Chapter 8

Accounting Information Systems and Business Processes:

Part II
Discussion Questions
8-1.
Four data items that both payroll and personnel functions would use are: employee
number (or SSN), employee name, department, and title. Personnel data would also include data
such as date hired, date of birth, and contact and family data. Payroll data would include pay rate,
job code, and information about deductions.
8-2.
Accounting transactions for payroll processing involve essentially the same steps for
each employee. Gross pay, deductions, and net pay must all be calculated. These calculations
involve a lot of basic math (e.g., footing and cross-footing). Outside service bureaus may be less
expensive for payroll processing. They may also offer some advantages in terms of confidentiality.
8-3.
Data items likely to be added when inputting a new raw materials inventory item
include: merchandise number, description, quantity measure (e.g., yard, pound, pair, etc.), vendor,
and cost. When a worker records time spent on a production line, data to be input include: worker
identification number, time started and stopped, department to be charged, and rate. In both these
examples, there are other data items that an AIS may capture, depending on the nature of the
reports to be output.
8-4.
Nonfinancial information that an AIS might capture about a manufacturing firms
production process would primarily consist of information that would help in evaluating productivity
and performance. For example, information needed for control would be the amount of wasted
materials and machine downtime. Productivity information would relate to the amount of time
needed to produce a product or each product component. AISs tend to focus on dollar
measurements, but in many cases, measurements of quantities are equally important to a
business organization.
8-5.
The basic concepts are a commitment to eliminate waste, simplify procedures and
speed up production. There are five areas that drive lean manufacturing, and they are cost, quality,
delivery, safety, and morale. Non-value added activities (waste) are eliminated through continuous
improvement efforts (http://www.1000ventures.com/business_guide/lean_production_main.html).
The concepts that are at the heart of lean production/manufacturing are total quality management
and continuous improvement.
8-6.
AIM Industries, a metal stamping company, located in Grand Haven, MI has been in
business for over 40 years. Jeanne Duthler had 10 employees when she bought the plant in 1984.
Now there are 37, and last years sales were $5 million. The company is doing the same numbers
dollar wise as they did last year, but showing more profit as a result of lean manufacturing. For
2007, the company expected to increase profitability by 10%.
Lean practices at AIM include:
Consolidating production steps
Having raw materials set up at hand to save time and increase productivity
Moving presses to make production flow smoother
Finishing a product in one space rather than walking to another room for finishing

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For more examples, see Karen Kroll, The Lowdown on Lean Accounting, The Journal of
Accountancy (July 2004), pp. 69-76.
8-7.
For examples, see Karen Kroll, The Lowdown on Lean Accounting, The Journal of
Accountancy (July 2004), pp. 69-76.
8-8.
Both homebuilders and cement companies have information needs related to their
manufacturing processes. The primary difference between these two companies concerns the
need to maintain a job order versus a process costing system. The homebuilder is likely to track
many costs for each individual house built. The cement company will use an AIS that uses input
and output data to calculate costs for specific quantities. This distinction is likely to impact the type
of accounting software a company chooses. Some software packages are specially designed for
either job order or process costing manufacturing environments.
8-9.
This chapter discussed AISs for the professional services, health care, and not-for-profit
industries. Some students feel that the absence of merchandise inventory is the unique
characteristic of service organizations that causes the greatest problem in their AISs (i.e., budget
forecasting of returns-on-assets employed can be difficult). However, the greatest problem may
be the difficulty in measuring the quantity and quality of output, which gives rise to difficulties in
budgetary planning activities, as well as developing preestablished operational quality goals for its
intangible products. These difficulties can cause various negligence suits against service
organizations.
Other vertical market industries include insurance, banking, construction, manufacturing, retail,
hospitality, and government organizations. Each is somewhat unique in its AIS needs. Insurance
has many special issues including co-insurance. The insurance industry is quite diverse and
various kinds of insurers need a variety of accounting information. An important issue for the
insurance industry is fraud. The banking industry must deal with check clearing, credit ratings and
credit histories, as well as information about financial markets. The construction industry is
concerned with projects and has a need for job cost accounting systems and bidding capabilities.
Retailers use POS (point-of-sale) systems to collect a variety of data helpful in analyzing sales.
Manufacturing systems need inventory control systems that allow them to efficiently manage a
variety of inventories. These systems may be quite sophisticated and can include MRP II and/or
ERP capabilities (input technologies might also be used, such as RFIDs and bar codes). The
hospitality industry includes restaurants and hotels and so its information systems vary.
Restaurants are concerned with monitoring costs and perishable inventories. Hotels need
sophisticated reservation systems that can handle various billing rates. AISs for government
entities are built around fund accounting and must comply with governmental accounting
standards. These are just a few of the issues you might discuss relative to these industries.
8-10.
To ensure that a business reengineering effort is successful, managers will want to
champion the effort. This means obtaining a buy in from employees and showing unwavering
commitment and enthusiasm for the project. Honesty is important because many workers equate
reengineering with downsizing. Managers should be realistic about jobs that may be lost and
should prepare to retrain workers or provide career counseling to affected employees.
Management should be conservative in estimating the benefits to accrue from reengineering
efforts, as well as the costs that may be incurred. The cost of reengineering can be high. Several
good reference articles on this topic are:
Change Champions, J. Berk, The Internal Auditor, April 2006, pp.64-68.

