Page 348 - Accounting Information Systems

C H A P TER 7 The Conversion Cycle 319

Finally, to maintain the independence of the GL function as a verification step, the GL department
must be separate from departments keeping subsidiary accounts. Therefore, the GL department is organi-
zationally segregated from inventory control and cost accounting.

Supervision
The following supervision procedures apply to the conversion cycle:
1. The supervisors in the work centers oversee the usage of RM in the production process. This helps
to ensure that all materials released from stores are used in production and that waste is minimized.
Employee time cards and job tickets must also be checked for accuracy.
2. Supervisors also observe and review timekeeping activities. This promotes accurate employee time
cards and job tickets.

Access Control

The conversion cycle allows both direct and indirect access to assets.
DIRECT ACCESS TO ASSETS. The nature of the physical product and the production process influ-
ences the type of access controls needed.
1. Firms often limit access to sensitive areas, such as storerooms, production work centers, and FG
warehouses. Control methods used include identification badges, security guards, observation
devices, and various electronic sensors and alarms.
2. The use of standard costs provides a type of access control. By specifying the quantities of material
and labor authorized for each product, the firm limits unauthorized access to those resources. To
obtain excess quantities requires special authorization and formal documentation.
INDIRECT ACCESS TO ASSETS. Assets, such as cash and inventories, can be manipulated through
access to the source documents that control them. In the conversion cycle, critical documents include
materials requisitions, excess materials requisitions, and employee time cards. A method of control that
also supports an audit trail is the use of prenumbered documents.

Accounting Records

As we have seen in preceding chapters, the objective of this control technique is to establish an audit trail
for each transaction. In the conversion cycle this is accomplished through the use of work orders, cost
sheets, move tickets, job tickets, materials requisitions, the WIP file, and the FG inventory file. By pre-
numbering source documents and referencing these in the WIP records, a company can trace every item
of FG inventory back through the production process to its source. This is essential in detecting errors in
production and record keeping, locating batches lost in production, and performing periodic audits.

Independent Verification
Verification steps in the conversion cycle are performed as follows:
1. Cost accounting reconciles the materials and labor usage taken from materials requisitions and job
tickets with the prescribed standards. Cost accounting personnel may then identify departures from
prescribed standards, which are formally reported as variances. In the traditional manufacturing envi-
ronment, calculated variances are an important source of data for the management reporting system.
2. The GL department also fulfills an important verification function by checking the total movement of
products from WIP to FG. This is done by reconciling journal vouchers from cost accounting and
summaries of the inventory subsidiary ledger from inventory control.
3. Finally, internal and external auditors periodically verify the RM and FG inventories on hand through
a physical count. They compare actual quantities against the inventory records and make adjustments
to the records when necessary.