Page 335 - Accounting Information Systems

306 PART II Transaction Cycles and Business Processes

The Traditional Manufacturing Environment

The conversion cycle consists of both physical and information activities related to manufacturing prod-
ucts for sale. The context-level data flow diagram (DFD) in Figure 7-1 illustrates the central role of the
conversion cycle and its interactions with other business cycles. Production is triggered by customer
orders from the revenue cycle and/or by sales forecasts 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 to meet production objectives are sent to the purchases procedures (expendi-
ture cycle), which prepares purchase orders for vendors. Labor used in production is transmitted to the
payroll system (expenditure cycle) for payroll processing. Manufacturing costs associated with intermedi-
ate work-in-process and finished goods (FG) are sent to the general ledger (GL) and financial reporting
system.
Depending on the type of product being manufactured, a company will employ one of the following
production methods:
1. Continuous processing creates a homogeneous product through a continuous series of standard pro-
cedures. Cement and petrochemicals are produced by this manufacturing method. Typically, under
this approach firms attempt to maintain finished-goods inventory at levels needed to meet expected
sales demand. The sales forecast in conjunction with information on current inventory levels triggers
this process.
2. Make-to-order processing involves the fabrication of discrete products in accordance with customer
specifications. This process is initiated by sales orders rather than depleted inventory levels.
3. Batch processing produces discrete groups (batches) of product. Each item in the batch is similar and
requires the same raw materials and operations. To justify the cost of setting up and retooling for

FI GU RE
7-1 CONVERSION CYCLE IN RELATION TO OTHER CYCLES

Marketing
System

Sales
Forecast

Purchase Requisitions
Revenue Cycle Sales Orders Conversion
Cycle Expenditure
Cycle
Labor Usage

Work Finished
In
Goods
Process

General Ledger
and Financial
Reporting System