Chapter 7 The Conversion Cycle
Accounting Information Systems, 5th edition James A. Hall
COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license
Objectives for Chapter 7 Elemen Elements ts and and proced procedure ures s of a trad traditi ition onal al produc productio tion n proces process s Data Data flow flows s and proc proced edure ures s in a trad traditi ition onal al cost accoun accountin ting g system Accoun Accountin ting g cont control rols s in a trad traditi ition onal al envir environm onmen entt Operat Operating ing feat feature ures, s, phil philoso osophi phies, es, and and techno technolo logie gies s of a world-class company Just-i Just-in-t n-tim ime e syste systems ms and and the imp implic licati ation ons s of maint maintain aining ing excessive inventories in the world-class environment Import Importan ance ce of quali quality ty in the world world-cl -class ass envi environ ronme ment nt Shortc Shortcom oming ings s of tradit traditio ional nal accoun accountin ting g method methods s in the worl worlddclass environment environment Charac Character terist istics ics of a world world-cl -class ass info informa rmatio tion n system system
The Continuum of Manufacturing Practices The Manufacturing Environment Traditional Fi Firms
Transitional Fi Firms
World-Class Fi Firms
Progression toward World-Class Status
A World Class Company« is a com compa pany ny that that has has achi achiev eved ed high high standards and has undergone fundamental changes from traditional forms of organization and management. management. contin continuou uously sly pursue pursues s imp improve rovemen mentt in in all all aspects of its operations, including including its manufacturing procedures. is high highly ly cust custom omer er orie orient nted ed..
Achieving World-Class Status The world world-cl -class ass firm firm nee needs ds new new accou account nting ing methods and new information systems that: ± ± ± ±
show what what matters matters to its its custom customers ers identify identify profitab profitable le products products identify identify profitab profitable le customers customers identify identify opport opportunit unities ies for improving improving operat operations ions and products ± encourag encourage e the adoptio adoption n of value-add value-added ed activities activities and processes and identify those that do not add value ± efficien efficiently tly support support multipl multiple e users with with both financial financial and nonfinancial information
The Conversion Cycle« transf transform orms s input input reso resourc urces, es, raw mater material ials, s, labor, and overhead into finished products or services for sale. cons consis ists ts of two two sub subsy syst stem ems: s: ± the production system ± the cost accounting system
Production System Invol Involves ves the the plann plannin ing, g, sche schedu duliling ng,, and control of the physical product through the manufacturing process ± determini determining ng raw materials materials requir requirement ements s ± authori authorizing zing the relea release se of raw materials materials into into production ± authori authorizing zing work work to be conducted conducted in the the production process ± directing directing the the movement movement of of work throug through h the various stages of production
Production Methods
Continuous
Processing creates a homogeneous 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 with customer specifications.
Documents in the Batch Production System
Sales
Forecast - expected demand for the finished goods Production Schedule - prod produc ucti tion on plan plan and authorization to produce Bill of Materials (BOM) - spec specif ifie ies s the the types and quantities of the raw r aw materials and subassemblies used to produce a single finished good unit
Documents in the Batch Production System
Route Sheet
- detail details s the the produc productio tion n path a particular batch will take in the manufacturing process ± sequence sequence of operati operations ons ± time allotted allotted at at each each station station
Work Order Order - uses uses the the BOM BOM and and rou route te sheet to specify the exact materials and production processes for each batch
Documents in the Batch Production System Move Ticket - record records s work work done done in each each work center and authorizes the movement of the batch Materials Requisition - auth author oriz izes es the the inventory warehouse warehouse to release raw materials for use in the t he production process
Production Planning and Control Sales Forecast
Raw Materials Requirements Inventory Status Report Engineering Specifications BOM and route sheets
(Purchase Requisitions)
Operations Requirements
Production Scheduling work orders move tickets materials requisitions open work orders work centers
job tickets time cards completed move tickets
cost accounting payroll prod. plan. and control
Upon
Completion of the Production Process«
Finished Product and Closed Work Order
F inished inished Goods Warehouse
Closed Work Order
Inventory Control status report of raw materials and finished goods journal voucher
Prod. Plan. and Control General Ledger
EOQ Inventory Model Obj ective: ective: minimize total inventory costs while ensuring that adequate inventories exist to meet current demand Very Very simp simple le too too use, use, but but assu assump mpti tion ons s are are not always valid
