Question

The following is a description of the conversion cycle of Central Production Limited: The conversion cycle of the company is triggered by a report from the warehouse. When the quantity of an inventory item falls below a pre-set minimum level, the warehouse manager sends an online inventory status report to production department advising them to schedule a production batch run for the item. Upon receipt of the report, the production clerk assesses the digital bill of materials and the route sheet files for the item to be produced and adds the production details to the online production schedule. The system automatically adds a record to the open work order file and sends an online work order to the work centre supervisor’s computer and to the accounting clerk’s computer. The work centre supervisor receives the work order from his computer and print hard-copy move tickets and materials requisitions for each production process. Production employees take the materials requisitions to store clerk and receives the materials and subassemblies needed to perform the production tasks. If additional materials beyond the standard amount is needed, the work centre supervisor prepares additional materials requisitions. Production employees complete job time tickets after completing a production process to record the time spent on the job. The job time tickets are then sent together with the move tickets to the accounting department. After releasing the materials into production, the store clerk updates the material inventory records and send the materials requisitions to accounting department. The clerk prepares a journal voucher and posts to the general ledger material control account at the end of each day. The accounting clerk assesses the work orders and set up a work-in-process account for a production batch. Throughout the production period, the clerk also receives move tickets, job tickets, and materials requisitions, which he uses to post to the work-in-process account. At the end of each day, the accounting clerk prepares a digital journal voucher and post it to the general ledger work-inprocess and finished goods control accounts. Identify the risks exist in the conversion cycle of Central Production Limited. (10 marks, maximum 300 words)

Answer 1

Conversion cycle is the period in which a raw material is converted into a finished product.

the process is discussed as follows:

1. It starts with the raw material keeper in the warehouse checks the available balance inventory of raw materials and any new arrival of earlier ordered raw material.

2. Production manager then updates the order to be complete and any further upcoming orders, if any.

3. A slip will be generated and provided to the supervisor and the accountant for the entry.

4. Supervisor will be responisble for the taking the material and forwading it to the assembly department. Any excess material issued will be taken care by him.

5. Time and job card will then be sent to the accountant for records.

6. Once the order is completed, accountant will update WIP and inventory levels in the books.

Risks in the conversion cycle:

a) Funds are blocked if excess inventory is ordered. There should a method in place that the order should be placed only when the inventory levels reaches below a certain level. Further in case there is any specific order which requires more raw materials, the same should be communicated to purchase department in advance to avoid stock out.

b) There should be seggregation of duties, the person placing the order should not be the one checking and verfying the receipt of such goods.

c) Supervisor on order, place the material requirement and if any excess requirement- "No Further Approval" is made to the store clerk. The risk here is the requisition over and above the order specifications by the purchase department.

d) Production employees should not be preparing their own job cards, it should be done by the production officer.

e) Accountant himself determines the WIP, FG of the order over the raw data received in the form of job card, time card, material requisition. The risk is that the accountant just need to verify the data from thr data received from production officer rather than himself maintain the numbers of the job.

Above are the risks involved in the vatious level of the above process of Central Production Limited.