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

ALREADY SOLVED

Consider the case of El Manufacturing Company in which an employee L E is responsible for preparing the journal vouchers to be used for general ledger entries. But there are certain control weaknesses and problems in this scenario.

The task of updating the general ledger must be separate from all the accounting and asset custody responsibility within the organization.

In the instant case, L is responsible for everything from preparing the Journal Voucher to posting it to the respective ledgers.

The potential control weakness in such scenario is as follows:

•           No Segregation of duty

•           Too much reliance on individual

•           Data integrity and confidentiality if any is questionable

•           Chances of error is high

In such scenario, to compensate for the potential risk, the system should be built to provide end users and GL departments with detailed listing of journal vouchers and account activity report.

Conversion Cycle is the cycle which track records for the system of raw material to finished goods.

Here on the proper view of the whole of the process:

1. Triger by warehouse dept ( Raw material Keeper)

2. Produnction manager updates the order to be complete and add further upcoming orders if any.

3.It will generate online order slip and directly post to supervisors tab + accountant tab

4. Supervisor take material and issue to assembling dept ( excess material requirement is issued by his authority also)

5. Time + job both completed card sare sent to Accountanct

6. Once order completed Accountant update the WIP as well as Inventory in books.

Risk in the Conversion Cycle:

After receipt of material and charging it to FG as Inventory in books

- Risk is blocking of funds in excess keeping of inventory, As material level down after a certain level automatc trigger option is in place, which alarms the productin depart. to determine the future requirement as per the productin order in hands ( Good control in place)

Second, Online workorder to Supervisior, All supervisor gets their no. of production order ( to be completed online) - Good control in place

Third, Supervisor on order, place the material requirement ( and if any excess requirement -" NO FURTHER APPROVAL" is made to store clerk. here risk is medium over the requisition over and above the Order specifies by the production dept.

Fourthly, production employees itself are preparing thier job tickets ( " NO AUTHENTICATION")- As tickets are completed by production employees itself control of data input or its approval is lacking.

Fifth, Accountant determines himeslef the WIP , FG of the order over the raw data received in the form of job card, time card, material requisition- Risk is accountant just need to verifiy the data from the data received from the production L2 officer rather than himself maintain the numbers of the job.

From above it is easy to capture the level of risk at various level in the above process of Central production Limited.