ASSIGNMENT DATA

What is cost accounting?

Cost Accounting is a system used to record, summarize and report cost information. Cost
information is presented in the form of special reports to the internal users, such as managers in
the company, which is used in deciding how to operate the organization . These decisions
are simply the choices managers make about how their organizations should do things. Some cost
information, is provided to external users, such as shareholders and creditors as part of the
financial statements).
Thus, cost accounting involves the accumulation, recording and reporting of
costs and other quantitative data. The information generated by the Cost
Accounting system is used by an organization for internal purposes and for
external purposes.

Cost accounting involves the techniques for:

1.

determining the costs of products, processes, projects, etc. in order to report the
correct amounts on the financial statements, and

2.

assisting management in making decisions and in the planning and control of an

organization.

For example, cost accounting is used to compute the unit cost of a

manufacturer's products in order to report the cost of inventory on its balance
sheet and the cost of goods sold on its income statement. This is achieved with
techniques such as the allocation of manufacturing overhead costs and through
the use of process costing, operations costing, and job-order costing systems.
Cost accounting assists management by providing analysis of cost behavior,
cost-volume-profit relationships, operational and capital budgeting, standard
costing, variance analyses for costs and revenues, transfer pricing, activitybased costing, and more.
Cost accounting had its roots in manufacturing businesses, but today it extends
to service businesses. For example, a bank will use cost accounting to determine
the cost of processing a customer's check and/or a deposit. This in turn may
provide management with guidance in the pricing of these services.

cost accounting
Definition

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A method of accounting in which all costs incurred in carrying out an activity or

accomplishing a purpose are collected, classified, and recorded. This data is then
summarized and analyzed to arrive at a selling price, or to determine
where savings are possible.
In contrast to financial accounting (which considers money as
the measure of economic performance) cost accounting considers money as
the economic factor of production.
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WHAT IS COST ACCOUNTING

Cost accounting examines the cost structure of a business. It does so by collecting information
about the costs incurred by a company's activities, assigning selected costs to products and
services and other cost objects, and evaluating the efficiency of cost usage. Cost accounting is
mostly concerned with developing an understanding of where a company earns and loses money,
and providing input into decisions to generate profits in the future.

Key activities include:

Defining costs as direct materials, direct labor, fixed overhead, variable overhead, and
period costs

Assisting the engineering and procurement departments in generating standard costs, if a

company uses a standard costing system

Using an allocation methodology to assign all costs except period costs to products and
services and other cost objects

Defining the transfer prices at which components and parts are sold from one subsidiary of
a parent company to another subsidiary

Examining costs incurred in relation to activities conducted, to see if the company is using
its resources effectively

Highlighting any changes in the trend of various costs incurred

Analyzing costs that will change as the result of a business decision

Evaluating the need for capital expenditures

Building a budget model that forecasts changes in costs based on expected activity levels

Determining whether costs can be reduced

Providing cost reports to management, so they can better operate the business

Participating in the calculation of costs that will be required to manufacture a new product
design

Analyzing the system of production to understand where bottlenecks are positioned, and
how they impact the throughput generated by the entire manufacturing system.
There are a multitude of tools that the cost accountant uses to accumulate and interpret costs,
including job costing, process costing, standard costing, activity-based costing,throughput
analysis, and direct costing.
Cost accounting is a source of information for the financial statements, especially in regard to the
valuation of inventory. However, it is not directly involved in the generation of financial statements.

Cost Accounting Systems

A cost accounting system (also called product costing system or costing system) is a framework
used by firms to estimate the cost of their products for profitability analysis, inventory valuation
and cost control.
Estimating the accurate cost of products is critical for profitable operations. A firm must know
which products are profitable and which ones are not, and this can be ascertained only when it has
estimated the correct cost of the product. Further, a product costing system helps in estimating the
closing value of materials inventory, work-in-progress and finished goods inventory for the purpose
of financial statement preparation.
There are two main cost accounting systems: the job order costing and the process costing.
Job order costing is a cost accounting system that accumulates manufacturing costs separately
for each job. It is appropriate for firms that are engaged in production of unique products and
special orders. For example, it is the costing accounting system most appropriate for an event
management company, a niche furniture producer, a producer of very high cost air surveillance
system, etc.
Process costing is a cost accounting system that accumulates manufacturing costs separately for
each process. It is appropriate for products whose production is a process involving different
departments and costs flow from one department to another. For example, it is the cost accounting
system used by oil refineries, chemical producers, etc.
There are situations when a firm uses a combination of features of both job-order costing and
process costing, in what is called hybrid cost accounting system.
In a cost accounting system, cost allocation is carried out based on either traditional costing
system or activity-based costing system.

Traditional costing system calculates a single overhead rate and applies it to each job or in
each department.
Activity-based costing on the other hand, involves calculation of activity rate and application of
overhead costs to products based on their respective activity usage.
Based on whether the fixed manufacturing overheads are charged to products or not, cost
accounting systems have two variations: variable costing and absorption costing. Variable costing
allocates only variable manufacturing overheads to inventories, while absorption costing allocates
both variable and fixed manufacturing overheads to products. Variable costing calculates
contribution margin, while absorption costing calculates the relevant gross profit.
Still further refinement to costing accounting systems include JIT-costing, back-flush costing.
Written by Obaidullah Jan, ACA, CFA

5 essential objectives of Cost Accounting

RABI GUPTA

The main objectives of Cost Accounting are as follows : (i) Ascertainment of cost, (ii)
Determination of selling price, (iii) Cost control and cost reduction, (iv) Ascertaining the profit of
each activity, (v) Assisting management in decision-making.
Ascertainment of Cost
There are two methods of ascertaining costs, viz., Post Costing and Continuous Costing.
Post Costing means, analysis of actual information as recorded in financial books. It is accurate
and is useful in the case of "Cost plus Contracts" where price is to be determined finally on the
basis of actual cost.
Continuous Costing, aims at collecting information about cost as and when the activity takes
place so that as soon as a job is completed the cost of completion would be known. This involves
careful estimates being prepared of overheads. In order to be of any use, costing must be a
continuous process.
Cost ascertained by the above two methods may be compared with the standard costs which are
the target figures already compiled on the basis of experience and experiments.
Determination of selling price
Though the selling price of a product is influenced by market conditions, which are beyond the
control of any business, it is still possible to determine the selling price within the market
constraints. For this purpose, it is necessary to rely upon cost data supplied by Cost Accountants.
Cost control and cost reduction
"The guidance and regulation, by executive action of the cost of operating an undertaking". The
word "guidance" indicates a goal or target to be guided; 'regulation' indicates taking action where
there is a deviation from what is laid down; executive action denotes action to "regulate" must be
initiated by executives i.e. persons responsible for carrying out the job or the operation; and all
this is to be exercised through modern methods of costing in respect of expenses incurred in
operating an undertaking. To exercise cost control, broadly speaking the following steps should
be observed:
(i) Determine clearly the objective, i.e., pre-determine the desired results;
(ii) Measure the actual performance;

(iii) Investigate into the causes of failure to perform according to plan; and
(iv) Institute corrective action.
The target cost and/or targets of performance should be laid down in respect of each department
or operation and these targets should be related to individuals who, by their action, control the
actual and bring them into line with the targets. Actual cost of performance should be measured
in the same manner in which the targets are set up, i.e. if the targets are set up operation-wise,
then the actual costs should also be collected operation-wise and not cost centre or departmentwise as this would make comparison difficult. Cost Reduction, may be defined "as the
achievement of real and permanent reduction in the unit cost of goods manufactured or services
rendered without impairing their suitability for the use intended or diminution in the quality of
the product."
Cost reduction should not be confused with Cost control. Cost saving could be a temporary affair
and may be at the cost of quality. Cost reduction implies the retention of the essential
characteristics and quality of the product and thus it must be confined to permanent and genuine
savings in the cost of manufacture, administration, distribution and selling, brought about by
elimination of wasteful and inessential elements from the design of the product and from the
techniques carried out in connection therewith. In other words, the essential characteristics and
quality of the products are retained through improved methods and techniques and thereby a
permanent reduction in unit cost is achieved. The definition of cost reduction does not, however,
include reduction in expenditure arising from reduction in taxation or similar Government action
or the effect of price agreements.
The three-fold assumptions involved in the definition of cost reduction may be summarized as
under:
(a) There is a saving in unit cost.
(b) Such saving is of permanent nature.
(c) The utility and quality of the goods and services remain unaffected, if not improved.
Ascertaining the profit of each activity
The profit of any activity can be ascertained by matching cost with the revenue of that activity.
The purpose under this step is to determine costing profit or loss of any activity on an objective
basis.
Assisting management in decision making
Decision making is defined as a process of selecting a course of action out of two or more
alternative courses. For making a choice between different courses of action, it is necessary to
make a comparison of the outcomes, which may be arrived under different alternatives. Such a
comparison has only been made possible with the help of Cost Accounting information.

These are the following important objectives of cost accounting:

Ascertainment of Cost: The primary objectives of the cost accounting is to ascertain
cost of each product, process, job, operation or service rendered.
Ascertainment of Profitability: Cost accounting determines the profitability of each
product, process, job, operation or service rendered. The statement of profit or losses and
Balance Sheet also submitted to the management periodically.
Classification of Cost: Cost accounting classifies cost in to different elements such as
materials, laborer and expenses. It has further been divided as direct cost and indirect cost for
cost control and recording.

Control of Cost: Cost accounting aims at controlling cost by setting standards and
compared with the actual, the deviation or variation between two is identified and necessary
steps are taken to control them.
Fixation or Selling Prices: Cost accounting guides management in regard to fixation
of selling prices of the products. It is also helpful for preparing tender and quotations.

Explain Cost Accounting. What are the objectives of doing it?

Cost Accounting is the process of classifying and recording of expenditure incurred during the
operations of the organization in a systematic way, in order to ascertain the cost of a cost center with the
intention to control the cost.

Following are the basic three objectives of Cost Accounting:

1) Ascertainment of Cost and Profitability

2) Cost Control
3) Presentation of information for managerial decision making.

What are the characteristic features of cost accounting?

Following are the characteristic features of Cost Accounting:

1) Cost accounting views the whole organization from the individual component of the organization like
a job, a process etc.
2) Cost accounting aims at ascertaining the profitability of individual components of the organization.
3) It is meant for those people who are part of the decision making process of the organization. Thus, it
is only for internal use.
4) It is not a legal requirement. It is not compulsory to maintain cost accounting records.
5) In Cost Accounting, data is immediately available which facilitates in decision making process.
6) Cost Accounting considers each and every transaction, whether related to past or future which will
have an impact on the business.

For knowing Extraordinary Objectives of Cost Accounting for bottom-line

profit , you should learn the basic fundamental of cost and costing and cost
accounting and after this you can understand What Are the Extraordinary
Objectives of Cost Accounting for bottom-line profit ?
Definition of Cost
Cost may be define as the price of any asset when one company purchases it or it may
the expenses for getting services . So , we can say that cost is total amount which is
sacrificed for getting the goods , services and assets .
In general , cost is calculated on production of goods . Total cost represents cost of raw
material , cost of labour and cost of overheads after adding above we can find total cost
and if we divide total numbers of units , then we can find cost per unit . [ Solution of
Cost Problem link]
Definition of Costing

Costing is technique to determine the cost. It involves the process and method to
classify and analysis of different expenditures.
Definition of Cost Accounting
Cost accounting is science of recording , classify , analyzing and allocation of cost to cost
centers or cost unit . It also include cost control .

Cost accounting = Accounting used { [ determine the cost + control the cost] }
Specific Order Costing
Operation Costing
Job Costing
Contract Costing
Batch Costing
Process Costing
Standard Costing
Cost Budget
Marginal Costing

Objective of Cost accounting

1. To determine the cost
It is the objective of cost accounting that cost accountant has to determine the cost
because, after this cost per unit, price per unit can be calculated and product can be sold
in market.
2. To analyse cost
Under this objective, cost is calculated after analysis which is done in cost sheet by
knowing different elements and writing in specific head.
3. To reduce the Wastage
Cost accountings main objective is to reduce the wastage, Wastage may be in material,
labour cost or overhead cost. Cost accountant makes cost sheet and after this he
compares it with standard cost and with this can find at where wastage are incurred and
after this he can reduce it by making proper control .
4. Provide cost data
There are large no. of previous records of cost of different products are available, if cost

accounting is maintained by accounting department. It can be given to other department

for taking decision. It is the another objective of cost accounting .
5. Ascertain the profitability
We know that cost accounting is to determine cost and with this cost we can find profit
margin.
6. Control the cost
Cost accountings objective is to control the cost . For example Over stocking and under
stocking is loss of money by using cost control techniques in stock maintaining , we can
keep optimum level of stock to control the cost of stock .
7. Advising the management
Cost accountant can advise to management for achieving the objectives of cost
accounting
At what cost , should any asset show in books of company ?
He will suggest how many cost centers are needed for effective control over cost .
He can solve different cost related problems in the company.
Alexander Dusty of President of Global Shop Solutions's thought on Objectives of Cost
Accounting .

"cost accounting provides a richer information base for operations

management. The collection, classification, and determination of cost through
accounting becomes, then, a means by which efficiencies are discovered and
implemented. To the extent that these implementations offer a greater return on
investment, and perhaps a greater dividend to shareholders, cost accounting can
be said to truly help build the bottom-line profit. via

Question One Part B

Cost and Cost Classifications

Cost is a sacrifice of resources to obtain a benefit or any other resource. For example in production
of a car, we sacrifice material, electricity, the value of machine's life (depreciation), and labor
wages etc. Thus these are our costs.
Costs are usually classified as follows:

Product Costs Vs. Period Costs

Product costs are costs assigned to the manufacture of products and recognized for financial
reporting when sold. They include direct materials, direct labor, factory wages, factory
depreciation, etc.
Period costs are on the other hand are all costs other than product costs. They include marketing
costs and administrative costs, etc.

Breakup of Product Costs

The product costs are further classified into:

Direct materials: Represents the cost of the materials that can be identified directly with
the product at reasonable cost. For example, cost of paper in newspaper printing, cost of

Direct labor: Represents the cost of the labor time spent on that product, for example
cost of the time spent by a petroleum engineer on an oil rig, etc.

Manufacturing overhead: Represents all production costs except those for direct labor
and direct materials, for example the cost of an accountant's time in an organization, depreciation
on equipment, electricity, fuel, etc.
The product costs that can be specifically identified with each unit of a product are called direct
product costs. Whereas those which cannot be traced to a specific unit are indirect product costs.
Thus direct material cost and direct labor cost are direct product costs whereas manufacturing
overhead cost is indirect product cost.

Prime Costs Vs. Conversion Costs

Prime costs are the sum of all direct costs such as direct materials, direct labor and any other
direct costs.
Conversion costs are all costs incurred to convert the raw materials to finished products and they
equal the sum of direct labor, other direct costs (other than materials) and manufacturing
overheads.

Cost Classification Diagram

Fixed Costs Vs. Variable Costs

Fixed costs are costs which remain constant within a certain level of output or sales. This certain
limit where fixed costs remain constant regardless of the level of activity is called relevant range.
For example, depreciation on fixed assets, etc.
Variable costs are costs which change with a change in the level of activity. Examples include direct
materials, direct labor, etc.

Sunk Costs Vs. Opportunity Costs

The costs discussed so far are historical costs which means they have been incurred in past and
cannot be avoided by our current decisions. Relevant in this regard is another cost classification,
called sunk costs. Sunk costs are those costs that have been irreversibly incurred or committed;
they may also be termed unrecoverable costs.
In contrast to sunk costs are opportunity costs which are costs of a potential benefit foregone. For
example the opportunity cost of going on a picnic is the money that you would have earned in that
time.
Written by Obaidullah Jan, ACA, CFA

What is the difference between product

costs and period costs?

A manufacturer's product costs are the direct materials, direct labor,

and manufacturing overhead used in making its products. (Manufacturing
overhead is also referred to as factory overhead, indirect manufacturing costs, and
burden.) The product costs of direct materials, direct labor, and manufacturing
overhead are also "inventoriable" costs, since these are the necessary costs of
manufacturing the products.
Period costs are not a necessary part of the manufacturing process. As a result,
period costs cannot be assigned to the products or to the cost of inventory. The period
costs are usually associated with the selling function of the business or its general
administration. The period costs are reported as expenses in the accounting
period in which they 1) best match with revenues, 2) when they expire, or 3) in the
current accounting period. In addition to the selling and general administrative
expenses, most interest expense is a period expense.

cost classification
Definition

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The separation of expenses into different categories. For example, cost classification
in economics might involve categories of
fixed, variable, opportunity, production and sunk costs. On the other
hand, accounting costs can be classified as either direct or indirect for a business.

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Introduction to cost classification

This chapter looks at how coding systems can be devised and used in accounting systems.

The nature and types of cost classification

Costs can be classified in a number of different ways:

By their behaviour. Do they increase as an organisation gets busier or do they tend to

stay the same? This is important when it comes to budgeting as it is essential to be able
to predict how costs are likely to change.

