Information System (is) The Term Information System Refers To A

Information System (IS) The term information system refers to a system of persons, data records and activities that process the data and information in an organization, and it includes the organization's manual and automated processes. Accounting Information System (AIS) An accounting information system (AIS) is an information system which processes financial data to provide information to mangers and other people for making financial decisions.

Cost Accounting Information System (CAIS) Cost accounting system is an accounting information system which determines the costs of products manufactured or services provided and record these costs in the accounting records.

Functions of CAIS Generally the purposes or functions of cost accounting information system fall into four categories. These include providing information for: 1) external financial statements, 2) planning and controlling activities or processes, 3) short term strategic decisions and 4) long term strategic decisions. These four functions relate to different audiences, emphasize different types of information, require different reporting intervals and involve different types of decisions. These characteristics and requirements of the four functions are summarized in Exhibit 1 and discussed individually below: External Financial Statements: General purpose financial statements are designed for outsiders in accordance with generally accepted accounting principles and the regulations of the Internal Revenue Service (IRS) and the Securities and Exchange Commission (SEC). Of course outsiders include investors and creditors as well as the IRS and SEC. These users generally require information concerning the overall financial performance of the company on a quarterly basis. The information is highly aggregated because these outside users do not require detailed information about the performance or profitability of specific segments of the company such as divisions, departments, activities, processes, products, services and

customers. The inventory valuation method is the key component in satisfying the requirements of GAAP and other regulatory agencies. Therefore, CAIS helps in making these external financial statements. EXHIBIT 1: Characteristics and Requirements related to the four functions of CAIS

Characteristic or Requirement

External Financial Statements

Planning & Controlling Activities or Processes

Short Term Strategic Decisions

Long Term Strategic Decisions

Audience

Outside investors, creditors, IRS and SEC.

Plant, production and operating managers, and workers.

Marketing, product, business and senior managers.

Marketing, product, business and senior managers

Type of information required

Aggregated quantitative overall financial results.

Disaggregated quantitative and qualitative nonfinancial information on specific activities and processes.

Disaggregated quantitative and qualitative financial and non-financial information on specific products, services, customers and suppliers.

Disaggregated quantitative and qualitative financial and non-financial information on specific aspects of the company’s competitive strategy.

Reporting interval required

Quarterly.

Real time, hourly or daily.

Annual or life cycle unless product design or process changes.

Special studies performed periodically.

Decision Examples

Should an investor purchase, or dispose of the stock or bonds of this company?

What resources are needed for the period? Are specific processes in control?

Should the company continue producing current products and services? What prices should be charged for products and services?

Should the company replace a machine, build a new plant, reengineer a product or process, convert to a JIT system?

Planning and Controlling Activities and Processes: Plant, production and operating managers and workers need information for planning and controlling specific activities and processes. These users need dis-aggregated

quantitative and qualitative non-financial information on a timely basis. In some cases, information is needed daily, hourly or even on a real time (continuous) basis. For example, the operating managers of a nuclear power plant, a computer integrated factory and a jumbo jet need continuous nonfinancial information to monitor performance. Although standard costing was developed to aid in planning and measuring the financial consequences of performance variations, cost accounting reports and financial statements do not satisfy the requirements of these users. Cost accounting reports and financial statements are useful to plant managers for planning and measuring financial results, but they are not designed to control the activities, processes and work performed on a day to day basis. Short Term Strategic Decisions: Marketing, product, business and senior level managers require information to provide guidance for a variety of short term strategic decisions. Dis-aggregated, quantitative and qualitative information is needed on both the financial and non-financial aspects of specific products, services, customers and suppliers. CAIS provides this information to its users. Long Term Strategic Decisions: Marketing, product, business and senior level managers also need information for a variety of long term strategic decisions. Decisions such as the replacement of a machine, building a new plant, re-engineering a product or process and implementing a JIT system require dis-aggregated quantitative and qualitative financial and nonfinancial information on a periodic basis. These decisions usually require special studies that fall into the topical areas of relevant costing, capital budgeting and investment management. Again, CAIS provides data for needed for making long-term strategic decisions.

