OVERVIEW OF THE CONVERSION PROCESS
OVERVIEW OF THE CONVERSION PROCESS
THE CONVERSION PROCESS
IS CONCERNED WITH :
- the conversion of input resources into products
-the provision of services to customers
-the costing of goods and services
-the management of inventories.
ALSO CALLED THE MANUFACTURING,
The PRODUCTION,
or the INVENTORY CYCLE.
supply push vs. demand pull
-balance between production and demand is maintained in ?
just-in-time inventory
-driven by lead time required for raw material procurement and production time
ACTIVITY BASED COSTING - ABC COSTING
direct materials are traced directly to the product or service
but conversion costs are traceable to activities
advantage lies in the information it provides to production managers
ABC focuses attention on the cost drivers - the activities that give rise to costs - and facilitates cost control by control of these drivers.
It draws attention to activities that may be expensive but add no value to the product.
FILE STRUCTURE
1. in a MERCHANDISING organization:
MASTER FILE -
MERCHANDISE INVENTORY file
TRANSACTION FILES -
RECEIVING TRANSACTION FILE
SALES TRANSACTION FILE
INTERFACE with PURCHASING and REVENUE
CYCLES
2. in a MANUFACTURING organization:
WE NEED 3 MASTER FILES FOR INVENTORY:
RAW MATERIALS
WORK IN PROCESS
FINISHED GOODS
PLUS
OPEN JOB FILE - in job costing system replaces
WORK IN PROCESS FILE
MANUFACTURING OVERHEAD or
ACTIVITY COST FILE
STANDARD COST FILE
TRANSACTION FILES:
RECEIVING TRANSACTION FILE -
(INTERFACE WITH PURCHASING CYCLE)
MATERIALS ISSUANCE TRANSACTION FILE
PRODUCTION LABOR TRANSACTION FILE -
(may be merged into PRODUCTION COST
TRANSACTION FILE)
COMPLETED PRODUCT TRANSACTION FILE
SALES or SHIPMENT TRANSACTION FILE
INVENTORY ADJUSTMENT file
INPUT DOCUMENTS for a manufacturing organization
1. MATERIALS REQUISITION
materials are issued to production through this form
which is authorized by a production supervisor
lists quantity of each material needed
2. PRODUCTION ORDER
internal to the CONVERSION PROCESS
issued in response to sales orders or may be issued
routinely
authorizes production of goods
3. WORK ORDER
used to document manual operations
authorizes the expenditure of labor resources for the
production of goods
list type of personnel needed, skill level, expected number
of hours required
4. TIME CARD or LABOR TICKET
capture labor hours
direct labor or indirect labor
job costing of hours
electronic time clock may be used to replace paper time card
labor variances
Use of input documents - particularly in CONVERSION PROCESS - is being replaced by electronic data capture.
REPORTS
INVENTORY AND PRODUCTION STATUS REPORTS:
1. INVENTORY STATUS REPORTS
(raw materials and finished goods)
2. INVENTORY REORDER REPORTS
(raw materials and finished goods)
3. MATERIALS REQUIREMENTS REPORT
4. PRODUCTION OR JOB STATUS REPORT
ACTIVITY REPORTS OR JOURNALS:
1. MATERIALS RECEIPTS AND ISSUANCES JOURNAL
2. MATERIALS AND LABOR USAGE REPORT
3. SCRAP AND LOST TIME REPORT
4. COMPLETED PRODUCTION REPORT
5. INVENTORY ADJUSTMENT JOURNALS
6. COST WORK SHEET
7. STANDARD COST VARIANCE REPORTS
MAJOR RISKS IN THE CONVERSION PROCESS
1. Risks concerning the management of inventories
.misstatement of inventory valuation
.costs determined or classified improperly
.errors made in cost allocations
.cost flow models - LIFO, FIFO - not applied as authorized
.total inventory is correct but misstatements exist among components - RM, WIP, FGS
.errors in perpetual inventory records
shortages, overstocking, obsolescence
.excessive inventory inflating carrying costs
.overstatement of inventory value due to obsolete, slow
movers, or overstocking
.loss of market value not reflected properly by write down of
inventory costs - LCM
2. Risks concerning the control of production
.production plan and initiation without management approval
.production is not regulated according to plan
excessive production and inventory
underutilization and inventory shortage
.unauthorized goods produced
not up to customer standards of quality
intent to sell without authorization (theft)
3. Risks in the accumulation of production costs
.computed production costs are erroneous
.materials, labor, overhead expensed when should be capitalized (or the opposite)
.period costs included in manufacturing overhead
.incorrect allocation of overhead
.overhead rates or standards are inappropriate
resulting in misstatement of product cost
misapplication of overhead
.completed production not recorded correctly or at all
lost sales
repeated production
.errors made in transfer of cost data from WIP to FGS inventory
.standard costs charged without management authorization
concealing unfavorable variances
.flow of costs into FGS inventory falsified to conceal shortages or theft
.issuance of materials to production incorrectly recorded
mismatch between raw materials and WIP
.scrap. spoilage, waste not recorded properly
sale of scrap not reported
.scrap stolen
INTERNAL CONTROLS FOR CONVERSION PROCESS
much of the control of safeguarding inventories lies with physical security measures--general controls
securely locked warehouse, storeroom, electronic sensing and monitoring devices, etc.
