Accounting Information Systems Chapter 13

Conversion Cycle/Production Cycle

The process of turning cash or raw materials and labor into finished goods.

Manufacturing in the Conversion/Product cycle

Involves planning and then turning raw materials, labor, and overhead into finished goods.

Distribution in the Conversion/Product Cycle

Planning, acquiring inventory, and tracking costs.

1.Product design, 2. Production schedule development, 3. Inventory control, a-Work order, materials requisition, and move ticket creation, b. Raw material issuance to production, c. Convert raw material to finished goods, 4. Cost accounting: a- product cost accumulation for the work in process and b transfer finished product to finished goods inventory.

Functions of the conversion cycle for manufacturing

Inventory control and inventory costing.

Functions of the merchandise cycle

The overall objective of the Conversion Cycle

Organizations efficiently and effective fulfill their inventory needs and preserve their gross profit margins.

Overall risks of the conversion cycle

Wasted time, resources leading to poor performance, and dissatisfied customers.

The importance of product design

A good design can help make the manufacturing process less expensive by streamlining processes as well as examining alternative materials that are as effective but cost less.

Risks of poor design

Wasted time and money + dissatisfied customers.

Communicating with the manufacturing and quality assurance personnel to ensure an effective and efficient production process that fits with the manufacturing capabilities. Changes to design process require documentation.

How to mitigate the risks of poor product design.

Production schedule

Source document that determines the number of units that will be needed to meet customer demand and inventory needs and when units should be made.

Objective of production schedule

Accurately determine the number of units that will be needed to meet customer demand and inventory needs. The production schedule will also specify when the units should be made.

Inventory control department. This objective is meet by having the right combination of people, technologies, and controls.

How does a company identify the desired inventory levels.

Over or underproduction.

Risks involved in production scheduling

Materials requirement planning (MRP) and Just-in-time manufacturing

2 approaches to manufacturing

Materials requirement planning (MRP)

Approach to manufacturing goods and is based off of sales forecasting and demand.

Just-in-time manufacturing/Lean Manufacturing

Approach to manufacturing that does not need future planning and makes sure you have everything you need just in time to manufacture based on the order.

Inventory Control

Control that consists of work orders, materials requisitions, and move tickets.

Work order

Source document used to initiate the manufacturing process in the production department and to control the bill of materials and move tickets for each production run.

Bill of materials

Source document that identifies all materials needed to produce a product.

Route sheet

Source document based off the work order that identifies the steps for manufacturing a product.

Objective of issuing raw materials to production

Ensure that material issuances are properly authorized and accurately tracked on a timely basis.

Materials requisition

Source document identifying the materials needed from a work order. Includes work order number, the issue date, and a list of the needed parts.

How to reduce the risk of fraud of raw materials

Raw materials should be physically separated under the responsibility of storeroom personnel. Only authorized personnel should be in the warehouse + movements should be documented.

Objective of converting raw materials to finished goods.

Make the product according to specifications and to do it in a reasonable amount of time and with a minimal amount of waste.

Move ticket

Source document used to document the completion of each step on the route sheet.

Work-in-process inventory

Inventory identified as ‘in process’ meaning that it is not raw materials nor is it yet finished goods, but has some labor hours associated with the raw materials.

Product Costing objective

Accurately accumulate product costs for inventory and cost of goods sold in accordance with GAAP.

Risks of inaccurate cost data

Poor decisions related to manufacturing performance evaluation and product pricing. They can also lead to misleading financial statements that affect user decisions.

Controls of inaccurate cost data

Control procedures should be used to either verify data input or automate the input process with barcode scanners.

Objective of inventory control for merchandisers

Maintain an optimal level of inventory —> Minimizing the total inventory cost while ensuring that adequate inventory is on hand to meet expected demand.

Economic order quantity (EOQ)

Formula used to determine the optimum number of an inventory item. EOQ= Square root of 2DF/CC

Reorder point (ROP)

Formula used to calculate when an inventory item should be reordered. ROP= D*L

Over or understocking of goods

Risks of inventory control

Understocking goods

Leads to stockouts and the risk of customer going elsewhere.

Overstocking goods

Having cash tied up into inventory on the balance sheet and, depending on the type of product, the possibility of obsolescence.

Control of Inventory Control

A sound risk assessment process. 

Perpetual inventory systems

Inventory is updated automatically in the AIS as inventory is purchased and sold.

Barcode scanners

Hardware and software that scans a barcode and updates the inventory in the AIS.