Assignment for week 6

AcctIS10E_Ch07_CE.pptx

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Chapter 7 The Conversion Cycle

James A. Hall, Accounting Information Systems, 10th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Objectives

Understand 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.

Understand the principles, operating features, and technologies that characterize lean manufacturing.

Understand the shortcomings of traditional accounting methods in a world-class environment.

Be familiar with 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.

The Traditional Manufacturing Environment

A company’s conversion cycle transforms (converts) input resources, such as raw materials, labor, and overhead, into finished products or services for sale.

Materials requirements planning (MRP) systems are used to determine how much raw materials are required to fulfill production orders.

The conversion cycle consists of both physical and information activities related to manufacturing products for sale.

Conversion Cycle in Relation to Other Cycles

BATCH PROCESSING SYSTEM

Documents in the Batch Processing System

The production schedule is the formal plan and authorization to begin production.

The bill of materials (BOM) is a document that specifies the types and quantities of the raw materials and subassemblies used in producing a single unit of finished product.

A route sheet is a document that shows the production path a particular batch of products follows during manufacturing.

The work order (or production order) is a document that draws from bills of materials and route sheets to specify the materials and production for each batch.

A move ticket is a document that records work done in each work center and authorizes the movement of the job or batch from one work center to the next.

A materials requisition is a document that authorizes the storekeeper to release materials to individuals or work centers in the production process.

DFD of Batch Production Process

Production Schedule

Bill of Materials

Route Sheet

Work Order

Move Ticket

Materials Requisition, Excess Materials Requisition, and Materials Return Ticket

BATCH PROCESSING SYSTEM (continued)

Batch Production Activities

PRODUCTION PLANNING AND CONTROL

MATERIALS AND OPERATIONS REQUIREMENTS

PRODUCTION SCHEDULING

WORK CENTERS AND STOREKEEPING

INVENTORY CONTROL: The economic order quantity (EOQ) model is an inventory model designed to reduce total inventory costs. The reorder point (ROP) is the lead time multiplied by daily demand. Safety stock is additional inventories added to the reorder point to avoid unanticipated stock-out conditions.

Cost Accounting Activities

Batch Production Process

Batch Production Process (continued)

The Relationship of Total Inventory Cost and Order Quantity

Inventory Usage

The Use of Safety Stock to Prevent Stock-Outs

Cost Accounting Procedures

CONTROLS IN THE TRADITIONAL ENVIRONMENT

Transaction Authorization

Segregation of Duties

Supervision

Access Control

DIRECT ACCESS TO ASSETS

INDIRECT ACCESS TO ASSETS

Accounting Records

Independent Verification

Summary of IT Application Controls

Summary of Conversion Cycle Physical Controls

World-Class Companies and Lean Manufacturing

Over the past three decades rapid swings in consumer demands, shorter product life cycles, and global competition have radically changed the rules of the marketplace.

In an attempt to cope with these changes, manufacturers have begun to conduct business in a dramatically different way.

The term world-class defines this modern era of business.

WHAT IS A WORLD-CLASS COMPANY?

World-class companies must maintain strategic agility and be able to turn on a dime.

World-class companies motivate and treat employees like appreciating assets.

A world-class company profitably meets the needs of its customers.

The philosophy of customer satisfaction permeates the world-class firm.

Lean manufacturing improves efficiency and effectiveness in product design, supplier interaction, factory operations, employee management, and customer relations.

PRINCIPLES OF LEAN MANUFACTURING

The Toyota Production System (TPS) is a lean manufacturing system based on the just-in-time production model.

The just-in-time (JIT) production model is a philosophy that addresses manufacturing problems through process simplification.

Pull Processing

Pull processing is the principle characterizing the lean manufacturing approach where products are pulled into production as capacity downstream becomes available. Products are pulled from the consumer end (demand).

Perfect Quality

PRINCIPLES OF LEAN MANUFACTURING (continued)

Waste Minimization

Inventory Reduction

Production Flexibility

Established Supplier Relations

Team Attitude

Techniques and Technologies that Promote Lean Manufacturing

Modern consumers want quality products, they want them quickly, and they want variety of choice.

This demand profile imposes a fundamental conflict for traditional manufacturers, whose structured and inflexible orientation renders them ineffective in this environment.

