Chapter 7 Accounting - A companys conversion cycle...

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Sheet1 Page 1 A company ¡ s conversion cycle transforms (converts) input resources, such as raw materials, labor, and overhead, into finished products or services for sale. The conversion cycle exists conceptually in all organizations, including those in service and retail industries. It is most formal and apparent, however, in manufacturing firms, which is the focus of this chapter. We begin with a review of the traditional batch production model, which consists of four basic processes: (1) plan and control production, (2) perform production operations, (3) maintain inventory control, and (4) perform cost accounting. The discussion focuses on the activities, documents, and controls pertaining to these traditional processes. The chapter then examines manufacturing techniques and technologies in world-class companies. Many firms pursuing world-class status follow a philosophy of lean manufacturing. This approach evolved from the Toyota Production System (TPS). The goal of lean manufacturing is to improve efficiency and effectiveness in product design, supplier interaction, factory operations, employee management, and customer relations. Key to successful lean manufacturing is achieving manufacturing flexibility, which involves the physical organization of production facilities and the employment of automated technologies, including computer numerical controlled (CNC) machines, computer-integrated manufacturing (CIM), automated storage and retrieval systems (AS/RS), robotics, computer-aided design (CAD), and computer-aided manufacturing (CAM). The chapter then examines problems associated with applying standard cost accounting techniques in a highly automated environment. The key features of two alternative accounting models are discussed: (1) activity-based costing (ABC) and (2) value stream accounting. The chapter concludes with a discussion of the information systems commonly associated with lean manufacturing and world-class companies. Materials re are used to determine how much raw materials are required to fulfill production orders. Manufacturing resources planning (MRP II) evolved from MRP to integrate additional functionality into the manufacturing process, including sales, marketing, and accounting. Enterprise resource planning (ERP) systems take MRP II a step further by integrating all aspects of the business into a set of core applications that use a common database. The Traditional Manufacturing Environment The conversion cycle consists of both physical and information activities related to manufacturing products for sale. The context-level data flow diagram (DFD) in Figure 7-1 illustrates the central role of the conversion cycle and its interactions with other business cycles. 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
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