lOMoARcPSD|7749849

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Accountancy (The National Teachers College)

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Journal Vouchers/Entries 8. Inventory Control adjusts the inventory

Billing Department prepares a journal voucher: subsidiary ledger.
Accounts Receivable DR 9. Billing, A/R, and Inventory Control submits
Sales CR summary information to the General Ledger
Inventory Control Dept. prepares a journal dept., which then reconciles this data and
voucher: posts to the control accounts in the G/L.
Cost of Goods Sold DR
Inventory CR Sales Return Journal Entry
Cash Receipts prepares a journal voucher: G/L posts the following to control accounts:
Cash DR Inventory—Control DR
Accounts Receivable CR Sales Returns and Allowances DR
Cost of Goods Sold CR
Revenue Cycle Databases Accounts Receivable—Control CR
 Master files
 customer master file Manual Cash Receipts Processes
 accounts receivable master file 1. Customer checks and remittance advices are
 merchandise inventory master file received in the Mail Room.
 Transaction and Open Document Files a) A mail room clerk prepares a cash prelist
 sales order transaction file and sends the prelist and the checks to
 open sales order transaction file Cash Receipts.
 sales invoice transaction file b) The cash prelist is also sent to A/R and
 cash receipts transaction file the Controller.
 Other files 2. Cash Receipts:
 shipping and price data reference file a) verifies the accuracy and completeness of
 credit reference file (may not be needed) the checks
 salesperson file (may be a master file) b) updates the cash receipts journal
 Sales history file c) prepares a deposit slip
 cash receipts history file d) prepares a journal voucher to send to G/L
 accounts receivable reports file 3. A/R posts from the remittance advices to the
accounts receivable subsidiary ledger.
Manual Sales Order Processing a) Periodically, a summary of the postings is
1. Begins with a customer placing an order sent to G/L
a) The sales department captures the 4. G/L department:
essential details on a sales order form. a) reconciles the journal voucher from Cash
2. The transaction is authorized by obtaining Receipts with the summaries from A/R
credit approval by the credit department b) updates the general ledger control
3. Sales information is released to: accounts
a) Billing 5. The Controller reconciles the bank accounts.
b) Warehouse (stock release or picking
ticket)
c) Shipping (packing slip and shipping notice)
4. The merchandise is picked from the
Warehouse and sent to Shipping.
a) Stock records are adjusted.
5. The merchandise, packing slip, and bill of
lading are prepared by Shipping and sent to
the customer.
a) Shipping reconciles the merchandise
received from the Warehouse with the
sales information on the packing slip.
6. Shipping information is sent to Billing. Billing
compiles and reconciles the relevant facts and
issues an invoice to the customer and updates
the sales journal. Information is transferred to:
a) Accounts Receivable (A/R)
b) Inventory Control
7. A/R records the information in the customer’s
account in the accounts receivable subsidiary
ledger.

