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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

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Page 1: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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

Page 2: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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

Page 3: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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

Page 4: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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

Page 5: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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)

Page 6: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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.

Page 7: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

Data Processing

The conversion cycle encompasses three major processing steps:

Production planning

Production operations

Accounting for production costs

Page 8: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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

Page 9: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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

Page 10: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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

Page 11: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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

Page 12: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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

Page 13: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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

Page 14: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

Measures Relating to the

Product Conversion Cycle - I

Category Examples ofMeasures

Customer Satisfaction Quality

Service

Availability

Figure M3-18

Page 15: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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

Page 16: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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

Page 17: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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

Page 18: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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

Page 19: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

Data Management: File

Oriented Approach

Master Files

Raw materials

WIP

Finished goods

Transaction Files

Production order file

Materials issues file

Operations/Routing file

Page 20: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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

Page 21: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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

Page 22: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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

Page 23: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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

Page 24: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

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

Page 25: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

General Controls

Organizational

Documentation

Asset Accountability

Management Practices

Authorization

Access

Page 26: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

Application Controls

Input Controls

Processing Controls

Output Controls

Page 27: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

Web Security Procedures

Authentication

Authorization

Accountability

Data Transmission

Disaster Contingency and Recovery Plan

Page 28: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing · Category Examples of Measures Performance Production cycle time Product yield Percentage of scrap cost to dollars

Copyright © 2000 John Wiley & Sons, Inc. All rights reserved.

Reproduction or translation of this work beyond that permitted in

Section 117 of the 1976 United States Copyright Act without the express

written permission of the copyright owner is unlawful. Request for

further information should be addressed to the Permissions Department,

John Wiley & Sons, Inc. The purchaser may make back-up copies for

his/her own use only and not for distribution or resale. The publisher

assumes no responsibility for errors, omissions, or damages, caused by

the use of these programs or from the use of the information contained

herein.

Accounting Information Systems:

Essential Concepts and Applications

Fourth Edition by Wilkinson, Cerullo,

Raval, and Wong-On-Wing