SUMMARY OF STUDY OBJECTIVES
Basic features of conversion processes. A company's conversion processes involve the activities related to transforming materials, labor, and overhead into goods or services. The primary functions within the conversion process are logistics and reporting.
Components of the logistics function. The logistics function includes three components: planning, resource management, and operations. Planning involves research and development, capital budgeting, engineering, and scheduling. Resource management involves maintenance and control, human resources, and inventory control (including the determination of the economic order quantity as well as the purchasing, receiving, stores, routing, warehousing, and shipping activities). Finally, operations involves production and quality control.
Cost accounting reports generated by conversion processes. Cost accountants prepare production cost analyses, inventory records, and standard costing information on the basis of conversion activities. Variance reports may be prepared to explain differences between actual and standard costs. The types of reports prepared may vary greatly from company to company, and may depend upon whether a perpetual or periodic inventory system is in place.
Risks and controls in conversion processes. Conversion activities should be well monitored and controlled. Consideration should be given to establishing proper controls related to the authorization of transactions, segregation of duties, adequate documents and records, security, independent checks and reconciliation, and the related cost–benefit factors.
IT systems of conversion processes. Integration of a company's conversion processing applications and cost accounting systems yields significant benefits in terms of workforce efficiency, paperwork reduction, and other cost savings. Popular computerized systems in the conversion process include computer-aided design (CAD), computer-aided manufacturing (CAM), materials resource planning (MRP), manufacturing resource planning (MRP-II), enterprise-wide resource planning (ERP), computer-integrated manufacturing (CIM), just-in-time (JIT) production systems, and radio-frequency identification (RFID) systems.
Ethical issues related to conversion processes.
The conversion process is the target of many types of fraud schemes, most of which involve falsification of inventory, manipulation of gross profits, or other earnings management techniques.
Corporate governance in conversion processes. The conversion processes described in this chapter are part of the management oversight of corporate governance. The internal controls and ethical tone and procedures within the conversion process are also part of the corporate governance structure. Establishing and maintaining reliable inventory management processes, internal controls, and ethical practices help ensure proper financial stewardship.