chapter

The conversion
cycle

15

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.

15-1

key 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.

15-2

Conversion cycle business

activities
Transactions 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.

15-3

Major groups in the conversion cycle

1. Inventory
2. Payroll
3. 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.

15-4

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.

15-5

Inventory 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.

15-6

Payroll 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.

15-7

Cost accounting
Records transactions of conversion cycle
classifying three major elements:
1. Direct material costs
2. Direct labour costs
3. 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.

15-8

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.

15-9

Internal control procedures for the

conversion cycle

Material requisitions properly authorised

Approved production schedules
Finished goods transferred to storepersons 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
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