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Get Ready: The Rules are Changing, K. Melymuka, Computerworld, June 13, 2005, p. 38.
Are Companies Really Ready for Stretch Targets? C. Chen and K. Jones, Management
Accounting Quarterly, Summer 2005, pp.10-18.

Problems
8-11.
This question requires students to do some outside research. It is useful for students
since it helps them to understand how industries vary in their accounting information needs.
Students might be randomly assigned to investigate health care, insurance, banking, construction,
manufacturing, retail, professional service, hospitality, not-for-profit, or government organizations.
Each of these organizations has very specialized AIS needs. Students may find that accounting
systems for these organizations consist of generic accounting software, supplemented by
spreadsheets and databases. They may also learn that many of the organizations use very
specific programs. For instance, a student who looks at catering firms might learn about catering
software and its special complexities. Students can be sent to doctor's offices, retail stores,
restaurants, and so on to interview employees about the accounting software used. There are
many sources of information about vertical market software programs, including personal
interviews and accounting magazines/journals.
Students might also use an Internet search engine, such as Yahoo or Google, to find sites for many
accounting software programs. Using the terms construction software, health software, and
retail software, students will find many specialized software vendors. You may want to ask
students to print web pages for specific vendors, or to do some analysis of the special features
associated with software for each industry. For example, the following web sites offer information
on software for dentists to manage their practice:
http://www.dentrix.com
http://gbsystems.com/os96i.htm
http://www.dentalexec.com/dental-exec
8-12.
As you might imagine there are a wide variety of choices that students might identify for
this problem. The important point to make with the students is that the solution should match the
company size, needs, and other factors that the supervisor should identify before the search is
conducted. However, the following are a representative sampling of the choices available:

ADP Payroll Software for Microsoft Office Small Business Accounting

(http://www.microsoft.com/smallbusiness/products/office/accounting/payroll-software.mspx)

ZPay Payroll Systems offers technical support, tutorials, and a free 30-day trial
(http://www.zpay.com/)

PenSoft Payroll Solutions is designed for small to mid-sized businesses, and can
process virtually any payroll and related tax requirements.
(http://www.pensoft.com/aboutus.asp)
8-13.
Again, there are a wide variety of choices that students might identify to help CEOs and
CFOs deal with the compliance requirements of the Sarbanes-Oxley Act, specifically the Section
302 and Section 404 reviews. Many business process management solutions are already
available to managers. The following web sites offer information on this type of BPM software:

