Chapter 7

1. Chapter 7 Accounting Information Systems The Conversion Cycle Dr. Hisham Madi

2. The Conversion Cycle • Transforms input resources, raw materials, labor, and overhead into finished products or services for sale • Consists of two subsystems: • Physical activities – the production system • Information activities – the cost accounting system

3. Marketing System Sales Forecast Purchase Requisitions Revenue Cycle Sales Orders Conversion Expenditure Cycle Cycle Labor Usage Work Finished In Goods Process General Ledger and Financial Reporting System Conversion Cycle in Relation to Other Cycles

4. The Conversion Cycle • Depending on the type of product being manufactured, a company will employ one of the following production methods: • Continuous processing creates a homogeneous product through a continuous series of standard procedures. Cement and petrochemicals are produced by this manufacturing method. • Make-to-order processing involves the fabrication of discrete products in accordance with customer specifications • Batch processing produces discrete groups (batches) of product. Each item in the batch is similar and requires the same raw materials and operations

5. The Conversion Cycle Batch Processing System • consists of four basic processes: plan and control production, perform production operations, maintain inventory control, and perform cost accounting

6. The Conversion Cycle Documents in the Batch Processing System The production schedule • Is the formal plan and authorization to begin production. This document describes the specific products to be made, the quantities to be produced in each batch, and the manufacturing timetable for starting and completing production. The bill of materials (BOM), Specifies the types and quantities of the raw material (RM) and subassemblies used in producing a single unit of finished product.

7. The Conversion Cycle Documents in the Batch Processing System A route sheet • the route sheet specifies the sequence of operations (machining or assembly) and the standard time allocated to each task. The work order • (or production order) draws from BOMs and route sheets to specify the materials and production (machining, assembly, and so on) for each batch. These, together with move tickets (described next), initiate the manufacturing process in the production departments

8. The Conversion Cycle Documents in the Batch Processing System A move ticket, • records work done in each work center and authorizes the movement of the job or batch from one work center to the next. A materials requisition • authorizes the storekeeper to release materials (and subassemblies) to individuals or work centers in the production process. • This document usually specifies only standard quantities.

9. The Conversion Cycle Batch Production System Production Planning And Control This consists of two main activities: • specifying materials and operations requirements • production scheduling

10. The Conversion Cycle Batch Production System Materials And Operations Requirements • is the difference between what is needed and what is available in the RM inventory. • This information comes from analysis of inventory on hand, the sales forecast, engineering specifications Operations requirements the assembly and/or manufacturing activities to be applied to the product

11. The Conversion Cycle • Batch Production System • Production Planning And Control • Coordinates the production of many different batches. • The schedule is influenced by time constraints, batch size, and specifications derived from BOMs and route sheets • The scheduling task also produces work orders, move tickets, and materials requisitions for each batch in the production run. • A copy of each work order is sent to cost accounting to set up a new work-in-process (WIP) account for the batch

12. The Conversion Cycle • Batch Production System • Work Centers and Storekeeping • Production operations begin when work centers obtain raw materials from storekeeping. • When the task is complete at a particular work center, the supervisor or other authorized person signs the move ticket, which authorizes the batch to proceed to the next work center. • To evidence that a stage of production has been completed, a copy of the move ticket is sent back to production planning and control to update the open work order file • The finished product along with a copy of the work order is sent to the finished goods (FG) warehouse

13. The Conversion Cycle • Batch Production System • Work Centers and Storekeeping • Also, a copy of the work order is sent to inventory control to update the FG inventory records

14. The Conversion Cycle Batch Production System Inventory Control. The inventory control function consists of three main activities First, it provides production planning and control with status reports on finished goods and raw materials inventory. Second, the inventory control function is continually involved in updating the raw material inventory records from materials requisitions, excess materials requisitions, and materials return tickets. Finally, upon receipt of the work order from the last work center, inventory control records the completed production by updating the finished goods inventory records

15. The Conversion Cycle Batch Production System Inventory Control An objective of inventory control is to minimize total inventory cost while ensuring that adequate inventories exist to meet current demand.

16. Designing Reports

18. Production Planning and Control Sales Forecast Inventory Status Report Engineering Specifications BOM and Route Sheets Raw Materials Requirements (Purchase Requisitions) Operations Requirements Production Scheduling Work Orders Move Tickets Materials Requisitions Open Work Orders Work Centers Cost Accounting Job Tickets Time Cards Completed Move Tickets Payroll Prod. Plan. and Control

19. Upon Completion of the Production Process… Finished Product and Closed Work Order Finished Goods Warehouse Closed Work Order Inventory Control Status Report of Raw Materials and Finished Goods Journal Voucher Prod. Plan. and Control General Ledger

20. The Conversion Cycle Cost Accounting Activities • begins when the production planning and control department sends a copy of the original work order to the cost accounting department • Cost accounting clerk creates a new cost record for the batch and files in WIP file • The records are updated as materials and labor are used. • Receipt of last move ticket signals completion of the production process • clerk removes the cost sheet from WIP file • prepares a journal voucher to transfer balance to a finished goods inventory account and forwards to the General Ledger department

21. Elements of the Cost Accounting System Inventory Control materials requisitions Work Centers job tickets completed move tickets COST ACCOUNTANTS Update WIP accounts DL DM Mfg. OH. Compute Variances STANDARDS

22. Internal Controls • Transaction authorizations • work orders – reflect a legitimate need based on sales forecast and the finished goods on hand • move tickets– signatures from each work station authorize the movement of the batch through the work centers • materials requisitions– authorize the warehouse to release materials to the work centers

23. Internal Controls Segregation of duties • Inventory control maintains accounting records for RM and FG inventories. This activity is kept separate from the materials storeroom and from the FG warehouse functions, which have custody of these assets. • the cost accounting function accounts for WIP and should be separate from the work centers in the production process

24. Internal Controls Supervision • The supervisors in the work centers oversee the usage of RM in the production process. This helps to ensure that all materials released from stores are used in production and that waste is minimized. Employee time cards and job tickets must also be checked for accuracy • Supervisors also observe and review timekeeping activities. This promotes accurate employee time cards and job tickets

25. Internal Controls Access Control Direct Access To Assets. • controlled access to storerooms, production work centers, and finished goods warehouses • Control methods used include identification badges, security guards, observation devices, and various electronic sensors and alarms • quantities in excess of standard amounts require approval

26. Internal Controls Indirect Access To Assets • Assets, such as cash and inventories, can be manipulated through access to the source documents that control them • controlled use of materials requisitions, excess materials requisitions, and employee time cards Accounting Records

27. Internal Controls • the objective of this control technique is to establish an audit trail for each transaction • work orders • cost sheets • move tickets • job tickets • material requisitions • WIP and finished goods files