CHAPTER 7

The Conversion Cycle

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.

Learning Objectives
Understand the operating features,

philosophies, and technologies that characterize a world-class company.

Understand the objectives of just-in-time

and recognized the implications of maintaining excessive inventories in the world-class environment.

Learning Objectives
Recognize the importance of quality in

the world-class environment

Understand

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

Be familiar with the characteristics of a

world-class information system.

Discussions

companys conversion cycle transforms (converts) input resources, such as raw materials, labor, and overhead, into finished products or services for sale. The conversion cycle is most formal and apparent in manufacturing firms. However, this cycle exists, conceptually, in certain service industries, such as health care, consulting, and public accounting.

Discussions

In this discussion of the conversion cycle,

we shall assume a manufacturing environment. U.S. manufactures are in a period of dynamic transformation. Rapid swings in consumer demands, shorter product life cycles, and foreign competition have radically changed the rules of market place.

Discussions

In

an attempt to cope with these changes, manufacturers are beginning to conduct business in a dramatically new way. The term world-class define this new area of business. The conversion cycle presents the manufacturing environment as a continuum with traditional firms at one end and world-class firms at the other. At points along this line are firms in various stages of transformations as

Discussions

Relatively

few firms have achieved world-class status. Many are moving in that direction; many more remain traditional. To deal with the diversity of practices, this chapter has been divided into four major sections: The first outlines the defining characteristics of a world-class organization

Discussions
The

second section describes the traditional manufacturing environment. It examines the batch-production process and the traditional accounting information system within this setting. The third section deals with the worldclass firms. Here, we become acquainted with the significant assumptions, philosophies, objectives, and technologies associated with worldclass firms.

Discussions
The

fourth section addresses the implications for accounting and Accounting Information System. Here, we will see how world-class competition is influencing changes in accounting techniques, information reporting, and information systems. The conversion cycle concludes by presenting the key features of a worldclass information system.

Learning Insights
To know what is a world class firm, what

characteristics do world-class information systems need to have to provide sufficient information to worldclass firms. To determine what activities are involved in the production system and cost accounting system. To distinguished between continuous, batch, and made-to-order processing.

Summary

This

chapter has examined the conversion cycle, whereby a company transforms input resources (i.e., materials, labor, and capital) into marketable products and services. The principal aim has been to highlight the changing manufacturing environment of the contemporary business world and show how it calls for a shift away from traditional forms of business organization and activities toward a

Summary
way of doing business. We have seen how companies that are attempting to achieve world-class status must pursue manufacturing flexibility through increased automation, inventory reduction, and improved product quality.

Summary

We have also seen that achieving worldclass status requires significant departures from traditional accounting techniques. In response to deficiencies in traditional accounting methods, world-class companies have adopted ABC, which provides a more precise and accurate allocation of costs to products.

Summary

New

techniques in activity management complement ABC and enable managers to better understand the nature of activities and cost drivers. New accounting models are needed that allow organizations to combine both financial and non-financial data in an integrated database that will support the needs of multiple users.

Summary

Finally, we examined the key features of

a world-class information system and briefly addresses potential control issues.