BASIC FEATURES OF CONVERSION PROCESSES (STUDY OBJECTIVE 1)

A company's conversion processes involve the activities related to the transformation of resources into goods or services. These resources include the following:

• Materials, including raw materials inventory
• Labor, namely, the human resources required for operations
• Overhead, including fixed assets, indirect materials, indirect labor, and various other expenses necessary to run the operating facility

Exhibit 11-1 highlights the portions of the conversion processes addressed in this chapter, as they relate to the overall accounting system.

A company must have systems in place to capture, record, summarize, and report all of its conversion activities. The major activities within this process include operational planning that supports the company's strategies, optimizing the use of the employees, property, and inventories that are needed in operations, controlling production flows, ensuring product quality, and preparing the related cost accounting and financial accounting records. These are considered routine processes in most companies because of the large number of transactions encountered on a daily basis.

Exhibit 11-1 Conversion Processes within the Overall System

Although many companies are not considered manufacturing firms—that is, their principal functions are not manufacturing operations—most companies do conduct some sort of productive activity. For example, even in service organizations such as professional firms and health care organizations, the processes of converting resources into outputs (services) are considered conversion activities. Therefore, 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. However, the discussion in the remainder of this chapter is set in the context of a manufacturing environment where the principal business activity is the production of finished goods. Exhibit 11-2 provides an overview of the functions within the conversion process.

Exhibit 11-2 Overview of the Conversion Process

The conversion process is initiated when the company recognizes the need to conduct operations. This need may arise in one of two ways. First, a sales order may have been received and conversion activities must take place in order to produce the goods needed to fill the order. Alternatively, the company may desire to produce goods to make sure they are available, even if a sales order has not yet been received for the related items. As a result of sales forecasting, management may launch production in order to be sure that certain levels of inventory are on hand to support sales expected in the future.

Regardless of the reason for initiating production, the company should have in place an organized approach to its conversion activities. The next section describes the typical components of such an approach.