Chapter 7: The Conversion Cycle

Documents in the Batch Processing System

1. production schedule - the formal plan and authorization to begin 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.
3. route sheet - shows the production path that a particular batch of product follows during
manufacturing.
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.
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.
Batch Production Activities
1. Production and Planning Control
a. Specifying 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.
b. Production Scheduling
- The schedule is influenced by time constraints, batch size, and specifications
derived from BOMs and route sheets.
2. Work Centers and Storekeeping
 The actual production operations begin when workers obtain raw materials from
storekeeping in exchange for materials requisitions.
3. 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 the finished goods inventory records.
Controls in the Traditional Environment
Transaction Authorization
o Work orders, move tickets, and materials requisitions.
Segregation of Duties
o Inventory control separate from RM and FG inventory custody.
o Cost accounting separate from work centers.
o GL separate from other accounting functions.
Supervision
o Supervisors oversee usage of RM and timekeeping.

Access Control
 o Limit physical access to FG, RM stocks, and production processes. Use formal
procedures and documents to release materials into production.
Accounting Records
o Work orders, cost sheets, move tickets, job tickets, materials requisitions, WIP
records, FG inventory file.
Independent Verification
o Cost accounting function reconciles all cost of production. GL reconciles overall
system.
World-Class - modern era of business.
Features of world-class company:
 maintain strategic agility and be able to turn on a dime. Top management must be
intimately aware of customer needs and not become rigid and resistant to paradigm
change.
 motivate and treat employees like appreciating assets. To activate the talents of
everyone, decisions are pushed to the lowest level in the organization. The result is a flat
and responsive organizational structure
 profitably meets the needs of its customers. Its goal is not simply to satisfy customers,
but to positively delight them. This is not something that can be done once and then
forgotten. With competitors aggressively seeking new ways to increase market share, a
world-class firm must continue to delight its customers.
 The philosophy of customer satisfaction permeates the world-class firm. All of its
activities, from the acquisition of raw materials to selling the finished product, form a chain
of customers. Each activity is dedicated to serving its customer, which is the next activity
in the process. The final paying customer is the last in the chain.
 Finally, manufacturing firms that achieve world-class status do so by following a
philosophy of lean manufacturing. This involves doing more with less, eliminating
waste, and reducing production cycle time.
Principles of Lean Manufacturing

 evolved from the Toyota Production System (TPS), which is based on the just-in-time (JIT)
production model.
 This manufacturing approach is in direct opposition to traditional manufacturing, which is
typified by high inventory levels, large production lot sizes, process inefficiencies, and
waste
 The goal of lean production is improved efficiency and effectiveness in every area,
including product design, supplier interaction, factory operations, employee management,
and customer relations.
The following principles characterizes Lean Manufacturing:
1. Pull Processing - involves pulling products from the consumer end (demand), rather than
pushing them from the production end (supply). Under the lean approach, inventories
arrive in small quantities from vendors several times per day, just in time to go into
production.
 2. Perfect Quality - Success of the pull processing model requires zero defects in RM, WIP,
and FG inventory. Poor quality is very expensive to a firm. Consumers demand quality
and seek the lowest-priced quality product.
3. Waste Minimization - All activities that do not add value and maximize the use of scarce
resources must be eliminated.
4. Inventory Reduction - The hallmark of lean manufacturing firms is their success in
inventory reduction. Such firms often experience annual inventory turnovers of 100 times
per year.
5. Production Flexibility - Long machine setup procedures cause delays in production and
encourage overproduction.
6. Established Supplier Relations - Late deliveries, defective raw materials, or incorrect
orders will shut down production immediately because this production model allows no
inventory reserves to draw upon.
7. Team Attitude - Lean manufacturing relies heavily on the team attitude of all employees
involved in the process.
Automation of the Manufacturing Process
A. Traditional Manufacturing
 consists of a range of different types of machines, each controlled by a single operator.
 the cost of setup must be absorbed by large production runs because these machines
require a great deal of setup time
B. Islands of Technology
 describes an environment in which modern automation exists in the form of islands
that stand alone within the traditional setting.
 employ computer numerical controlled (CNC) machines that can perform multiple
operations with little human involvement. CNC machines contain computer programs
for all the parts that are manufactured by the machine.
C. Computer-Integrated Manufacturing
 A completely automated environment with the objective of eliminating non–value-
added activities.
 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.
a. Automated Storage and Retrieval Systems (AS/RS)
 computer-controlled conveyor systems that carry raw materials from stores to the shop
floor and finished products to the warehouse.
 Many firms have increased productivity and profitability by replacing traditional forklifts
and their human operators with this.
b. 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
c. 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
d. 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.
Value Stream Mapping

 A company’s value stream includes all the steps in the process that are essential to
producing a product.
 These are the steps for which the customer is willing to pay
 Companies pursuing lean manufacturing often use a tool called a value stream map
(VSM) to graphically represent their business processes to identify aspects of it that
are wasteful and should be removed.
Accounting in a Lean Manufacturing Environment

 The lean manufacturing environment carries profound implications for accounting.

 They require new accounting methods and new information that:
o Shows what matters to its customers (such as quality and service).
o Identifies profitable products.
o Identifies profitable customers.
o Identifies opportunities for improvement in operations and products.
o Encourages the adoption of value-added activities and processes within the
organization and identifies those that do not add value.
o Efficiently supports multiple users with both financial and nonfinancial
information.
Deficiencies of Standard Accounting Systems
1. Inaccurate Cost Allocations
2. Promotes Nonlean Behavior
3. Financial Orientation
Activity-Based Costing

 ABC is a method of allocating costs to products and services to facilitate better

planning and control.
 It accomplishes this by assigning cost to activities based on their use of resources and
assigning cost to cost objects based on their use of activities.
Value Stream Accounting

 captures costs by value stream rather than by department or activity

Materials Requirement Planning - automated production planning and control system used to
support inventory management.
Objectives of Materials Requirement Planning

 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) - is an extension of MRP that has evolved beyond
the confines of inventory management. It is both a system and a philosophy for coordinating a
wide range of manufacturing activities.
Benefits of MRP II

 Improved customer service

 Reduced inventory investment
 Increased productivity
 Improved cash flow
 Assistance in achieving long-term strategic goals
 Help in managing change (for example, new product development or specialized product
development for customers or by vendors)
 Flexibility in the production process