1. Production, HR and GL Cycles
Lecture 13
(Chapter )

2. Basic Subsystems in the AIS
Financing
Cycle
Expenditure
Cycle
Human
Resources
General Ledger & Reporting System
Production
Cycle
Revenue
Cycle
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3. Production Cycle Activities
The production cycle is a recurring set of business activities and related data processing operations associated with the manufacturing of products.
The four basic activities in the production cycle are:
Product design
Planning and scheduling
Production operations
Cost accounting
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4. Product Design Documents and procedures:
The objective of this activity is to design a product that meets customer requirements for quality, durability, and functionality while simultaneously minimizing production costs.
Documents and procedures:
Product design activity creates two main documents:
Bill of materials
Operations list
Production Cycle:
Product design
Planning & scheduling
Production operations
Cost accounting
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5. Product Design How can accountants be involved?
by showing how various design trade-offs affect production costs and thereby profitability
by ensuring that the AIS is designed to collect and provide information about the machine setup and materials handling costs associated with alternative product designs
by providing data about repair and warranty costs associated with existing products
Production Cycle:
Product design
Planning & scheduling
Production operations
Cost accounting
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6. Planning and Scheduling
The objective is to plan production efficient enough to meet existing orders and anticipate short-term demand without creating excess finished goods inventories.
Common methods of production planning:
Manufacturing resource planning
It seeks to match existing production capacity and raw materials needs with forecasted sales demands.
Just-in-time (JIT) manufacturing systems
The goal is to minimize inventories of raw materials, work in process, and finished goods.
Production Cycle:
Product design
Planning & scheduling
Production operations
Cost accounting
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7. Planning and Scheduling
Production Cycle:
Product design
Planning & scheduling
Production operations
Cost accounting
How can accountants be involved:
by ensuring that the AIS collects and reports costs in a manner consistent with the production planning techniques used by the company
by helping to choose whether MRP-II or JIT is more appropriate
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8. Production Operations
The way this activity is accomplished varies greatly across companies.
Computer-integrated manufacturing (CIM): It is the use of information technology in the production process.
Every firm needs to collect data about the following four facets of its production operations:
Raw materials used
Labor-hours expended
Machine operations performed
Other manufacturing overhead costs incurred
Production Cycle:
Product design
Planning & scheduling
Production operations
Cost accounting
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9. Cost Accounting
What minimum information should organizations keep about their fixed assets?
Production Cycle:
Product design
Planning & scheduling
Production operations
Cost accounting
identification number
serial number
location
cost
date of acquisition
vendor name and address
expected life
expected salvage value
depreciation method
depreciation charges to date
improvements
maintenance services performed
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10. Control Objectives, Threats, and Procedures
A well-designed AIS is to provide adequate controls to ensure that the following objectives are met:
All production & fixed asset acquisitions are properly authorized.
Work-in-process inventories and fixed assets are safeguarded.
All valid, authorized production cycle transactions are recorded.
All production cycle transactions are recorded accurately.
Accurate records are maintained and protected from loss.
Production cycle activities are performed efficiently and effectively.
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11. Control Objectives, Threats, and Procedures
unauthorized transaction
theft or destruction of inventories and fixed assets
recording and posting errors
loss of data
inefficiencies and quality control problems
Exposures:
overproduction & excess inventories
obsolescence
underproduction, stockouts, & lost sales
excess investment in fixed assets
loss of assets
overstated inventory records
ineffective scheduling & planning
decision errors
increased expenses & taxes on fixed assets that are incorrectly valued
ineffective decision making
loss of customer goodwill & future sales
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12. Control Objectives, Threats, and Procedures
Control procedures:
accurate sales forecasts and inventory records
authorization of production
restricted access to production planning program and to blank production order documents
review and approval of capital asset expenditures
documentation of all internal movements of inventory
proper segregation of duties
source data automation
online data entry edit controls
backup and disaster recovery procedures
regular performance reports
cost of quality control measurement
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13. Information Needs & Procedures
Major criticisms of traditional cost accounting systems:
Inappropriate allocation of overhead costs
Inaccurate performance measures
Potential solution to the first criticism:
activity-based costing (ABC)
Potential solution to the second criticism:
Integrated production cycle data model
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14. Information Needs and Procedures
What are some benefits of ABC?
better decisions
improved cost management
More accurate cost data results in better product mix and pricing decisions.
More detailed cost data improves management’s ability to control and manage total costs.
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15. Basic Subsystems in the AIS
Financing
Cycle
Expenditure
Cycle
Human
Resources
General Ledger & Reporting System
Production
Cycle
Revenue
Cycle
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16. Payroll Cycle Activities
The first function of the AIS is processing transactional data.