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Independent Verification
Authorization Controls  Physical procedures as well as record-keeping
 Proper authorization of transactions should be independently reviewed at various
(documentation) should occur so that only valid points in the system to check for accuracy and
transactions get processed. completeness:
 Within the revenue cycle, authorization should  shipping verifies the goods sent from the
take place when: warehouse are correct in type and quantity
 a sale is made on credit (authorization)  warehouse reconciles the stock release
 a cash refund is requested (authorization) document (picking slip) and packing slip
 posting a cash payment received to a  billing reconciles the shipping notice with
customer’s account (cash pre-list) the sales invoice
 general ledger reconciles journal vouchers
Segregation of Functions from billing, inventory control, cash
1. Transaction authorization should be separate receipts, and accounts receivable
from transaction processing.
2. Asset custody should be separate from asset Automating the Revenue Cycle
record-keeping.  Authorizations and data access can be
3. The organization should be so structured that performed through computer screens.
the perpetration of a fraud requires collusion  There is a decrease in the amount of paper.
between two or more individuals.  The manual journals and ledgers are changed
to disk or tape transaction and master files.
 Sales Order Processing  Input is still typically from a hard copy
 credit authorization separate from SO document and goes through one or more
processing computerized processes.
 inventory control separate from warehouse  Processes store data in electronic files (the
 accounts receivable sub-ledger separate tape or disk) or prepare data in the form of a
from general ledger control account hardcopy report.
 Cash Receipts Processing  Revenue cycle programs can include:
 cash receipts separate from accounting  formatted screens for collecting data
records  edit checks on the data entered
 accounts receivable sub-ledger separate  instructions for processing and storing the
from general ledger data
 security procedures (passwords or user
Supervision IDs)
 Often used when unable to enact appropriate  steps for generating and displaying output
segregation of duties.  To understand files, you must consider the
 Supervision of employees serves as a record design and layout.
deterrent to dishonest acts and is particularly  The documents and the files used as input
important in the mailroom sources must contain the data necessary to
generate the output reports.
Accounting Records
 With a properly maintained audit trail, it is Computer-Based Accounting Systems
possible to track transactions through the  automation - use technology to improve
systems and to find where and when errors efficiency and effectiveness
were made:  reengineering – use technology to restructure
 pre-numbered source documents business processes and firm organization
 special journals
 subsidiary ledgers Reengineering Sales Order Processing Using
 general ledger Real-Time Technology
 files  Manual procedures and physical documents
are replaced by interactive computer terminals.
Access Controls  Real time input and output occurs, with some
 Access to assets and information (accounting master files still being updated using batches.
records) should be limited.  Real-time - entry of customer order,
 Within the revenue cycle, the assets to protect printout of stock release, packing slip and
are cash and inventories and access to bill of lading; update of credit file, inventory
records such as the accounts receivable file, and open sales orders file
subsidiary ledger and cash journal should be  Batch - printout of invoice, update of
restricted. closed sales order (journal), accounts

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receivable and general ledger control  The exchange is completely automated.

account  No human intervention or management

Advantages of Real-Time Processing Reengineering Using the Internet

 Shortens the cash cycle of the firm by reducing
the time between the order date and billing
date
 Better inventory management which can lead
to a competitive advantage
 Fewer clerical errors, reducing incorrect items
being shipped and bill discrepancies
 Reduces the amount of expensive paper
documents and their storage costs
 Typically, no formal business agreements exist
as they do in EDI.
 Most orders are made with credit cards.
 Mainly done with e-mail systems, and thus a
turnaround time is necessary
 Intelligent agents are needed to eliminate
this time lag.
 Security and control over data is a concern
with Internet transactions.

Reengineered Cash Receipts CBAS Control Considerations

 The mail room is a frequent target for  Authorization - in real-time systems,
reengineering. authorizations are automated
 Companies send their customers preprinted  Programmed decision rules must be
envelopes and remittance advices. closely monitored.
 Upon receipt, these envelopes are scanned to  Segregation of Functions - consolidation of
provides a control procedure against theft. tasks by the computer is common
 Machines are open the envelopes, scan  Protect the computer programs
remittance advices and checks, and separate  Coding, processing, and maintenance
the checks. should be separated.
 Artificial intelligence may be used to read  Supervision - in POS systems, the cash
handwriting, such as remittance amounts and register’s internal tape or database is an added
signatures. form of supervision
 Access Control - magnetic records are
Point-of-Sale Systems vulnerable to both authorized and unauthorized
 Point of sale systems are used extensively in exposure and should be protected
retail establishments.  Must have limited file accessibility
 Customers pick the inventory from the  Must safeguard and monitor computer
shelves and take them to a cashier. programs
 The clerk scans the universal product code  Accounting Records - rest on reliability and
(UPC). The POS system is connected to an security of stored digitalized data
inventory file, where the price and description  Accountants should be skeptical about the
are retrieved. accuracy of hard-copy printouts.
 The inventory levels are updated and  Backups - the system needs to ensure
reorder needs can immediately be that backups of all files are continuously
detected. kept
 The system computes the amount due.  Independent Verification – consolidating
Payment is either cash, check, ATM or credit accounting tasks under one computer program
card in most cases. can remove traditional independent verification
 No accounts receivables controls. To counter this problem:
 If checks, ATM or credit cards are used, an on-  perform batch control balancing after each
line link to receive approval is necessary. run
 At the end of the day or a cashier’s shift, the  produce management reports and
money and receipts in the drawer are summaries for end users to review
reconciled to the internal cash register tape or
a printout from the computer’s database. PC-Based Accounting Systems
 Cash over and under must be recorded  Used by small firms and some large
decentralized firms
Reengineering Using EDI  Allow one or few individuals to perform entire
 EDI helps to expedite transactions. accounting function
 The customer’s computer:  Most systems are divided into modules
 determines that inventory is needed controlled by a menu-driven program:
 selects a supplier with whom the business  general ledger
has a formal business agreement  inventory control
 dials the supplier’s computer and places  payroll
the order  cash disbursements

