The conversion cycle

Question

What is the conversion cycle?

Answer 1

The conversion cycle of a company transforms (converts) input resources, such as raw materials, labor, and overhead, into finished products or service for sale. The conversion cycle exists conceptually in all organization, but is most apparent in manufacturing firms, which is the focus of this chapter.

Answer 2

Production is triggered by customer orders from the revenue cycle and/or by sales forecast 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 are sent to the purchase procedures (expenditure cycle). Labor used in production is transmitted to the payroll system (expenditure cycle). Manufacturing costs associated with intermediate work-in-process and finished goods are sent to the general ledger and financial reporting system.

Answer 3

1. Continuous processing:
creates a homogeneous product through a continuous series of standard procedures.
2. Make-to-order processing:
Involves the fabrication of discrete products in accordance with customer specifications.
3. Batch processing procedures:
Produces discrete groups (batches) of product. Each item in the batch is similar and requires the same raw materials and operations.

Answer 4

1. Production planning and control

2. Production operations

3. Inventory control

4. Cost accounting

Answer 5

This consists of two main activities:
- materials and operations requirements
The raw materials requirement for a batch is the difference between what is
needed and what is available in the RM inventory, leading to the creation of purchase requisitions for additional raw materials.
- production scheduling
The scheduling task produces work orders, move tickets, and materials
requisitions for each batch in the production run. A copy of each work order is sent to cost accounting to set up a new work-in-process (WIP) account for the batch.