CAIS TECHNOLOGY Input: The input devices commonly associated with CAIS include: standard personal computers or workstations running applications; scanning devices for standardized data entry; electronic communication devices for electronic data interchange (EDI) and e-commerce. In addition, many financial systems come "Web-enabled" to allow devices to connect to the World Wide Web. Process: Basic processing is achieved through computer systems ranging from individual personal computers to large-scale enterprise servers.

However, conceptually, the underlying processing model is still the "doubleentry" accounting system initially introduced in the fifteenth century. Output: Output devices used include computer displays, impact and nonimpact printers, and electronic communication devices for EDI and ecommerce. The output content may encompass almost any type of financial reports from budgets and tax reports to multinational financial statements.

Development of CAIS The development of a CAIS includes five basic phases: planning, analysis, design, implementation, and support. The time period associated with each of these phases can be as short as a few weeks or as long as several years. Planning—project management objectives and techniques: The first phase of systems development is the planning of the project. This entails determination of the scope and objectives of the project, the definition of project responsibilities, control requirements, project phases, project budgets, and project deliverables. Analysis: The analysis phase is used to both determine and document the cost accounting and business processes used by the organization. Such processes are redesigned to take advantage of best practices or of the operating characteristics of modern system solutions. Design: The design phase takes the conceptual results of the analysis phase and develops detailed, specific designs that can be implemented in subsequent phases. It involves the detailed design of all inputs, processing, storage, and outputs of the proposed accounting system. Inputs may be defined using screen layout tools and application generators. Processing can be shown through the use of flowcharts or business process maps that define the system logic, operations, and work flow. Logical data storage designs are identified by modeling the relationships among the organization's resources, events, and agents through diagrams. Also, entity relationship diagram (ERD) modeling is used to document large-scale database relationships. Output designs are documented through the use of a variety of reporting tools such as report writers, data extraction tools, query tools, and on-line analytical processing tools. In addition, all aspects of the design phase can be performed with software tool sets provided by specific software manufacturers.

Implementation: The implementation phase consists of two primary parts: construction and delivery. Construction includes the selection of hardware, software and vendors for the implementation; building and testing the network communication systems; building and testing the databases; writing and testing the new program modifications; and installing and testing the total system from a technical standpoint. Delivery is the process of conducting final system and user acceptance testing; preparing the conversion plan; installing the production database; training the users; and converting all operations to the new system. Support: The support phase has two objectives. The first is to update and maintain the CAIS. This includes fixing problems and updating the system for business and environmental changes. For example, changes in generally accepted accounting principles (GAAP) or tax laws might necessitate changes to conversion or reference tables used for financial reporting. The second objective of support is to continue development by continuously improving the business through adjustments to the CAIS caused by business and environmental changes. These changes might result in future problems, new opportunities, or management or governmental directives requiring additional system modifications.

Cost Accounting Transactions and Documents In a manufacturing company, data entry clerks record in cost accounting information system two transactions, in addition to those recorded in the inventory system. They are the transfer of material, labor and overhead into production, and the transfer of completed production into finished goods inventory. Transfer of Material, Labor, and Overhead: A manufacturing company purchases raw material inventory and adds labor and overhead to it. This produces units of product that are in process. After the units are completed, it sells the finished products. The cost accounting information system accumulates production costs, including those of material, labor, and overhead, in an inventory account called Work in Process, Labor costs include the pay earned by all workers directly involved in the process. Overhead costs include those required for manufacturing but not directly associated with products. Examples are

factory power, factory heating, manufacturing supplies and pay for factory supervisors. The entry recording this transaction is: Work in Process Inventory…………………xxx Raw Material Inventory…………………………………xxx Direct Labor……………………………………………..xxx Factory Overhead……………………………………….xxx

A manufacturing company uses a materials requisition to document the use of raw material in the process and job ticket to record the hours of labor devoted by employees to manufacturing each kind of product. Transfer of Completed Goods: In a manufacturing company, when the production process is completed, workers transfer products to the inventory warehouse. The costs of these products are no longer associated with the units in process. Accountants transfer the cost of completed goods out of the Work in Process account with the entry: Finished Goods Inventory………………...xxx Work in Process Inventory……………………………xxx

Companies determine the amount of this entry in different ways; some use a job costing system, in which they identify products by job or batch number. They accumulate costs for the job, and these constitute the amount of the entry that is recorded when the job is complete. Other companies, for example those that employ assembly lines, use a process costing system. They accumulate costs incurred in the factory and transfer these costs monthly to the Finished Goods account. With either system, a completed production order documents the completion of the products.