By their location. Where in the organisation are they incurred? For example, costs
incurred in the factory are relevant to working out the cost of production. However, costs
incurred in storing and delivering finished goods are not relevant to production.

By their function. For example costs related to research and development, marketing,
training, manufacturing.

By the person responsible for their control. All costs need to be controlled and there
should be a clearly identified person who is responsible for the control of each cost. For
example, the managers of a branch might be held responsible for the costs incurred
there.

By their type. For example, material, labour, other production expenses, such as the cost
of running machinery.

By their traceability. Are they direct or indirect? Direct costs are closely related and
traceable to each item produced. Indirect costs are not so easy to relate and trace to
each unit of production.

Variable, fixed, semi-variable and stepped fixed

costs
These terms relate to how costs behave as the activity level of an organisation changes.

Variable costs: these are directly proportional to the level of activity.

If the number of units produced doubles, then variable production costs will double also. An
example would be the cost of material used to produce units.
If the number of units sold increases by 20% then variable selling and distribution costs would
increase by 20% also.
On a graph, variable costs would look like:

Fixed costs: constant over a wide range of activity

An example would be the factory rent. It does no matter how many units are made, the rent is
fixed.
On a graph, fixed costs would appear as:

Note that the cost per unit will decrease as the activity level decreases. For example, say that the
rent was $10,000 and 1,000 units were made. Then you could argue that it takes $10 rent to
make a unit ($10,000/1,000).
If, however, 10,000 units were made, the rental cost per unit would be only $1 ($10,000/10,000).
Higher production volumes are making better use of the fixed resource.

Semi-variable costs have a fixed element and a variable element.

An example would be a telephone bill. Usually there is a fixed cost for the line rental then each
minute of telephone calls causes an additional cost.
On a graph, fixed costs would appear as:

Stepped fixed costs: constant over a range of activity then a sudden

increase, then constant again

An example would be the salary of supervisors. One supervisor for up to six workers, two for up
to 12 workers, etc.
On a graph, stepped fixed costs would appear as:

The classification of labour and material costs

There are three types of production expenses:

Material

Labour

Expenses (often known as overheads)

Each can be direct or indirect

Businesses also have non-production overheads. These are costs which have nothing to do with
production such as the accounting department, advertising, distribution, head office costs.

Question One 3

ABC analysis
Definition

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An analysis of a range of items that have different levels of significance and should be
handled or controlled differently. It is a form of Pareto analysis in which the items (such
as activities, customers, documents, inventory items, sales territories) are grouped into three
categories (A, B, and C) in order of their estimated importance. 'A' items are very important,
'B' items are important, 'C' items are marginally important.
For example, the best customers who yield highest revenue are given the 'A' rating, are
usually serviced by the sales manager, and receive most attention. 'B' and 'C'
customers warrant progressively less attention and are serviced accordingly.

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ABC ANALYSIS (INVENTORY)

By Joffrey Collignon, Joannes Vermorel, February 2012
In supply chain, ABC analysis is an inventory categorization method which consists in
dividing items into three categories, A, B and C: A being the most valuable items, C being
the least valuable ones. This method aims to draw managers attention on the critical
few (A-items) and not on the trivial many (C-items).

Prioritization of the management attention

Inventory optimization is critical in order to keep costs under control within the supply
chain. Yet, in order to get the most from management efforts, it is efficient to focus
on items that cost most to the business.
The Pareto principle states that 80% of the overall consumption value is based on
only 20% of total items. In other words, demand is not evenly distributed between
items: top sellers vastly outperform the rest.
The ABC approach states that, when reviewing inventory, a company should rate items
from A to C, basing its ratings on the following rules:

A-items are goods which annual consumption value is the highest. The top

70-80% of the annual consumption value of the company typically accounts for only 1020% of total inventory items.
C-items are, on the contrary, items with the lowest consumption value. The

lower 5% of the annual consumption value typically accounts for 50% of total inventory
items.
B-items are the interclass items, with a medium consumption value. Those
15-25% of annual consumption value typically accounts for 30% of total inventory items.
The annual consumption value is calculated with the formula: (Annual demand) x (item
cost per unit).
Through this categorization, the supply manager can identify inventory hot spots,
and separate them from the rest of the items, especially those that are numerous but not
that profitable.

eCommerce example
The graph above illustrates the yearly sales distribution of a US eCommerce in
2011 for all products that have been sold at least one. Products are ranked starting with
the highest sales volumes. Out of 17000 references:

Top 2500 products (Top 15%) represent 70% of the sales.

Next 4000 products (Next 25%) represent 20% of the sales.

Bottom 10500 products (Bottom 60%) represents 10% of the sales.

This example is fairly close to the canonical Pareto situation.

Inventory management policies

Policies based on ABC analysis leverage the sales imbalance outlined by the Pareto
principle. This implies that each item should receive a weighed
treatment corresponding to its class:

A-items should have tight inventory control, more secured storage areas

and better sales forecasts. Reorders should should be frequent, with weekly or even
daily reorder. Avoiding stock-outs on A-items is a priority.
Reordering C-items is made less frequently. A typically inventory policy for C-

items consist of having only 1 unit on hand, and of reordering only when an actual
purchase is made. This approach leads to stock-out situation after each
purchase which can be an acceptable situation, as the C-items present both low
demand and higher risk of excessive inventory costs. For C-items, the question is not
so much how many units do we store? but rather do we even keep this item in store?
B-items benefit from an intermediate status between A and C. An important
aspect of class B is the monitoringof potential evolution toward class A or, in the
contrary, toward the class C.
Splitting items in A, B and C classes is relatively arbitrary. This grouping only represents a
rather straightforward interpretation of the Pareto principle. In practice, sales volume is
not the only metric that weighs the importance of an item. Margin but also the
impact of a stock-out on the business of the client should also influence the inventory
strategy.

Lokad Gotcha's
Pareto priciple is over a century old and ABC analysis has been around for multiple
decades already. Those concepts provide interesting insights in supply chain, but we
believe, fail to some extent to embrace a more modern approach where software can
automate the bulk of the inventory management. For example, as far demand
forecasting is concerned, tools such as our forecasting engine can indifferently forecast
A, B and C items without any extra effort once the historical data is fed into the system.

ABC Classification / Analysis of Inventory

The ABC classification process is an analysis of a range of objects, such as

finished products ,items lying in inventory or customers into three categories. It's
a system of categorization, with similarities to Pareto analysis, and the method
usually categorizes inventory into three classes with each class having a different
management control associated :
A - outstandingly important; B - of
average importance; C - relatively
unimportant as a basis for a control
scheme. Each category can and
sometimes should be handled in a
different way, with more attention
being devoted to category A, less to
B, and still less to C.
Popularly known as the "80/20" rule
ABC concept is applied to inventory
management as a rule-of-thumb. It
says that about 80% of the Rupee
value, consumption wise, of an
inventory
remains in about 20% of the items.
This rule , in general , applies well and is frequently used by inventory managers to put
their efforts where greatest benefits , in terms of cost reduction as well as maintaining a
smooth availability of stock, are attained.
The ABC concept is derived from the Pareto's 80/20 rule curve. It is also known as the
80-20 concept. Here, Rupee / Dollar value of each individual inventory item is calculated
on annual consumption basis.

Thus, applied in the context of inventory, it's a determination of the relative ratios
between the number of items and the currency value of the items purchased / consumed
on a repetitive basis :

10-20% of the items ('A' class) account for 70-80% of the consumption

the next 15-25% ('B' class) account for 10-20% of the consumption and

the balance 65-75% ('C' class) account for 5-10% of the consumption

'A' class items are closely monitored because of the value involved (70-80% !).

High value (A), Low value (C) , intermediary value (B)

20% of the items account for 80% of total inventory consumption value
(Qty consumed X unit rate)

Specific items on which efforts can be concentrated profitably

Provides a sound basis on which to allocate funds and time

A,B & C , all have a purchasing / storage policy - "A", most critically
reviewed , "B" little less while "C" still less with greater results.

ABC Analysis is the basis for material management processes and helps define
how stock is managed. It can form the basis of various activity including leading
plans on alternative stocking arrangements (consignment stock), reorder
calculations and can help determine at what intervals inventory checks are
carried out (for example A class items may be required to be checked more
frequently than c class stores
Inventory Control Application: The ABC classification system is to grouping
items according to annual issue value, (in terms of money), in an attempt to
identify the small number of items that will account for most of the issue value
and that are the most important ones to control for effective inventory
management. The emphasis is on putting effort where it will have the most effect.
All the items of inventories are put in three categories, as below :
A Items : These Items are seen to be of
high Rupee consumption volume. "A"
items usually include 10-20% of all
inventory items, and account for 50-60%
of the total Rupee consumption volume.
B Items : "B" items are those that are

30-40% of all inventory items, and

account for 30-40% of the total Rupee
consumption volume of the inventory.
These are important, but not critical, and
don't pose sourcing difficulties.
C Items : "C" items account for 40-50%
of all inventory items, but only 5-10% of
the total
Rupee consumption volume. Characteristically, these are standard, low-cost and
readily available items. ABC classifications allow the inventory manager to assign
priorities for inventory control. Strict control needs to be kept on A and B items,
with preferably low safety stock level. Taking a lenient view, the C class items can
be maintained with looser control and with high safety stock level. The ABC
concept puts emphasis on the fact that every item of inventory is critical and has
the potential of affecting ,adversely, production, or sales to a customer or
operations. The categorization helps in better control on A and B items.
In addition to other management procedures, ABC classifications can be used to
design cycle counting schemes. For example, A items may be counted 3 times
per year, B items 1 to 2 times, and C items only once, or not at all.
Suggested policy guidelines for A , B & C classes of items
A items (High cons. Val)

B items (Moderate cons.Val)

Very strict cons. control

No or very low safety stock
Phased delivery (Weekly)
Weekly control report
Maximum follow up
As many sources as
possible
Accurate forecasts
Central purchasing
/storage
Max.efforts to control LT
To be handled by
Sr.officers

C item (Low cons. Val)

Moderate control
Low safety stock
Once in three months
Monthly control report
Periodic follow up
Two or more reliable

Loose control
High safety stock
Once in 6 months
Quarterly report
Exceptional
Two reliable

Estimates on past data

Combination purchasing

Rough estimate
Decentralised

Moderate
Middle level

Min.clerical efforts
Can be delegated

Must read these......

Do you know ...........
Basics of an Inventory
Basics Of Production Inventory Management
What is ABC Analysis of inventory ?
How to Carry out an ABC analysis ?
What is the Role of inventory management ?
Key Performance Indicators of inventory
Calculating Safety Stock
Optimization of Inventory
Process (steps) in inventory management
What's Supply Chain Inventory Management ?
What is XYZ Analysis of inventory ?
Learn AX control of inventory

'A' class items are also usually 'Fast

Moving' items of inventory?
And
'C' class items are also usually 'Slow /
Non Moving' items of inventory ?
For effective management, you need
to classify 'A' items into further A1, A2
classes for better identification of and
control on 'A' class inventory as also
on B1,B2 of B class items as some of
them need more focus than other B
class items.

Finally, ABC Analysis is an intrinsic part of Materials Management and is the

categorization of products into groups sorted by their spend volume. Given
Pareto analysis a typical ABC analysis might find that 20% of a products equate
for 70% of the value, these are termed As and are the more expensive group
(often comprised of complex assets) . Cheap consumable (and often easily
replaceable items) fall into the C class.

How to do ABC Analysis ? Learn here....

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Online Job Links

Value Analysis

ABC Analysis

MRP System

Automatic
Procurement System

XYZ Analysis

Advantages and Disadvantages of ABC Analysis Inventory

by Alia Nikolakopulos, Demand Media
Activity Based Costing, or ABC, is a method of allocating overhead and direct expenses
related to the most important activities of the company first. This process allows business
owners and managers an opportunity to better define the areas of manufacturing or
sales that generate the most profit for the company. Inventory analyzed under the ABC
method is classified in order of profitability to the company. Class A inventory accounts
for 80 percent of revenue, class B inventory for 15 percent of revenue and class C
inventory for 5 percent of revenue.

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Better Control of High-Priority Inventory
ABC inventory analysis places tighter and more frequent controls on high-priority
inventory. High-priority inventory, or class A inventory, is the class of inventory that
customers request most often. In manufacturing, class A inventory also can include the
items most often used in the production of goods. Because Class A inventory is directly
linked to the success of the company, it is important to constantly monitor the demand
for it and ensure stock levels match that demand. With ABC analysis, your company can
use its resources to prioritize control of high-priority inventory over inventory that has a
lower impact on your bottom line.

More Efficient Cycle Counts

Under the ABC inventory analysis method, you can allocate your resources more
efficiently during cycle counts. A cycle count is the process of counting only certain items
on scheduled dates. The frequency of your cycle counts and the items you choose to
include depends on how often your inventory fluctuates. Once inventory is organized by
class, you can focus regular cycle counts on class A inventory. Depending on your needs,
it may be necessary to count class B inventory as infrequently as twice per year and
class C inventory only once per year. The ABC analysis method saves time and labor
counting only the inventory required by the cycle for the class of inventory versus
counting all inventory items each cycle.

Advantages and Disadvantages of ABC

Analysis Inventory
by Cam Merritt, Demand Media

(Photo: RL Productions/Digital Vision/Getty Images )

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The Advantages of Reducing Inventory

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The items in your inventory are not all the same, and it would be inefficient to treat them the
same. It would be expensive and time-consuming, for example, to apply the same strict inventory

control procedures to a 3-cent part as to a $3,000 component. "ABC" inventory analysis can help
you manage inventory more efficiently, but it's not without its potential pitfalls.
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The ABC Process

In the ABC method of analysis, you place all of the items in your inventory into one of three
categories: A, B and C. Category A includes critical items -- those with the highest value to your
company. They tend to be more expensive and have higher margins. Category C items are the
least critical. They tend to be cheaper, low-margin and "nuts and bolts" items. Category B items
are those in the middle.

Boosting Efficiency
The point of ABC analysis, and the prime advantage of the method, is efficiency -- it allows you to
put tight inventory controls only on those items that really need them. Items in Category A are
carefully monitored and handled to prevent theft, damage or waste. Usage and demand are
closely tracked so that the company orders enough of these items to meet its day-to-day needs
without getting stuck with excess inventory that might go obsolete. At the other end of the
spectrum, Category C items get minimal controls. The company may order large quantities on a
regular schedule, review usage maybe once a year and not even bother to track individual
pieces. The Category B items in the middle get standard controls: periodic (but not constant)
reviews and occasional usage forecasting.

Identifying Critical Items

The heavy lifting in ABC analysis really comes at the start, when you sort the items into the three
categories. This part of the process forces you to take a hard look at your inventory and
operations and then identify where your money really comes from, which is an additional benefit
of the system. ABC analysis rests on the Pareto principle, a rule of thumb in economics that
holds that about 80 percent of the "output" in any situation comes from about 20 percent of the
"input." For inventory management, the numbers may not be precisely 80-20, but the same idea
applies. Category A might make up, say, 5 percent of all items in inventory but represent 75
percent of your inventory's value to your company. Category B might be 20 percent of items and
10 percent of value, and Category C might be 75 percent of items but only 15 percent of value.

Undersupply and Oversupply

One downside to ABC analysis is that it's based on dollar values rather on the number of items
that cycle through inventory, so there is a risk of running out of low-value, but nevertheless
essential, Category B or C items. A small manufacturer might keep close track of the high-value
Category A components going into its products. But if it runs out of Category C screws because
those screws are so cheap that no one was paying attention to them, production will halt. The
opposite can happen, too -- excess Category B or C items may pile up in inventory if they are
regularly reordered without a review.

Risk of Loss
Just because B and C items aren't as valuable as A items, that doesn't mean they have no value.
If the ABC method leads a company to pay too little attention to its inventory of these lower-value
items, the risk of loss rises. Excess stocks are always in danger of damage or obsolescence, and
large amounts of mostly unmonitored and uncounted merchandise are a ripe target for theft.
Sponsored Links

The A.B.C. Method of Inventory

Control System: Advantages and
Disadvantages
by Smriti Chand Inventory Control

The A.B.C. Method of Inventory Control System:

Advantages and Disadvantages!
In order to exercise effective control over materials, A.B.C. (Always
Better Control) method is of immense use. Under this method
materials are classified into three categories in accordance with
their respective values. Group A constitutes costly items which may
be only 10 to 20% of the total items but account for about 50% of
the total value of the stores.
A greater degree of control is exercised to preserve these items.
Group B consists of items which constitutes 20 to 30% of the store
items and represent about 30% of the total value of stores.

A reasonable degree of care may be taken in order to control these

items. In the last category i.e. group Q about 70 to 80% of the
items is covered costing about 20% of the total value. This can be
referred to as residuary category. A routine type of care may be
taken in the case of third category.
This method is also known as stock control according to value
method, selective value approach and proportional parts value
approach.
If this method is applied with care, it ensures considerable
reduction in the storage expenses and it is also greatly helpful in
preserving costly items.
Advantages of A.B.C. method of Inventory Control:

It ensures control over the costly items in which a large amount of capital is invested.

It helps in developing scientific method of controlling inventories. Clerical costs are

considerably reduced and stock is maintained at optimum level.

