Generally, when we talk of the conversion

cycle, we refer to manufacturing businesses

where such cycle is easily observed. However,

Chapter 7 each and every business has a conversion cycle.

For merchandising businesses, when the
business transforms the goods purchased to be
store ready, that in effect is conversion. They
The Conversion Cycle may do repacking or relabeling of
merchandise. For service businesses, the
(for online classes Part 1)
conversion can be in the preparation of
materials to be used for the service, e.g.,
mixing color and emulsion to create the hair
dye for parlor services. For DLSUD, these can
be how professors convert information
gathered from academic sources into lectures
customized for classes being handled.
 The Conversion Cycle
Transforms input resources, raw
materials, labor, and overhead into
finished products or services for sale
Consists of two subsystems:
Physical activities – the production
system
Information activities – the cost
accounting system
 Please recall in your Marketing subject the inputs used to develop a sales forecast.
Conversion Cycle in Relation to Other Cycles
Historical sales data is used if the product has been introduced in the market in
previous years. To determine projected % increases, the sales objectives as identified
in the StrategicInformation
planning ofon the activity
Work will be added
in Process to previous sales data.
at the end
However, we all of knowan accounting Marketing
that company executives
period cannot to
are forwarded just invent % increases
without basis. Theythe mayGLneed to do surveys,
Accounting forecast
for setting trends, consider macro and
up the
microeconomic statistics, corresponding System
weather patterns, havepsychology
Weinventory account.
learned of the targeted
in Chapter buying public
4, the Revenue Cycle,
Likewise, we have learned in the Expenditure Cycle, when
andinventories
so much more. run For ToFinished
low, make a sales
this signals forecast
Goods,
that
the whenever
this of
start is the
a tough
cycle goods undertaking which canorders
are when customer
is triggered make
or break
purchasing a company.
process. completed,
Inventories Sales
The weight
GL areusesreally
are the
depleted Forecast
belongs
information
received.
because tothe
The the Marketing
to add
Conversion personnel.
cycle receives input
Accountants
raw materials andsimply furnish
to the
supplies aredata
Finished for
Goods
issuedfromthem
to the
the to
Inventoryanalyze.
Revenue
factory There
account.
forcycle are a lotifofthe
especially unknown
company
variables that have toCycle.
the Conversion be considered Purchase
in making aand
does JIT processing sales forecast.
does Expenditure
not keep huge
Revenue
In this
havepandemic
Sales
crisis, could there be a company
Conversion which of considered the Covid 19 in
We also learned in the Payroll cycle, Requisitions
thatinventories
needed their products.
Cycle
2019 when they
Cycle
manpower
could have
Orders
were developing
for production
known
forecasts
Cycle
When
is supplied afor 2020. Iforder
customer
by recruiting Labor
medical
is suppliesthe
received, companies
approved
personnel by the HR in 2019 that
Dept. The adatagigantic
order spike
for hours in demand
is forwarded
spent for their products
byto production which in would
turn
happenare
workers in the 1st halffrom
st
received of 2020,
theWorkthen perhaps
Payroll toshortages
manufactures
cycle be used Usage
in medical
the
in orderedsupplies
product.wouldUponnot
have
Cost happened.for
Accounting Only
the perhaps
computation Bill Gates Finished
was able
completion,
of manufacturing thetoproduct
predict iswhat would
brought happen.
back to the
We are also have suspicions costs. In
that the Chinese Goods
Revenue government plannedtoeverything
cycle for delivery the customerthat is
why their industries were Process ready to supply global markets when the pandemic struck.
