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Accounting Information Systems:
Essential Concepts and Applications
Fourth Edition by Wilkinson, Cerullo, Raval,
and Wong-On-Wing
Module 3: The Conversion
Cycle
Slides Authored by Somnath Bhattacharya, Ph.D. Florida Atlantic University
Objectives of the
Conversion Cycle - I
The major purpose of the Conversion Cycle is to transform raw materials into finished goods
Specifically, the objective is to ensure that: 1) Adequate raw materials and other resources are
available for production, while the investment in such resources is minimized
2) Production costs are minimized through high labor productivity, full utilization of production equipment, low levels of scrap and rework, and optimal design of production layouts and procedures
3) WIP inventories are transformed into finished goods, which are then either warehoused or shipped
on schedule
Objectives of the
Conversion Cycle - II
4) Establish levels of product quality and after-sales service are attained
5) Costs for each order or process are accumulated fully and accurately
A Partial Organization Chart of
a Logistics Function
Production
Planning
& Control
Maintenance
Work Center
A
Work Center
B
Work Center
...n
Production
Superintendent
Quality
Control
Shipping
Production
Management
Sales Order
Entry
Engineering
Design
Purchasing Receiving Stores
Inventory
Management
VP
Logistics
Figure M3-1
Forms of Data Input
Customer order
Bill of materials
Operations list/Routing slip
Production schedule
Production order
Materials issue slip/Materials requisition
Labor job-time ticket
Move ticket/traveler
Inspection report(s)
Computerized Data Entry
Data are captured via terminals or micro-based work-stations using such techniques as keyed-in alphanumeric codes, inserted badges or cards, scanned bar codes, or touched monitor screens.
Preformatted documents are automatically generated using application software and on-line data bases.
Electronic copies of the documents are maintained in on-line files, and hard-copy forms are printed only as needed and requested.
Data Processing
The conversion cycle encompasses three major processing steps:
Production planning
Production operations
Accounting for production costs
Advantages of Computer Integrated
Manufacturing Systems - I
1) The materials requirements relating to demands for products are determined beforehand, so that the materials are transferred to the production areas in time for production starts
2) Production orders are scheduled to accommodate the manufacturing capacity
3) Data are validated upon online entry, so that errors are detected more quickly and reprocessing delays due to undetected errors are reduced
Advantages of Computer Integrated
Manufacturing Systems - II
4) Inventory and production order records are updated in a timely manner from materials requisitions, labor-time entries, and move tickets
5) Accounting-related processing is simplified, since transactions are posted without sorting to online files
6) Control reports such as cost variance analyses are prepared for managers
A Configuration for CIM, Including
Associated Accounting Modules
Logistics
data base
Accounting
data base
Cost Accounting
Inventory
Control
Product
Costing
Automated
Handling
Warehousing
Manufacturing
CAM
FMS
Robotics
Production
Planning
MRP
JIT
Engineering
CAD
Figure M3-17
Benefits of CIM Systems - I
Greater flexibility in meeting the changing needs of customers
Savings in the material inventory investment
Increased quality in products
Optimal scheduling of production, with dynamic adjustments as conditions change or new orders are received
Shorter production cycle times
Improved productivity of employees and hence reduced labor costs
Continuous monitoring of production operations, with immediate feedback of control problems as they arise
Benefits of CIM Systems - II
Savings in paperwork costs, since most interactions are performed via computer and records are stored electronically
Better utilization of all production facilities
Greater accessibility of information, including the ability to provide ad hoc reports for planning and control
Benefits of CIM Systems - III
Measures Relating to the
Product Conversion Cycle - I
Category Examples ofMeasures
Customer Satisfaction Quality
Service
Availability
Figure M3-18
Category Examples of Measures
Performance Production cycle time
Product yield
Percentage of scrap costto dollars of productshipped
Employee productivity
Direct labor variance
Figure M3-18 Continued
Measures Relating to the
Product Conversion Cycle - II
Figure M3-18 Continued
Category Examples ofMeasures
ResourceManagement
Manufacturing cost asa percentage of dollarsale
Dollar sales perproduction employee