It helps in maintaining stock turnover rate at comparatively higher level through

scientific control of inventories.

It ensures considerable reduction in the storage expenses. It results in stock carrying

stock.

It helps in maintaining enough safety stock for C category of items.

The following graph demonstrates ABC inventory classification.

Disadvantages:
This analysis suffers from the following drawbacks:
1. This technique can be successfully employed only, if there is
proper standardisation of materials in the store.
2. A good system of codification of materials should be in operation
for the success of this analysis.
3. The analysis is based on monetary value of the items in use.
Other important factors one ignored.
In spite of the above mentioned limitations, the ABC analysis is very
popular method of inventory control. It is an effective instrument in
reducing the cost of materials in the store house.

idle time
Definition

Add to FlashcardsSave to FavoritesSee Examples

Non-productive time (during which an employee is still paid)

of employees or machines, or both, due to work stoppage from any cause.
Also called waiting time, allowed time, or downtime.

Read more: http://www.businessdictionary.com/definition/idle-time.html#ixzz3UqGF8i1A

Meaning and Definition of Idle Time In Cost Accounting.

Generally idle time means that time for which the employer pays, but from which he obtains no
production. Otherwise it is the difference between the time for which workers are paid but the
workers do not work. So it is a loss to the organisation. It can be minimized but, cannot be
controlled during idle time, the workers remain due and contribute nothing towards production.
It is the difference between actual hour and actual hour worked. There are two types of idle
times:
1.

Normal idle time: The normal idle time is that idle time which cannot be fully avoided
but effective effort should be made to reduce it.
2.
Abnormal idle time: Abnormal idle time arises due to various causes which can be
avoided. Abnormal idle time can be avoided if proper precautions are taken. Thus the factors
which are responsible for controlling and avoiding idle time must be taken care of.
Normal idle time is permitted but abnormal idle time should be avoided.

What is Idle time and its accounting

treatment?
By Hasaan Fazal on March 28, 2013
Idle time is the simply the time for which labour has been paid for but no work
has been done. Whereas inefficiency arises when labour is actually engaged on
production but output is not as expected or simply not 100%.
Idle time may arise out of normal or abnormal situations and it is the situation that will
tell whether it is a normal idle time (unavoidable idle time) or abnormal idle time
(avoidable idle time).
Normal idle time, as the name is suggesting arises due to such reasons which are
considered:

either part of the process e.g. in paint industry labour has to wait for certain time
to apply the second layer of paint over the first one

or simply out of control of the entity e.g. delays in receiving orders of raw
material due to war etc

On the other hand abnormal idle time is such idle time that given the situation is
considered controllable and should have been avoided if due care was taken. In other
words abnormal idle is most of the time result of mismanagement.
Accounting treatment of idle time depends on whether:

idle time is normal or abnormal

idle time relates to direct or indirect labour

If normal idle time relates to direct labour then it will form part of direct labour
cost or simply direct cost. Usually while planning for labour, provision for normal idle
time is made in the labour cost budget.
If normal idle time relates to indirect labour then it will considered as
overheads cost and will be absorbed in the cost of units produced or services provided as
indirect cost.
However, in case of abnormal idle time irrespective of the labour i.e. whether it relates
to direct or indirect labour, abnormal idle time will be reported separately as a loss in the
profit and loss account and will not form part of the cost of units produced or services
rendered. In other words costs related to abnormal idle time are neither direct
production cost or indirect production costs they are simply losses to be written of as
expenses in the income statement of the entity.

Treatment of idle time, overtime premium, and fringe benefit

costs
Posted in: Classifications of cost
10

In addition to direct labor costs, there are other costs associated with direct labor workers. These are
idle time, overtime premium and fringe benefits that are provided to workers. These are not part of
direct labor cost. The following paragraphs explain the computation and accounting treatment of idle
time, overtime premium and labor fringe benefits:

Treatment of idle time:

Idle time means the amount of time the workers remain idle in a normal working day. The
idle time is usually caused by a sudden fault in machine or equipment, power failure, lack of
orders for the product, inefficient work scheduling, defective materials and shortage of raw
materials etc. The cost associated with idle time is treated as indirect labor cost and should,
therefore, be included in manufacturing overhead cost. For example, the normal weekly
working hours of a worker are 48 and he is paid @ $8 per hour. If he remains idle for 6 hours

due to power failure, then the cost of 42 hours would be treated as direct labor cost and the
cost of 6 hours (idle time) would be treated as indirect labor cost and included in
manufacturing overhead cost.
Direct labor (42 hours $8)

$336

Manufacturing overhead (6 hours $8)

$48 Idle time

Total cost

$384

Treatment of overtime premium:

Overtime premium is the amount that is paid, for the overtime worked, in excess of the normal wage
rate. Like idle time, overtime premium is also treated as indirect labor cost and included in
manufacturing overhead cost. For example, a worker normally works for 48 hours per week @ $8 per
hour. In a particular week, if he works for 52 hours and company pays him $12 for every hour worked
in excess of 48 hours, the allocation of the labor cost of the worker would be made as follows:
Direct labor (52 hours $8)
Manufacturing overhead (4 hours $4)
Total cost

$416
$16Overtime premium

$432

The amount of $16 is overtime premium and is a part of manufacturing overhead cost.

Treatment of labor fringe benefits:

Fringe benefits are benefits that employers provide to employees in addition to normal salaries or
wages. Examples of fringe benefits are hospitalization, insurance programs, retirement plans, paid
holidays and stock options etc. Most of the companies treat labor fringe benefits as indirect labor and,
therefore, include them in manufacturing overhead costs.
A few firms treat direct labor related fringe benefits as addition direct labor cost that is considered a
more superior practice.
The above information has been summarized below:

What is Idle Time?

>> AUGUST 24, 2010

To know about idle time in cost accounting is very important for reducing the cost of
labor because after increasing idle time, production cost will increase. First of all we
understand what is idle time. Taking some rest after hard work in factory is not idle time
but waste the time with any production in factory is idle time due to delay of material or
any laziness of laborers or any other reasons. Employer has to pay for this waste time
also. So, idle time is loss of business. We can divide idle time into two main parts.
1.

Normal

Idle

Time

This is that waste of time which we can not stop because it is normal and producer has
to

pay

a)

Walking

b)

laborers

for

time

this

from

Consuming

idle

one

time

to

time.

For

department to
start

example

other

any

job

department.
in

factory.

c) Consuming time for fulfilling personal needs like drinking of water, refreshment and
rest.
d)

Consuming

Treatment

time

of

to

the

set

Cost

of

the

Normal

machines.
Idle

Time

a) It must be charged as indirect expenses in factory. For example, if a laborer gets Rs.
1 per hr and he spend 8 hrs in factory and his total wage will be Rs. 8 but he utilized his
productive time 7 hrs, then direct labor cost will be 8 hrs X Rs. 1 = Rs. 8 and 1hr will be
overhead of idle time and Rs. 1 per hr idle time will be written in factory expenses in cost
sheet.
b)

We

can

If

labor

also

increase

works

the

cost

hrs,

for

of

he

labor

rate.

with

Rs.

gets

following

per

way

hr

If a labor works for 7 hrs, he gets = Rs. 1 / 8 X 7 = Rs. 1.14 per hr

Now

labor

2.
This

cost

will

increase

Abnormal
is

that

wastage

of

time

by

0.14

Idle
which

we

can

stop

paise
Time

by

good

supervision.

a)

waste

of

time

due

b)

to

inefficiency

of

Power

c)

Delay

of

d)

supply

failure
of

Strike

Treatment

of

the

material

to

and
cost

engineers.

of

Abnormal

factory
lockout

Idle

Time

Wage for abnormal idle time is loss of business and it must be transferred to costing
profit and loss account.

Types Of Idle Time

Idle time may be of under mentioned types:

a.

Normal idle time:

Normal idle time is idle time which cannot be avoided & on the
basis of the nature of industry it remains within the normal limit.

Examples are:

b.

i.

loss of time between the factory gate to the department due to personal needs, tea
breaks, machine adjustments etc.; idle time normally arising between finishing of one
job & beginning of the next job.

ii.

Loss of time on account of waiting for instructions, job, material, tools, power etc. & due
to breakdown of machinery for short period, load shedding for short period, adverse
atmosphere etc.

Abnormal idle time:

Abnormal idle time is that idle time, the occurrence of which is not normal & because of some
unexpected reasons such occurrence takes place. Thus idle time arising due to machinery
breakdown, long time failure of power or load shedding, sudden strike or lockout are abnormal
idle time.

c.

Concealed idle time:

Idle time which arises due to worker's employment in unnecessary work only for the
purpose of keeping them engaged & also idle time which arises when upper category
workers are employed under lower category work. These types of idle time apparently

look like working time, but since there is involvement of loss of wages, they mean
idle time of concealed nature.
Idle time, from the point of view of controllability, may be classified into two groups:Controllable idle time
Controllable idle time is that idle time, the cause of which can be controlled. For exampleidle time arising from waiting for instructions can be controlled provided instructions are
prepared in advance & have been given to the workers without delay.

Uncontrollable idle time

Idle time, the cause of which cannot be controlled is known as uncontrollable idle time. For
example: When the factory has to depend on outside supply of power, idle time will be there
due to load shedding, power utilization control etc.

Uncontrollable shall not remain forever as such. For example-If own power house can be
installed by the factory, idle time arising due to load shedding can be avoided.
Treatment in Cost Accounts:Normal idle time cost arising out of the causes like, time lost between the factory gate to the
department due to personal needs, tea breaks, machine adjustments etc.; idle time normally arising
between finishing of one job and beginning of the next job etc. should be treated by neglect, i.e.,
recoding of such time separately is not required, but they should be allowed to remain merged in the
job orders or standing order numbers.

Normal idle time cost arising out of the causes like, loss of time on account of waiting for
instructions, job, material, tools, power etc. and due to breakdown of machinery for short period, load
shedding for short period, adverse atmosphere etc., should be debited to factory overhead account.
Abnormal idle time costs should not be treated as an element of cost but should be charged to costing
profit & loss account.
According to circumstances, concealed idle time costs should be treated as overhead or direct wage,
but since cost per unit increased undesirably because of such idle time cost, care must be taken for
their prevention by using suitable measures.
Control:
Idle time can be prevented or reduced considerably by advanced production planning, timely
procurement of stores, proper maintenance of tools & machinery, assurance of supply of power from own
power plant, advance planning for machine utilization & personnel etc. For causes which are not within
the control of the organization, idle time, in spite of best efforts shall arise to some extent.
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What is idle time? How are its causes classified?

Idle time indicates that time for which wages are paid to the workers but no production is obtained during that
time. Following are the causes of idle time:
- Due to machine break down
- Power failures
- Waiting for instructions
- Waiting for tools or raw materials to start the production
- Economic Causes includes: Seasonal, cyclical or industrial nature.
- Administrative decisions are also a big cause of idle time.

What is idle time and what are its causes?

In: Engineering, Definitions [Edit categories]

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Answer:
Generally idle time means that time for which the employer pays, but from which he obtains no
production. Otherwise it is the difference between the time for which workers are paid but the
workers do not work. So it is a loss to the organisation. It can be minimized but, cannot be
controlled during idle time, the workers remain due and contribute nothing towards production. It
is the difference between actual hour and actual hour worked. There are two types of idle
times: Normal idle time: The normal idle time is that idle time which cannot be fully avoided but
effective effort should be made to reduce it. Abnormal idle time: Abnormal idle time arises due
to various causes which can be avoided. Abnormal idle time can be avoided if proper precautions
are taken. Thus the factors which are responsible for controlling and avoiding idle time must be
taken care of.
Normal idle time is permitted but abnormal idle time should be avoided.
ANSWER:

Idle time indicates that time for which wages are paid to the workers but no production is obtained
during that time. Following are the causes of idle time:
- Due to machine break down
- Power failures
- Waiting for instructions
- Waiting for tools or raw materials to start the production
- Economic Causes includes: Seasonal, cyclical or industrial nature
this is unproductive time spent by employees due to factors beyond their control

Read
more: http://www.answers.com/Q/What_is_idle_time_and_what_are_its_causes#ixzz3UqPzyrrp

Causes of Lost & Idle

Time in Manufacturing
There are many causes of lost & idle time in
manufacturing . Eliminating those causes means to
lower cycle times and increase production
throughput.
by Ian Johnson

Every manufacturer knows that to decrease costs

means to identify and eliminate causes of excessive lost
& idle time in manufacturing. However, many companies
underestimate the impact of lost & idle time and its
overall consequences of increased cycle times, higher
costs and reduced production capacity.
When companies look to increase gross profit, it must
first start by analyzing work flow and processes inside
the company. When it comes to work flow in
manufacturing, its mostly those small periods of lost
time that are often ignored. After all, how bad are a
couple of extra minutes?

Understand Incidence of Lost & Idle

Time in Manufacturing
By itself, a minute here and there isnt serious. However,
its the incidence of this lost time that must be
eliminated. Companies must become aware of the
incidence of this lost time in a given production work
cell. Optimizing production work cell efficiency means to
understand that a couple of minutes here and there, in
each and every work cell, simply adds up over time and
creates backlogs in production. Soon, those minutes
turn into lost hours during the week and total lost
production days during the year.

Understand the Causes of Lost &

Idle Time in Manufacturing
There are many root causes of lost time. In many cases,
it could be as simple as a poor bill of materials or
assembly drawing, unclear work instructions, lack of the
proper production jig, stock out on material and parts
needed to perform the work task, and even machine
downtime. There are many causes of lost time and
companies must become accustomed to identifying
them and quantifying their costs.

Poor Bill of Materials & Assembly Drawings: Its

amazing to think this is an issue in manufacturing, but
it is. In fact, a large amount of lost time is simply
because of poor assembly instructions and a lack of
clarity on bill of materials parts lists.

Unclear Work Instructions: While many may

assume this is the same as poor quality bill of
materials, there is a distinct difference. In this case, it
amounts to poor training and the lack of properly
assigning work to the abilities of the operator.

Lack of Production Jig: Production jigs are

simply blocks and assembly tools that allow operators
to not only reduce assembly and manufacturing cycle
times, but also ensure quality by having a working
envelope to produce consistent parts.

Material Stock-Outs: This occurs quite often.

Every company wants to mitigate its inventory costs,
but when cutting back on parts and raw materials in
inventory impacts production, then any inventory
savings is eroded with increased costs of lost time.

Machine Downtime: Many companies take a

make-do mentality to machine down time. The idea
is that the costs of repairing the machine are too
expensive relative to the lost time it causes. What

companies lack is the ability to properly ascertain the

costs of that lost time in terms of its impact on gross
profit.
Its relatively easy to identify lost time in manufacturing.
The key is to be able to put a dollar value figure on that
lost time and put plans in motion to eliminate it
altogether. Lower production cycle times means lower
costs and increased production throughput. Eliminating
lost time at every opportunity, regardless of how small,
will improve production and product gross profit.
Tags:

Downtime

Production and manufacturing

Data about budgets

What are the budget types in accounting?

January 14, 2012

Learn about different budget types and classification in accounting.

1. Main budget types

Budgeting is performed for planning and control purposes. Budgeting allows identifying and setting
business objectives and goals. There is a variety of budgets. The most common budget types include
the following:

master budget

operating budget

financial budget

cash budget

static budget

flexible budget

capital expenditure budget, and

program budget
Budgets can be classified as following:

activity-based budget

add-on budget

bracket budget

continuous (rolling) budget

incremental budget

strategic budget

stretch budget

supplemental budget, and

target budget
These budget types are briefly explained below.
Master budget is the set of financial and operating budgets for a specific accounting period, usually
the next fiscal or calendar year. Master budget is prepared quarterly or annually. The format of the
master budget varies with business nature and size. Operating budgets are used in daily operations
and are the basis for financial budgets. Operating budgets include the following: sales, production,
direct materials, direct labor, overhead, selling and administrative expenses, cost of goods
manufactured, and cost of goods sold. Financial budgets include a budgeted income statement and
balance sheet, cash budget, and capital expenditures budget. Budgeted income statement and
budgeted balance sheet are also called pro forma financial statements.
Operating budget is the budget for income statement elements such as revenues and expenses.
Financial budget is the budget for balance sheet elements. In other words, financial budget deals
with the expected assets, liabilities, and stockholders equity.
Cash budget is the budget for expected cash inflows and outflows during the specific period of time.
Cash budget consists of four sections: receipts, disbursements, cash surplus or deficit, and financing
section. The receipts section lists the beginning cash balance, cash collections from customers, and
other receipts. The disbursements section shows all cash payments (characterized by purpose). The
cash surplus (deficit) section provides the difference between cash receipts and cash disbursements.
Finally, the financing section examines in detail expected borrowings and repayments during the
period.
Static (fixed) budget is the budget at the expected capacity level. Because static budget is fixed, it is
usually used by stable companies. Also, this type of budget can be used by departments with
operations independent from capacity levels. For example, operations of administrative and general
marketing departments usually does not depend on the level of production and sales and is rather
determined by the departments management; as the result, static budget can be used by such
departments.
Flexible (expense) budget is the budget at the actual capacity level. Because flexible budget is
dynamic, it is commonly used by companies. Flexible budget is adjusted to the actual activity of the
company. It can be easily prepared using a computerized spreadsheet (e.g., Excel). At first, the

relevant activity range is determined for the coming period. Next, costs that are expected be incurred
over the relevant range are analyzed. These costs are then separated based on their cost behavior:
fixed, variable, or mixed. Finally, the flexible budget for variable costs at different points throughout the
relevant range is prepared. In other words, flexible budget matches expenses to specific revenue
levels or activity levels. For example, utility costs can be tied to the number of machines in operation.
Capital expenditure budget is the budget for expected investments in capital assets and long-term
projects. It is usually prepared for 3 to 10 years. Investments in capital assets include purchasing fixed
assets such as plant, land, buildings, machinery, equipment, and mineral resources. Long-term
projects might be undertaken to develop new products, expand existing product lines, or reduce costs.
Sometimes a capital project committee is created to overlook capital budgeting processes. Such a
committee is typically separate from the budgeting committee.
Program budget is the budget for a specific program or activity such as marketing, research and
development, public relations, training, engineering, etc. Usually program budgets are created for
product lines. As program budgets are typically created for activities of multiple departments, such
budgets cannot be used for control purposes.

