Accounting Information Systems, 1st Edition Conversion Processes and Controls Accounting Information Systems, 1st Edition

Study Objectives Basic features of conversion processes The components of the logistics function Cost accounting reports generated by conversion processes Risks and controls in conversion processes IT systems of conversion processes Ethical issues related to conversion processes Corporate governance in conversion processes 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)

Basic Features of Conversion Processes Conversion processes - activities related to the transformation of resources into goods or services. Resources include: Materials Labor Overhead Various other expenses necessary to run the operating facility SO 1 Basic features of conversion processes

Basic Features of Conversion Processes Major activities within this process include Operational planning, Optimizing use of employees, property, and inventories, Controlling production flows, Ensuring product quality, and Preparing related cost accounting and financial accounting records. SO 1 Basic features of conversion processes

Basic Features of Conversion Processes Exhibit 11-1 Conversion Processes within the Overall System SO 1 Basic features of conversion processes

Basic Features of Conversion Processes Exhibit 11-2 Overview of the Conversion Processes SO 1 Basic features of conversion processes

Basic Features of Conversion Processes Quick Review Manufacturing has changed in recent years as a result of each of the following factors except: globalization technological advances increased competition lack of economic prosperity SO 1 Basic features of conversion processes

Components of the Logistics Function Logistics is the logical, systematic flow of resources throughout the organization. Three primary components: planning, resource management, and operations. SO 2 The components of the logistics function

Components of the Logistics Function bill of materials operations list Production orders Production schedule Exhibit 11-3 Components of the Logistics Function SO 2 The components of the logistics function

Components of the Logistics Function Terminology Economic Order Quantities (EOQ) Raw materials Work-in-process Finished goods Inventory status report Exhibit 11-3 Components of the Logistics Function SO 2 The components of the logistics function

Components of the Logistics Function Operations may be performed by : Continuous processing of homogeneous products Batch processing Custom, made-to-order processing Exhibit 11-3 Components of the Logistics Function SO 2 The components of the logistics function

Components of the Logistics Function Exhibit 11-5 Production Process Map See next slide for larger image. SO 2 The components of the logistics function

Components of the Logistics Function Exhibit 11-5 Production Process Map SO 2 The components of the logistics function

Components of the Logistics Function Exhibit 11-5 Production Process Map SO 2 The components of the logistics function

Components of the Logistics Function Quick Review The term conversion processes is often used synonymously with operations. production. manufacturing. all of the above. SO 2 The components of the logistics function

Components of the Logistics Function Quick Review Which of the following activities is not part of the planning component of the logistics function? Research and development Capital budgeting Human resource management Scheduling SO 2 The components of the logistics function

Components of the Logistics Function Quick Review Which of the following terms relates to the control of materials being held for future production? Routing Work-in-process Stores Warehousing SO 2 The components of the logistics function

Components of the Logistics Function Quick Review When additional procedures are necessary to bring a defective product up to its required specifications, this is referred to as rework. scrap. work-in-process. variance reporting. SO 2 The components of the logistics function

Components of the Logistics Function Quick Review A firm expects to sell 1000 units of its best-selling product in the coming year. Ordering costs for this product are $100 per order, and carrying costs are $2 per unit. Compute the optimum order size, using the EOQ model. 10 units 224 units 317 units 448 units SO 2 The components of the logistics function

Cost Accounting Reports Generated by Conversion Processes Standard costs are expected costs based on projections of a product’s required resources. Perpetual inventory systems involve recording purchases as raw materials inventory, recording all components of work-in-process for inventories in various stages of production, and recording total cost of sales for products completed and sold. SO 3 Cost accounting reports generated by conversion processes

Cost Accounting Reports Generated by Conversion Processes Periodic inventory systems involve updating the inventory and cost of sales accounts only at the end of the period. Variances represent the differences between actual costs and the standard costs applied. SO 3 Cost accounting reports generated by conversion processes

Risks and Controls in Conversion Processes Common procedures within the conversion process: Authorization of transactions Initiation of production orders Issuance of materials into production Transfer finished goods to warehouse or shipping areas Segregation of duties Adequate records and documents SO 4 Risks and controls in conversion processes

Risks and Controls in Conversion Processes Common procedures within the conversion process: Security of assets and documents Independent checks and reconciliation Physical inventory count Physical inventory reconciliation Cost-benefit considerations SO 4 Risks and controls in conversion processes

Risks and Controls in Conversion Processes Quick Review Which of the following internal controls is typically associated with the maintenance of accurate inventory records? Performing regular comparisons of perpetual records with recent costs of inventory items Using a just-in-time system to keep inventory levels at a minimum Performing a match of the purchase request, receiving report, and purchase order before payment is approved Using physical inventory counts as a basis for adjusting the perpetual records SO 4 Risks and controls in conversion processes

Risks and Controls in Conversion Processes Quick Review The goal of a physical inventory reconciliation is to determine the quantity of inventory sold. compare the physical count with the perpetual records. compare the physical count with the periodic records. determine the quantity of inventory in process. SO 4 Risks and controls in conversion processes

IT Systems of Conversion Processes Computerized systems may provide the following benefits: Automatic computation of materials requirements Systematic scheduling that allows for greater flexibility and increased efficiencies Timely transfer of inventories due to the automatic notification features Validation of data entries Automatic updating of inventory status reports Automatic preparation of financial accounting entries and cost accounting reports SO 5 IT systems of conversion processes

IT Systems of Conversion Processes Additional trends that enhance the conversion process: Computer-aided design (CAD) Computer-aided manufacturing (CAM) Industrial robots Materials resource planning (MRP) Manufacturing resource planning (MRP-II) Enterprise-wide resource planning (ERP) Computer-integrated manufacturing systems (CIMs) Just-in-time (JIT) production systems SO 5 IT systems of conversion processes