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 purchases and accounts payable  A/P periodically summarizes the entries in the
 cash receipts purchases journal as a journal voucher which
 sales order is sent to the General Ledger (G/L)
department.
PC Control Issues Inv-Control or Purchases DR
 Segregation of Duties - tend to be inadequate Accts Payable-Control CR
and should be compensated for with increased  A/P also prepares a cash disbursements
supervision, detailed management reports, and voucher and posts it in the voucher register.
frequent independent verification  G/L department:
 Access Control - access controls to the data  posts from the accounts payable
stored on the computer tends to be weak; journal voucher to the general ledger
methods such as encryption and disk locking  reconciles the inventory amount with
devices should be used the account summary received from
 Accounting Records - computer disk failures inventory control
cause data losses; external backup methods
need to be implemented to allow data recovery Manual Cash Disbursements System
 Periodically, A/P searches the open vouchers
Procurement Cycle payable file for items with payments due:
1. Purchase Requisition  A/P sends the voucher and supporting
2. Purchasing documents to Cash Disbursements
3. Receiving/Inspection  A/P updates the accounts payable
4. Accounts Payable subsidiary ledger
5. Cash Disbursements  Cash Disbursements:
 prepares the check
Goals of the Expenditure Cycle  records the information in a check register
 The goal of providing needed resources to (cash disbursements journal)
organization can be broken down into several  returns paid vouchers to accounts payable,
objectives: mails the check to the supplier
 purchase from reliable vendors  sends a journal voucher to G/L:
 purchase high quality items Accounts Payable DR
 obtain best possible price Cash CR
 purchase only items that are properly  G/L department receives:
authorized  the journal voucher from cash
 have resources available when they are disbursements
needed  a summary of the accounts payable
 receive only those items ordered subsidiary ledger from A/P
 ensure items are not lost, stolen, or broken  The journal voucher is used to update the
 pay for the items in a timely manner general ledger.
 The accounts payable control account is
A Manual Purchases System reconciled with the subsidiary summary.
 Begins in Inventory Control when inventory
levels drop to reorder levels Computer-Based Accounting Systems
 A purchase requisition (PR) is prepared and  automation - use technology to improve
copies to sent to Purchasing and Accounts efficiency and effectiveness
Payable (A/P)  reengineering – use technology to restructure
 Purchasing prepares a purchase order (PO) for business processes and firm organization
each vendor and sends copies to Inventory
Control, A/P, and Receiving Levels of Automating and Reengineering
 Upon receipt, Receiving counts and inspects Ordering
the goods.  Computer generates PR
 A blind copy of the PO is used to force  Purchases manually generates PO
workers to count the goods.  Computer generates PO (no PR needed)
 A receiving report is prepared and copies sent  PO not sent until manually reviewed
to the raw materials storeroom, Purchasing,  Computer-generated PO is automatically sent
Inventory Control, and A/P. without manual review
 A/P eventually receives copies of the PR, PO,  Electronic Data Interchange (EDI)
receiving report, and the supplier’s invoice.  Computer-to-computer communication
 A/P reconciles these documents, posts to the without PO
purchases journal, and records the liability in
the accounts payable subsidiary ledger. Expenditure Cycle Database