Activity-based budget is the budget for the costs of individual activities. In activity-based budgeting,
all costs are allocated to cost centers and then are assigned to activities. Products or customers are
allocated the costs based on the amount of activity they consume. Activity-based budgets ensure cost
reduction and performance improvement. As activity-based budgeting requires a new budgeting
model, it requires careful planning and implementation.
Add-on budget is the budget based on the previous years budgets adjusted for current information.
For example, add-on budgets can be adjusted for new levels of inflation, employee wage rates, or
new requirements.
Bracket budget is the budget at higher and lower levels than the base estimate. Essentially bracket
budgets are contingency expense plans for downside risks. For example, such budgets allow
management to estimate an impact of decreased sales on earnings. In bracket budgeting,
management identifies potential problems and acceptable profit. In this way, management can test
different alternatives and improve planning process.
Continuous (rolling) budget is the budget revised on a regular basis. As the period ends, a new
budget period is added. For example, the budget can be regularly extended for another month (or
quarter) at the end of each month (or quarter). As the result, continuous budgets are based on the
most recent information and ensure proper planning and performance. The drawback of continuous
budgets is that they require continuous planning.
Incremental budget is the budget adjusted for incremental increases in terms of dollars or
percentages. Historically incremental budgeting has been the most common budgeting method. It is
based on the priors year expenditures. In incremental budgeting, each budget line receives the same
increment (e.g., 10% percent) increase or decrease for the next budget cycle. Projects can also be
segregated in multiple increments, and each increment is then allocated labor and other resources to
complete the project. Incremental budget are easy to prepare. However, they have multiple
drawbacks. Incremental budgets are based on aggregate data. They might not match companys
targets. Incremental budgets can potentially cause over- or underfunding of certain areas.
Strategic budget is the budget adjusted for strategic planning. Strategic budgets are used under
conditions of uncertainty or instability. Strategic budgeting is the mixture between the top-down

approach when top management allocates resources and the bottom-up approach when lower
management participates in resource allocation.
Stretch budget is the budget based on sales and marketing forecasts that are higher than estimates.
Stretch budgets are not used for estimating expenditures; expenses are estimated at the budget
target. Stretch budgets can be too subjective or complex.
Supplemental budget is the budget for an area that is not included in the main (base) budget.
Target budget is the budget that matches major expenditures to companys goals.

Cost Volume Profit Analysis

Cost-Volume-Profit (CVP) analysis is a managerial accounting technique that is concerned with the

It deals with how

operating profit is affected by changes in variable costs, fixed costs, selling price
per unit and the sales mix of two or more different products.
effect of sales volume and product costs on operating profit of a business.

CVP analysis has following assumptions:

1.

All cost can be categorized as variable or fixed.

2.

Sales price per unit, variable cost per unit and total fixed cost are constant.

3.

All units produced are sold.

Where the problem involves mixed costs, they must be split into their fixed and variable
component by High-Low Method, Scatter Plot Method or Regression Method.

CVP Analysis Formula

The basic formula used in CVP Analysis is derived from profit equation:
px = vx + FC + Profit
In the above formula,
p is price per unit;
v is variable cost per unit;
x are total number of units produced and sold; and
FC is total fixed cost
Besides the above formula, CVP analysis also makes use of following concepts:

Contribution Margin (CM)

Contribution Margin (CM) is equal to the difference between total sales (S) and total variable cost
or, in other words, it is the amount by which sales exceed total variable costs (VC). In order to
make profit the contribution margin of a business must exceed its total fixed costs. In short:
CM = S VC

Unit Contribution Margin (Unit CM)

Contribution Margin can also be calculated per unit which is called Unit Contribution Margin. It is
the excess of sales price per unit (p) over variable cost per unit (v). Thus:
Unit CM = p v

Contribution Margin Ratio (CM Ratio)

Contribution Margin Ratio is calculated by dividing contribution margin by total sales or unit CM by
price per unit.

ACCA
COST-VOLUME-PROFIT ANALYSIS

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Cost-volume-profit analysis looks primarily at the effects of differing
levels of activity on the financial results of a business
In any business, or, indeed, in life in general, hindsight is a beautiful thing. If only
we could look into a crystal ball and find out exactly how many customers were
going to buy our product, we would be able to make perfect business decisions
and maximise profits.
Take a restaurant, for example. If the owners knew exactly how many customers
would come in each evening and the number and type of meals that they would
order, they could ensure that staffing levels were exactly accurate and no waste
occurred in the kitchen. The reality is, of course, that decisions such as staffing
and food purchases have to be made on the basis of estimates, with these
estimates being based on past experience.
While management accounting information cant really help much with the
crystal ball, it can be of use in providing the answers to questions about the
consequences of different courses of action. One of the most important decisions
that needs to be made before any business even starts is how much do we need
to sell in order to break-even? By break-even we mean simply covering all our
costs without making a profit.
This type of analysis is known as cost-volume-profit analysis (CVP analysis) and
the purpose of this article is to cover some of the straight forward calculations
and graphs required for this part of the Paper F5 syllabus, while also considering
the assumptions which underlie any such analysis.
THE OBJECTIVE OF CVP ANALYSIS

CVP analysis looks primarily at the effects of differing levels of activity on the financial
results of a business. The reason for the particular focus on sales volume is because, in the
short-run, sales price, and the cost of materials and labour, are usually known with a degree
of accuracy. Sales volume, however, is not usually so predictable and therefore, in the shortrun, profitability often hinges upon it. For example, Company A may know that the sales
price for product x in a particular year is going to be in the region of $50 and its variable
costs are approximately $30.
It can, therefore, say with some degree of certainty that the contribution per unit (sales price
less variable costs) is $20. Company A may also have fixed costs of $200,000 per annum,
which again, are fairly easy to predict. However, when we ask the question: Will the
company make a profit in that year?, the answer is We dont know. We dont know because
we dont know the sales volume for the year. However, we can work out how many sales the
business needs to make in order to make a profit and this is where CVP analysis begins.
Methods for calculating the break-even point
The break-even point is when total revenues and total costs are equal, that is, there is no profit but also no loss
made. There are three methods for ascertaining this break-even point:
1 The equation method
A little bit of simple maths can help us answer numerous different cost-volume-profit questions.
We know that total revenues are found by multiplying unit selling price (USP) by quantity sold (Q). Also, total
costs are made up firstly of total fixed costs (FC) and secondly by variable costs (VC). Total variable costs are
found by multiplying unit variable cost (UVC) by total quantity (Q). Any excess of total revenue over total costs will
give rise to profit (P). By putting this information into a simple equation, we come up with a method of answering
CVP type questions. This is done below continuing with the example of Company A above.
Total revenue total variable costs total fixed costs = Profit
(USP x Q) (UVC x Q) FC = P (50Q) (30Q) 200,000 = P
Note: total fixed costs are used rather than unit fixed costs since unit fixed costs will vary depending on the level
of output.
It would, therefore, be inappropriate to use a unit fixed cost since this would vary depending on output. Sales
price and variable costs, on the other hand, are assumed to remain constant for all levels of output in the shortrun, and, therefore, unit costs are appropriate.
Continuing with our equation, we now set P to zero in order to find out how many items we need to sell in order to
make no profit, ie to break even:
(50Q) (30Q) 200,000 = 0
20Q 200,000 = 0
20Q = 200,000
Q = 10,000 units.

The equation has given us our answer. If Company A sells less than 10,000 units, it will make
a loss; if it sells exactly 10,000 units, it will break-even, and if it sells more than 10,000 units,
it will make a profit.
2 The contribution margin method
This second approach uses a little bit of algebra to rewrite our equation above, concentrating on the use of the
contribution margin. The contribution margin is equal to total revenue less total variable costs. Alternatively, the
unit contribution margin (UCM) is the unit selling price (USP) less the unit variable cost (UVC). Hence, the
formula from our mathematical method above is manipulated in the following way:

(USP x Q) (UVC x Q) FC = P
(USP UVC) x Q = FC + P
UCM x Q = FC + P
Q = FC + P
UCM
So, if P=0 (because we want to find the break-even point), then we would simply take our
fixed costs and divide them by our unit contribution margin. We often see the unit
contribution margin referred to as the contribution per unit.
Applying this approach to Company A again:
UCM = 20, FC = 200,000 and P = 0.
Q = FC
UCM
Q = 200,000
20
Therefore Q = 10,000 units
The contribution margin method uses a little bit of algebra to rewrite our equation above,
concentrating on the use of the contribution margin.
3 The graphical method
With the graphical method, the total costs and total revenue lines are plotted on a graph; $ is shown on the y axis
and units are shown on the x axis. The point where the total cost and revenue lines intersect is the break-even
point. The amount of profit or loss at different output levels is represented by the distance between the total cost
and total revenue lines. Figure 1 shows a typical break-even chart for Company A. The gap between the fixed
costs and the total costs line represents variable costs.
Alternatively, a contribution graph could be drawn. While this is not specifically covered by the Paper F5 syllabus,
it is still useful to see it. This is very similar to a break-even chart, the only difference being that instead of
showing a fixed cost line, a variable cost line is shown instead.
Hence, it is the difference between the variable cost line and the total cost line that represents fixed costs.The
advantage of this is that it emphasises contribution as it is represented by the gap between the total revenue and
the variable cost lines. This is shown for Company A in Figure 2.
Finally, a profitvolume graph could be drawn, which emphasises the impact of volume changes on profit (Figure
3). This is key to the Paper F5 syllabus and is discussed in more detail later in this article.

ASCERTAINING THE SALES VOLUME REQUIRED TO ACHIEVE A TARGET PROFIT

As well as ascertaining the break-even point, there are other routine calculations that it is just as important to
understand. For example, a business may want to know how many items it must sell in order to attain a target
profit.
Example 1
Company A wants to achieve a target profit of $300,000. The sales volume necessary in order to achieve this
profit can be ascertained using any of the three methods outlined above. If the equation method is used, the profit
of $300,000 is put into the equation rather than the profit of $0:
(50Q) (30Q) 200,000 = 300,000
20Q 200,000 = 300,000
20Q = 500,000
Q = 25,000 units.
Alternatively, the contribution method can be used:
UCM = 20, FC = 200,000 and P = 300,000.
Q = FC + P

UCM
Q = 200,000 + 300,000
20
Therefore Q = 25,000 units.
Finally, the answer can be read from the graph, although this method becomes clumsier than the previous two.
The profit will be $300,000 where the gap between the total revenue and total cost line is $300,000, since the gap
represents profit (after the break-even point) or loss (before the break-even point.)
A contribution graph shows the difference between the variable cost line and the total cost line that represents
fixed costs. An advantage of this is that it emphasises contribution as it is represented by the gap between the
total revenue and variable cost lines.
This is not a quick enough method to use in an exam so it is not recommended.
Margin of safety
The margin of safety indicates by how much sales can decrease before a loss occurs, ie it is the excess of
budgeted revenues over break-even revenues. Using Company A as an example, lets assume that budgeted
sales are 20,000 units. The margin of safety can be found, in units, as follows:
Budgeted sales break-even sales = 20,000 10,000 = 10,000 units.
Alternatively, as is often the case, it may be calculated as a percentage:
Budgeted sales break-even sales/budgeted sales.
In Company As case, it will be 10,000/20,000 x 100 = 50%.
Finally, it could be calculated in terms of $ sales revenue as follows:
Budgeted sales break-even sales x selling price = 10,000 x $50 = $500,000.
Contribution to sales ratio
It is often useful in single product situations, and essential in multi-product situations, to ascertain how much each
$ sold actually contributes towards the fixed costs. This calculation is known as the contribution to sales or C/S
ratio. It is found in single product situations by either simply dividing the total contribution by the total sales
revenue, or by dividing the unit contribution margin (otherwise known as contribution per unit) by the selling price:
For Company A: $20/$50 = 0.4
In multi-product situations, a weighted average C/S ratio is calculated by using the formula:
Total contribution/total sales revenue
This weighted average C/S ratio can then be used to find CVP information such as break-even point, margin of
safety etc.
Example 2
As well as producing product x described above, Company A also begins producing product y. The following
information is available for both products:

Product x

Product y

Sales price

$50

$60

Variable cost

$30

$45

Contribuion per unit

$20

$15

Budgeted sales (units)

20,000

10,000

The weighted average C/S ratio can be once again calculated by dividing the total expected contribution by the
total expected sales:
(20,000 x $20) + (10,000 x $15) /(20,000 x $50) + (10,000 x $60) = 34.375%
The C/S ratio is useful in its own right as it tells us what percentage each $ of sales revenue contributes towards
fixed costs; it is also invaluable in helping us to quickly calculate the break-even point in $ sales revenue, or the
sales revenue required to generate a target profit. The break-even point can now be calculated this way for
Company A:
Fixed costs / contribution to sales ratio = $200,000/0.34375 = $581,819 of sales revenue.
To achieve a target profit of $300,000:
Fixed costs + required profit /contribution to sales ratio = $200,000 + $300,000/0.34375 = $1,454,546.
Of course, such calculations provide only estimated information because they assume that products x and y are
sold in a constant mix of 2x to 1y. In reality, this constant mix is unlikely to exist and, at times, more y may be sold
than x. Such changes in the mix throughout a period, even if the overall mix for the period is 2:1, will lead to the
actual break-even point being different than anticipated. This point is touched upon again later in this article.
Contribution to sales ratio is often useful in single product situations, and essential in multi-product situations, to
ascertain how much each $ sold actually contributes towards the fixed costs.
Table 3: Figure 3 continued

Product x

Product y

Sales price

$50

$60

Variable cosr

$30

$45

Contribution per unit

$20

$15

Budgeted sales (units)

20,000

10,000

C/S ratios

0.4

0.25

Weighted average C/S ratio

Product ranking (most profitable
first)

Contribution
$'000

Product
(Fixed costs)

0.34375

Cumulative
profit/loss
$'000
(200)

Cumulative
revenue
$'000

Revenue
$'000
0

Product

Contribution
$'000

Cumulative
profit/loss
$'000

Revenue
$'000

Cumulative
revenue
$'000

400

200

1,000,000

1,000,000

150

350

600,000

1,600,000

In order to draw a multi-product/volume graph it is necessary to work out the C/S ratio of each product being sold.

MULTI-PRODUCT PROFITVOLUME CHARTS

When discussing graphical methods for establishing the break-even point, we considered break-even charts and
contribution graphs. These could also be drawn for a company selling multiple products, such as Company A in
our example. The one type of graph that hasnt yet been discussed is a profitvolume graph. This is slightly
different from the others in that it focuses purely on showing a profit/loss line and doesnt separately show the
cost and revenue lines. In a multi-product environment, it is common to actually show two lines on the graph: one
straight line, where a constant mix between the products is assumed; and one bow-shaped line, where it is
assumed that the company sells its most profitable product first and then its next most profitable product, and so
on. In order to draw the graph, it is therefore necessary to work out the C/S ratio of each product being sold
before ranking the products in order of profitability. It is easy here for Company A, since only two products are
being produced, and so it is useful to draw a quick table (prevents mistakes in the exam hall) in order to ascertain
each of the points that need to be plotted on the graph in order to show the profit/loss lines.
See Table 3.
The graph can then be drawn (Figure 3), showing cumulative sales on the x axis and cumulative profit/loss on
the y axis. It can be observed from the graph that, when the company sells its most profitable product first (x) it
breaks even earlier than when it sells products in a constant mix. The break-even point is the point where each
line cuts the x axis.

LIMITATIONS OF COST-VOLUME-PROFIT ANALYSIS

Cost-volume-profit analysis is invaluable in demonstrating the effect on an organisation that changes in

volume (in particular), costs and selling prices, have on profit. However, its use is limited because it is based
on the following assumptions: Either a single product is being sold or, if there are multiple products, these
are sold in a constant mix. We have considered this above in Figure 3 and seen that if the constance mix
assumption changes, so does the break-even point.