Why is payroll processed in batch mode?
Paychecks are prepared periodically.
Most employees are paid at the same time.
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17. Payroll Cycle Activities
What are the basic activities performed in the payroll cycle?
Update master payroll file
Update tax rates and deductions
Validate time and attendance data
Prepare payroll
Disburse payroll
Calculate employer-paid benefits and taxes
Deduct payroll taxes and other deductions
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18. Update Master Payroll File
Update master file
Update deduction rates
Validate time data
Prepare payroll
Disburse payroll
Calculate benefits & taxes
Deduct payroll deductions
The first activity in the HRM/payroll cycle involves updating the payroll master file to reflect payroll changes such as new hires, terminations, changes in pay rates, or changes in discretionary withholdings.
It is important that all payroll changes are entered in a timely manner and are properly reflected in the next pay period.
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19. Update Tax & Deduction Rate
Update master file
Update deduction rates
Validate time data
Prepare payroll
Disburse payroll
Calculate benefits & taxes
Deduct payroll deductions
The second activity in the HRM/payroll cycle involves updating information about tax rates and other withholdings.
These changes happen whenever updates about changes in tax rates and other payroll deductions are received from various government units and insurance companies.
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20. Validate Time/Attendance Data
Update master file
Update deduction rates
Validate time data
Prepare payroll
Disburse payroll
Calculate benefits & taxes
Deduct payroll deductions
The third activity in the payroll cycle is to validate each employee’s time & attendance data.
Some pay schemes include:
time cards for those paid on an hourly basis
self report for professionals
straight commission or salary plus commission
incentives and bonuses
Opportunities of using information technology:
collecting employee time/attendance data electronically, instead of on paper documents
using badge readers
using electronic time clocks
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21. Prepare Payroll
Update master file
Update deduction rates
Validate time data
Prepare payroll
Disburse payroll
Calculate benefits & taxes
Deduct payroll deductions
This activity in the payroll cycle involves preparing payroll.
Data about the hours worked are provided by the department in which the employee works.
Pay rate information is obtained from the payroll master file.
The person responsible for preparing paychecks cannot add new records to this file.
Opportunities of using information technology:
produce and distribute payroll reports electronically rather than on paper
online terminals
corporate intranets
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22. Prepare Payroll Procedures:
Update master file
Update deduction rates
Validate time data
Prepare payroll
Disburse payroll
Calculate benefits & taxes
Deduct payroll deductions
Procedures:
Payroll processing is performed in the computer operations department.
The payroll transaction file is sorted by employee number.
The sorted time data file is used to prepare employee paychecks.
All payroll deductions are summed and the total is subtracted from gross pay to obtain net pay.
What are types of payroll deductions?
withholdings
voluntary deductions
Finally, the payroll register and employee paychecks are printed.
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23. Disburse Payroll Opportunities of using information technology:
Update master file
Update deduction rates
Validate time data
Prepare payroll
Disburse payroll
Calculate benefits & taxes
Deduct payroll deductions
This activity is actual disbursement of paychecks to employees.
Most employees are paid either by check or by direct deposit of the net pay amount.
Procedures:
Once paychecks have been prepared, the payroll register is sent to the A/P for review & approval.
A disbursement voucher is then prepared.
The disbursement voucher and payroll register are then sent to the cashier.
Opportunities of using information technology:
direct deposit
outsourcing to a payroll service bureau
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24. Calculate Employer-Paid Benefits and Taxes
Update master file
Update deduction rates
Validate time data
Prepare payroll
Disburse payroll
Calculate benefits & taxes
Deduct payroll deductions
Some payroll taxes & employee benefits are paid directly by the employer.
Federal &d state laws require employers to contribute a specified % of each employee’s gross pay to federal & state employment insurance funds.
Employers often contribute to health, disability, and insurance premiums.
Many companies also offer their employees flexible benefit plans.
Employees are offered & contribute toward retirement savings plans.
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25. Disburse Payroll Taxes and Other Deductions
Update master file
Update deduction rates
Validate time data
Prepare payroll
Disburse payroll
Calculate benefits & taxes
Deduct payroll deductions
The final activity involves paying the payroll tax liability & other voluntary deductions of each employee.
An organization must periodically prepare checks or use electronic transfer to pay the various tax liabilities.
The timing of these payments is specified by the government agencies.
The funds voluntarily withheld from each employee’s paycheck for various benefits must be disbursed to the appropriate organizations.