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 Master Files  Eliminates much of the storage and shuffling of

 supplier (vendor) master file paper documents
 accounts payable master file  Reduces data entry correction procedures
 merchandise inventory master file
 Transaction and Open Document Files
 purchase order file
 open purchase order file
 supplier’s invoice file
 open vouchers file
 cash disbursements file
 Other Files
 supplier reference and history file
 buyer file
 accounts payable detail file

Computer-Based Purchases
 A Data Processing dept. performs routine
accounting tasks.
 Purchasing - a computer program identifies
inventory requirements
 The following methods are used for authorizing
and ordering inventories:
 the system prepares POs and sends them
to Purchases for review, signing, and General Internal Controls
distributing  Organization controls
 the system distributes POs directly to the  segregation of duties
vendors and internal users, bypassing  Documentation
Purchases  Asset Accountability Controls
 the system uses electronic data  Management Practices
interchange (EDI) and electronically  Data Center Operations Controls
places the order without POs  Authorization Controls
 Access Controls
 Other tasks performed automatically by the
computer: Manual Authorization Controls
 updates the inventory subsidiary file from  Purchases of inventory should be authorized
the receiving report by the Inventory Control department, not by
 calculates batch totals for general ledger purchasing agents
update  Accounts Payable authorizes the payments of
 closes the corresponding records in the bills, not the cash disbursements clerk, who
open PO file to the closed PO file writes the checks
 validates the voucher records against valid
vendor files Computer-Based Authorization Controls
 Authorizations are automated.
 programmed decision rules must be
Computer-Based Cash Disbursements
 Tasks performed automatically by the debugged
 Automating inventory in EDI and JIT
computer:
 faulty inventory model can lead to over-
 the system scans for vouchers currently
due purchasing or under-purchasing
 Cash disbursements may automate check
 prints checks for these vouchers
printing and signing.
 records these checks in the check register
 programming logic must be flawless
 batch totals are prepared for the general
 automated signing only below a dollar
ledger update procedure
threshold
Advantages of Real-Time Data Input &
Traditional Segregation of Duties
Processing Over Batch Processing
 Shortens the time-lag in record-keeping;  Warehouse (stores)
hence, records are more current  Inventory control
 Accounts payable
 Eliminates much of the routine manual
 General ledger
procedures, such as transcribing information
onto paper documents  Requisitioning
 Purchases

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 Purchases returns and allowances  As the system becomes increasing

 Cash disbursements paperless, maintaining an audit trail
becomes more difficult.
Manual Segregation of Functions
 Custody of the asset, inventory, by the Manual Access Controls
Warehouse must be separate from  Access to:
recordkeeping for the assets by the Inventory  inventories (direct)
Control.  cash (direct)
 Custody of the asset, cash, by Cash  accounting records (indirect)
Disbursements must be kept separate from
recordkeeping for the asset by A/P. Computer-Based Access Controls
 Magnetic records are vulnerable to both
Computer-Based Segregation of Functions authorized and unauthorized exposure and
 Extensive consolidation by the computer of should be protected
tasks traditionally segregated  must have limited file accessibility
 computer programs authorize and process  programs must be safeguarded and
purchase orders monitored
 computer programs authorize and issue
checks to vendors Manual Independent Verification
 A/Payable dept. verifies much of the work done
Manual Supervision within the expenditure cycle.
 Within the expenditure cycle, supervision is of  PR, PO, receiving reports, and suppliers’
highest importance in the Receiving invoices must be checked and verified by
department, where the inventory arrives and is A/P.
logged in by a receiving clerk. Need to  G/Ledger dept. verifies:
minimize:  the total obligations recorded equal the
 failures to properly inspect the assets total inventories received
 theft of the assets  the total reductions in accounts payable
equal the total disbursements of cash
Computer-Based Supervision
 Automation often leads to a collapsing of the Computer-Based Independent Verification
traditional segregation of duties.  Automating the accounting function reduces
 requires greater supervision the need for verification by reducing the
 Supervision takes on new aspects as chances of fraud and error in the expenditure
technology advances. cycle.
 electronic monitoring  However, the need for verification shifts to the
 Supervision because more difficult as the computer program and the programmers
workplace becomes more sophisticated. where fraud and error may still be present.
 employees may have advanced IT training

Manual Accounting Records

 Must maintain adequate records for:
 accounts payable
 vouchers payable
 checks
 general ledger
 subsidiary ledgers

Computer-Based Accounting Records

 Accounting records rest on the reliability and
security of stored digitalized data.
 Accountants should be skeptical about the
accuracy of hard-copy printouts.
 Backups - the system needs to ensure that
backups of all files are continuously kept
 Most automated systems still have a lot of
paper documents.
 This is good for audit trail purposes but is
often inefficient.