All other variables, apart from volume, remain constant, ie volume is the only factor that causes
revenues and costs to change. In reality, this assumption may not hold true as, for example, economies of
scale may be achieved as volumes increase. Similarly, if there is a change in sales mix, revenues will
change. Furthermore, it is often found that if sales volumes are to increase, sales price must fall. These are
only a few reasons why the assumption may not hold true; there are many others.

The total cost and total revenue functions are linear. This is only likely to hold a short-run, restricted level
of activity.

Costs can be divided into a component that is fixed and a component that is variable. In reality, some
costs may be semi-fixed, such as telephone charges, whereby there may be a fixed monthly rental charge
and a variable charge for calls made.

Fixed costs remain constant over the 'relevant range' - levels in activity in which the business has
experience and can therefore perform a degree of accurate analysis. It will either have operated at those
activity levels before or studied them carefully so that it can, for example, make accurate predictions of fixed
costs in that range.

Profits are calculated on a variable cost basis or, if absorption costing is used, it is assumed that
production volumes are equal to sales volumes.

Written by a member of the Paper F5 examining team

Last updated: 25 Feb 2015

COST-VOLUME-PROFIT ANALYSIS
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Cost-volume-profit analysis looks primarily at the effects of differing levels of activity on the financial results of a
business
In any business, or, indeed, in life in general, hindsight is a beautiful thing. If only we could look into a crystal ball and find
out exactly how many customers were going to buy our product, we would be able to make perfect business decisions and
maximise profits.
Take a restaurant, for example. If the owners knew exactly how many customers would come in each evening and the
number and type of meals that they would order, they could ensure that staffing levels were exactly accurate and no waste
occurred in the kitchen. The reality is, of course, that decisions such as staffing and food purchases have to be made on the
basis of estimates, with these estimates being based on past experience.
While management accounting information cant really help much with the crystal ball, it can be of use in providing the
answers to questions about the consequences of different courses of action. One of the most important decisions that needs to
be made before any business even starts is how much do we need to sell in order to break-even? By break-even we mean
simply covering all our costs without making a profit.
This type of analysis is known as cost-volume-profit analysis (CVP analysis) and the purpose of this article is to cover
some of the straight forward calculations and graphs required for this part of the Paper F5 syllabus, while also considering
the assumptions which underlie any such analysis.

THE OBJECTIVE OF CVP ANALYSIS

CVP analysis looks primarily at the effects of differing levels of activity on the financial results of a business. The reason for
the particular focus on sales volume is because, in the short-run, sales price, and the cost of materials and labour, are usually
known with a degree of accuracy. Sales volume, however, is not usually so predictable and therefore, in the short-run,
profitability often hinges upon it. For example, Company A may know that the sales price for product x in a particular year
is going to be in the region of $50 and its variable costs are approximately $30.
It can, therefore, say with some degree of certainty that the contribution per unit (sales price less variable costs) is $20.
Company A may also have fixed costs of $200,000 per annum, which again, are fairly easy to predict. However, when we

ask the question: Will the company make a profit in that year?, the answer is We dont know. We dont know because we
dont know the sales volume for the year. However, we can work out how many sales the business needs to make in order to
make a profit and this is where CVP analysis begins.
Methods for calculating the break-even point
The break-even point is when total revenues and total costs are equal, that is, there is no profit but also no loss made. There
are three methods for ascertaining this break-even point:
1 The equation method
A little bit of simple maths can help us answer numerous different cost-volume-profit questions.
We know that total revenues are found by multiplying unit selling price (USP) by quantity sold (Q). Also, total costs are
made up firstly of total fixed costs (FC) and secondly by variable costs (VC). Total variable costs are found by multiplying
unit variable cost (UVC) by total quantity (Q). Any excess of total revenue over total costs will give rise to profit (P). By
putting this information into a simple equation, we come up with a method of answering CVP type questions. This is done
below continuing with the example of Company A above.
Total revenue total variable costs total fixed costs = Profit
(USP x Q) (UVC x Q) FC = P (50Q) (30Q) 200,000 = P
Note: total fixed costs are used rather than unit fixed costs since unit fixed costs will vary depending on the level of output.
It would, therefore, be inappropriate to use a unit fixed cost since this would vary depending on output. Sales price and
variable costs, on the other hand, are assumed to remain constant for all levels of output in the short-run, and, therefore, unit
costs are appropriate.
Continuing with our equation, we now set P to zero in order to find out how many items we need to sell in order to make no
profit, ie to break even:
(50Q) (30Q) 200,000 = 0
20Q 200,000 = 0
20Q = 200,000
Q = 10,000 units.
The equation has given us our answer. If Company A sells less than 10,000 units, it will make a loss; if it sells exactly 10,000
units, it will break-even, and if it sells more than 10,000 units, it will make a profit.
2 The contribution margin method
This second approach uses a little bit of algebra to rewrite our equation above, concentrating on the use of the contribution
margin. The contribution margin is equal to total revenue less total variable costs. Alternatively, the unit contribution margin
(UCM) is the unit selling price (USP) less the unit variable cost (UVC). Hence, the formula from our mathematical method
above is manipulated in the following way:
(USP x Q) (UVC x Q) FC = P
(USP UVC) x Q = FC + P
UCM x Q = FC + P
Q = FC + P
UCM
So, if P=0 (because we want to find the break-even point), then we would simply take our fixed costs and divide them by our
unit contribution margin. We often see the unit contribution margin referred to as the contribution per unit.
Applying this approach to Company A again:
UCM = 20, FC = 200,000 and P = 0.
Q = FC
UCM
Q = 200,000
20
Therefore Q = 10,000 units
The contribution margin method uses a little bit of algebra to rewrite our equation above, concentrating on the use of the
contribution margin.
3 The graphical method
With the graphical method, the total costs and total revenue lines are plotted on a graph; $ is shown on the y axis and units
are shown on the x axis. The point where the total cost and revenue lines intersect is the break-even point. The amount of
profit or loss at different output levels is represented by the distance between the total cost and total revenue lines. Figure
1 shows a typical break-even chart for Company A. The gap between the fixed costs and the total costs line represents
variable costs.
Alternatively, a contribution graph could be drawn. While this is not specifically covered by the Paper F5 syllabus, it is still
useful to see it. This is very similar to a break-even chart, the only difference being that instead of showing a fixed cost line,
a variable cost line is shown instead.

Hence, it is the difference between the variable cost line and the total cost line that represents fixed costs.The advantage of
this is that it emphasises contribution as it is represented by the gap between the total revenue and the variable cost lines.
This is shown for Company A in Figure 2.
Finally, a profitvolume graph could be drawn, which emphasises the impact of volume changes on profit (Figure 3). This is
key to the Paper F5 syllabus and is discussed in more detail later in this article.

ASCERTAINING THE SALES VOLUME REQUIRED TO ACHIEVE A TARGET PROFIT

As well as ascertaining the break-even point, there are other routine calculations that it is just as important to understand. For
example, a business may want to know how many items it must sell in order to attain a target profit.
Example 1
Company A wants to achieve a target profit of $300,000. The sales volume necessary in order to achieve this profit can be
ascertained using any of the three methods outlined above. If the equation method is used, the profit of $300,000 is put into
the equation rather than the profit of $0:
(50Q) (30Q) 200,000 = 300,000
20Q 200,000 = 300,000
20Q = 500,000
Q = 25,000 units.
Alternatively, the contribution method can be used:
UCM = 20, FC = 200,000 and P = 300,000.
Q = FC + P
UCM
Q = 200,000 + 300,000
20
Therefore Q = 25,000 units.
Finally, the answer can be read from the graph, although this method becomes clumsier than the previous two. The profit
will be $300,000 where the gap between the total revenue and total cost line is $300,000, since the gap represents profit
(after the break-even point) or loss (before the break-even point.)
A contribution graph shows the difference between the variable cost line and the total cost line that represents fixed costs. An
advantage of this is that it emphasises contribution as it is represented by the gap between the total revenue and variable cost
lines.
This is not a quick enough method to use in an exam so it is not recommended.
Margin of safety
The margin of safety indicates by how much sales can decrease before a loss occurs, ie it is the excess of budgeted revenues
over break-even revenues. Using Company A as an example, lets assume that budgeted sales are 20,000 units. The margin of
safety can be found, in units, as follows:
Budgeted sales break-even sales = 20,000 10,000 = 10,000 units.
Alternatively, as is often the case, it may be calculated as a percentage:
Budgeted sales break-even sales/budgeted sales.
In Company As case, it will be 10,000/20,000 x 100 = 50%.
Finally, it could be calculated in terms of $ sales revenue as follows:
Budgeted sales break-even sales x selling price = 10,000 x $50 = $500,000.
Contribution to sales ratio
It is often useful in single product situations, and essential in multi-product situations, to ascertain how much each $ sold
actually contributes towards the fixed costs. This calculation is known as the contribution to sales or C/S ratio. It is found in
single product situations by either simply dividing the total contribution by the total sales revenue, or by dividing the unit
contribution margin (otherwise known as contribution per unit) by the selling price:
For Company A: $20/$50 = 0.4
In multi-product situations, a weighted average C/S ratio is calculated by using the formula:
Total contribution/total sales revenue
This weighted average C/S ratio can then be used to find CVP information such as break-even point, margin of safety etc.
Example 2
As well as producing product x described above, Company A also begins producing product y. The following information is
available for both products:

Product x

Product y

Sales price

$50

$60

Variable cost

$30

$45

Contribuion per unit

$20

$15

Budgeted sales (units)

20,000

10,000

The weighted average C/S ratio can be once again calculated by dividing the total expected contribution by the total
expected sales:
(20,000 x $20) + (10,000 x $15) /(20,000 x $50) + (10,000 x $60) = 34.375%
The C/S ratio is useful in its own right as it tells us what percentage each $ of sales revenue contributes towards fixed costs;
it is also invaluable in helping us to quickly calculate the break-even point in $ sales revenue, or the sales revenue required to
generate a target profit. The break-even point can now be calculated this way for Company A:
Fixed costs / contribution to sales ratio = $200,000/0.34375 = $581,819 of sales revenue.
To achieve a target profit of $300,000:
Fixed costs + required profit /contribution to sales ratio = $200,000 + $300,000/0.34375 = $1,454,546.
Of course, such calculations provide only estimated information because they assume that products x and y are sold in a
constant mix of 2x to 1y. In reality, this constant mix is unlikely to exist and, at times, more y may be sold than x. Such
changes in the mix throughout a period, even if the overall mix for the period is 2:1, will lead to the actual break-even point
being different than anticipated. This point is touched upon again later in this article.
Contribution to sales ratio is often useful in single product situations, and essential in multi-product situations, to ascertain
how much each $ sold actually contributes towards the fixed costs.
Table 3: Figure 3 continued

Product x

Product y

Sales price

$50

$60

Variable cosr

$30

$45

Contribution per unit

$20

$15

Budgeted sales (units)

20,000

10,000

C/S ratios

0.4

0.25

Weighted average C/S ratio

Product ranking (most profitable
first)

0.34375

Contribution
$'000

Product

Cumulative
profit/loss
$'000

Cumulative
revenue
$'000

Revenue
$'000

(Fixed costs)

(200)

400

200

1,000,000

1,000,000

150

350

600,000

1,600,000

In order to draw a multi-product/volume graph it is necessary to work out the C/S ratio of each product being sold.

MULTI-PRODUCT PROFITVOLUME CHARTS

When discussing graphical methods for establishing the break-even point, we considered break-even charts and contribution
graphs. These could also be drawn for a company selling multiple products, such as Company A in our example. The one
type of graph that hasnt yet been discussed is a profitvolume graph. This is slightly different from the others in that it
focuses purely on showing a profit/loss line and doesnt separately show the cost and revenue lines. In a multi-product
environment, it is common to actually show two lines on the graph: one straight line, where a constant mix between the
products is assumed; and one bow-shaped line, where it is assumed that the company sells its most profitable product first
and then its next most profitable product, and so on. In order to draw the graph, it is therefore necessary to work out the C/S
ratio of each product being sold before ranking the products in order of profitability. It is easy here for Company A, since
only two products are being produced, and so it is useful to draw a quick table (prevents mistakes in the exam hall) in order
to ascertain each of the points that need to be plotted on the graph in order to show the profit/loss lines.
See Table 3.
The graph can then be drawn (Figure 3), showing cumulative sales on the x axis and cumulative profit/loss on the y axis. It
can be observed from the graph that, when the company sells its most profitable product first (x) it breaks even earlier than
when it sells products in a constant mix. The break-even point is the point where each line cuts the x axis.

LIMITATIONS OF COST-VOLUME-PROFIT ANALYSIS

Cost-volume-profit analysis is invaluable in demonstrating the effect on an organisation that changes in volume (in
particular), costs and selling prices, have on profit. However, its use is limited because it is based on the following
assumptions: Either a single product is being sold or, if there are multiple products, these are sold in a constant mix.
We have considered this above in Figure 3 and seen that if the constance mix assumption changes, so does the breakeven point.

All other variables, apart from volume, remain constant, ie volume is the only factor that causes revenues and costs
to change. In reality, this assumption may not hold true as, for example, economies of scale may be achieved as
volumes increase. Similarly, if there is a change in sales mix, revenues will change. Furthermore, it is often found that
if sales volumes are to increase, sales price must fall. These are only a few reasons why the assumption may not hold
true; there are many others.

The total cost and total revenue functions are linear. This is only likely to hold a short-run, restricted level of
activity.

Costs can be divided into a component that is fixed and a component that is variable. In reality, some costs may be
semi-fixed, such as telephone charges, whereby there may be a fixed monthly rental charge and a variable charge for
calls made.

Fixed costs remain constant over the 'relevant range' - levels in activity in which the business has experience and
can therefore perform a degree of accurate analysis. It will either have operated at those activity levels before or
studied them carefully so that it can, for example, make accurate predictions of fixed costs in that range.

Profits are calculated on a variable cost basis or, if absorption costing is used, it is assumed that production
volumes are equal to sales volumes.

Cost-Volume-Profit Analysis

Cost-volume-profit (CVP) analysis is used to determine how changes in costs

and volume affect a company's operating income and net income. In performing this
analysis, there are several assumptions made, including:

Sales price per unit is constant.

Variable costs per unit are constant.

Total fixed costs are constant.

Everything produced is sold.

Costs are only affected because activity changes.

If a company sells more than one product, they are sold in the same mix.

CVP analysis requires that all the company's costs, including manufacturing,
selling, and administrative costs, be identified as variable or fixed.
Contribution margin and contribution margin ratio
Key calculations when using CVP analysis are the contribution margin and
the contribution margin ratio. The contribution margin represents the
amount of income or profit the company made before deducting its fixed costs.
Said another way, it is the amount of sales dollars available to cover (or
contribute to) fixed costs. When calculated as a ratio, it is the percent of sales
dollars available to cover fixed costs. Once fixed costs are covered, the next
dollar of sales results in the company having income.
The contribution margin is sales revenue minus all variable costs. It may be
calculated using dollars or on a per unit basis. If The Three M's, Inc., has sales
of $750,000 and total variable costs of $450,000, its contribution margin is
$300,000. Assuming the company sold 250,000 units during the year, the per
unit sales price is $3 and the total variable cost per unit is $1.80. The
contribution margin per unit is $1.20. The contribution margin ratio is 40%. It
can be calculated using either the contribution margin in dollars or the
contribution margin per unit. To calculate the contribution margin ratio, the
contribution margin is divided by the sales or revenues amount.

Break-even point
The breakeven point represents the level of sales where net income equals
zero. In other words, the point where sales revenue equals total variable costs
plus total fixed costs, and contribution margin equals fixed costs. Using the
previous information and given that the company has fixed costs of $300,000,
the breakeven income statement shows zero net income.

This income statement format is known as the contribution margin income

statement and is used for internal reporting only.
The $1.80 per unit or $450,000 of variable costs represent all variable costs
including costs classified as manufacturing costs, selling expenses, and
administrative expenses. Similarly, the fixed costs
manufacturing, selling, and administrative fixed costs.

represent

total

Breakeven point in dollars. The breakeven point in sales dollars of

$750,000 is calculated by dividing total fixed costs of $300,000 by the
contribution margin ratio of 40%.

Another way to calculate breakeven sales dollars is to use the mathematical

equation.

In this equation, the variable costs are stated as a percent of sales. If a unit
has a $3.00 selling price and variable costs of $1.80, variable costs as a
percent of sales is 60% ($1.80 $3.00). Using fixed costs of $300,000, the
breakeven equation is shown below.

The last calculation using the mathematical equation is the same as the break
even sales formula using the fixed costs and the contribution margin ratio
previously discussed in this chapter.
Breakeven point in units. The breakeven point in units of 250,000 is
calculated by dividing fixed costs of $300,000 by contribution margin per unit
of $1.20.

The breakeven point in units may also be calculated using the mathematical
equation where X equals breakeven units.

Again it should be noted that the last portion of the calculation using the
mathematical equation is the same as the first calculation of breakeven units
that used the contribution margin per unit. Once the breakeven point in units
has been calculated, the breakeven point in sales dollars may be calculated by
multiplying the number of breakeven units by the selling price per unit. This
also works in reverse. If the breakeven point in sales dollars is known, it can
be divided by the selling price per unit to determine the breakeven point in
units.