Raw materialsinventory turnover
Production output persquare foot of factoryspace
Average machinetime in days permonth
Measures Relating to the
Product Conversion Cycle - III
Category Examples ofMeasures
Flexibility Average cycle timeper product
Number of daysunder productionschedule
Changeover time
Figure M3-18 Continued
Measures Relating to the
Product Conversion Cycle - IV
Scheduled Managerial
Reports
Employee productivity reports that compare the output of the operations work center employees against standard levels of production
Work center performance reports that reflect the efficiency of each work center
Open production order status reports that show which orders are behind schedule and by how much
Equipment utilization reports that show the percentage of downtime for each piece of factory equipment
Waste reports that show the percentages of scrap, rework, and rejects for the production orders currently in process
Data Management: File
Oriented Approach
Master Files
Raw materials
WIP
Finished goods
Transaction Files
Production order file
Materials issues file
Operations/Routing file
An Entity-Relationship Diagram
of the Product Conversion Cycle
Production
Planner
Dispatch
Production Order Work Center
Employees Assign to
Production order/materials
Raw
Materials
Production Order/Operations
Undertake to
Perform
Operations Used in
Establish
WIP
Inventory
Accumulate Costs
Cost
Accountant Complete
Production Finished Goods
Inventory
1
1
m
m 1
n
1
n
n
n
n
n
1
1 m
1 1
1 Figure M3-22
Risk Exposures Within the
Product Conversion Cycle - I
Risk Exposure(s)1) Incorrect costs charged toWIP Inventory
1) Overstatement of inventory
2) Errors in recording quantitiesof WIP or Finished GoodsInventory
2) Incorrect balances ininventory records
3) Release of wrong productionorder into production
3) Mix-up in productionschedule, causing possibledelays
4) Unauthorized release ofproduction order intoproduction
4) Mix-up in productionschedule; causing possibledelays
5) Issuance of excessive orinsufficient quantities ofmaterials into production
5) Possibility of lost materials ifexcessive issue, or delay ifinsufficient issue
6) Fraudulent charging of laborhours to production
6) Excessive production costs
Figure M3-24
Risk Exposure(s)7) Fraudulent charging ofexcessive overtime forproduction employees
7) Excessive production costs
8) Theft of inventories or scrap 8) Losses of cash
9) Excessive delays of ordersbetween production operations
9) Excessive production costsand possible revision inschedule
10) Falsification of finished-goods inventory records
10) Misstatement of inventoryvaluation
11) Improper use of cost-flowmethods with respect toinventories
11) Misstatement of inventoryvaluation
12) Inflation of inventoryvalues due to not writing downitems
12) Overstatement of inventoryvaluation
Figure M3-24 Continued
Risk Exposures Within the
Product Conversion Cycle - II
Risk Exposure(s)13) Undue delays in detectingitems of products that havebecome defective duringproduction operations
13) Excessive production costs
14) Involvement of inventories,production facilities, and ledgerrecords in natural or human-made disasters
14) Loss of or damage toassets, including possible lossof data
15) Interception of datatransmitted via the web
15) Loss or alteration of data
16) Denying that an onlineorder was placed after theproduction order is processed
16) Loss of sales revenues
17) Unauthorized purchase ofmaterials initiated via the web
17) Excessive inventory andstorage costs
18) Breakdown of the Webserver
18) Loss of data and delay inprocessing orders
Figure M3-24 Continued
Risk Exposures Within the
Product Conversion Cycle - III
Control Objectives
To ensure that: All production orders are properly authorized and
scheduled
All needed raw materials and other resources are assigned to production orders promptly and accurately, and the related costs are accumulated fully in accordance with the established system of cost accounting
All movements of production orders through the production process are reflected by acknowledgements at the various work centers
All finished goods are valued properly
All inventories are adequately safeguarded
General Controls
Organizational
Documentation
Asset Accountability
Management Practices
Authorization
Access
Application Controls
Input Controls
Processing Controls
Output Controls
Web Security Procedures
Authentication
Authorization
Accountability
Data Transmission
Disaster Contingency and Recovery Plan
Copyright © 2000 John Wiley & Sons, Inc. All rights reserved.
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Accounting Information Systems:
Essential Concepts and Applications
Fourth Edition by Wilkinson, Cerullo,
Raval, and Wong-On-Wing