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 G/L dept. makes a journal entry to transfer the

cash from the operating bank account to the
payroll imprest account:
Cash - Payroll Imprest Account DR
Manual Payroll System Cash - Operating Account CR
 Personnel dept. uses personnel action forms
to: Payroll Controls
 activate new employees  Transaction authorization - the personnel
 change the pay rate of employees action form helps prevent:
 change marital status and/or number of  terminated employees from receiving
dependents checks
 terminate employees  wage rates from being improperly changed
 Production employees fill out two forms: for current employees
 job tickets - account for the time spent by  Segregation of Duties - timekeeping and
the worker on each production job personnel functions should be separated
 time cards - used to capture the total time  Supervision - need to monitor employees to
worked each pay period for payroll ensure they are not “clocking in” for one
calculations another
 must be signed by a supervisor  Accounting Records - audit trail includes:
 Cost Accounting dept:  time cards
 uses the job tickets to allocate labor costs to  job tickets
WIP accounts  disbursement vouchers
 summarizes these charges in a labor  labor distribution summary
distribution summary which is forwarded to G/L  payroll register
dept.  subsidiary ledger accounts
 Payroll dept receives personnel action forms  general ledger accounts
and time cards.  Access Controls - need to prevent employees
 Uses them to: from having improper access to:
 prepare the payroll register  accounting records, such as time cards
 enter the information into the employee which can be altered
payroll records  unsigned checks
 prepare paychecks  Independent Verification:
 send paychecks to Cash Disbursements  verification of time cards
and a copy of the payroll register to  distribution of paychecks to authorized
Accounts Payable employees
 Accounts Payable dept:  verification of accuracy of payroll register
 prepares a cash disbursements voucher by A/P dept.
for the total amount of the payroll  G/L dept. reconciles the labor distribution
 sends copies to the Cash Disbursements summary and the payroll disbursement
and G/L depts. voucher
 Cash Disbursements dept:
 reviews and signs the paychecks and Computer-Based Payroll Systems
forwards them to a paymaster for  Payroll is well-suited to batch processing and
distribution to the employees sequential files.
 writes a check for the payroll and deposits  Most employees on the master file receive
it into the payroll imprest account paychecks periodically.
 G/L dept. makes the following journal entries:  The computer program performs the detailed
 From the Labor Distribution Summary record-keeping, check-writing, and general
WIP (Direct Labor) DR ledger functions.
Factory Overhead (Indirect Labor) DR
Wages Payable CR Reengineered HRM Systems
 From the Distribution Voucher  Payroll can be reengineered as a part of
Wages Payable DR human resource management (HRM).
Cash CR  IT can process a wide range of personnel-
Fed. Inc. Tax Withholding Payable CR related data, including:
State Inc. Tax Withholding Payable CR  employee benefits
FICA Withholding Payable CR  labor resource planning
Other Withholding Payables CR  employee skills and training
 pay rates, deductions, and pay checks
 evaluations