Targeted income
CVP analysis is also used when a company is trying to determine what level of
sales is necessary to reach a specific level of income, also called targeted

income. To calculate the required sales level, the targeted income is added to
fixed costs, and the total is divided by the contribution margin ratio to
determine required sales dollars, or the total is divided by contribution margin
per unit to determine the required sales level in units.

Using the data from the previous example, what level of sales would be
required if the company wanted $60,000 of income? The $60,000 of income
required is called the targeted income. The required sales level is $900,000
and the required number of units is 300,000. Why is the answer $900,000
instead of $810,000 ($750,000 [breakeven sales] plus $60,000)? Remember
that there are additional variable costs incurred every time an additional unit is
sold, and these costs reduce the extra revenues when calculating income.

This calculation of targeted income assumes it is being calculated for a division

as it ignores income taxes. If a targeted net income (income after taxes) is
being calculated, then income taxes would also be added to fixed costs along
with targeted net income.

Assuming the company has a 40% income tax rate, its breakeven point in
sales is $1,000,000 and breakeven point in units is 333,333. The amount of
income taxes used in the calculation is $40,000 ([$60,000 net income (1 .
40 tax rate)] $60,000).

A summarized contribution margin income statement can be used to prove

these calculations.

SECTION B QUESTION ONE

standard cost
Definition

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An estimated or predetermined cost of performing an operation or producing a good

or service, under normal conditions.
Standard costs are used as target costs (or basis for comparison with the actual
costs), and are developed from historical data analysis or from time and motion

studies. They almost always vary from actual costs, because every situation has
its share of unpredictable factors. Also called normal cost.
Read more: http://www.businessdictionary.com/definition/standard-cost.html#ixzz3VH37rSFd

Standard Costing
Standard Costing Overview
Standard costing is the practice of substituting an expected cost for an actual cost in the
accounting records, and then periodically recording variances showing the difference between the
expected and actual costs. This approach represents a simplified alternative to cost layering
systems, such as the FIFO and LIFO methods, where large amounts of historical cost information
must be maintained for items held in stock.

Standard costing involves the creation of estimated (i.e., standard) costs for some or all activities
within a company. The core reason for using standard costs is that there are a number of
applications where it is too time-consuming to collect actual costs, so standard costs are used as a
close approximation to actual costs.
Since standard costs are usually slightly different from actual costs, the cost accountantperiodically
calculates variances that break out differences caused by such factors as labor rate changes and
the cost of materials. The cost accountant may also periodically change the standard costs to bring
them into closer alignment with actual costs.
Advantages of Standard Costing
Though most companies do not use standard costing in its original application of calculating the
cost of ending inventory, it is still useful for a number of other applications. In most cases, users
are probably not even aware that they are using standard costing, only that they are using an
approximation of actual costs. Here are some potential uses:

Budgeting. A budget is always composed of standard costs, since it would be impossible to

include in it the exact actual cost of an item on the day the budget is finalized. Also, since a key
application of the budget is to compare it to actual results in subsequent periods, the standards
used within it continue to appear in financial reports through the budget period.

Inventory costing. It is extremely easy to print a report showing the period-end inventory
balances (if you are using a perpetual inventory system), multiply it by the standard cost of each
item, and instantly generate an ending inventory valuation. The result does not exactly match the
actual cost of inventory, but it is close. However, it may be necessary to update standard costs

frequently, if actual costs are continually changing. It is easiest to update costs for the highestdollar components of inventory on a frequent basis, and leave lower-value items for occasional
cost reviews.
Overhead application. If it takes too long to aggregate actual costs into cost pools for

allocation to inventory, then you may use a standard overhead application rate instead, and adjust
this rate every few months to keep it close to actual costs.
Price formulation. If a company deals with custom products, then it uses standard costs to

compile the projected cost of a customers requirements, after which it adds on a margin. This
may be quite a complex system, where the sales department uses a database of component costs
that change depending upon the unit quantity that the customer wants to order. This system may
also account for changes in the companys production costs at different volume levels, since this
may call for the use of longer production runs that are less expensive.
Nearly all companies have budgets and many use standard cost calculations to derive product
prices, so it is apparent that standard costing will find some uses for the foreseeable future. In
particular, standard costing provides a benchmark against which management can compare actual
performance.
Problems with Standard Costing
Despite the advantages just noted for some applications of standard costing, there are
substantially more situations where it is not a viable costing system. Here are some problem
areas:
Cost-plus contracts. If you have a contract with a customer under which the customer pays

you for your costs incurred, plus a profit (known as a cost-plus contract), then you must use actual
costs, as per the terms of the contract. Standard costing is not allowed.
Drives inappropriate activities. A number of the variances reported under a standard

costing system will drive management to take incorrect actions to create favorable variances. For
example, they may buy raw materials in larger quantities in order to improve the purchase price
variance, even though this increases the investment in inventory. Similarly, management may
schedule longer production runs in order to improve the labor efficiency variance, even though it is
better to produce in smaller quantities and accept less labor efficiency in exchange.
Fast-paced environment. A standard costing system assumes that costs do not change

much in the near term, so that you can rely on standards for a number of months or even a year,
before updating the costs. However, in an environment where product lives are short or continuous
improvement is driving down costs, a standard cost may become out-of-date within a month or
two.

Slow feedback. A complex system of variance calculations are an integral part of a

standard costing system, which the accounting staff completes at the end of each reporting period.
If the production department is focused on immediate feedback of problems for instant correction,
the reporting of these variances is much too late to be useful.

Unit-level information. The variance calculations that typically accompany a standard

costing report are accumulated in aggregate for a companys entire production department, and so
are unable to provide information about discrepancies at a lower level, such as the individual work
cell, batch, or unit.
The preceding list shows that there are a multitude of situations where standard costing is not
useful, and may even result in incorrect management actions. Nonetheless, as long as you are
aware of these issues, it is usually possible to profitably adapt standard costing into some aspects
of a companys operations.
Standard Cost Variances
A variance is the difference between the actual cost incurred and the standard cost against which it
is measured. A variance can also be used to measure the difference between actual and expected
sales. Thus, variance analysis can be used to review the performance of both revenue and
expenses.
There are two basic types of variances from a standard that can arise, which are the rate variance
and the volume variance. Here is more information about both types of variances:

Rate variance. A rate variance (which is also known as a price variance) is the difference
between the actual price paid for something and the expected price, multiplied by the actual
quantity purchased. The rate variance designation is most commonly applied to the labor rate
variance, which involves the actual cost of direct labor in comparison to the standard cost of direct
labor. The rate variance uses a different designation when applied to the purchase of materials,
and may be called the purchase price variance or the material price variance.

Volume variance. A volume variance is the difference between the actual quantity sold or
consumed and the budgeted amount, multiplied by the standard price or cost per unit. If the
variance relates to the sale of goods, it is called the sales volume variance. If it relates to the use
of direct materials, it is called the material yield variance. If the variance relates to the use of
direct labor, it is called the labor efficiency variance. Finally, if the variance relates to the
application of overhead, it is called the overhead efficiency variance.
Thus, variances are based on either changes in cost from the expected amount, or changes in the
quantity from the expected amount. The most common variances that a cost accountant elects to
report on are subdivided within the rate and volume variance categories for direct materials, direct
labor, and overhead. It is also possible to report these variances for revenue.

It is not always considered practical or even necessary to calculate and report on variances, unless
the resulting information can be used by management to improve the operations or lower the costs
of a business. When a variance is considered to have a practical application, the cost accountant
should research the reason for the variance in considerable detail and present the results to the
responsible manager, perhaps also with a suggested course of action.
Standard Cost Creation
At the most basic level, you can create a standard cost simply by calculating the average of the
most recent actual cost for the past few months. In many smaller companies, this is the extent of
the analysis used. However, there are some additional factors to consider, which can significantly
alter the standard cost that you elect to use. They are:

Equipment age. If a machine is nearing the end of its productive life, it may produce a
higher proportion of scrap than was previously the case.

Equipment setup speeds. If it takes a long time to setup equipment for a production run,
the cost of the setup, as spread over the units in the production run, is expensive. If a setup
reduction plan is contemplated, this can yield significantly lower overhead costs.

Labor efficiency changes. If there are production process changes, such as the installation
of new, automated equipment, then this impacts the amount of labor required to manufacture a
product.

Labor rate changes. If you know that employees are about to receive pay raises, either
through a scheduled raise or as mandated by a labor union contract, then incorporate it into the
new standard. This may mean setting an effective date for the new standard that matches the
date when the cost increase is supposed to go into effect.

Learning curve. As the production staff creates an increasing volume of a product, it

becomes more efficient at doing so. Thus, the standard labor cost should decrease (though at a
declining rate) as production volumes increase.

Purchasing terms. The purchasing department may be able to significantly alter the price
of a purchased component by switching suppliers, altering contract terms, or by buying in different
quantities.
Any one of the additional factors noted here can have a major impact on a standard cost, which is
why it may be necessary in a larger production environment to spend a significant amount of time
formulating a standard cost.

Introduction to Standard Costing

Standard costing is an important subtopic of cost accounting. Standard costs are usually
associated with a manufacturing company's costs of direct material, direct labor, and
manufacturing overhead.
Rather than assigning the actual costs of direct material, direct labor, and manufacturing
overhead to a product, many manufacturers assign the expected or standard cost. This means
that a manufacturer's inventories and cost of goods sold will begin with amounts reflecting the
standard costs, not the actual costs, of a product. Manufacturers, of course, still have to pay the
actual costs. As a result there are almost always differences between the actual costs and the
standard costs, and those differences are known as variances.
Standard costing and the related variances is a valuable management tool. If a variance arises,
management becomes aware that manufacturing costs have differed from the standard (planned,
expected) costs.

If actual costs are greater than standard costs the variance is unfavorable. An
unfavorable variance tells management that if everything else stays constant
the company's actual profit will be less than planned.

If actual costs are less than standard costs the variance is favorable. A
favorable variance tells management that if everything else stays constant
the actual profit will likely exceed the planned profit.

The sooner that the accounting system reports a variance, the sooner that management can
direct its attention to the difference from the planned amounts.
If we assume that a company uses the perpetual inventory system and that it carries all
of its inventory accounts at standard cost (including Direct Materials Inventory or Stores), then
the standard cost of a finished product is the sum of the standard costs of the inputs:
1. Direct material
2. Direct labor
3. Manufacturing overhead
1. Variable manufacturing overhead
2. Fixed manufacturing overhead
Usually there will be two variances computed for each input:

Since the calculation of variances can be difficult, we developed several business forms (for PRO
members) to help you get started and to understand what the variances tell us. Learn more
about AccountingCoach PRO.

Sample Standards Table

Let's assume that your Uncle Pete runs a retail outlet that sells denim aprons in two sizes. Pete
suggests that you get into the manufacturing side of the business, so on January 1, 2013 you
start up an apron production company called DenimWorks. Using the best information at hand,
the two of you compile the following estimates to use as standards for 2013:
Standards Table for DenimWorks

The aprons are easy to produce, and no apron is ever left unfinished at the end of any given day.
This means that your company never has work-in-process inventory.
When we make your journal entries for completed aprons (shown below), we'll use an account
called Inventory-FG which means Finished Goods Inventory. (Some companies will use WIP
Inventory or Work-in-Process Inventory). We'll also use the account Direct Materials
Inventory. (Other account titles often used for direct materials are Raw Materials Inventory
or Stores.)

Direct Materials Purchased: Standard

Cost and Price Variance
Direct materials refers to just thatraw materials that are directly traceable into a product. In your
apron business the direct material is the denim. (In a food manufacturer's business the direct
materials are the ingredients such as flour and sugar; in an automobile assembly plant, the direct
materials are the cars' component parts).

DenimWorks purchases its denim from a local supplier with terms of net 30 days, FOB
destination. This means that title to the denim passes from the supplier to DenimWorks when
DenimWorks receives the material. When the denim arrives, DenimWorks will record the denim
received in its Direct Materials Inventory at the standard cost of $3 per yard (see standards table
above) and will record the liability at the actual cost for the amount received. Any difference
between the standard cost of the material and the actual cost of the material received is recorded
as a purchase price variance.

Examples of Standard Cost of Materials and Price Variance

Let's assume that on January 2, 2013 DenimWorks ordered 1,000 yards of denim at $2.90 per
yard. On January 8, 2013 DenimWorks receives 1,000 yards of denim and an invoice for the
actual cost of $2,900. On January 8, 2013 DenimWorks becomes the owner of the material and
has a liability to its supplier. On January 8 DenimWorks' Direct Materials Inventory is increased
by the standard cost of $3,000 (1,000 yards of denim at the standard cost of $3 per yard),
Accounts Payable is credited for $2,900 (the actual amount owed to the supplier), and the
difference of $100 is credited to Direct Materials Price Variance. In general journal format the
entry looks like this:

The $100 credit to the price variance account communicates immediately (when the denim
arrives) that the company is experiencing actual costs that are more favorable than the planned,
standard cost.
In February, DenimWorks orders 3,000 yards of denim at $3.05 per yard. On March 1, 2013
DenimWorks receives the 3,000 yards of denim and an invoice for $9,150 due in 30 days. On
March 1, the Direct Materials Inventory account is increased by the standard cost of $9,000
(3,000 yards at the standard cost of $3 per yard), Accounts Payable is credited for $9,150 (the
actual cost of the denim), and the difference of $150 is debited to Direct Materials Price Variance
as an unfavorable price variance:

After the March 1 transaction is posted, the Direct Materials Price Variance account shows a
debit balance of $50 (the $100 credit on January 2 combined with the $150 debit on March 1). A
debit balance in a variance account is always unfavorableit shows that the total of actual costs

is higher than the total of the expected standard costs. In other words, your company's profit will
be $50 less than planned unless you take some action.
On June 1 your company receives 3,000 yards of denim at an actual cost of $2.92 per yard for a
total of $8,760 due in 30 days. The entry is:

Direct Materials Inventory is debited for the standard cost of $9,000 (3,000 yards at $3 per yard),
Accounts Payable is credited for the actual amount owed, and the difference of $240 is credited
to Direct Materials Price Variance. A credit to the variance account indicates that the actual cost
is less than the standard cost.
After this transaction is recorded, the Direct Materials Price Variance account shows an overall
credit balance of $190. A credit balance in a variance account is always favorable. In other
words, your company's profit will be $190 greater than planned due to the favorable cost of direct
materials.
Note that the entire price variance pertaining to all of the direct materials received was recorded
immediately. In other words, the price variance associated with the direct materials received was
not delayed until the materials were used.
We will discuss later how to handle the balances in the variance accounts under the
heading"What To Do With Variance Amounts".

Standard Costing and Variance Analysis

Standard costing is the establishment of cost standards for activities and their periodic analysis to
determine the reasons for any variances. Standard costing is a tool that helps management
account in controlling costs.
For example, at the beginning of a year a company estimates that labor costs should be $2 per
unit. Such standards are established either by historical trend analysis of the cost or by an
estimation by any engineer or management scientist. After a period, say one month, the company
compares the actual cost incurred per unit, say $2.05 to the standard cost and determines
whether it has succeeded in controlling cost or not.
This comparison of actual costs with standard costs is called variance analysis and it is vital for
controlling costs and identifying ways for improving efficiency and profitability. If actual cost
exceeds the standard costs, it is an unfavorable variance. On the other hand, if actual cost is less
than the standard cost, it is a favorable variance.

Variance analysis is usually conducted for

Direct material costs (price and quantity variances);

Direct labor costs (wage rate and efficiency variances); and

Overhead costs.
Analysis of variance in planned and actual sales and sales margin is also vital to ensure
profitability.
Written by Obaidullah Jan, ACA, CFA

Standard Costing System

In accounting, a standard costing system is a tool for planning budgets, managing and controlling
costs, and evaluating cost management performance.
A standard costing system involves estimating the required costs of a production process. Before the
start of the accounting period, standards are determined and set regarding the amount and cost
of direct materials required for the production process and the amount and pay rate of direct
labor required for the production process. These standards are used to plan a budget for the
production process.
At the end of the accounting period, the actual amounts and costs of direct material used and the
actual amounts and pay rates of direct labor utilized are compared to the previously set standards.
Comparing the actual costs to the standard costs and examining the variances between them allows
managers to look for ways to improve cost control, cost management, and operational efficiency.

Standard Costing Advantages and Disadvantages

There are advantages and disadvantages to using a standard costing system. The primary
advantages to using a standard costing system are that it can be used for product costing, for
controlling costs, and for decision-making purposes.
The disadvantages include that implementing a standard costing system can be time consuming,
labor intensive, and expensive. Also, the standards often have to be updated if the cost structure of
the production process changes.

Source:
Hilton, Ronald W., Michael W. Maher, Frank H. Selto. Cost Management Strategies for Business
Decision, Mcgraw-Hill Irwin, New York, NY, 2008.