But this is still part of a conspiracy theory which has not been proven entirely. The
results of the sales forecasts become General Ledger
the basis for the conversion cycle to determine
how much the company will produce andand Financial
therefore determine as well the quantity of
raw materials to be purchased, personnel to be recruited and forecast other overhead
Reporting
expenses as well.
System
Production System
Involves the planning, scheduling, and
control of the physical product through the
manufacturing process
determining raw materials requirements
authorizing the release of raw materials
into production
authorizing work to be conducted in the
production process
directing the movement of work through
the various stages of production
 ProductiondoThis
Methods
would be for products that
not vary or change through the
Continuous Processing creates a
years, e.g., fuel, electricity, water,
homogeneous cement,
product rawthrough a salt.
lumber, sugar,
continuous series
Theseof
These arestandard
are for
theproducts that have
basic commodities.
procedures. variants or would come in different
models such as cars, shampoos,
Batch Processing produces
fashion accessories, discrete
biscuits, flavored
groups (batches) of products.
drinks, etc.
These are products for which
Make-to-Order Processing involves
specifications are made by a
customer such as wedding dresses,
the fabrication of discrete products in
cakes, streamers or tarpaulins,
accordance with customer specifications.
sculpture, painting, etc.
As discussed, Marketing establishes demand through
a marketing research where they do surveys,
Information: Documents in the Batch
Production schedules are not confined only to manufacturing
interviews,companies.
focus groupBPOs discussions and other data
for instance have dedicated staff to do production
gathering techniques. Results
a daily of
or these
weeklytechniques
basis. Basedare
Production System
schedules on
projected to the
in a intended niche market
BPO, the number by analysts
of calls are
on the accounts handled
forecastedtowhich in turn has to be
come up with a reasonable
supported sales forecast.
by a corresponding This of
number is the
call agents, equipment and
Sales Forecast - expected demand
input for continuous
furniture.and batch processing
If accounts handled havemethods.
seasonal products or services,
number
The production of resources
schedule willformal
is the vary as plan
to specific
and times within the year.
for the finished goods
That is to
authorization why thereproduction.
begin are “on call” agents or freelance agents.
For schools like DLSUD, the production schedule would be based on
Production Schedule
the projected enrollees - production
for a semester which has to be supported by a
corresponding number of faculty, classrooms, equipment and
plan and authorization to produce
facilities.
Bill of Materials (BOM) - specifies
the types and quantities of the raw
materials and subassemblies used to
produce a single finished good unit. It
outlines the “ingredients” like in a recipe
Information: Documents in the Batch
Production System
Route Sheet - details the production
path a particular batch will take in the
manufacturing process
sequence of operations
time allotted at each station
Work Order - uses the BOM and route
sheet to specify the exact materials and
production processes for each batch
Information: Documents in the Batch
Production System The supervisor of the
next section signs
here to acknowledge
Move Ticket - recordstheir
work done
responsibility in
for the goods in
each work center and authorizesprocess
the
movement of the batch
Materials Requisition -
authorizes the inventory warehouse
to release raw materials for use in the
production process
Example of the Physical Flow of Processes in a Conversion Cycle
Example of the Physical Flow of Processes in a Conversion Cycle
 1
D1
The 4 different
D2
processes found in the2
Conversion Cycle DFD
are discussed in the
next slides.
3 D5