± demand demand is known known and constan constantt ± ordering ordering lead lead time is is known known and constan constantt ± total cost per per year year of placing placing orders orders decreases as the order quantities increase ± carrying costs of inventory inventory increases as as quantity quantity of orders increases ± no quantit quantity y discou discounts nts
EOQ Inventory Model Inventory Cycle
Daily Demand
EOQ
Reorder Point
Lead Time
Time (days)
Cost Accounting System Record Records s the financ financia iall effec effects ts of of the the even events ts occurring in the production process Init Initia iate ted d by the the wor work k orde order r Cost Cost acco account unting ing clerk clerk create creates s a new cost cost record for the batch and files in WIP W IP file The The reco records rds are update updated d as mate materia rials ls and labor are used
Elements of the Cost Accounting System Inventory Control
Work Centers
materials requisitions
job tickets completed move tickets
COST Update
STANDARDS
ACCOUNTANTS
WIP accounts DL DM Mfg. OH. Compute Variances
Cost Accounting System Rece Receip iptt of of last last move move tick ticket et sig signa nals ls completion of the production process ± clerk remove removes s the cost sheet sheet from WIP file ± prepares prepares a journal journal voucher to transfer transfer balance to a finished goods inventory account and forwards to the General Ledger department
Summary of Internal Controls
Internal Controls Tran Transa sact ctio ion n auth author oriz izat atio ions ns ± work orders reflect a legitimate need based on sales forecast and the finished goods on hand ± move tickets authorized signatures from each work station authorize the movement m ovement of the batch through the work centers ± materials requisitions authorize the warehouse to release materials to the work centers
Internal Controls Segre egrega gati tion on of du duties ties ± productio production n plannin planning g and control control department is separate from the work centers ± invento inventory ry control control separate separate from materials materials storeroom and finished goods warehouse ± cost accoun accounting ting functio function n accounts accounts for WIP and should be separate from the work centers in the production process
Internal Controls Supervision ± superviso supervisors rs in the work work centers centers oversee oversee the usage of raw materials in the production process to ensure that all released materials are used in production production and waste is minimized ± employe employee e time cards cards and and job tickets tickets are checked for accuracy
Internal Controls Access control ± direct access to assets storeroom storerooms, s, produ production ction work work centers, centers, and finished goods warehouses quantiti quantities es in excess excess of standard standard amounts amounts should require approval
± indirect access to assets material materials s requisit requisition ions, s, excess excess mater materials ials requisitions, and employee time cards
Internal Controls Accou counti nting reco record rds s ± pre-numbe pre-numbered red documents documents ± work work orde orders rs ± cost cost shee sheets ts ± move move ticke tickets ts ± job job tick ticket ets s ± materia materiall requis requisiti ition ons s ± WIP and finish finished ed goods goods files files
Internal Controls Inde Indepe pend nden entt veri verifi fica cati tion on ± cost accountin accounting g reconciles reconciles material material usage usage (materi (material al requisitions) requisitions) and labor usage (job tickets) with standards vari varian ance ces s are inv inves esti tiga gate ted d
± GL dept. dept. verifies verifies movement movement from from WIP to FG by reconci reconciling ling journal vouchers from cost accounting and inventory subsidiary ledgers from inventory control ± internal internal and and external external auditors auditors periodi periodically cally verify verify the raw raw materials and FGs inventories through a physical count
Trends in Competitive Advantage
The World-Class Environment and Manufacturing Flexibility Customers: ± want want quali quality ty prod product ucts s ± want want them them quic quickl kly y ± want want vari variet ety y
Achiev Achievin ing g manuf manufact acturi uring ng flex flexib ibili ility ty incorpo incorporat rates es four operational operational characteristics: ± physical physical reorgan reorganizat ization ion of the product production ion facilitie facilities s ± automat automation ion of the manufactu manufacturing ring process process ± reduct reduction ion of inve invento ntorie ries s ± high high produ product ct quali quality ty
Physical Reorganization Reorganization of the Production Facilities Inef Ineffic ficien iencie cies s inhe inheren rentt in the lay layou outt of trad traditi itiona onall plants add handling costs, conversion, time, and excess inventories inventories to the manufacturing process. Employ Employee ees s tend tend to feel feel owne ownersh rship ip over over the their ir stations, which which is contrary to a team concept. The The reor reorga gani niza zati tion on is base based d on flows through cells which shorten the physical distance between the activities, thus reducing setup and processing time, handling costs, and inventories in the flow.