Access to storerooms should be limited to those with authorized access-photo id cards
magnetic key, locks changed periodically
insurance coverage
use of standard cost systems and perpetual inventory recordkeeping systems are also important means of control
comparing inventory per count (or floor) to inventory per books
1. ORGANIZATIONAL CONTROLS
segregation of duties--established through the organization chart and related job descriptions
some types of segregation can be enforced through the use of passwords and by selective read-update privileges
restrict access to key data and processes to designated terminals
responsibility for custody of inventory should be separated from responsibility for maintaining perpetual inventory records
physical custody or issuance of inventory items should be separated from preparation of receiving documents, materials requisitions or shipping documents
responsibility for reviewing inventory valuations and approving write-down or write-off of inventory should be separated from maintenance of perpetual inventory records and from the authority to dispose of obsolete, unsalable items.
2. Data Access Controls
special attention should be given to the security of interactive systems, particularly those in real time mode--which is particularly prone to error contamination.
Access to interactive terminals should be controlled by physical controls over terminals as well as passwords.
Access logs determine the origin of transaction data.
Transaction entry should be accepted only upon submittal and verification of user identification codes.
3. Authorization Controls
to ensure that input data are authorized
authority to accept raw materials lies with receiving dept
authority to transport finished goods lies with the shipping dept
authorization of production orders should be made in accordance with clearly stated management policies
any deviation from these policies should be approved in writing by management
production orders for custom goods should be coordinated with sales orders and contract specifications
authorization for materials requisitions for the issuance of raw materials and parts lies with factory dept
requisitions should be coordinated with bills of materials and engineering specifications
woork orders authorized by production supervisors, who also authorize time cards or labor tickets related to the work
labor and machine assignments should be made in accordance with engineering specifications, production schedules, standard allowances
overhead application rates and cost standards approved by upper management and remain in force for 12 month budget periods
any deviations should be approved in writing
written authorization must be received to remove any equipment, materials, goods or scrap from the plant facilities
written procedures should be established for the accumulation of materials, labor and overhead costs
periodic checks should be made to ensure that computer programs are working as established
computer programs should routinely analyze inventory status to identify slow moving, overstocked, or obsolete items
actual levels should be compared with reorder points
4. Data Verification Controls
ie. Input controls--ensure that input data are accurate before processing begins
Verification can be performed by batch edit program or by point-of-entry editing
Real Time inventory systems demand point-of-entry controls because of the immediate update of master records.
All inventory part or product numbers should be validated by check digits or table look up.
Retrieval of the inventory description allows data entry clerk to make comparisons between the number typed in and the description.
Limit and reasonableness tests should be done on inventory quantity and dollar amounts.
Entry of redundant data, such as inventory number and description, provides high rejection rate for invalid entries.
5. Processing Controls
a. batch controls / batch balancing
record counts
control totals / control logs
cross footings
hash totals
b. prenumbered documents - all processing is complete
production orders, work orders, materials requisitions issued in sequence
deviations from sequence reported to exception report
control of unused form supply
form used to approve inventory adjustments and disposal of assets
c. independent comparisons
between production records and production orders
outstanding production orders on open job file and
number of jobs being worked in the factory
reports of spoiled jobs with spoilage reports
6. File Controls
currency of data in inventory master files
file maintenance
edit logs - adjustments to inventory approved in writing
data security for back up concerns
7. Output Controls
output may be generated automatically
may generated purchase order by programmed criteria
control over proper distribution / usefulness of
reports to management
................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.
Related download
- project management an overview
- overview mssp services osibeyond
- acquisition planning package overview
- technology overview dicom
- disaster recovery plan policy purplesec
- dell openmanage connections an overview
- electronic records management use cases overview
- embedded systems management and dell white paper
- overview of the conversion process
Related searches
- the whole process of photosynthesis
- starbucks overview of the company
- brief overview of the bible
- overview of the lymphatic system
- overview of the book of acts
- process of the lymphatic system
- the basic process of photosynthesis
- overview of the financial system
- what is the phonological process of stopping
- brief overview of the constitution
- overview of the bible pdf
- overview of the american revolution