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http://www.longview.com
http://www.approva.net/products
8-14.
An automated time and billing system could help this firm in several ways. First, by
investing in an in-house time and billing software, it may be possible to significantly reduce
the expense associated with the outside accountant. Since this type of software may be
integrated with a complete AIS, the outside accountant would not need to compile financial
statements. The system would do this automatically.
Another way the automated time and billing system would help is by capturing more detail. A
manual system cannot keep track of so many items without becoming unwieldy. The automated
system can keep track of specific charges by customer and therefore reduce overhead to be
allocated. With an automated system, many indirect costs may become direct costs. For
instance, secretarial work, phone expenses, and copying may all be directly related to a
particular client.
An automated system will be able to analyze data in many different ways. Each lawyer's
billable hours can be computed and compared for various periods, for example. Productivity
reports and reports highlighting budget overruns can be produced easily with an automated
system. What an automated system cannot do is to force lawyers to record their activities on a
timely basis. This is frequently a problem in professional service firms. Some organizations
resolve the problem by holding up paychecks until time sheets are filled out completely and
accurately. Other solutions lie in technology that makes it easier for professionals to record
their time or automatically records the time for individuals.
Lawyers who use computers may record time spent on a client's work in the following way.
Every time the lawyer logs into a particular file, software can keep track of the time the file
is in use. Alternatively, a professional might keep track of time in an on-line organizer. As
the individual begins work on a particular client's file, he or she might enter the time in the
organizer and then enter the time when finished. Online time sheets work the same way.
By assigning a special code to a customer that is used when copying, the amount spent for
copying can be captured directly. Special codes entered into the telephone can help record
phone charges, particularly long distance charges. Use of customer codes when special mail
services are necessary, such as Federal Express, also allows for tracking expenses directly.
Software: A number of companies offer this type of software, such as QuickBooks
(http://quickbooks.intuit.com) and Imagine Time (http://www.imaginetime.com).
Features include: Time & billing (tracks billable time; some programs create reports for individual
billing; stopwatch feature accurately times tasks; billable time can be recorded on an hourly,
contingent, transactional, or user defined fee rate individually or firm-wide); due date monitor;
calendar/contacts; integrated scheduling; client relations manager; credit card processing; and
others.

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Case Analyses
8-15

Public Accounting Firm (Modeling Human Resource Management)

8-16.

Hammaker Manufacturing I (AIS for New Manufacturing Firm)

1. Many companies are turning to an AIS or ERP to help them better manage inventory.
Automated systems are able to react faster than manual ones. An AIS may place automatic
orders when inventories fall below specified levels. Use of e-business or EDI can also help as
electronic orders are faster than the ones that rely on phone or mail systems. Data analysis
and logistics tools can help to manage inventories by considering variables such as lead times,
delivery schedules, routing, safety stocks, and others.
2. There are many data elements that the system may include about inventory items. Vendor,
delivery time, safety stock, lead times, and average order size are a few of them. As an
example of the complexity of configuring a system to manage inventories, consider McDonalds
distributors. McDonalds has nine distributors and hundreds of suppliers. They need frozen
foods and other perishable food items, in addition to restaurant supplies. They must estimate
inventory needs with very tight windows. Further, they need to take into account items such as
promotions (remember when McDonalds ran out of beanie babies?). Delivery times can be
very tight. For example, a store may want frozen goods delivered each Tuesday between noon
and 12:30 p.m. leaving only a hour window. As it happens, McDonalds distributors use JD
Edwards software. The software had to be customized to allow for different fields when
suppliers used EDI versus manual orders, among other data items needed to accommodate
the special needs of this particular business.

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8-17.

Hammaker Manufacturing II (Business Process Reengineering or Outsource)

1. Students might select any of the documentation tools identified in Chapter 3 (flowcharts,
process maps, or one of the graphical tools such as CASE tools). Most likely, HMC would work
on the manufacturing processes or they might limit their efforts to the inventory process first.
By restructuring the manufacturing process or by looking into just-in-time inventory purchasing,
the company might be able to save money and jobs.

