IT Concepts &

Systems Analysis
Conversion Cycle - Internal Control

What is common conversion cycle process?

What are the typical of internal controls

set-up in conversion cycle?

How to automate manufacturing?

What is the conversion cycle?

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
 What is the conversion cycle?

Marketing
System
Conversion cycle involves in
transforming input resources, raw
Sales materials, labor, and overhead into
Forecast finished products or services for sale.

Purchase Requisitions Consists of two subsystems:

Revenue Cycle Sales Orders
Conversion Expenditure
❑ Physical activities – the
Cycle Cycle production system
Labor Usage ❑ Information activities – the cost
accounting system
Work
Finished
In
Goods
Process

General Ledger
and Financial
Reporting
System
 What is the production system?
Production system involves the planning, scheduling, and control of the physical product
through the manufacturing process

1) determining raw materials requirements

2) authorizing the release of raw materials into production
3) authorizing work to be conducted in the production process
4) directing the movement of work through the various stages of production

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.
✓ Batch Processing produces discrete groups (batches) of products.
✓ Make-to-Order Processing involves the fabrication of discrete products in accordance with
customer specifications.

We will be focusing on batch processing in the next slides.

What is the Traditional Batch Production Model?
 What is the Traditional Batch Production Model?

Batch processing consists of four basic processes:

1) plan and control production
• Materials and operations requirements
✓ Materials requirement – the difference between what is needed and what is available in inventory
✓ Operations requirements – the assembly and/or manufacturing activities to be applied to the product
• Production scheduling
✓ Coordinates the production of multiple batches
✓ Influenced by time constraints, batch size, and other specifications
2) perform production operations
▪ Production operations begin when work centers obtain raw materials from storekeeping.
▪ It ends with the completed product being sent to the finished goods (FG) warehouse
3) maintain inventory control
• Objective: minimize total inventory cost while ensuring that adequate inventories exist of
production demand
• Provides production planning and control with status of finished goods and raw materials
inventory
• Continually updates the raw material inventory during production process
• Upon completion of production, updates finished goods inventory
4) perform cost accounting
 What are the common documents used in
batch processing?

• Route Sheet - details the production path a particular batch will take in the manufacturing
process
✓ sequence of operations
✓ time allotted at each station
• Work Order - uses the BOM and route sheet to specify the exact materials and production
processes for each batch
• Move Ticket - records work done in each work center and authorizes the movement of the
batch
• Materials Requisition - authorizes the inventory warehouse to release raw materials for
use in the production process
 What is the cost accounting system?
Cost accounting focuses on the following tasks:

• Records the financial effects of the events occurring in the production process
• Initiated by the work order
• 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
 Internal Control
System
The internal control system comprises policies, practices,
and procedures employed by the organization to achieve
four broad objectives
What are the different types of Internal Control applicable
for conversion cycle?
Chapter 3 defined six classes of
internal control activities that guide us
in designing and evaluating transaction
processing controls. They are
transaction authorization, segregation
of duties, supervision, accounting
records, access control, and
independent verification.
What are the different types of Internal Control applicable
for conversion cycle?
Transaction Authorization

The following describes the

transaction authorization procedure in
the conversion cycle.
1. In the traditional manufacturing
environment, production planning and
control authorize the production
activity via a formal work order. This
document reflects production
requirements, which are the
difference between the expected
demand for products (based on the
sales forecast) and the FG inventory
on hand.
2. Move tickets signed by the
supervisor in each work center
authorize activities for each batch and
for the movement of products through
the various work centers.
3. Materials requisitions and excess
materials requisitions authorize the
storekeeper to release materials
to the work centers.
What are the different types of Internal Control applicable
for conversion cycle?
Segregation of Duties

One objective of this control procedure

is to separate the tasks of transaction
authorization and transaction
processing. As a result, the production
planning and control department is
organizationally segregated
from the work centers.
What are the different types of Internal Control applicable
for conversion cycle?
Supervision

The following supervision procedures

apply to the conversion cycle:

1. 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.

2. Supervisors also observe and

review timekeeping activities. This
promotes accurate employee time
cards and job tickets.
What are the different types of Internal Control applicable
for conversion cycle?
Access

Direct Access - The nature of the

physical product and the production
process influences the type of access
controls needed. Example of controls
are identification badges, security
guards, observation devices, and
various electronic sensors and alarms.

Indirect Access - In the conversion

cycle, critical documents include
materials requisitions, excess materials
requisitions, and employee time cards.
A method of control that also supports
an audit trail is the use of
prenumbered documents.
What are the different types of Internal Control applicable
for conversion cycle?
Accounting Records

In the conversion cycle this is

accomplished through the use of work
orders, cost sheets, move tickets, job
tickets, materials requisitions, the WIP
file, and the FG inventory file. By
prenumbering source documents and
referencing these in the WIP records, a
company can trace every item of FG
inventory back through the production
process to its source. This is essential
in detecting errors in
production and record keeping,
locating batches lost in production,
and performing periodic audits.
What are the different types of Internal Control applicable
for conversion cycle?
Independent Verification

Verification steps in the conversion

cycle are performed as follows:

1. Cost accounting reconciles the

materials and labor usage taken from
materials requisitions and job
tickets with the prescribed standards.
2. The GL department also fulfills an
important verification function by
checking the total movement of
products from WIP to FG.
3. Internal and external auditors
periodically verify the RM and FG
inventories on hand through
a physical count
 How to automate manufacturing?
Here are the following activities that can automate manufacturing:

Islands of Technology
Stand alone islands which employ computer numerical controlled (CNC) machines that can perform multiple
operations with less human involvement
Computer Numerical Controlled (CNC ) Machines
Reduce the complexity of the physical layout
Arranged in groups and in cells to produce an entire part from start to finish
Need less set-up time
Computer Integrated Manufacturing (CIM)
A completely automated environment which employs automated storage and retrieval systems (AS/RS) and
robotics
Automated Storage and Retrieval Systems (AS/RS)
Replaces traditional forklifts and their human operators with computer-controlled conveyor systems
Reduce errors, improved inventory control, and lower storage costs
Robotics
Use special CNC machines that are useful in performing hazardous, difficult, and monotonous tasks
Computer-Aided Design (CAD)
Increases engineers’ productivity
Improves accuracy
Allows firms to be more responsive to market demands
Interfaces with CAM and MRPII systems
Reference: Accounting Information Systems, James Hall