IT Systems of Conversion Processes Match IT systems on left with their definitions on the right: CAD CAM MRP MRP-II ERP CIMs JIT A network including production equipment, computer terminals, and accounting systems b. Electronic workstation including advanced graphics and 3-D modeling of production processes Automated scheduling of manufacturing resources, including scheduling, capacity, and forecasting functions The minimization of inventory levels by the control of production so that products are produced on a tight schedule in time for their sale A single software system that includes all manufacturing and related accounting applications Automated scheduling of production orders and materials movement Production automation, including use of computers and robotics SO 5 IT systems of conversion processes

IT Systems of Conversion Processes Match IT systems on left with their definitions on the right: CAD CAM MRP MRP-II ERP CIMs JIT A network including production equipment, computer terminals, and accounting systems b. Electronic workstation including advanced graphics and 3-D modeling of production processes Automated scheduling of manufacturing resources, including scheduling, capacity, and forecasting functions The minimization of inventory levels by the control of production so that products are produced on a tight schedule in time for their sale A single software system that includes all manufacturing and related accounting applications Automated scheduling of production orders and materials movement Production automation, including use of computers and robotics SO 5 IT systems of conversion processes

IT Systems of Conversion Processes Match IT systems on left with their definitions on the right: CAD CAM MRP MRP-II ERP CIMs JIT A network including production equipment, computer terminals, and accounting systems b. Electronic workstation including advanced graphics and 3-D modeling of production processes Automated scheduling of manufacturing resources, including scheduling, capacity, and forecasting functions The minimization of inventory levels by the control of production so that products are produced on a tight schedule in time for their sale A single software system that includes all manufacturing and related accounting applications Automated scheduling of production orders and materials movement Production automation, including use of computers and robotics SO 5 IT systems of conversion processes

IT Systems of Conversion Processes Match IT systems on left with their definitions on the right: CAD CAM MRP MRP-II ERP CIMs JIT A network including production equipment, computer terminals, and accounting systems b. Electronic workstation including advanced graphics and 3-D modeling of production processes Automated scheduling of manufacturing resources, including scheduling, capacity, and forecasting functions The minimization of inventory levels by the control of production so that products are produced on a tight schedule in time for their sale A single software system that includes all manufacturing and related accounting applications Automated scheduling of production orders and materials movement Production automation, including use of computers and robotics SO 5 IT systems of conversion processes

IT Systems of Conversion Processes Match IT systems on left with their definitions on the right: CAD CAM MRP MRP-II ERP CIMs JIT A network including production equipment, computer terminals, and accounting systems b. Electronic workstation including advanced graphics and 3-D modeling of production processes Automated scheduling of manufacturing resources, including scheduling, capacity, and forecasting functions The minimization of inventory levels by the control of production so that products are produced on a tight schedule in time for their sale A single software system that includes all manufacturing and related accounting applications Automated scheduling of production orders and materials movement Production automation, including use of computers and robotics SO 5 IT systems of conversion processes

IT Systems of Conversion Processes Match IT systems on left with their definitions on the right: CAD CAM MRP MRP-II ERP CIMs JIT A network including production equipment, computer terminals, and accounting systems b. Electronic workstation including advanced graphics and 3-D modeling of production processes Automated scheduling of manufacturing resources, including scheduling, capacity, and forecasting functions The minimization of inventory levels by the control of production so that products are produced on a tight schedule in time for their sale A single software system that includes all manufacturing and related accounting applications Automated scheduling of production orders and materials movement Production automation, including use of computers and robotics SO 5 IT systems of conversion processes

IT Systems of Conversion Processes Match IT systems on left with their definitions on the right: CAD CAM MRP MRP-II ERP CIMs JIT A network including production equipment, computer terminals, and accounting systems b. Electronic workstation including advanced graphics and 3-D modeling of production processes Automated scheduling of manufacturing resources, including scheduling, capacity, and forecasting functions The minimization of inventory levels by the control of production so that products are produced on a tight schedule in time for their sale A single software system that includes all manufacturing and related accounting applications Automated scheduling of production orders and materials movement Production automation, including use of computers and robotics SO 5 IT systems of conversion processes

IT Systems of Conversion Processes Match IT systems on left with their definitions on the right: SO 5 IT systems of conversion processes

IT Systems of Conversion Processes Quick Review Which of the following is not considered a benefit of using computerized conversion systems? Automatic computation of materials requirements Increased sales and cost of sales Increased efficiency and flexibility Early error detection and increased accuracy SO 5 IT systems of conversion processes

IT Systems of Conversion Processes Quick Review Which of the following represents a method of managing inventory designed to minimize a company’s investment in inventories by scheduling materials to arrive at the time they are needed for production? The economic order quantity (EOQ) Material resource planning (MRP) First-in, first-out (FIFO) Just-in-time (JIT) SO 5 IT systems of conversion processes

IT Systems of Conversion Processes Quick Review For which of the following computerized conversion systems is Wal-Mart well known? CAD/CAM MRP-II CIMs JIT SO 5 IT systems of conversion processes

Ethical Issues Related to Conversion Processes Earnings management is the act of misstating financial information in order to improve financial statement results. Absorption costing involves the inclusion of both variable and fixed costs in the determination of unit costs for ending inventories and cost of goods sold. SO 6 Ethical issues related to conversion processes

Corporate Governance in Conversion Processes The internal controls and ethical tone and procedures within the conversion process are also part of the corporate governance structure. Establishing and maintaining reliable inventory management processes, internal controls, and ethical practices help ensure proper financial stewardship. SO 7 Corporate governance in conversion processes

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