CONVERSION

• The Real World example on the next page will help you understand the context of many concepts in this chapter. Please read the Real World example to begin effective reading and studying of this chapter. The Real World example explains how Nissan Motor Company uses advanced technology to enhance its conversion processes.
• This chapter examines the activities and information flows in a manufacturing firm's conversion processes. The first part of the chapter covers the basic features of the conversion processes, beginning with a typical traditional system and the related controls, followed by trends in computer‐based systems. The latter part of the chapter examines ethical issues and corporate governance related to the conversion processes.
• Individual companies may have differences in their conversion processes. This chapter explains common, simple methods of conducting these business activities, and these explanations should help you understand different accounting systems involving conversion processes, even if they are not exactly like the ones you may have seen or will see in your personal experience.
• Conversion processes


  • Involve the activities related to the transformation of resources into goods or services
  • Resources include materials, labor, and overhead
• Conversion processes


  1. Operational planning

  2. Optimizing use of employees, property, and inventories

  3. Controlling production flows

  4. Ensuring product quality

  5. Preparing cost accounting and financial accounting records
• Whether the company is in business to manufacture automobiles, build houses, treat patients in a medical facility, or provide consulting services, there is some sort of productive activity that drives its business. Thus, the contents of this chapter are relevant to most companies, even nonmanufacturing companies.
• Conversion process initiation


  1. Sales order received

  2. Production launched to increase inventory stock
• Logistics function


  • Logical, systematic flow of resources throughout the organization
  • Goal is to make the most efficient use of resources
• Components of the logistics function


  • Planning
  • Resource management
  • Operations
• Planning component


  1. Determining what products should be produced

  2. Determining how many products should be produced

  3. Determining what resources should be available

  4. Determining what timing is needed
• Research and development


  • Focuses on product improvement
  • Investigates and develops new, innovative products and methods of producing those products
  • Conducts studies to determine which parts should be manufactured and which will be purchased
• Bill of materials


  Form that specifies the components of a product, including descriptions and quantities of materials and parts needed
• Operations list


  Describes the chain of events that constitute a product's production, including all the necessary operations to be performed, identifying the locations, resources used, and standard timing for each phase
• Scheduling


  1. Plans the timing for production activities

  2. Takes into consideration open sales orders, inventory needs, and available resources

  3. Goal is to meet customer needs while making efficient use of resources
• Production order


  Authorizes production activities for a particular sales order or forecasted need
• Production schedule


  Outlines the specific timing required for a sales order, including the dates and times designated for the production run
• Maintenance and control


  • Concerned with maintaining the capital resources used to support production
  • Includes scheduling tune‐ups and other preventative maintenance procedures, as well as timely repair in case of breakdowns or other interruptions
  • Involves monitoring to support production in the most effective and efficient manner
• Human resources


  • Responsible for managing the placement and development of sufficient qualified personnel
  • Includes hiring and training workers, as well as maintaining records of their performance
  • Ensures adequate human resources are available to sustain the company's planned course of action
• Economic order quantity (EOQ)


  The most efficient quantity of products to purchase, based on the relative costs of maintaining inventory and ordering materials
• EOQ formula


  EOQ = √(2RS/A), where R = number of units required per year, S = cost of placing an order, A = cost of holding a unit in inventory per year
• Inventory stores function


  • Controls raw materials inventory held in storage or holding areas, waiting for processing
  • Necessary when materials are purchased in large quantities or to maintain designated levels of stock in anticipation of future sales
  • Storeroom should be organized to make it easy to locate and retrieve items
• Economic order quantity (EOQ)


  Formula to calculate the optimal order quantity to minimize inventory costs:

  EOQ = √(2RS/A)

  where:

  R = annual demand

  S = cost per order

  A = annual holding cost per unit
• Inventory stores function


  • Concerns the control of raw materials inventory held in storage or in holding areas, waiting for processing
  • Raw materials include the basic components of the company's products
  • Storing these materials is necessary when they are purchased in large quantities or in order to maintain designated levels of stock in anticipation of future sales
  • After the items are received, they are usually moved to a storeroom
  • The storeroom should be organized in a manner that makes it easy to locate the items when they are needed in production or to satisfy a sales order
• Routing


  1. Issuance and movement of materials into the various production phases

  2. When items are removed from the storeroom and taken into production, a routing slip is prepared to indicate the movement of inventory

  3. The routing slip documents the descriptions and quantities of materials taken into production for a specified sale or other authorized production activity

