Accounting Information Systems:
Essential Concepts and Applications
Fourth Edition by Wilkinson, Cerullo, Raval,
and Wong-On-Wing
Module 3: The Conversion
Cycle
Slides Authored by Somnath Bhattacharya, Ph.D.
Florida Atlantic University
Objectives of the
Conversion Cycle - I
The major purpose of the Conversion Cycle is to
transform raw materials into finished goods
Specifically, the objective is to ensure that:
1) Adequate raw materials and other resources are
available for production, while the investment in such
resources is minimized
2) Production costs are minimized through high labor
productivity, full utilization of production equipment,
low levels of scrap and rework, and optimal design of
production layouts and procedures
3) WIP inventories are transformed into finished
goods, which are then either warehoused or shipped
on schedule
Objectives of the
Conversion Cycle - II
4) Establish levels of product quality and after-sales
service are attained
5) Costs for each order or process are accumulated
fully and accurately
A Partial Organization Chart
of a Logistics Function
VP
Logistics
Production
Planning
& Control
Maintenance
Production
Management
Sales Order
Entry
Engineering
Design
Production
Superintendent
Quality
Control
Shipping
Work Center Work Center Work Center
A
B
...n
Figure M3-1
Inventory
Management
Purchasing
Receiving
Stores
Forms of Data Input
Customer order
Bill of materials
Operations list/Routing slip
Production schedule
Production order
Materials issue slip/Materials requisition
Labor job-time ticket
Move ticket/traveler
Inspection report(s)
Computerized Data Entry
Data are captured via terminals or micro-based
work-stations using such techniques as keyed-in
alphanumeric codes, inserted badges or cards,
scanned bar codes, or touched monitor screens.
Preformatted documents are automatically
generated using application software and online data bases.
Electronic copies of the documents are
maintained in on-line files, and hard-copy
forms are printed only as needed and
requested.
Data Processing
The conversion cycle encompasses three
major processing steps:
Production planning
Production operations
Accounting for production
costs
Advantages of Computer
Integrated Manufacturing Systems
-I
1) The materials requirements relating
to demands for products are determined
beforehand, so that the materials are
transferred to the production areas in time for
production starts
2) Production orders are scheduled to
accommodate the manufacturing capacity
3) Data are validated upon online entry, so that
errors are detected more quickly and
reprocessing delays due to undetected errors
are reduced
Advantages of Computer
Integrated Manufacturing Systems
- II
4) Inventory and production order
records are updated in a timely manner from
materials requisitions, labor-time entries, and
move tickets
5) Accounting-related processing is simplified,
since transactions are posted without sorting to
online files
6) Control reports such as cost variance
analyses are prepared for managers
A Configuration for CIM, Including
Associated Accounting Modules
Figure M3-17
Engineering
Logistics
data base
Accounting
data base
Production
Planning
Warehousing
Cost Accounting
MRP
Manufacturing
Automated
Handling
JIT
FMS
CAD
CAM
Robotics
Inventory
Control
Product
Costing
Benefits of CIM Systems - I
Greater flexibility in meeting the changing
needs of customers
Savings in the material inventory
investment
Increased quality in products
Optimal scheduling of production, with
dynamic adjustments as conditions
change or new orders are received
Benefits of CIM Systems - II
Shorter production cycle times
Improved productivity of employees and
hence reduced labor costs
Continuous monitoring of production
operations, with immediate feedback of
control problems as they arise
Benefits of CIM Systems - III
Savings in paperwork costs, since most
interactions are performed via computer
and records are stored electronically
Better utilization of all production facilities
Greater accessibility of information,
including the ability to provide ad hoc
reports for planning and control
Measures Relating to the
Product Conversion Cycle - I
Category
Examples of
Measures
Customer Satisfaction Quality
Service
Availability
Figure M3-18
Measures Relating to the
Product Conversion Cycle - II
Category
Examples of Measures
Performance
Production cycle time
Product yield
Percentage of scrap cost
to dollars of product
shipped
Employee productivity
Direct labor variance
Figure M3-18 Continued
Measures Relating to the
Product Conversion Cycle - III
Category
Resource
Management
Figure M3-18 Continued
Examples of
Measures
Manufacturing cost as
a percentage of dollar
sale
Dollar sales per
production employee
Raw materials
inventory turnover
Production output per
square foot of factory
space
Average machine
time in days per
month
Measures Relating to the
Product Conversion Cycle - IV
Category