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 Depreciation calculations are internal

transactions that the FAS system bases upon
a depreciation schedule.
 Physical improvements must also be recorded
to increase the subsidiary account balance and
depreciation schedule.
Key Features of Reengineered HRM Asset Disposal
 Personnel - can make changes to the  At the end of an asset’s useful life (or earlier
employee file in real time disposition), the asset must be removed from
 Cost Accounting - enters job cost data either the records and depreciation schedule
daily or in real time  Disposals require disposal request forms and
 Timekeeping - enters the attendance file daily disposal reports as source documents.
 Data Processing - still uses batch processing
and prepares all reports, the checks, and Computer-Based Fixed Asset System—
updates the general ledger Acquisition
 Receipt of assets are digitally recorded in the
Reengineered HRM Systems differ from system, along with information such as its
automated manual and batch/sequential file useful life, depreciation methods, etc.
systems because:  Ledgers are automatically updated
 operations depts. transmit transactions to data
processing via terminals Computer-Based Fixed Asset System—
 direct access files are used for storage Maintenance
 many processes are performed real time  Computerized FAS automatically:
 real-time access to personnel files required for  calculate current period’s depreciation
direct inquiries  update accumulated depreciation and
book-value fields in the subsidiary records
The Fixed Asset System (FAS)  post total depreciation to the affected
Fixed Assets - property, plant, and equipment general ledger accounts
used in the operation of a business  record depreciation transactions by adding
records to the journal voucher file
Life of a fixed Asset
1. Acquisition of Asset Computer-Based Fixed Asset System—
2. Depreciation Disposal
3. Subsequent Expenditure  Computerized FAS automatically:
4. Disposal of Asset  post adjusting entries to the fixed asset
control account in the general ledger
Objectives of FAS  record losses or gains associated with the
 Acquire fixed assets in accordance with disposal transaction
management approval and procedures  prepare journal voucher records
 Maintain adequate accounting records of asset
acquisition, cost, description, and location FAS Controls
 Maintain depreciation records for depreciable  Authorization - should be formal and explicit
assets in accordance with acceptable method because of high cost of FAS:
 Provide management with information to help it  acquisitions
plan future fixed asset investments  changes in depreciation methods
 Properly record the retirement and disposal of  Supervision - threat of misappropriation
fixed assets requires constant management oversight:
 theft - secure physical locations of assets
Asset Acquisition  misuse - monitor on-the-job activities
 Begins when a dept. manager determines that  Independent Verification - internal auditors
an old fixed asset needs to be replaced or that should periodically verify FAS records:
a new fixed asset is warranted  the reasonableness of factors used in
 A purchase requisition is filled out. decisions (useful life, discounts, budgeting
 May require an authorizing signature for model)
items over a pre-specified limit  location, condition, and fair value of the
 FAS dept. performs record-keeping functions. fixed asset records in the subsidiary ledger
 the programming logic for automatic
Asset Maintenance calculations (depreciation)
 Involves adjusting FAS subsidiary account
balances as assets depreciate

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 Influenced by time constraints, batch size,

and other specifications
 Work Centers and Storekeeping
 Production operations begin when work
centers obtain raw materials from
storekeeping.
The Conversion Cycle  It ends with the completed product being sent
 Transforms input resources, raw materials, to the finished goods (FG) warehouse .
labor, and overhead into finished products or  Inventory Control
services for sale  Objective: minimize total inventory cost
 Consists of two subsystems: while ensuring that adequate inventories
 Physical activities – the production system exist of production demand
 Information activities – the cost accounting  Provides production planning and control
system with status of finished goods and raw
materials inventory
Production System  Continually updates the raw material
 Involves the planning, scheduling, and control inventory during production process
of the physical product through the  Upon completion of production, updates
manufacturing process finished goods inventory
 determining raw materials requirements
 authorizing the release of raw materials EOQ Inventory Model
into production  Very simple too use, but assumptions are not
 authorizing work to be conducted in the always valid
production process  demand is known and constant
 directing the movement of work through  ordering lead time is known and constant
the various stages of production  total cost per year of placing orders
decreases as the order quantities increase
Production Methods  carrying costs of inventory increases as
 Continuous Processing creates a quantity of orders increases
homogeneous product through a continuous  no quantity discounts
series of standard procedures.
 Batch Processing produces discrete groups Information: Documents in the Batch
(batches) of products. Production System
 Make-to-Order Processing involves the  Sales Forecast - expected demand for the
fabrication of discrete products in accordance finished goods
with customer specifications.  Production Schedule - production plan and
authorization to produce
Overview: Traditional Batch Production  Bill of Materials (BOM) - specifies the types
Model… and quantities of the raw materials and
 consists of four basic processes: subassemblies used to produce a single
 plan and control production finished good unit
 perform production operations  Route Sheet - details the production path a
 maintain inventory control particular batch will take in the manufacturing
 perform cost accounting process
 sequence of operations
Batch Production System  time allotted at each station
 Production Planning and Control  Work Order - uses the BOM and route sheet
 Materials and operations requirements to specify the exact materials and production
 Production scheduling processes for each batch
 Materials and Operations Requirements  Move Ticket - records work done in each work
 Materials requirement – the difference center and authorizes the movement of the
between what is needed and what is batch
available in inventory  Materials Requisition - authorizes the
 Operations requirements – the assembly inventory warehouse to release raw materials
and/or manufacturing activities to be for use in the production process
applied to the product
 Production Scheduling Cost Accounting System
 Coordinates the production of multiple  Records the financial effects of the events
batches occurring in the production process
 Initiated by the work order

