Chapter 7

The Conversion Cycle

(for online classes Part 2)
Summary of Internal Controls
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
Internal Controls
Segregation of duties
production planning and control
department is separate from the work
centers
inventory control is separate from
materials storeroom and finished goods
warehouse
cost accounting function accounts for
WIP and should be separate from the
work centers in the production process
Internal Controls
Supervision
work center supervisors oversee the
usage of raw materials to ensure that
all released materials are used in
production and waste is minimized
employee time cards and job tickets
are checked for accuracy (work center
supervisors have the primary responsibility to ensure that
whatever is reflected on both documents are correct to avoid any
possibility of fraud by the employees)
Internal Controls
In my experience, theft by production employees were rampant. This
was however at a time that technological controls like CCTVs were not
Access control yet adopted in factories. There are cases of:
1. Employees taping or tying products, e.g., ham slices, to their body
particularly parts that will not be frisked by security personnel at
 the
direct access to assets
gates. There was one time that while frisking an employee, the
products, which were scotch taped to the inner thighs, fell out of
controlled access
the employees pants. to storerooms,
Employee production
was immediately terminated. For
work centers,they
female employees, and
tapefinished
it under theirgoods
breasts orwarehouses
inside their
underwear. They would usually do this for 250 gram packages and
quantities
if done regularly in
can excess
amount toof standard
a substantial amounts
quantity of products
stolen.
require
2. To approval
avoid the frisking of guards at the gates, employees would throw
 products over the walls (around 15 feet high). Accomplices would
indirect access to assets
be waiting at the other side of the wall.
3. Employees would eat products inside the factory. Sometimes
controlled use of materials requisitions, excess
bringing with them bread in which the product can be placed in.
materialsInstant requisitions, andforemployee
sandwich. No need “baon”. time
cards. (unused documents must be safeguarded to prevent
misuse by unauthorized personnel)
Internal Controls
Accounting records (proper use of the following is
a good control):
pre-numbered documents
work orders
cost sheets
move tickets
job tickets
material requisitions
WIP and finished goods files
 Internal Controls
Independent verification
cost accounting reconciles material usage (material
requisitions) and labor usage (job tickets) with standards
 variances are investigated (Mam Bel already taught you this,
right?)
GL dept. verifies movement from WIP to FG by reconciling
journal vouchers from cost accounting and inventory
subsidiary ledgers from inventory control
internal and external auditors periodically verify the raw
materials and FGs inventories through a physical count ( for
BSAs, participation in physical counts would be among the first things you
will experience as new CPAs. Usually done at year end – either last week
of December or the first week of January. For BSMs, if you are in the
Accounting Department of a company, even if you are not in Cost
Accounting, you are tasked to perform inventory counts as well.)
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