Progression of Automation in the Manufacturing Process
Traditional
Islands of Technology
Process Simplification (JIT)
Computer Integrated Manufacturing
Progression of Automation Automation toward World-Class Status
Automation of the Manufacturing Process Traditional: ± consists consists of many many differe different nt types types of machines machines which which require a lot of setup time ± machines machines and and operators operators are organ organized ized in functio functional nal departments ± WIP follo follows ws a circuitous circuitous route route through through the the differen differentt operations
Islands of Technology: ± stand stand alone alone island islands s which which employ employ compute computer r controlled machines that can perform multiple operations with less human involvement ± less less set up tim time e neede needed d
Automating Manufacturing
Automating Manufacturing Process Simplification: ± reduces the complexity complexity of the physical physical layout layout ± groups groups of CNC machines machines are are arranged arranged in cells cells to produce an entire part from start to finish ± no human involvement in involvement in a cell
Computer (CIM):
Integrated Manufacturing
± a completely automated environment which environment which employs automated storage and retrieval systems (AS/RS) and robotics
Automating Manufacturing
Robotics:
± use specia speciall CNC machines machines that that are usefu usefull in performing hazardous, difficult, and monotonous monotonous tasks
omputer-Aided Computer-Aided
Design ( CAD):
± increases increases engi enginee neers¶ rs¶ productivit productivity y ± improv improves es accura accuracy cy ± allows allows firms to to be more responsive responsive to to market demands ± interface interfaces s with CAM and MRPII MRPII systems systems
Automating Manufacturing
Computer
Aided Manufacturing (CAM):
± uses computers computers to control control the physica physicall manufacturing process ± provide provides s greater greater precision precision,, speed, and control control than than human production processes
Manufacturing Resources Planning (MRP II): ± an extensio extension n of materials materials require requirements ments planni planning ng (MRP) ± more than invento inventory ry management management--it --it is a system system for coordinating coordinating the activities activities of of the entire firm
Automating Manufacturing
Enterprise Resource
Planning ( ERP)
Systems:
± huge comme commercial rcial softwar software e packages packages that suppor supportt the information needs of the entire organization, not just the manufacturing functions ± automat automates es all busine business ss functions functions along along with with full full financial and managerial reporting capability
Electronic
Data Interchange ( EDI):
± external external commu communicat nications ions with with its custome customers rs and suppliers via Internet or direct connection
Accounting and MRP
The Evils of Inventories Inventories Inve Invent ntor orie ies s cost cost mon money ey and and « ± represen representt an investment investment ± need need to be insured insured and and stored stored ± can become become obsole obsolete te over over time
Invento Inventorie ries s may camouf camouflag lage e prod product uction ion problems. Willing Willingnes ness s to main maintai tain n inven inventor tories ies can precipitate overproduction.