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 Cost accounting clerk creates a new cost
record for the batch and files in WIP file
 The records are updated as materials and
labor are used
 Receipt of last move ticket signals completion
of the production process
 clerk removes the cost sheet from WIP file
 prepares a journal voucher to transfer
balance to a finished goods inventory
account and forwards to the General
Ledger department
Internal Controls
 Transaction authorizations
 work orders – reflect a legitimate need
based on sales forecast and the finished
goods on hand
 move tickets – signatures from each work
station authorize the movement of the
batch through the work centers
 materials requisitions – authorize the
warehouse to release materials to the
work centers
 Segregation of duties
 production planning and control
department is separate from the work
centers
 inventory control is separate from
materials storeroom and finished goods
warehouse
 cost accounting function accounts for WIP
and should be separate from the work
centers in the production process
 Supervision
 work center supervisors oversee the
usage of raw materials to ensure that all
released materials are used in production
and waste is minimized
 employee time cards and job tickets are
checked for accuracy
 Access control
 direct access to assets
 controlled access to storerooms,
production work centers, and finished
goods warehouses
 quantities in excess of standard
amounts require approval
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 indirect access to assets
 controlled use of materials
requisitions, excess materials
requisitions, and employee time cards
 Accounting records
 pre-numbered documents
 work orders
 cost sheets
 move tickets
 job tickets
 material requisitions
 WIP and finished goods files
 Independent verification
 cost accounting reconciles material usage
(material requisitions) and labor usage (job
tickets) with standards
 variances are investigated
 GL dept. verifies movement from WIP to
FG by reconciling journal vouchers from
cost accounting and inventory subsidiary
ledgers from inventory control
 internal and external auditors periodically
verify the raw materials and FGs
inventories through a physical count
World-Class Companies…
 continuously pursue improvements in all
aspects of their operations, including
manufacturing procedures
 are highly customer oriented
 have undergone fundamental changes from
the traditional production model
 often adopt a lean manufacturing model
Principles of Lean Manufacturing
 Pull Processing – products are pulled from
the consumer end (demand), not pushed from
the production end (supply)
 Perfect Quality –pull processing requires zero
defects in raw material, WIP, and FG
inventories
 Waste Minimization – activities that do not
add value or maximize the use of scarce
resources are eliminated
 Inventory Reduction – hallmark of lean
manufacturing
 Inventories cost money
 Inventories can mask production problems
 Inventories can precipitate overproduction
 Production Flexibility – reduce setup time to
a minimum, allowing for a greater diversity of
products, without sacrificing efficiency
 Established Supplier Relations – late
deliveries, defective raw materials, or incorrect
orders will shut down production since there
are inventory reserves
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 Team Attitude – each employee must be
vigilant of problems that threaten the
continuous flow of the production line
 Achieve production flexibility by means of:
 Changes in the physical organization of
production facilities
 Employment of automated technologies
CIM, AS/RS, robotics, CAD, and CAM
 Use of alternative accounting models
ABC and value stream accounting
 Use of advanced information systems
MRP, MRPII, ERP, and EDI
Physical Reorganization of the Production
Facilities
 Inefficiencies in traditional plant layouts
increase handling costs, conversion time, and
excess inventories.
 Employees tend to feel ownership over their
stations, contrary to the team concept.
 Reorganization is based on flows through cells
which shorten the physical distance between
activities.
 This reduces setup and processing time,
handling costs, and inventories.
Automating Manufacturing
 Traditional Approach to Automation
 Consists of many different types of
machines which require a lot of setup time
 Machines and operators are organized in
functional departments
 WIP follows a circuitous route through the
different operations
 Islands of Technology
 Stand alone islands which employ
computer numerical controlled (CNC)
machines that can perform multiple
operations with less human involvement
 Computer Numerical Controlled (CNC )
Machines
 Reduce the complexity of the physical
layout
 Arranged in groups and in cells to
produce an entire part from start to finish
 Need less set-up time
 Computer Integrated Manufacturing (CIM)
 A completely automated environment
which employs automated storage and
retrieval systems (AS/RS) and robotics
 Automated Storage and Retrieval Systems
(AS/RS)
 Replaces traditional forklifts and their
human operators with computer-controlled
conveyor systems
 Reduce errors, improved inventory control,
and lower storage costs
 Robotics
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 Use special CNC machines that are useful
in performing hazardous, difficult, and
monotonous tasks
 Computer-Aided Design (CAD)
 Increases engineers’ productivity
 Improves accuracy
 Allows firms to be more responsive to
market demands
 Interfaces with CAM and MRPII systems
 Computer Aided Manufacturing (CAM)
 Uses computers to control the physical
manufacturing process
 Provides greater precision, speed, and
control than human production processes
Achieving World-Class Status
 The world-class firm needs new accounting
methods and new information systems that:
 show what matters to its customers
 identify profitable products
 identify profitable customers
 identify opportunities for improving
operations and products
 encourage the adoption of value-added
activities and processes and identify those
that do not add value
 efficiently support multiple users with both
financial and nonfinancial information
What’s Wrong with Traditional Accounting
Information?
 Inaccurate cost allocations – automation
changes the relationship between direct labor,
direct materials, and overhead cost
 Promotes nonlean behavior – incentives to
produce large batches and inventories, and
conceal waste in overhead allocations
 Time lag – data lag due to assumption that
control can be applied after the fact to correct
errors
 Financial orientation – dollars as the
standard unit of measure
Activity Based Costing (ABC)…
 is an information system that provides
managers with information about activities and
cost objects
 assumes that activities cause costs and that
products (and other cost objects) create a
demand for activities
 is different from traditional accounting system
since ABC has multiple activity drivers,
whereas traditional accounting has only one,
e.g. machine hours
ABC – Pros and Cons
 Advantages
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 More accurate costing of  External communications with its