Cost Accounting System Reports Cost accounting systems produce control reports and various production cost reports Control Reports: Control reports provide evidence that transactions are not lost or improperly changed during processing. A cost accounting information system typically uses control reports to summarize all jobs, or batches of products, that are added to or removed from the Work in Process

Inventory account. They are also used to summarize the total additions of material and labor to all active jobs. Production Cost Reports: Cost accounting information systems produce several different cost reports. Some disclose these for specific jobs. When a company uses a standard costing system, these reports compare actual costs with those budgeted. If a company uses batch processing system, its CAIS will produce periodic reports showing costs incurred up to the date of printing for all jobs or cost centers. And if it uses an on-line real-time system, employees can display at a terminal or print a report showing current costs recorded for a specific job or cost center by using CAIS of the company. This provides better information for controlling costs than is available from a manual or batch processing system.

Cost Accounting System Records Manual accounting information systems use books, card files, and filing cabinets to record and store accounting data. Computer-based information systems replace books and cards with magnetic media such as disks and tapes. Although the data maintained by each form of technology are similar, computer-based systems use the data to produce more management reports than manual systems can generate. Non-computerized Records: Manufacturing and service companies use a production cost ledger. It serves as a subsidiary ledger for the general ledger Work in Process Inventory account and exists in different forms in various industries. If the company uses a job costing system, this ledger contains one page for each active job. If the company uses a process costing system, it contains one page for each cost center. Computerized Records: Computerized records in a traditional data file system are similar to the non-computerized records in a manual system. They consist of both master files and transaction files. A DBMS maintains the same data and provides the data to application programs as a subschema. However, the DBMS stores these data independently of the subschema.

In manufacturing companies, the cost accounting information system processes those transactions that record the transfer of goods into or out of Work in Process Inventory. The computerized equivalent of a cost ledger in a manual system is a production cost file. Depending on the industry, this may exist in two forms. A company that uses a process costing system establishes a cost center file containing one record for each factory cost center. The cost accounting information system records in this file the costs of material, labor, and allocated factory overhead for the cost center during each month. From this data, the system calculates the cost of the units completed and the cost of the Work in Process Inventory in that cost center at the end of the month. A company that uses a job costing system establishes a job cost file containing one record for each job. In this record, the cost accounting information system posts the costs of material, labor, and factory overhead for the job. Whenever the production control manager issues a new production order, the system creates a record in this file for it and assigns a job number. When production is complete and the products are transferred to the inventory warehouse, the system removes the job cost record. If the company uses a standard cost system, then the cost center record or job cost record must store standard costs as well as actual ones. This allows the system to calculate variances. A batch processing system creates transaction files containing the data found on materials requisitions and job tickets. These transactions files contain records that the system posts to the inventory master, cost center, and job cost files. An on-line real-time system posts these transactions individually when they enter the system. Similar to certain other application systems, a cost accounting information system produces records for the general ledger batch summary file. These records summarize the transfers of material, labor, and overheads costs into work in process inventory. Other records summarize the transfer of completed units into finished goods inventory. The general ledger system posts the records in this transaction file to the general ledger master file during the closing process.

Cost Accounting Transactions Control in CAIS

The transactions that are made to cost accounting information system should also be controlled to detect and prevent errors. Control Procedures: An adequate internal control structure requires proper segregation of duties and good control practices over transactions. Exhibit 2 shows how to implement the four types of control activities in a cost accounting information system. It summarizes the control practices that should be applied to the documents and records just described. EXHIBIT 2: Control Activities for Cost Accounting Transactions in CAIS Activity Transaction authorization

Materials a. Production control manager authorizes, inventory control approves

Security for assets and records

Raw materials a. Initial quantity based on bill of materials b. Released only on receipt of materials requisitions a. Factory and production control b. Inventory records and warehouse c. Cost accounting and general accounting Production order request a. Based on reorder point and reorder quantity, or based on special customer order