Reasons for using a Standard Costing System:

There are several reasons for using a standard costing system:
Cost Control: The most frequent reason cited by companies for using standard
costing systems is cost control. One might initially think that standard costing
provides less information than actual costing, because a standard costing system

tracks inventory using budgeted amounts that were known before the first day of
the period, and fails to incorporate valuable information about how actual costs
have differed from budget during the period. However, this reasoning is not
correct, because actual costs are tracked by the accounting system in journal
entries to accrue liabilities for the purchase of materials and the payment of labor,
entries to record accumulated depreciation, and entries to record other costs related
to production. Hence, a standard costing system records both budgeted amounts
(via debits to work-in-process, finished goods, and cost-of-goods-sold) and actual
costs incurred. The difference between these budgeted amounts and actual amounts
provides important information about cost control. This information could be
available to a company that uses an actual costing system or a normal costing
system, but the analysis would not be an integral part of the general ledger system.
Rather, it might be done, for example, on a spreadsheet program on a personal
computer. The advantage of a standard costing system is that the general ledger
system itself tracks the information necessary to provide detailed performance
reports showing cost variances.
Smooth out short-term fluctuations in direct costs: Similar to the reasons given
in the previous chapter for using normal costing to average the overhead rate over
time, there are reasons to average direct costs. For example, if an apparel
manufacturer purchases denim fabric from different textile mills at slightly
different prices, should these differences be tracked through finished goods
inventory and into cost-of-goods-sold? In other words, should the accounting
system track the fact that jeans production on Tuesday cost a few cents more per
unit than production on Wednesday, because the fabric used on Tuesday came from
a different mill, and the negotiated fabric price with that mill was slightly higher?
Many companies prefer to average out these small differences in direct costs.
When actual overhead rates are used, production volume of each product
affects the reported costs of all other products: This reason, which was
discussed in the previous chapter on normal costing, represents an advantage of
standard costing over actual costing, but does not represent an advantage of
standard costing over normal costing.
Costing systems that use budgeted data are economical: Accounting systems
should satisfy a cost-benefit test: more sophisticated accounting systems are more
costly to design, implement and operate. If the alternative to a standard costing
system is an actual costing system that tracks actual costs in a more timely (and
more expensive) manner, then management should assess whether the
improvement in the quality of the decisions that will be made using that
information is worth the additional cost. In many cases, standard costing systems
provide highly reliable information, and the additional cost of operating an actual
costing system is not warranted.

Summary of Actual Costing, Normal Costing and Standard Costing:

The following table summarizes and compares three commonly-used costing
systems.
Actual Costing System
Direct
Costs:

Overhead
Costs:

Normal Costing System

Standard Costing System

(Actual prices or rates

x actualquantity of inputs
per output) xactual outputs

(Actual prices or rates

x actualquantity of inputs per
output) xactual outputs

(Budgeted prices or rates

x standard inputs allowed for
each output) xactual outputs

Actual overhead rates

x actualquantity of the
allocation base incurred.

Budgeted overhead rates

xactual quantity of the
allocation base incurred.

Budgeted overhead rates x

(standard inputs allowed for
actual outputs achieved)

The following points are worth noting:

1.

All three costing systems record the cost of inventory based on actual
output units produced. The static budget level of production does not
appear anywhere in this table.

2.

Actual costing and normal costing are identical with respect to how
direct costs are treated.

3.

With respect to overhead costs, actual costing and normal costing use
different overhead rates, but both costing systems multiply the overhead
rate by the same amount: the actual quantity of the allocation base
incurred.

4.
5.

Normal costing and standard costing use the same overhead rate.
Standard costing records the cost of inventory using a flexible budget
concept: the inputs that should have been used for the output achieved.

There are costing systems other than these three. For example, some service sector
companies apply direct costs using budgeted prices multiplied by actual quantities
of inputs. For example, many accounting firms track professional labor costs using
budgeted professional staff hourly rates multiplied by actual staff time incurred on
each job.

Concept And Meaning Of Standard Costing

Historical costs are the actual costs that are ascertained after they are incurred. During the initial
stages of development of cost accounting, historical costing systems like process costing,

contract costing, service costing etc. were available for ascertaining the costs. The historical
costing methods are used to determine the cost incurred for the production of a particular
products

orcompletion of

particular

job.

The historical costing systems suffer from several limitations; some of them are as follows:
*

No basis for cost

No

yardstick

Delay

control

for

in

measuring

availability

efficiency

of

information

Expensive

Although standard costing attempts to overcome the limitations of historical costing system, it is
not an alternative to the existing historical costing. Standard costing is the most widely used
technique

of

controlling

costs.

Standard costing is a technique that establishes predetermined estimates of the cost of products
and services and compares these costs with the actual costs as they incur. Standard costing can
be considered as a yardstick to measure the efficiency with the actual cost incurred. Hence,
standard costing is system of costing which makes a comparisonbetween the standard cost of
each product or service with its actual cost to determine the efficiency of the operation, with a
view

to

take corrective actions

at

the

earliest

possible

time.

Thus, standard costing is the preparation and uses of standard costs, which involves the
following
*

process:
Establishment

*
*
*

of

Ascertainment
Comparison

of

the

standard

costs

of actual

above

two

Analysis

and

measurement

costs
of variances
of variances

* Reporting to responsibility centers to take appropriate and necessary remedial actions.

What is historical cost?

Historical cost is a term used instead of the term cost. Cost and historical cost usually
mean the original cost at the time of a transaction. The term historical cost helps to
distinguish an asset's original cost from its replacement cost, current cost, or inflationadjusted cost. For example, land purchased in 1992 at cost of $80,000 and still owned by the
buyer will be reported on the buyer's balance sheet at its cost or historical cost of $80,000
even though its current cost, replacement cost, and inflation-adjusted cost is much higher
today.
The cost principle or historical cost principle states that an asset should be reported at its
cost (cash or cash equivalent amount) at the time of the exchange transaction and
should include all costs necessary to get the asset in place and ready for use.

Historical cost
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In accounting under the traditional historical cost paradigm, historical cost is the original
nominal monetary value of an economic item.[1] Historical cost is based on the stable measuring
unit assumption. In some circumstances, assetsand liabilities may be shown at their historical
cost, as if there had been no change in value since the date of acquisition. The balance
sheet value of the item may therefore differ from the real value.
While historical cost is criticised for its inaccuracy (deviation from real value), it remains in use in
most accounting systems during low and high inflation and deflation. During hyperinflation,
International Financial Reporting Standards require financial capital maintenance in units of
constant purchasing power in terms of the monthly CPI as set out in IAS 29 Financial Reporting
in Hyperinflationary Economies. Various corrections to historical cost are used, many of which
require the use of management judgment and may be difficult to verify. The trend in most
accounting standards is a move to more accurate reflection of the fair or market value, although
the historical cost principle remains in use, particularly for assets of little importance.
Depreciation affects the carrying value of an asset on the balance sheet. The historical cost will
equal the carrying value if there has been no change recorded in the value of the asset since
acquisition. Improvements may be added to thecost basis of an asset.
Historical cost does not generally reflect current market valuation. Alternative measurement
bases to the historical cost measurement basis, which may be applied for some types of assets
for which market values are readily available, require that the carrying value of an asset (or
liability) be updated to the market price (mark-to-market valuation) or some other estimate of
value that better approximates the real value. Accounting standards may also have different
methods required or allowed (even for different types of balance sheet variable real value nonmonetary assets or liabilities) as to how the resultant change in value of an asset or liability is
recorded, as a part of income or as a direct change to shareholders' equity.
The Capital Maintenance in Units of Constant Purchasing Power model is an International
Accounting Standards Boardapproved alternative basic accounting model to the traditional
Historical Cost Accounting model.
Contents

1 Historical cost basis (original cost)

2 Measurement under the historical cost basis

o

2.1 Inventory

2.2 Property, plant and equipment

2.3 Assets and liabilities denominated in foreign currency

3 Exceptions to the historical cost basis of accounting

o

3.1 Revaluation of property, plant and equipment

3.2 Derivative financial instruments

3.3 Financial reporting in hyperinflationary economies

3.4 Management accounting techniques

4 IASB approved alternative to Historical Cost Accounting

5 Advantages and disadvantages of historical cost accounting

6 See also

7 References

Historical cost basis (original cost)[edit]

Under the historical cost basis of accounting, assets and liabilities are recorded at their values
when first acquired. They are not then generally restated for changes in values.
Costs recorded in the Income Statement are based on the historical cost of items sold or used,
rather than their replacement costs.
For example

a company acquires an asset in year 1 for $100;

the asset is still held at the end of year 1, when its market value is $120;

the company sells the asset in year 2 for $115.

At the end year 1 the asset is recorded in the balance sheet at cost of $100. No account is taken
of the increase in value from $100 to $120 in year 1. In year 2 the company records a sale of
$115. The cost of sales is $100, being the historical cost of the asset. This gives rise to a gain of
$15 which is wholly recognized in year 2.

Measurement under the historical cost basis[edit]

Inventory[edit]
It is standard under the historical cost basis to write down the value of inventory (stock) to a
lower cost and net realisable value.[2] As a result:

A downward movement in the realisable value of inventory below cost is recognised

immediately[3]

An upward movement in the realisable value of inventory is not recognised until the
inventory is sold[3]

Property, plant and equipment[edit]

Property, plant and equipment is recorded at cost under the historical cost basis.[4] Cost includes:

Purchase price, including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates;

Any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating. These can include site preparation, delivery and
handling costs, installation, assembly, testing, professional fees and the costs of employees
directly involved in these activities.

In IFRS, cost also includes the initial estimate of the costs of dismantling and removing the item
and restoring it. Cost may include the cost of borrowing to finance construction if this policy is
consistently adopted. Cost is then subject todepreciation with to write off the cost of the asset
over its estimated useful life down to the recoverable amount.[5] In most cases the method is
"straight line", with the same depreciation charge from the date when an asset is brought into use
until it is expected to be sold or no further economic benefits obtained from it, but other patterns
of depreciation are used if assets are used proportionately more in some periods than others.

Assets and liabilities denominated in foreign currency[edit]

Monetary items such as cash balances, receivables and payables which are denominated in
foreign currency are reported using the closing exchange rate under IFRS.[6]

Exceptions to the historical cost basis of accounting[edit]

Revaluation of property, plant and equipment[edit]
Under IFRS it is acceptable, but not required, to restate the values of property, plant and
equipment to fair value.[7] 'Fair value' is the amount for which an asset could be exchanged, or a
liability settled, between knowledgeable, willing parties in an arm's length transaction. Such a
policy must be applied to all assets of a particular class. It would therefore be acceptable for an
entity to revalue freehold properties every three years. The revaluations must be made with
sufficient regularity to ensure that the carrying value does not differ materially from market value
in subsequent years. A surplus on revaluation would be recorded as a reserve movement, not as
income.

Derivative financial instruments[edit]

Under IFRS and US GAAP derivative financial instruments are stated at fair value ("mark to
market") with movements recorded in the income statement.[8][9]

Financial reporting in hyperinflationary economies [edit]

IFRS requires IAS 29 Financial Reporting in Hyperinflationary Economies which
prescribes Capital Maintenance in Units of Constant Purchasing Power in currencies deemed to
be hyperinflationary.[10] The characteristics of a hyperinflation include the population keeping its
wealth in non-monetary assets or relatively stable foreign currencies, prices quoted in foreign
currencies or widespread indexation of prices. This might arise if cumulative inflation reaches or
exceeds 100% over three years. An entity operating in a hyperinflationary economy:

Records a gain or loss on its 'net monetary position' in its income statement.
Records non-monetary items (for example, property, plant & equipment) in the balance
sheet by applying indexation to their historical cost.

Management accounting techniques[edit]

In management accounting there are a number of techniques used as alternatives to historical
cost accounting including:

measuring profit on sale of inventory by reference to its replacement cost. If inventory

with a historical cost of $100 is sold for $115 when it costs $110 to replace it, the profit
recorded would be $5 only based on replacement cost, not $15;

charging economic rent for assets, particularly property. If a business uses a 20-year old
property which it owns, depreciation on a historical cost basis might be insignificant.
However, the management accounts could show a notional rent payable, being
perhaps opportunity cost - the amount the business could receive if it let the property to a
third party.

IASB approved alternative to Historical Cost Accounting[edit]

The IASB's Framework introduced Capital Maintenance in Units of Constant Purchasing
Power as an alternative to Historical Cost Accounting in 1989 in Par. 104 (a) where it states that
financial capital maintenance can be measured in either nominal monetary units - the traditional
HCA model - or in units of constant purchasing power at all levels of inflation and deflation: the
CMUCPP model.[11]
The specific choice of measuring financial capital maintenance in units of constant purchasing
power (the CMUCPP model) at all levels of inflation and deflation as contained in the Framework

for the Preparation and Presentation of Financial Statements, was approved by the International
Accounting Standards Board's predecessor body, the International Accounting Standards
Committee Board, in April 1989 for publication in July 1989 and adopted by the IASB in April
2001.
"In the absence of a Standard or an Interpretation that specifically applies to a transaction,
management must use its judgement in developing and applying an accounting policy that
results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires
management to consider the definitions, recognition criteria, and measurement concepts for
assets, liabilities, income, and expenses in the Framework. This elevation of the importance of
the Framework was added in the 2003 revisions to IAS 8."
[12]

IAS8, 11:
"In making the judgement, management shall refer to, and consider the applicability of, the
following sources in descending order:
(a) the requirements and guidance in Standards and Interpretations dealing with similar and
related issues; and
(b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income
and expenses in the Framework."
There is no applicable International Financial Reporting Standard or Interpretation regarding the
valuation of constant real value non-monetary items, e.g. issued share capital, retained earnings,
capital reserves, all other items in Shareholders Equity, trade debtors, trade creditors, deferred
tax assets and liabilities, taxes payable and receivable, all other non-monetary receivables and
payables, Profit and Loss account items such as salaries, wages, rents, etc. The Framework is
thus applicable.
The CMUCPP model is chosen by hardly any accountant in non-hyperinflationary economies
even though it would automatically maintain the real value of constant real value non-monetary
items, e.g. issued share capital, retained income, other shareholder equity items, trade debtors,
trade creditors, etc., constant for an unlimited period of time in all entities that at least in real
value at all levels of inflation and deflation - all else being equal. This is because the CMUCPP
model is generally viewed by accountants as a 1970's failed inflation accounting model that
requires all non-monetary items - variable real value non-monetary items and constant real value
non-monetary items - to be inflation-adjusted by means of theConsumer Price Index.
The IASB did not approve CMUCPP in 1989 as an inflation accounting model. CMUCPP by
measuring financial capital maintenance in units of constant purchasing power incorporates an
alternative capital concept, financial capital maintenance concept and profit determination
concept to the Historical Cost capital concept, financial capital maintenance concept and profit
determination concept. CMUCPP requires all constant real value non-monetary items, e.g.
issued share capital, retained income, all other items in Shareholders Equity, trade debtors, trade
creditors, deferred tax assets and liabilities, taxes payable and receivable, all items in the profit
and loss account, etc. to be valued in units of constant purchasing power on a daily basis.
Variable real value non-monetary items, e.g. property, plant, equipment, listed and unlisted
shares, inventory, etc. are valued in terms of IFRS and updated daily.
The IASB requires entities to implement IAS 29 which is a Capital Maintenance in Units of
Constant Purchasing Power model during hyperinflation.

Advantages and disadvantages of historical cost accounting [edit]

Advantages

Historical cost accounts are straightforward to produce

Historical cost accounts do not record gains until they are realized

Historical cost accounts are still used in most accounting systems

Disadvantages

Historical cost accounts give no indication of current values of the assets of a business

Historical cost accounts do not record the opportunity costs of the use of older assets,
particularly property which may be recorded at a value based on costs incurred many years
ago

Historical cost accounts do not report/account the loss of real value of nominal monetary
items as a result of inflation or the gain in real value in nominal monetary items during
deflation.[13][14][15]
Currently accountants in the U.S. record assets on the balance sheet using
historical cost, or the amount that the company or individual paid for the asset
at the time of purchase.

Historical cost ignores the amount the asset could be sold for in the open market, called the fair
value, until the asset is actually sold. The company carries the asset on the balance sheet at the
purchase cost less any depreciation taken. At the time of sale, the company records a gain or a
loss against the purchase cost of the asset less any depreciation if applicable.

Historical Cost Accounting Example

For example, if Sunny purchased an asset for $5,000 and estimated depreciation expense of
$500 per year for 10 years, the cost of the asset after the first year less depreciation is $4,500. If
the market value of the asset were $4,800 after year one in the open market, Sunny would not
write up the asset after the first year. Rather, the asset would remain at original cost less any
depreciation until the asset is sold.
If Sunny sold the asset for $4,800 after year one, Sunny recognizes a realized gain of $300.

Sale of Equipment at Historical Cost

Account and Explanation

Debits

Cash

$4,800

Accumulated Depreciation

$500

Equipment

$5,000

Gain on Sale of Equip.

$300

To record sale of asset at original cost less depreciation.

Credits

Therefore, assets on the balance sheet are recorded at historical costs until sold. Since everyone
in the U.S. is currently required to follow the historical cost principle, users of financial statements
understand where the asset values are coming from: the price originally paid for the asset (less
any depreciation where applicable).

