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

3. 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)

4. 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

5. 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

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

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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

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

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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

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

37. 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

38. 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

39. 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

40. 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

41. 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

42. Copyright
Copyright © 2008 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.