OVERVIEW OF THE CONVERSION PROCESSTHE CONVERSION PROCESS IS CONCERNED WITH :- the conversion of input resources into products-the provision of services to customers-the costing of goods and services-the management of inventories.ALSO CALLED THE MANUFACTURING,The PRODUCTION,or the INVENTORY CYCLE.1supply push vs. demand pull-balance between production and demand is maintained in ?just-in-time inventory-driven by lead time required for raw material procurement and production time2ACTIVITY BASED COSTING - ABC COSTINGdirect materials are traced directly to the product or service but conversion costs are traceable to activitiesadvantage lies in the information it provides to production managersABC focuses attention on the cost drivers - the activities that give rise to costs - and facilitates cost control by control of these drivers.It draws attention to activities that may be expensive but add no value to the product.3FILE STRUCTURE1. in a MERCHANDISING organization:MASTER FILE - MERCHANDISE INVENTORY fileTRANSACTION FILES -RECEIVING TRANSACTION FILESALES TRANSACTION FILEINTERFACE with PURCHASING and REVENUE CYCLES2. in a MANUFACTURING organization:WE NEED 3 MASTER FILES FOR INVENTORY: RAW MATERIALS WORK IN PROCESSFINISHED GOODSPLUS OPEN JOB FILE - in job costing system replacesWORK IN PROCESS FILEMANUFACTURING OVERHEAD or ACTIVITY COST FILE4STANDARD COST FILETRANSACTION FILES:RECEIVING TRANSACTION FILE - (INTERFACE WITH PURCHASING CYCLE)MATERIALS ISSUANCE TRANSACTION FILEPRODUCTION LABOR TRANSACTION FILE - (may be merged into PRODUCTION COST TRANSACTION FILE)COMPLETED PRODUCT TRANSACTION FILESALES or SHIPMENT TRANSACTION FILE INVENTORY ADJUSTMENT file5INPUT DOCUMENTS for a manufacturing organization1. MATERIALS REQUISITIONmaterials are issued to production through this formwhich is authorized by a production supervisorlists quantity of each material needed2. PRODUCTION ORDERinternal to the CONVERSION PROCESSissued in response to sales orders or may be issued routinelyauthorizes production of goods 3. WORK ORDERused to document manual operationsauthorizes the expenditure of labor resources for the production of goodslist type of personnel needed, skill level, expectednumber of hours required4. TIME CARD or LABOR TICKETcapture labor hoursdirect labor or indirect laborjob costing of hourselectronic time clock may be used to replace 6paper time cardlabor variancesUse of input documents - particularly in CONVERSION PROCESS - is being replaced by electronic data capture.REPORTSINVENTORY AND PRODUCTION STATUS REPORTS:1. INVENTORY STATUS REPORTS (raw materials and finished goods)2. INVENTORY REORDER REPORTS(raw materials and finished goods)3. MATERIALS REQUIREMENTS REPORT4. PRODUCTION OR JOB STATUS REPORTACTIVITY REPORTS OR JOURNALS:1. MATERIALS RECEIPTS AND ISSUANCES JOURNAL2. MATERIALS AND LABOR USAGE REPORT3. SCRAP AND LOST TIME REPORT74. COMPLETED PRODUCTION REPORT5. INVENTORY ADJUSTMENT JOURNALS6. COST WORK SHEET7. STANDARD COST VARIANCE REPORTSMAJOR RISKS IN THE CONVERSION PROCESS1. Risks concerning the management of inventories.misstatement of inventory valuation.costs determined or classified improperly.errors made in cost allocations.cost flow models - LIFO, FIFO - not applied as authorized.total inventory is correct but misstatements exist among components - RM, WIP, FGS.errors in perpetual inventory recordsshortages, overstocking, obsolescence.excessive inventory inflating carrying costs.overstatement of inventory value due to obsolete, slow movers, or overstocking.loss of market value not reflected properly by write down of inventory costs - LCM82. Risks concerning the control of production .production plan and initiation without management approval.production is not regulated according to planexcessive production and inventoryunderutilization and inventory shortage.unauthorized goods producednot up to customer standards of qualityintent to sell without authorization (theft)3. Risks in the accumulation of production costs.computed production costs are erroneous.materials, labor, overhead expensed when should be capitalized (or the opposite).period costs included in manufacturing overhead.incorrect allocation of overhead.overhead rates or standards are inappropriateresulting in misstatement of product costmisapplication of overhead.completed production not recorded correctly or at alllost salesrepeated production.errors made in transfer of cost data from WIP to FGS inventory.standard costs charged without management authorizationconcealing unfavorable variances9.flow of costs into FGS inventory falsified to conceal shortages or theft.issuance of materials to production incorrectly recordedmismatch between raw materials and WIP.scrap. spoilage, waste not recorded properlysale of scrap not reported.scrap stolenINTERNAL CONTROLS FOR CONVERSION PROCESSmuch of the control of safeguarding inventories lies with physical security measures--general controlssecurely locked warehouse, storeroom, electronic sensingand monitoring devices, etc.Access to storerooms should be limited to those with authorized access-photo id cardsmagnetic key, locks changed periodicallyinsurance coverageuse of standard cost systems and perpetual inventory recordkeeping systems are also important means of controlcomparing inventory per count (or floor) to inventory per books101. ORGANIZATIONAL CONTROLSsegregation of duties--established through the organization chart and related job descriptionssome types of segregation can be enforced through the use of passwords and by selective read-update privilegesrestrict access to key data and processes to designated terminalsresponsibility for custody of inventory should be separated from responsibility for maintaining perpetual inventory recordsphysical custody or issuance of inventory items should beseparated from preparation of receiving documents, materials requisitions or shipping documentsresponsibility for reviewing inventory valuations and approving write-down or write-off of inventory should be separated from maintenance of perpetual inventory records and from the authority to dispose of obsolete, unsalable items.2. Data Access Controlsspecial attention should be given to the security of interactive systems, particularly those in real time mode--which is particularly prone to error contamination.Access to interactive terminals should be controlled by 11physical controls over terminals as well as passwords.Access logs determine