products/services, customers, and customers and suppliers via Internet or
distribution channels direct connection
 Identifying the most and least profitable
products and customers
 Accurately tracking costs of activities and
processes
 Equipping managers with cost intelligence
to drive continuous improvements
 Facilitating better marketing mix
 Identifying waste and non-value-added
activities

 Disadvantages
 Too time-consuming and complicated to
be practical
 Promotes complex bureaucracies in
conflict with lean manufacturing
philosophy

Value Stream Accounting

 Value stream – all the steps in a process that
are essential to producing a product
 Value streams cut across functions and
departments
 Captures costs by value stream rather than by
department or activity
 Simpler than ABC accounting
 Makes no distinction between direct and
indirect costs
 Including labor costs

Information Systems that Support Lean

Manufacturing
 Manufacturing Resources Planning (MRP)
 Ensures adequate raw materials for
production process
 Maintains the lowest possible level of
inventory on hand
 Produce production and purchasing
schedules and other information needed to
control production
 MRP II
 An extension of MRP
 More than inventory management and
production scheduling – it is a system for
coordinating the activities of the entire
firm
 Enterprise Resource Planning (ERP)
Systems
 Huge commercial software packages that
support the information needs of the entire
organization, not just the manufacturing
functions
 Automates all business functions along
with full financial and managerial reporting
capability
 Electronic Data Interchange (EDI)

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