Segregation of duties

Adequate documents and records

Production order a. Issued only on the basis b. Pre-numbered Job cost record a. Initiated only on receipt of production order b. Posted daily c. Control total established at months end Inventory record a. Numerical sequence of materials requisitions accounted for b. Control total established at

Labor a. Production control manager authorizes, production supervisor approves

Transfer of Work in Process to Finished Goods a. Production supervisor authorizes and approves Finished goods a. Transfer based on finished goods report

a. Timekeeping and payroll b. Factory and timekeeping c. Cost accounting and general accounting d. Payroll and personnel

a. Inventory records and warehouse b. Cost accounting and general accounting

Labor time a. Allowed time based on operations list b. Job ticket prepared with each assignment c. Data on job ticket and clock card compared

Finished goods report a. Issued as soon as production process is completed b. Pre-numbered

Labor cost a. Updated employee list and pay rates provided by personnel department b. Posted with each pay period c. Control total established at month end General ledger a. Control total for direct labor compared to payroll

Job cost record a. Removed from work in process records only on receipt of finished goods report b. Control total established at month end Inventory record a. Numerical sequence of finished goods report accounted for b. Control total established at month end

month end

total

General ledger a. Cost accounting integrated into financial accounting b. Control total from inventory.

General ledger a. Cost accounting integrated into financial accounting b. Control total from inventory records and cost accounting

Effective segregation of duties requires separating the custody of assets from the recordkeeping regarding them. This means that the employees keeping inventory records should not have access to the warehouse, and those employees performing timekeeping should not aid in preparing paychecks. Separating cost accounting functions from those of general accounting allows cost accountants to become more specialized and helps to prevent errors. Application Controls: Application controls prevent or detect error and irregularities in an application system. They do this during input of data, during processing of data by the computer, and with the outputs from processing. Exhibit 3 shows how a system design team implements input, processing and output controls for the CAIS. These examples include completeness tests, control totals, record counts, and run-to-run controls. EXHIBIT 3: Example Application Controls in CAIS Type Input

Program Validate transactions

Processing

Compute and purge

Output

Control Procedure Completeness tests: Verify that all fields exist in the materials transaction and labor transaction records Control total: Program verifies that total credits to work in progress = total debits to finished goods

Validate and post

Control total: In the on-line real-time system, program verifies that total costs recorded in job cost file – total costs recorded in cost center file

Merge

Record count: Verify that the number of new job records + number of records in the old job cost = number of records in the new job cost file Control totals: Data control group verifies that total cost of jobs on job

Compute and purge

purge control report = total of job cost reports Post to cost records Validate

Run-to-run controls: In batch system, data control group verifies that total on register = total transactions disclosed on error listings

CAIS Transactions and Transactions Processing

Materials Requisition A factory worker completes the requisition and submits it to the inventory warehouse. The inventory clerk accepts the requisition, issues the materials, and records on the requisition the cost of the materials issued. This is the source of the amount of the credit entry in the Raw Material Inventory account during the transfer of materials to Work in Process Inventory account. Illustration 1 shows a materials requisition. Illustration 1 Date Item number

MATERIALS REQUSITION Production order no. Materials to Description Date Issued Quantity

Prepared by

Materials received by

Cost data by

No.6-1054 For office use Cost per unit Amount

Posted to work in process record by

Job Ticket Weekly, employees give their job tickets to a cost accountant, who computes the cost of their labor based on their pay rates. This becomes the amount of the credit entry in the direct labor account during transferring direct labor to Work in Process Inventory account. Illustration 2 shows a job ticket. Periodically, all job tickets are reconciled with time cards used in calculating payroll. Illustration 2 JOB TICKET

No. B0248

Production order no.

Employee name

Time stopped

Employee

Employee no.