Reducing Inventories
Just-in
time (JIT) manufacturing is a model that fosters inventories reduction and even elimination. elimination. It is based on the following assumptions: ± zero zero defe defect cts s ± zero zero set setup up time time ± small small lot lot sizes sizes ± zero zero inven inventor tories ies ± zero lead times times and and reliable reliable vendors vendors ± team team atti attitu tude de
Product Quality Poor Poor qua qualility ty is is expe expens nsiv ive e via via scra scrap, p, reworking, scheduling delays, delays, extra inventories to compensate for defective parts, warranty claims, and service. Prod Produc uctt qua qualility ty is is a bas basis is on whi which ch world-class manufacturers compete Produc Productt qual quality ity can be impro improved ved though though control point methods such as statistical process control.
What¶s Wrong with Traditional Cost Accounting Information? Inac Inaccu cura rate te cos costt alloc allocat atio ions ns Time la lag in in rep repor orti tin ng Fina Financ ncia iall orie orient ntat atio ion n Emph Emphas asis is on stan standa dard rd cost costs s
Activity Based Costing (ABC)« is an inform informati ation on sy syste stem m that that provi provides des managers with information about activities and cost objects assum assumes es that that activi activitie ties s caus cause e costs costs and and that that products (and other cost objects) create a demand for activities is diffe differen rentt from from tradit tradition ional al acco account unting ing sy syste stem m since ABC has multiple activity drivers, whereas traditional accounting has only one, e.g. machine hours
Allocation of Costs
Using
ABC
Total Manufacturing Costs
Activity Cost Pools Activity Cost Drivers
Direct Labor Costs Direct Labor Hours
Materials Costs
Number of Materials Used
Machine Costs
Machine Hours
Setup Costs
Setup Hours
Product Flow
Order Costs
Number of Orders Placed
Material Handling Costs Number of Loads
Quality Assurance Costs Inspection Hours
Activity Managemen Managementt Manag anager ers s mus mustt unde unders rsta tand nd which hich activities should be performed and how best to perform them. ± Manage Managers rs should should deploy deploy resources resources to to activities that yield maximum benefits. ± Manage Managers rs should seek seek to improve improve those those factories most important to their customers.
Activity Management Tasks Eval Evalua uati ting ng manu manufa fact ctur urin ing g activi activiti ties es Identi Identify fying ing noness nonessent entia iall activi activitie ties s Iden Identi tify fyin ing g cos costt dri drive vers rs Comp Compar arin ing g acti activit vitie ies s to benc benchm hmar arks ks Establ Establish ishing ing links links betw between een key activi activitie ties s
World-Class Information Systems
Integrate all functional and technological components: ± basic basic accoun accountin ting g applica applicatio tions ns ± ABC ± materia materials ls requir requiremen ements ts planni planning ng ± capa capaci city ty plan planni ning ng ± inve invent ntor ory y cont contro roll ± bill bill-o -off-ma mate teri rial als s ± maste masterr produ product ction ions s sched schedul ule e ± for forecastin sting g ± order en entry ± compu compute terr-ai aide ded d desi design gn ± compute computer-a r-aide ided d manufact manufacturi uring ng ± EDI commu communi nica cati tion ons s links links
Need for New Performance Measures in the Information Pyramid Performance Measures for the Resource Management CSF
Corporate Management Return on Assets
VP Manufacturing
l s e v e t L n e m e g n a a M
Plant Manager
Department Manager
Process Driver
Days Inventory on Hand Production/ Equipment Investment
Days of Finished Goods Inventory on Hand
Number of Unplanned Schedule Changes
Machine Breakdowns
Spare Parts Availability
Production/ Square Feet Plant
Manufacturing Lead Time (days)
Machine Downtime
Bottlenecks in Upstream Production Processes
Vendor Lead Time (days)
Percent of Scrapped Production
Labor Availability
Power Failures
Control Issues in the WCIS Paperless environment - no traditio traditional nal audit audit trail trail Automatic transactions - need need assuran assurance ce that: that: ± orders orders are placed placed only only when invento inventory ry is needed needed ± orders orders are are placed placed only only with with approved approved vendor vendors s ± the quantity quantity of items items ordered ordered is is correct correct ± programs programs matchi matching ng electroni electronic c controls controls data befor before e initiating payment perform correctly Networking considerations