  4. It should also be prepared whenever purchased materials are taken directly into production from the receiving area

  5. The routing slip is also sometimes called a materials issuance form, or move ticket

  6. It is important in tracking the physical movement of inventory items

  7. It should be updated when the items are subsequently moved from one production station to another

  8. Some companies use routing slips with multiple removable stubs so that a record of the materials movement can be retained in each production station
• Raw materials inventory


  Inventory that is no longer considered raw materials when it is routed out of the receiving or storage area, it becomes work-in-process inventory
• Work-in-process inventory


  Inventory that is no longer considered raw materials when it is routed out of the receiving or storage area
• Finished goods inventory


  Inventory that is prepared for disposition to the warehouse or to the customer after production is completed
• Inventory status reports


  1. Prepared at various stages of production to document the extent of work completed and the resulting level of inventory

  2. Provide detail on the resources used in production to-date, as well as the resources available to complete production of the goods

  3. Should be monitored regularly so that the scheduling department can be notified if changes need to be made
• Inventory warehousing


  • Involves managing the holding area for finished goods awaiting sale
  • Companies maintain inventories of finished goods when they produce fairly homogeneous products or when it is important for them to be able to fill sales orders quickly
  • The inventory warehouse should be well organized so that the items can be located and moved into the shipping department as quickly as possible
  • It should be controlled in order to prevent theft, loss, or damage
• Inventory control


  • The goal is to minimize the cost of maintaining inventories
  • Whether inventory is maintained in the form of raw materials, work-in-process, or finished goods, most companies weigh the costs and benefits of carrying inventories
  • The costs are generally incurred in the areas of stores and warehousing, whereas the benefits tend to be more difficult to measure because they relate to keeping customers satisfied
  • Ideally, the elimination of inventories is desirable, except in cases where inventory is needed immediately due to sales that may result from unexpected changes in production scheduling or increased demand for the company's products
• Operations


  • The term commonly used to refer to the major business activity in which a company engages
  • Often synonymous with the terms "production" and "manufacturing"
  • Involves the day-to-day performance of production activities, including monitoring the related costs, time, and quality
• Production methods


  • Continuous processing of homogeneous products
  • Batch processing, where each batch contains homogeneous products, but each batch is not necessarily the same type of product
  • Custom, made-to-order processing, where each order may be unique
• Production process


  1. May be conducted in a single operating facility or multiple locations and stations

  2. Regardless of its production complexity as determined by the method of production and the number of locations, each scheduled production order follows a designated physical flow through the production process

  3. Generally involves a systematic flow similar to that described in Exhibit 11-5
• Except for the preparation of the documents that initiate the production planning process and the general ledger accounting that finalizes this process, all of the other processes depicted in Exhibit 11-5 are components of the logistics function
• Quality control


  • A follow-up to production, where the products are inspected for quality before they are moved to the warehouse or shipping area
  • The company may have a policy of inspecting every item produced, or they may be inspected arbitrarily or in specific intervals
  • The nature of a company's products may also require that they be tested in order to determine that they are top quality
  • The frequency of inspections or product testing should be based on the likelihood of finding defects
  • Quality control personnel often work closely with cost accountants and resource managers to solve production problems
• Rework


  • The additional procedures necessary to bring a product up to its required specifications
  • In some cases, the extent of a product's defect may be so great that it is not cost-effective for it to be reworked, and the product may be scrapped or discarded
• Standard costs


  • Expected costs based on projections of a product's required resources
  • Include direct materials, direct labor, and overhead
  • Overhead consists of indirect materials, indirect labor, and costs of maintaining the production facility
  • Developing standard costs helps companies control their production costs and monitor the quality of their production process
• Cost accounting process


  1. During production periods, cost accountants accumulate the costs of actual materials and labor for the company's products

  2. Materials costs are based on review of the routing slips and inventory status reports

  3. Labor costs are derived from time sheets and are added to work-in-process

  4. Overhead costs must be applied to work-in-process, with the standard overhead rate applied to actual activity (hours or units), as documented in the inventory status report

  5. After work-in-process costs have been determined, cost accountants review completed production transactions for items transferred to the warehouse or shipping area
• Perpetual inventory records


  • Involve recording purchases as raw materials inventory, recording all the components of work-in-process for inventories in various stages of production, and recording the total cost of sales for products completed and sold
  • Perpetual inventory records are the generally preferred way of controlling inventory quantities
• Periodic inventory systems


  • Involve updating the inventory and cost of sales accounts only at the end of the period
  • When periodic systems are in place, close management supervision and ongoing monitoring of key operating statistics are necessary to achieve adequate control