Flexibility
Figure M3-18 Continued
Examples of
Measures
Average cycle time
per product
Number of days
under production
schedule
Changeover time
Scheduled Managerial
Reports
 Employee productivity reports that compare the output
of the operations work center employees against
standard levels of production
 Work center performance reports that reflect the
efficiency of each work center
 Open production order status reports that show which
orders are behind schedule and by how much
 Equipment utilization reports that show the percentage
of downtime for each piece of factory equipment
 Waste reports that show the percentages of scrap,
rework, and rejects for the production orders currently
in process
Data Management: File
Oriented Approach
Master Files
Raw materials
WIP
Finished goods
Transaction Files
Production order file
Materials issues file
Operations/Routing file
An Entity-Relationship Diagram
of the Product Conversion Cycle
Production
Planner
1
Dispatch
1
Production Order
m
1
m
Work Center
Employees
1
Assign to
Production
order/materials
Production
Order/Operations
Undertake to
n
n
Raw
Materials
1
WIP
Inventory
Establish
1
m
nn
Accumulate
Costs
1
Cost
Accountant
1
Complete
Production
Perform
Operations
Used in
n
n
1
Finished Goods
Inventory
Figure M3-22
Risk Exposures Within the
Product Conversion Cycle - I
Risk
Exposure(s)
1) Incorrect costs charged to
WIP Inventory
2) Errors in recording quantities
of WIP or Finished Goods
Inventory
3) Release of wrong production
order into production
1) Overstatement of inventory
4) Unauthorized release of
production order into
production
5) Issuance of excessive or
insufficient quantities of
materials into production
6) Fraudulent charging of labor
hours to production
Figure M3-24
2) Incorrect balances in
inventory records
3) Mix-up in production
schedule, causing possible
delays
4) Mix-up in production
schedule; causing possible
delays
5) Possibility of lost materials if
excessive issue, or delay if
insufficient issue
6) Excessive production costs
Risk Exposures Within the
Product Conversion Cycle - II
Risk
Exposure(s)
7) Fraudulent charging of
excessive overtime for
production employees
8) Theft of inventories or scrap
7) Excessive production costs
9) Excessive delays of orders
between production operations
9) Excessive production costs
and possible revision in
schedule
10) Misstatement of inventory
valuation
11) Misstatement of inventory
valuation
10) Falsification of finishedgoods inventory records
11) Improper use of cost-flow
methods with respect to
inventories
12) Inflation of inventory
values due to not writing down
items
Figure M3-24 Continued
8) Losses of cash
12) Overstatement of inventory
valuation
Risk Exposures Within the
Product Conversion Cycle - III
Risk
Exposure(s)
13) Undue delays in detecting
items of products that have
become defective during
production operations
14) Involvement of inventories,
production facilities, and ledger
records in natural or humanmade disasters
15) Interception of data
transmitted via the web
16) Denying that an online
order was placed after the
production order is processed
17) Unauthorized purchase of
materials initiated via the web
18) Breakdown of the Web
server
13) Excessive production costs
Figure M3-24 Continued
14) Loss of or damage to
assets, including possible loss
of data
15) Loss or alteration of data
16) Loss of sales revenues
17) Excessive inventory and
storage costs
18) Loss of data and delay in
processing orders
Control Objectives
To ensure that:
All production orders are properly authorized and
scheduled
All needed raw materials and other resources are
assigned to production orders promptly and
accurately, and the related costs are accumulated
fully in accordance with the established system of
cost accounting
All movements of production orders through the
production process are reflected by
acknowledgements at the various work centers
All finished goods are valued properly
All inventories are adequately safeguarded
General Controls
Organizational
Documentation
Asset Accountability
Management Practices
Authorization
Access
Application Controls
Input Controls
Processing Controls
Output Controls
Web Security Procedures
Authentication
Authorization
Accountability
Data Transmission
Disaster Contingency and
Recovery Plan
Accounting Information Systems:
Essential Concepts and Applications
Fourth Edition by Wilkinson, Cerullo,
Raval, and Wong-On-Wing
Copyright © 2000 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the express
written permission of the copyright owner is unlawful. Request for
further information should be addressed to the Permissions Department,
John Wiley & Sons, Inc. The purchaser may make back-up copies for
his/her own use only and not for distribution or resale. The publisher
assumes no responsibility for errors, omissions, or damages, caused by
the use of these programs or from the use of the information contained
herein.