Time started

Date

For office use Elapsed time Rate

Foreman approval

Time accounted f or by

Cost computed by

Amount

Posting to labor summary by

Production Order The company uses a job costing system. A cost accountant calculates the amount of entry of finished goods to transfer to Work in Process account. Illustration 3 shows a production order that a cost accountant uses to record and calculate these costs. The manager prepares a production order. A copy of this document, a production cost sheet, goes to cost accounting where a clerk files it in the production ledger. When factory workers need material, they complete a material requisition and exchange it for the material at the inventory warehouse. This document goes to cost accounting, where a clerk records the material on the production cost sheet. As work proceeds on the products, workers complete job tickets. A production supervisor forwards these to cost accounting weekly, where a clerk records labor costs on the production sheet. When the production is complete, a cost accountant computes the unit cost of the goods and records the transfers of materials, labor, overhead, and Work in Process on journal vouchers.

Illustration 3

For: _____________________________ _____________________________ Item: _____________________________

Production order no. A1282 Quantity desired _______

Material Date

Material requisition no.

Direct Labor Amount

Pay period ended

Date received ________________________ Date delivery promised ________________ Date order completed__________________ Quantity produced ____________________

Hours

Cost summary: Standard

Factory overhead Amount

Variance

Amount

Total

Material Labor Factory overhead __________________________ __________________________

CAIS Production Cost Reports As the company uses batch processing system, it produces periodic production cost reports for specific jobs called job summary report. Illustration 4 contains a job cost summary report that summarizes the costs of all active jobs of the company.

Illustration 4

RUN DATE:__________ RUN TIME: __________

PAGE 1 Job Cost Job Cost Summary Report

JOB RANGE ALL TO END NUMBER JOB DESCRIPTION

REVISED DUE PRICE DATE

TOTAL BILLING S

TOTAL PAYMENTS

TOTAL COSTS

TOTAL MARGIN

TOTAL RANGE NUMBER OF JOBS: *** END OF JOB SUMMARY REPORT ***

CAIS Records This company uses computerized CAIS and a DBMS maintains the records. This computerized system establishes a job cost file containing one record for each job as it uses a job costing system. The cost accounting information system records in this file the costs of material, labor, and allocated factory overhead for the cost center during each month. From this data, the system calculates the cost of the units completed and the cost of the Work in Process Inventory in that cost center at the end of the month. Illustration 5 shows its contents. The job number in this record is called PRODUCTIONORDER-NUMBER, which is the primary key field in DBMS. Data entry clerks create a new job cost record for each production order received from the production control manger. The system merges the new job cost records with the existing job cost file. Illustration 5

Contents of a Job Cost Record PRODUCTION-ORDER-NUMBER ITEM-NUMBER ITEM-DECRIPTION ORDER-SOURCE ORDER-QUANTITY ORDER-COMPLETION-DATE LABOR-COST-ACTUAL LABOR-COST-STANDARD MATERIALS-COST-ACTUAL MATERIALS-COST-STANDARD LABOR-HOURS-ACTUAL LABOR-HOURS-STANDARD TOTAL-VARIABLE-OVERHEAD TOTAL-FIXED-OVERHEAD TOTAL-COST SALES-PRICE MARGIN

Illustration 6 summarizes the contents of materials requisition and job ticket records. A materials requisition number uniquely identifies each materials requisition record; a job ticket number uniquely identifies each job ticket. Illustration 6 Materials Requisition Record MATERIALS-REQUISITION-NUMBER TRANSACTION-CODE RESPONSIBILITY-CODE GENERAL-LEDGER-NUMBER PRODUCTION-ORDER-NUMBER DATE ACTUAL-QUANTITY STANDARD-QUANTITY ACTUAL-UNIT-COST STANDARD-UNIT-COST

Job Ticket Record JOB-TICKET-NUMBER TRANSACTION-CODE RESPONSIBILITY-CODE GENERAL-LEDGER-ACCOUNT PRODUCTION-ORDER-NUMBER DATE ACTUAL-HOURS STANDARD-HOURS ACTUAL-RATE STANDARD-RATE

Each day data entry clerks create transactions records from materials requisitions and job tickets and form transaction files. When the production is complete, a factory supervisor records the number of units produced on the production order and sends it to cost accounting. Here clerk execute a

program that calculates unit costs for the job, produces summary records for the general ledger batch summary file, purges the completed job from the job cost file, and prints a job cost report. It also records in the inventory master file the transfer to work in process and finished goods inventory.