© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information & Reporting Systems by A. Aseervatham and D. Anandarajah. Slides

prepared by Kaye Watson.15-1

chapter

1515The conversion cycle

Learning objectives–To learn what the conversion cycle business activities are.–To learn how to flow chart the conversion cycle business activities.–To understand the processing of conversion cycle transactions using a computer.–To know the control practices and procedures required in the conversion cycle.

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information & Reporting Systems by A. Aseervatham and D. Anandarajah. Slides

prepared by Kaye Watson.15-2

key termskey terms

• direct labour cost• direct material cost• job order costing• just-in-time inventory system• material requirements planning• overhead cost• process costing• work in process

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information & Reporting Systems by A. Aseervatham and D. Anandarajah. Slides

prepared by Kaye Watson.15-3

Conversion cycle business Conversion cycle business activitiesactivitiesTransactions in the conversion process:• acquisition of materials• acquisition of labour• transfer of materials, labour and overheads

into production• transfer of finished goods to inventory• sale of inventory

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information & Reporting Systems by A. Aseervatham and D. Anandarajah. Slides

prepared by Kaye Watson.15-4

Major groups in the conversion cycleMajor groups in the conversion cycle

1. Inventory2. Payroll3. Cost accounting

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information & Reporting Systems by A. Aseervatham and D. Anandarajah. Slides

prepared by Kaye Watson.15-5

Inventory Inventory • Main activity is to keep records of inventory

levels:– raw materials – finished goods

• Valuation methods used:– periodic inventory method– perpetual inventory method

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information & Reporting Systems by A. Aseervatham and D. Anandarajah. Slides

prepared by Kaye Watson.15-6

Inventory processingInventory processing

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information & Reporting Systems by A. Aseervatham and D. Anandarajah. Slides

prepared by Kaye Watson.15-7

Payroll systemPayroll system• Records labour transactions• Payroll system interfaces with conversion

cycle providing information on labour transactions

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information & Reporting Systems by A. Aseervatham and D. Anandarajah. Slides

prepared by Kaye Watson.15-8

Cost accountingCost accounting

Records transactions of conversion cycle classifying three major elements:

1. Direct material costs2. Direct labour costs3. Overhead costs

These are recorded in a ‘Work in process account’

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information & Reporting Systems by A. Aseervatham and D. Anandarajah. Slides

prepared by Kaye Watson.15-9

Non-accounting systems Non-accounting systems

Systems necessary to the conversion cycle:• Product design• Production planning and scheduling systems• Material requirements planning• Just-in-time systems• Computer-aided manufacturing

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information & Reporting Systems by A. Aseervatham and D. Anandarajah. Slides

prepared by Kaye Watson.15-10

Internal control procedures for the Internal control procedures for the conversion cycleconversion cycle• Material requisitions properly authorised• Approved production schedules• Finished goods transferred to storeperson’s care• Inventory records checked for accuracy• Physically verify stocks to check for losses and accuracy of

records• Investigate differences in physical and accounting records and

take appropriate action• Monitor defective production• Investigate customer complaints