Manufacturing flexibility is the ability to physically organize and reorganize production facilities and the employment of automated technologies.

PHYSICAL REORGANIZATION OF THE PRODUCTION FACILITIES

Traditional manufacturing facilities tend to evolve into snakelike sequences of activities.

The inefficiencies inherent in this layout add handling costs, conversion time, and even inventories to the manufacturing process.

The flexible production system is organized into a smooth-flowing stream of activities.

Computer-controlled machines, robots, and manual tasks that comprise the stream are grouped physically into factory units called cells.

The Traditional Factory Layout

Flexible Production System

AUTOMATION OF THE MANUFACTURING PROCESS

Traditional Manufacturing

Islands of Technology

The term islands of technology describes an environment where modern automation exists in the form of islands that stand alone within the traditional setting.

Computer numerical controlled (CNC) machines can perform multiple operations with little human involvement. The computer contains programs for all parts being manufactured by the machine.

AUTOMATION OF THE MANUFACTURING PROCESS (continued)

Computer-Integrated Manufacturing

Computer-integrated manufacturing (CIM) is a completely automated environment.

Automated storage and retrieval systems (AS/RS) are computer-controlled conveyor systems that carry raw materials from stores to the shop floor and finished products to the warehouse.

ROBOTICS

Computer-aided design (CAD) is the use of computers to design products to be manufactured.

Computer-aided manufacturing (CAM) is the use of computers in factory automation.

AUTOMATION OF THE MANUFACTURING PROCESS (continued)

Value Stream Mapping

A company’s value stream includes all the steps in the process that are essential to producing a product.

A value stream map (VSM) is a graphical representation of the business process to identify aspects that are wasteful and should be removed.

The Automation Continuum

Computer-Integrated Manufacturing System

Value Stream Map

Accounting in a Lean Manufacturing Environment

Lean companies require new accounting methods and new information that:

Shows what matters to their customers (such as quality and service).

Identifies profitable products.

Identifies profitable customers.

Identifies opportunities for improvement in operations and products.

Encourages the adoption of value-added activities and processes within the organization and identifies those that do not add value.

Efficiently supports multiple users with both financial and nonfinancial information.

WHAT’S WRONG WITH TRADITIONAL ACCOUNTING INFORMATION?

Inaccurate Cost Allocations

Promotes Nonlean Behavior

Time Lag

Financial Orientation

Changes in Cost Structure between Different Manufacturing Environments

ACTIVITY-BASED COSTING

Activity-based costing (ABC) is an accounting technique that provides managers with information about activities and cost objects.

An activity driver is a factor that measures the activity consumption by the cost object.

Advantages of ABC

Disadvantages of ABC

Allocation of Overhead Costs to Products under ABC

VALUE STREAM ACCOUNTING

Value stream accounting is an accounting technique that captures cost data according to value stream rather than by department.

Product families share common processes from the point of placing the order to shipping the finished goods to the customer.

Cost Assignment to Value Stream

Grouping Products by Families

Information Systems That Support Lean Manufacturing

Materials requirements planning (MRP) are systems used to plan inventory requirements in response to production work orders.

Manufacturing resources planning (MRP II) is a system that incorporates techniques to execute the production plan, provide feedback, and control the process.

Enterprise resource planning (ERP) is a system assembled of prefabricated software components.

MATERIALS REQUIREMENT PLANNING

MRP is an automated production planning and control system used to support inventory management. Its operational objectives are to:

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.

Overview of MRP System

MANUFACTURING RESOURCE PLANNING

MRP II is an extension of MRP that has evolved beyond the confines of inventory management.

MRP II integrates product manufacturing, product engineering, sales order processing, customer billing, human resources, and related accounting functions.

Benefits of the MRP II:

Improved customer service

Reduced inventory investment

Increased productivity

Improved cash flow

Assistance in achieving long-term strategic goals

Help in managing change (e.g., new product development or specialized product development for customers or by vendors)

Flexibility in the production process

The Integration of Manufacturing and Financial Systems within the MRP II Environment

ENTERPRISE RESOURCE PLANNING SYSTEMS

Electronic data interchange (EDI) is an intercompany exchange of computer-processable business information in standard format.