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26. Control Objectives, Threats, & Procedures
The internal controls objectives are:
payroll transactions are properly authorized
recorded payroll transactions are valid
authorized payroll transactions are recorded
payroll transactions are accurately recorded
applicable government regulations regarding remittance of taxes & filing of payroll & HRM reports are met
assets (cash & data) are safeguarded from loss or theft
HRM/payroll cycle activities are performed efficiently and effectively
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27. Control Objectives, Threats, and Procedures
hiring of unqualified or larcenous employees
violation of employment law
unauthorized changes to the master payroll file
inaccurate time data
inaccurate processing of payroll
theft or fraudulent distribution of paychecks
loss or unauthorized disclosure of payroll data
poor performance
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28. Control Objectives, Threats, and Procedures
Exposures:
increased expenses
lower productivity
theft
fines and civil suits
inaccurate records and reports
over/underpayment of employees
reduced morale
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29. Control Objectives, Threats, and Procedures
Control procedures:
sound hiring practices (verification of applicant’s skills, references, & employment history)
thorough documentation of hiring procedures
segregation of duties
batch totals and other application controls
direct deposit
paycheck distribution by someone independent of payroll process
investigation of all unclaimed paychecks
separate payroll checking account
access control
backup procedures
encryption
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30. Information Needs & Procedures
AIS is to provide information useful for decision making.
The payroll system must be designed to collect & integrate cost data with other types of information in order to enable management to make the following kinds of decisions:
Future work force staffing needs
Employee performance
Employee morale
Payroll processing efficiency and effectiveness
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31. Information Needs and Procedures
Some of the information has traditionally been provided by the payroll system.
Other information, such as data about employee skills, had normally been provided and maintained by the HRM system.
Other information, such as data about employee morale, has traditionally not been collected.
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32. Basic Subsystems in the AIS
Financing
Cycle
Expenditure
Cycle
Human
Resources
General Ledger & Reporting System
Production
Cycle
Revenue
Cycle
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33. General Ledger and Reporting Activities
What are the four basic activities performed in the general ledger and reporting system?
Update the general ledger
Post adjusting entries
Prepare financial statements
Produce managerial reports
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34. Update The General Ledger
The first activity is to update the general ledger.
Updating consists of posting journal entries that originated from two sources:
Accounting subsystems
The treasurer
Update the general ledger
Post adjusting entries
Prepare financial statements
Produce managerial reports
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35. Post Adjusting Entries
This activity involves posting various adjusting entries.
Adjusting entries originate from the controller’s office, after the initial trial balance has been prepared.
Basic categories of adjusting entries:
Accruals (wages payable)
Deferrals (rent, interest, insurance)
Estimates (depreciation)
Revaluation (change in inventory method)
Corrections
Update the general ledger
Post adjusting entries
Prepare financial statements
Produce managerial reports
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36. Prepare Financial Statements
Update the general ledger
Post adjusting entries
Prepare financial statements
Produce managerial reports
The third activity in the general ledger and reporting system involves the preparation of financial statements.
The income statement is prepared first.
The balance sheet is prepared next.
The cash flows statement is prepared last.
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37. Produce Managerial Reports
This activity involves the production of various managerial reports.
The two main categories of managerial reports?
General ledger control reports:
lists of journal vouchers by numerical sequence, account number, or date
listing of general ledger account balances
Budgets:
operating budget
capital expenditures budget
Update the general ledger
Post adjusting entries
Prepare financial statements
Produce managerial reports
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38. Produce Managerial Reports
Budgets and performance reports should be developed on the basis of responsibility accounting.
What is responsibility accounting?
It involves reporting financial results on the basis of managerial responsibilities within an organization.
Update the general ledger
Post adjusting entries
Prepare financial statements
Produce managerial reports
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39. Control Objectives, Threats, and Procedures
Control objectives in the general ledger and reporting system:
Updates to the general ledger are properly authorized.
Recorded general ledger transactions are valid.
Valid, authorized general ledger transactions are recorded.
General ledger transactions are accurately recorded.
General ledger data are safeguarded from loss or theft.
General ledger system activities are performed efficiently and effectively.
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40. Control Objectives, Threats, and Procedures
errors in updating the general ledger
inaccurate/incomplete journal entries
inaccurate/incomplete posting of journal entries
unauthorized access to the general ledger
loss or destruction of general ledger data
Exposures:
inaccurate records and reports, resulting in bad decisions based on erroneous information
leak of confidential data
corruption of general ledger
cover-up of theft
loss of data
loss of assets
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41. Control Objectives, Threats, and Procedures
What are some control procedures?
input, edit, and processing controls
reconciliations and control reports
access controls
adequate audit trail
proper backup procedures
disaster recovery plan
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42. Balanced Scorecard What is a balanced scorecard?
a report that measures four dimensions of performance
What are those measures?
financial
internal operations
innovation and learning
customer perspectives of the organization
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43. End of Lecture 13 ©2003 Prentice Hall Business Publishing,
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