D3

D6

4
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in part, except for use as permitted in a license distributed with a certain product or service or otherwise
D4
on a password-protected website for classroom use.

11
Overview: Traditional Batch Production
Model…
consists of four basic processes:
plan and control
production
perform production
operations
maintain inventory
control
perform cost accounting
 Batch Production System
1. Production Planning and Control
Materials and operations requirements
Materials requirement – the difference between
what is needed and what is available in
inventory. The gap is the amount of raw materials to be
acquired or purchased. Request is forwarded to the Expenditure
Cycle
Operations requirements – the assembly and/or
manufacturing activities to be applied to the
product. This could include hiring of additional workers
(Payroll Cycle), leasing new floor spaces, buying new equipment (FA
cycle), spending for overhead expenses, etc.)
Production scheduling
Batch Production System
Production Scheduling
Master schedule coordinates the production of
multiple batches
Produces work orders, move tickets, and material
requisitions (these are supporting documents generated after
finalizing the production schedule) for each batch with
copies of work orders sent to cost accounting.
Influenced by constraints (could be availability of
manpower, raw materials, overhead and equipment; can even be the
weather, or “acts of God”. Deadlines too), batch size, and
other specifications. (This is the reason why allowances or
buffers are considered)
 Batch Production System
Work centers and storekeeping (2. Perform
production operations):
Production begins when workers obtain raw
materials.
When task completed move ticket authorizes batch
to proceed to next work center with copy sent to
production planning.
Finished products sent to FG warehouse and copy
of work order sent to inventory control to update
FG inventory records.
Work center supervisors send employee time cards
and job tickets to payroll and cost accounting.
Batch Production System
3. Maintain Inventory Control
Objective: minimize total inventory cost
while ensuring that adequate inventories
exist of production demand
Provides production planning and control
with status of finished goods and raw
materials inventory
Continually updates the raw material
inventory during production process
Upon completion of production, updates
finished goods inventory
EOQ Inventory Model
Objective of inventory control is to minimize total
inventory cost while ensuring adequate inventories
to meet demand.
When and how much inventory should beThis has been
purchased?
discussed in your
Economic order quantity (EOQ) model based
other subjects andon
assumptions that may not reflect economic reality:
therefore will not be
Demand is constant and known with certainty.discussed further
assuming that you
Ordering lead time is known and constant. are familiar with the
All inventories in the order arrive at the same
method.time.
Are you?
Total yearly cost of placing orders decreasesYouasshould
orderbe
quantities increase.
Carrying costs increase as quantity of inventory orders
increases.
No quantity discounts so purchase price is constant.
17
• Objective of EOQ is to reduce total inventory
costs. Figure 7.10 shows relationship
between costs and order quantity.

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in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website for classroom use.

18
• Assumptions of the EOQ model
produce the saw-toothed inventory
usage pattern illustrated below.

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in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website for classroom use.

19
• When parameters are subject to variation,
additional inventory units (safety stock) are
added to the reorder point to avoid stock-out
events.

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in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website for classroom use.

20
EOQ Inventory Model
Very simple too use, but assumptions are
not always valid
demand is known and constant
ordering lead time is known and
constant
total cost per year of placing orders
decreases as the order quantities
increase
carrying costs of inventory increases as
quantity of orders increases
no quantity discounts
 EOQ Inventory Model
INVENTORY LEVEL

Inventory Cycle Daily Demand

EOQ

Reorder
Point

Lead Time Time (days)

 Production Planning and Control

Sales Forecast
Raw Materials Requirements
Inventory Status Report (Purchase Requisitions)
This is a graphical depiction of the
Engineering Specifications
relationships Operations
of Requirements
documents,
BOM and Route Sheets
processes and entities in the
Conversion Cycle. Similar to
Production Scheduling
concept mapping method.
Work Orders
Move Tickets
Materials Requisitions
Open Work Orders
Work Centers
Job Tickets Cost Accounting
Time Cards Payroll
Completed Move Tickets Prod. Plan. and Control
 Upon Completion of the Production Process…
Finished Product Finished Goods
and Closed Work Order
Warehouse
Closed Work Order

Inventory Control
Status Report of Raw Materials Prod. Plan. and
and Finished Goods Control
Journal Voucher General Ledger
4. Perform Cost Accounting Activities
Record the financial effects of the physical events occurring
in the production process.
Begins when the production planning and control
department sends the work order to cost accounting.
Cost accounting clerk creates a new cost record for the batch
and files in WIP file.
The records are updated as materials and labor are used.
Deviations from standards are recorded to produce
variances.
Receipt of last move ticket signals completion of production
and transfer for WIP to FG inventory.
 WIP account is closed, journal vouchers are recorded and sent to
the GL department for posting to the control accounts.

25
 Cost Accounting System
Work Centers
This is another graphical depiction
Inventory Control
of the relationshipsjob tickets
of documents,
materials requisitions
processes completed
and entities move tickets
in the Cost
Accounting subsystem of the
Conversion Cycle.

COST ACCOUNTANTS
Update WIP accounts
DL
STANDARDS DM
Mfg. OH.
Compute Variances
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in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website for classroom use.
Example of the Physical Flow of Processes in a Cost Accounting Procedures 27