series of
standard procedures. Cement and petrochemicals are produced by this manufacturing
method. Typically, under this approach firms attempt to maintain finished-goods
inventory at levels needed to meet expected sales demand. The sales forecast in
conjunction with information on current inventory levels triggers this process.
2. Make-to-order processing involves the fabrication of discrete products in accordance
with customer specifications. This process is initiated by sales orders rather than
depleted inventory levels.
3. Batch processing produces discrete groups (batches) of product. Each item in the batch
is similar and requires the same raw materials and operations. To justify the cost of
setting up and retooling for each batch run, the number of items in the batch tends to be
large. This is the most common method of production and is used to manufacture
products such as automobiles, household appliances, canned goods, automotive tires,
and textbooks.
Batch Processing System
Documents:
1. 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.
2. 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. The RM requirements
for an entire batch are determined by multiplying the BOM by the number of items in the
batch.
3. Route sheet - shows the production path that a particular batch of product follows
during manufacturing. It is similar conceptually to a BOM. Whereas the BOM specifies
material requirements, the route sheet specifies the sequence of operations (machining
or assembly) and the standard time allocated to each task.
4. 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, initiate the manufacturing process in the production
departments.
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.
6. 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. Materials needed in excess of standard
amounts require separate requisitions that may be identified explicitly as excess
materials requisitions. This allows for closer control over the production process by
highlighting excess material usage.
Batch Production Activities
1. Production Planning and Control. This consists of two main activities: (1) specifying
materials and operations requirements and (2) production scheduling.
a. Materials and Operations Requirements. The RM requirement for a batch of any
given product 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 (if any), and the BOM. A product of this activity is
the creation of purchase requisitions for additional RMs.
b. Production Scheduling. The master schedule for a production run 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. The work orders, move
tickets, and materials requisitions enter the production process and flow through the
various work centers in accordance with the route sheet.
2. Work Centers and Storekeeping. The actual production operations begin when workers
obtain raw materials from storekeeping in exchange for materials requisitions. These
materials, as well as the machining and the labor required to manufacture the product,
are applied in compliance with the work order. When the task is complete at a particular

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ACCO 20153: Accounting Information System Module 6 TRANSACTION CYCLES: THE CONVERSION CYCLE (PLAN TO INVENTORY PROCESS) Overview: The production cycle is comprised of all activities related to the conversion of raw materials into finished goods. The cycle is comprised of several distinct components, involving the design of products, their incorporation into a production schedule, manufacturing activities, and a cost accounting feedback loop. These four areas are usually managed by four different departments – the engineering, materials management, production, and accounting departments, respectively. Module Objectives: After successful Completion of this module, you should be able to: • Identify 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. • Know the principles, operating features, and technologies that characterize lean manufacturing. • Identify the shortcomings of traditional accounting methods in a world-class environment. • Learn 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. Course Materials: The Conversion Cycle is the series of events whereby the company converts inputs such as raw materials, labor and factory overhead, ...
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