2. Students might locate a variety of sources that list reasons for outsourcing. The Introduction
section of Part Two of the textbook, identifies several reasons: global pressures to cut costs, to
reduce capital expenditures, and to become as efficient as possible at core competencies.
Additional reasons that different companies might use are:
access resources that are not available within the company (people, capacity, technology)
a. To access innovative ideas, solutions, expertise of individuals
b. To provide flexibility to meet changing volume requirements to increase or decrease
capacity as needed
c. To access plant and equipment without the time and cost of building
d. To gain quick access to new process, production, or information systems technology
(perhaps too costly or unproven so company is not ready to buy it yet if at all)
To improve speed-to-market of products
To accelerate reengineering benefits
To share risks
To take advantage of offshore capabilities (human capital, lower cost)
To better manage difficult or non-core processes and functions
To enjoy economies of scale (vendor can accomplish process on much larger scale)
Some believe that investors want companies to expense context work (anything that is not
considered a core process of the firm) rather than invest in it. That is, investors would rather
see it on the income statement than the balance sheet, which in effect would free up resources
(employees) to focus on the processes that generate revenue, and increase share value. For
example, if we outsource the accounting function, then we might be able to better use the
talents of the staff accountants in analyzing other business opportunities, analyzing and
improving business processes, etc. So we could use our human capital in endeavors more
directly related to our core processes.
Hammaker might consider a number of these reasons to decide to outsource. Of course, the
first question is: What process (or processes) might Dick want to outsource? Denise does
not know the answer to this question, so the company should study the various processes
discussed in Chapters 4 and 5 to make this determination. Since frequently outsourced
processes are human resources, finance and accounting, customer services, learning services
and training, janitorial services, and information technology, these should probably be
examined first. Once one or several of these processes have been identified as possible
candidates for outsourcing, we would then ask: Which of these processes are core to our
business?
Of course, in the effort to examine each of these processes, Dick might want his employees to
determine where efficiencies may be realized through Business Process Reengineering.
3. We would probably all agree that producing automotive parts is a core business process for
Hammaker. Its the primary thing the company does. Its what the company does to generate
revenue. Its also whatever you do to differentiate your companys products from your
competitors products.
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4. The answer is yes, businesses do sometimes outsource what we would call core processes. A
number of examples may be cited here. Probably the best known example is Nike. This
sneaker company doesnt manufacture any sneakers. The entire production process has been
outsourced. Insurance companies are another example. Several of their core business
processes are risk management, information services, underwriting, claims administration, and
customer service. Both customer service and underwriting are processes that are now
outsourced by some insurance companies.
Why would companies outsource a core process? There is no one answer for every situation,
but most likely firms would do this for the same reasons cited above in the answer to
requirement #2. Sometimes this becomes a strategic alliance with another company (or
companies) so that the company that does the outsourcing can focus on other products or on
other services to generate revenue.
5. Most likely any business decision that displaces employees will have social and legal
implications. Socially responsible organizations are typically admired by the community and
the marketplace, so developing options for the displaced workers is always an important
consideration. If the employees job is deleted, what other jobs might the person do for
Hammaker? Is training required? What if there are no employment choices? Should
Hammaker offer transition-assistance packages to those employees to help them find jobs at
other firms? At what cost? These are all important questions that should be asked.
Regarding legal implications, we need to know if the company employees are represented by a
union. We might have restrictions that are in contracts with the union that would limit what
options we can and cannot exercise. In this case, we know that Hammaker Manufacturing is
not limited by any union contracts. The company might have other contractual obligations that
it needs to honor. For example, is there a mortgage on the manufacturing complex or is there a
long-term lease? The lease contract might have certain penalties for breaking the contract if
the facilities are no longer needed.
6. This is certainly a case that has many facets and interesting possibilities. Unfortunately, we
dont really have enough information at this point to make an informed recommendation, but
many intriguing clues may be found in the case to suggest that some sort of outsourcing would
be advantageous to Hammaker.

8-18.

Hammaker Manufacturing III (Lean Production/Lean Accounting)

1. To adopt lean production, HMC would probably want to focus on the five principles of lean
thinking that are identified in an article in Strategic Finance, May 2007 (How do your
measurements stack up to lean? By Kennedy et al.). These include:
Customer Value: Lean enterprises continually redefine value from a customers standpoint.
This means that HMC would need to get feedback from their customers.
Value Stream: The lean enterprise is organized in value streams. This means that HMC
would need to rethink how they collect data for decision making.
Flow and Pull: In a lean enterprise the customer order triggers or pulls production. This
might represent the biggest change in philosophy for HMC which would be a change from
stockpiling inventory to more of a JIT philosophy.
Empowerment: Lean enterprises employees are empowered with the authority to interpret
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information and to take necessary actions.

Perfection: Lean enterprises seek perfection, defined as 100% quality flowing in an
unbroken flow at the pull of the customer. HMC is already committed to quality products so
this does not represent a change from current thinking.

2. Firms that implement lean production concepts typically benefit in the following ways:
Waste reduction
Production cost reduction
Labor reduction
Inventory reduction
Production capacity increase
Employee involvement and empowerment (multi-skilled workforce)
Higher quality products
More information: http://www.1000ventures.com/presentations/production_systems.html
3. Denise and her financial analysts might gain the following benefits from attending a Lean
Accounting Summit:
Perhaps the most important benefit is the ability to network with professionals at other
organizations who have already implemented lean production concepts to gain insights
from their efforts i.e., lessons learned from those who have already worked with these
concepts
Learn cutting-edge thoughts and ideas
Discover helpful software packages and accounting methods that support lean production
Identify some best practices from companies currently using lean production concepts
Identify companies to benchmark these concepts

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