Historical Cost and Fair Value Accounting: Relevance

and Reliability Revisited
The historical cost principle follows the accounting quality of reliability since everyone can agree
on the original purchase price of an asset. However, the historical price is not necessarily
relevant information. Land that was purchased 20 years ago could be worth much more than the
balance sheet shows. Likewise a building purchased many years ago and recorded on the
balance sheet at the original cost does not reflect the current market price.
For this reason, many accountants and users of financial statements argue that the market price,
or fair value should be used when reporting financial information. The fair value is more relevant,
but is not necessarily reliable. Selling the same item at different auctions will lead to a wide range
of winning bids for the same item, and even professional appraisers will value an asset at a
range of prices instead of a set value.
Differences can involve the future use of the asset, assumptions about its useful life and output,
and opinions and professional judgments that result in a range of values for an asset. Like other
professions, professional appraisers balance opinions and judgments with verifiable data. So
although the market price, or fair value of an asset may be more relevant, it is less reliable.
The reliability vs. relevance debate centers on one of the key issues in financial reporting and
one of the major transitions currently underway in GAAP: the transition from historical cost to fair
value accounting.
Currently accountants in the U.S. are not allowed to write up the value of an asset to the market
or fair value, but accountants are required to write down an asset when an asset is materially
impaired in any way. This follows the GAAP accounting principles of conservatism and reliability,
since assets could be written up and overstate a companys financial position.
Other countries, however, commonly write up assets to the market value. In order to make
financial statements more uniform internationally, FASB is currently working with The
International Accounting Standards Board (IASB) to follow consistent standards worldwide.
As part of this project, FASB is recommending a transition from historical cost to fair value for
some assets, which would create sweeping and somewhat controversial changes to how some
assets are reported on the balance sheet as the reliability vs. relevance debate continues.

Financial Reporting: Historical Cost to Fair Value

Accounting
FASB has started a gradual convergence of financial reporting standards with the International
Accounting Standards Board (IASB) to transition from the longstanding historical cost basis to
fair value accounting.

SECTION B Q 2

What is a flexible budget?

A flexible budget includes formulas that adjust expenses based on changes in
actual revenue or other activities. The result is a budget that is fairly closely
aligned with actual results. This approach varies from the more common static
budget, which contains nothing but fixed expense amounts that do not vary with
actual revenue levels.

In its simplest form, the flex budget uses percentages of revenue for certain expenses, rather than
the usual fixed numbers. This allows for an infinite series of changes in budgeted expenses that
are directly tied to actual revenue incurred. However, this approach ignores changes to other
costs that do not change in accordance with small revenue variations. Consequently, a more
sophisticated format will also incorporate changes to many additional expenses when certain larger
revenue changes occur, thereby accounting for

step costs. By incorporating these changes into

the budget, a company will have a tool for comparing actual to budgeted performance at many
levels of activity.
Advantages of Flexible Budgeting
Since the flexible budget restructures itself based on activity levels, it is a good tool for evaluating
the performance of managers - the budget should closely align to expectations at any number of
activity levels. It is also a useful planning tool for managers, who can use it to model the likely
financial results at a variety of different activity levels.
Disadvantages of Flexible Budgeting
Though the flex budget is a good tool, it can be difficult to formulate and administer. Several
issues are:

Many costs are not fully variable, instead having a fixed cost component that must be
derived and then included in the flex budget formula.

A great deal of time can be spent developing step costs, which is more time than the
typical accounting staff has available, especially when in the midst of creating the more traditional
static budget. Consequently, the flex budget tends to include only a small number of step costs,
as well as variable costs whose fixed cost components are not fully recognized.

The flexible budget model usually only works within a relatively limited revenue range; the
budget analyst is unlikely to spend the time developing a more wide-ranging model if it is
considered unlikely that outlier revenue amounts will be encountered.
There may also be a time delay between when there is a change in revenue and when a
supposedly variable cost changes. Here are several examples:

Sales increase, but factory overhead costs do not increase at a similar rate, since the sales
are from inventory that was produced in a prior period.

Sales increase, but commissions do not increase at a similar rate, since the commissions
are based on cash received, which has a 30-day time lag.

Sales decline, but direct labor costs do not decline at the same rate, because management
elected to retain the production staff.
Given the considerable amount of time required to maintain a flexible budget, some organizations
may instead opt to eliminate their budgets entirely, in favor of using short-range forecasting
without the use of any types of standards (flexible or otherwise). An alternative is to run a highlevel flex budget as a pilot test to see how useful the concept is, and then expand the model as
necessary.
Example of a Flexible Budget
ABC Company has a budget of $10 million in revenues and a $4 million cost of goods sold. Of the
$4 million in budgeted cost of goods sold, $1 million is fixed, and $3 million varies directly with
revenue. Thus, the variable portion of the cost of goods sold is 30% of revenues. Once the budget
period has been completed, ABC finds that sales were actually $9 million. If it used a flexible
budget, the fixed portion of the cost of goods sold would still be $1 million, but the variable portion
would drop to $2.7 million, since it is always 30% of revenues. The result is that a flexible budget
yields a budgeted cost of goods sold of $3.7 million at a $9 million revenue level, rather than the
$4 million that would be listed in a static budget.
Similar Terms
A flexible budget is also known as a flex budget.

What is a flexible budget?

A flexible budget is a budget that adjusts or flexes for changes in the volume of activity.
The flexible budget is more sophisticated and useful than a static budget, which remains
at one amount regardless of the volume of activity.
Assume that a manufacturer determines that its cost of electricity and supplies for the factory
are approximately $10 per machine hour (MH). It also knows that the factory
supervision, depreciation, and other fixed costs are approximately $40,000 per month.
Typically, the production equipment operates between 4,000 and 7,000 hours per month.
Based on this information, the flexible budget for each month would be $40,000 + $10 per
MH.
Now let's illustrate the flexible budget by using some data. If the production equipment is
required to operate for 5,000 hours during January, the flexible budget for January will be
$90,000 ($40,000 fixed + $10 x 5,000 MH). If the equipment is required to operate in
February for 6,300 hours, then the flexible budget for February will be $103,000 ($40,000
fixed + $10 x 6,300 MH). If March requires only 4,100 machine hours, the flexible budget
for March will be $81,000 ($40,000 fixed + $10 x 4,100 MH).
If the plant manager is required to use more machine hours, it is logical to increase the plant
manager's budget for the additional cost of electricity and supplies. The manager's budget
should also decrease when the need to operate the equipment is reduced. In short, the flexible
budget provides a better opportunity for planning and controlling than does a static budget.

Flexible Budget
Flexible Budget Overview
A flexible budget calculates different expenditure levels for variable costs, depending upon changes
in actual revenue. The result is a budget that varies, depending on the activity levels experienced.
You input the actual revenues or other activity measures into the flexible budget once an
accounting period has been completed, and it generates a budget that is specific to the inputs.

The budget is then compared to actual information for control purposes. The steps needed to
construct a flexible budget are:

1. Identify all fixed costs and segregate them in the budget model.
2. Determine the extent to which all variable costs change as activity measures change.
3. Create the budget model, where fixed costs are hard coded into the model, and
variable costs are stated as a percentage of the relevant activity measures or as a cost
per unit of activity measure.
4. Enter actual activity measures into the model after an accounting period has been
completed. This updates the variable costs in the flexible budget.
5. Enter the resulting flexible budget for the completed period into the accounting
system for comparison to actual expenses.
This approach varies from the more common static budget, which contains nothing but fixed
amounts that do not vary with actual revenue levels. Budget versus actual reports under a flexible
budget tend to yield variances that are much more relevant than those generated under a static
budget, since both the budgeted and actual expenses are based on the same activity measure.
This means that the variances will likely be smaller than under a static budget, and will also be
highly actionable.
You can create a flexible budget that ranges in level of sophistication. Here are several variations
on the concept:

Basic flexible budget. At its simplest, the flexible budget alters those expenses that vary
directly with revenues. There is typically a percentage built into the model that is multiplied by
actual revenues to arrive at what expenses should be at a stated revenue level. In the case of the
cost of goods sold, a cost per unit may be used, rather than a percentage of sales.

Intermediate flexible budget. Some expenditures vary with other activity measures than
revenue. For example, telephone expenses may vary with changes in headcount. If so, you can
integrate these other activity measures into the flexible budget model.

Advanced flexible budget. Expenditures may only vary within certain ranges of revenue or
other activities; outside of those ranges, a different proportion of expenditures may apply. A
sophisticated flexible budget will change the proportions for these expenditures if the
measurements they are based on exceed their target ranges.
In short, a flexible budget gives a company a tool for comparing actual to budgeted performance
at many levels of activity.

Advantages of Flexible Budgeting

The flexible budget is an appealing concept. We note three particular advantages in this section.
Usage in variable cost environment. The flexible budget is especially useful in businesses

where costs are closely aligned with the level of business activity, such as a retail environment
where overhead can be segregated and treated as a fixed cost, while the cost of merchandise is
directly linked to revenues.
Performance measurement. Since the flexible budget restructures itself based on activity

levels, it is a good tool for evaluating the performance of managers - the budget should closely
align to expectations at any number of activity levels. It is also a useful planning tool for
managers, who can use it to model the likely financial results at a variety of different activity
levels.

Budgeting efficiency. Flexible budgeting can be used to more easily update a budget for
which revenue or other activity figures have not yet been finalized. Under this approach, managers
give their approval for all fixed expenses, as well as variable expenses as a proportion of revenues
or other activity measures. Then the budgeting staff completes the remainder of the budget, which
flows through the formulas in the flexible budget and automatically alters expenditure levels. This
approach can improve the efficiency of the budget formulation process, especially when the
management team is working its way through a large number of iterations.
These points make the flexible budget an appealing model for the advanced budget user. However,
before deciding to switch to the flexible budget, consider the following countervailing issues.
Disadvantages of Flexible Budgeting
The flexible budget at first appears to be an excellent way to resolve many of the difficulties
inherent in a static budget. However, there are also a number of serious issues with it, which we
address in the following points:

Formulation. Though the flex budget is a good tool, it can be difficult to formulate and
administer. One problem with its formulation is that many costs are not fully variable, instead
having a fixed cost component that must be calculated and included in the budget formula. Also, a
great deal of time can be spent developing cost formulas, which is more time than the typical
budgeting staff has available in the midst of the budget process. Consequently, the flexible budget
tends to include only a small number of variable cost formulas.

Closing delay. You cannot pre-load a flexible budget into the accounting software for
comparison to the financial statements. Instead, you must wait until a financial reporting period
has been completed, then input revenue and other activity measures into the budget model,
extract the results from the model, and load them into the accounting software. Only then can you

issue financial statements that contain budget versus actual information, with variances between
the two. These extra steps will delay the issuance of financial statements.

Revenue comparison. In a flexible budget, there is no comparison of budgeted to actual

revenues, since the two numbers are the same. The model is designed to match actual expenses
to expected expenses, not to compare revenue levels. There is no way to highlight whether actual
revenues are above or below expectations.

Applicability. Some companies have so few variable costs of any kind that there is little
point in constructing a flexible budget. Instead, they have a massive amount of fixed overhead
that does not vary in response to any type of activity. For example, consider a web store that
downloads software to its customers; a certain amount of expenditure is required to maintain the
store, and there is essentially no cost of goods sold, other than credit card fees. In this situation,
there is no point in constructing a flexible budget, since it will not vary from a static budget.
In short, a flexible budget requires extra time to construct, delays the issuance of financial
statements, does not measure revenue variances, and may not be applicable under certain budget
models. These are serious issues that tend to restrict its usage.

Flexible Budget
Flexible budget
A budget that shows how costs vary with different rates of output or atdifferent levels of sales volum
e and projects revenue based on thesedifferent output levels.
Copyright 2012, Campbell R. Harvey. All Rights Reserved.

Flexible Budget
A budget that considers different levels of production or sales. A flexiblebudget makes different amo
unts available to departments depending on whatproduction or sales are realized. For example, a flexi
ble budget may make6% more money available to its research and
development department ifits revenue increases 6%.

SECTION B Q 3

What is responsibility accounting?

Responsibility accounting involves a company's internal accounting and budgeting.
The objective is to assist in the planning and control of a company's responsibility
centerssuch as decentralized departments and divisions.
Responsibility accounting usually involves the preparation of annual and monthly
budgets for each responsibility center. Then the company's actual transactions
are classified by responsibility center and a monthly report is prepared. The reports will
present the actual amounts for each budget line item and the variance between
the budget and actual amounts.
Responsibility accounting allows the company and each manager of a responsibility
center to receive monthly feedback on the manager's performance.

What is Responsibility Accounting?

Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of Sourth Florida
Most of this material is from MAAW's Textbook Chapter 9
Responsibility Accounting Main Page | Responsibility Accounting Summary

Responsibility accounting is an underlying concept of accounting performance measurement

systems. The basic idea is that large diversified organizations are difficult, if not impossible
to manage as a single segment, thus they must be decentralized or separated into manageable
parts. These parts, or segments are referred to as responsibility centers that include: 1)
revenue centers, 2) cost centers, 3) profit centers and 4) investment centers. This approach
allows responsibility to be assigned to the segment managers that have the greatest amount of
influence over the key elements to be managed. These elements include revenue for a revenue
center (a segment that mainly generates revenue with relatively little costs), costs for a cost
center (a segment that generates costs, but no revenue), a measure of profitability for a profit
center (a segment that generates both revenue and costs) and return on investment (ROI) for
an investment center (a segment such as a division of a company where the manager controls
the acquisition and utilization of assets, as well as revenue and costs).

Controllability Concept
An underlying concept of responsibility accounting is referred to as controllability.
Conceptually, a manager should only be held responsible for those aspects of

performance that he or she can control. In my view, this concept is rarely, if ever,
applied successfully in practice because of the system variation present in all
systems. Attempts to apply the controllability concept produce responsibility
reports where each layer of management is held responsible for all subordinate
management layers as illustrated below.

Advantages and Disadvantages

Responsibility accounting has been an accepted part of traditional accounting
control systems for many years because it provides an organization with a number
of advantages. Perhaps the most compelling argument for the responsibility
accounting approach is that it provides a way to manage an organization that would
otherwise be unmanageable. In addition, assigning responsibility to lower level
managers allows higher level managers to pursue other activities such as long term
planning and policy making. It also provides a way to motivate lower level
managers and workers. Managers and workers in an individualistic system tend to
be motivated by measurements that emphasize their individual performances.
However, this emphasis on the performance of individuals and individual segments
creates what some critics refer to as the "stovepipe organization." Others have used
the term "functional silos" to describe the same idea. Consider Exhibit 9-6 below 1.
Information flows vertically, rather than horizontally. Individuals in the various

segments and functional areas are separated and tend to ignore the
interdependencies within the organization. Segment managers and individual
workers within segments tend to compete to optimize their own performance
measurements rather than working together to optimize the performance of the
system.

Summary and Controversial Question

An implicit assumption of responsibility accounting is that separating a company
into responsibility centers that are controlled in a top down manner is the way to
optimize the system. However, this separation inevitably fails to consider many of
the interdependencies within the organization. Ignoring the interdependencies
prevents teamwork and creates the need for buffers such as additional inventory,
workers, managers and capacity. Of course, a system that prevents teamwork and
creates excess is inconsistent with the lean enterprise concepts of just-in-time and
the theory of constraints. For this reason, critics of traditional accounting control
systems advocate managing the system as a whole to eliminate the need for buffers
and excess. They also argue that companies need to develop process oriented
learning support systems, not financial results, fear oriented control systems. The

information system needs to reveal the company's problems and constraints in a

timely manner and at a disaggregated level so that empowered users can identify
how to correct problems, remove constraints and improve the process. According
to these critics, accounting control information does not qualify in any of these
categories because it is not timely, disaggregated, or user friendly.
This harsh criticism of accounting control information leads us to a very important
controversial question. Can a company successfully implement just-in-time and
other continuous improvement concepts while retaining a traditional responsibility
accounting control system? Although the jury is still out on this question, a number
of field research studies indicate that accounting based controls are playing a
decreasing role in companies that adopt the lean enterprise concepts. In a study
involving nine companies, each company answered this controversial question in a
different way by using a different mix of process oriented versus results oriented
learning and control information.2 Since each company is different, a generalized
answer to this question for all firms in all situations cannot be provided.

responsibility accounting
Definition

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Focuses on providing financial information useful in

evaluating efficiency and effectiveness of managers or department heads, on the
basis of financial performance directly under their control.
Read more: http://www.businessdictionary.com/definition/responsibility-accounting.html#ixzz3VI12JvJW

What is a responsibility center?

A responsibility center is a part or subunit of a company for which a manager has authority
and responsibility. The company's detailed organization chart is a logical source for
determining responsibility centers. The most common responsibility centers are the
departments within a company.
When the manager of a responsibility center can control only costs, the responsibility center
is referred to as a cost center. If a manager can control both costs and revenues, the
responsibility center is known as a profit center. If a manager has authority and
responsibility for costs, revenues, and investments the responsibility center is referred to as
an investment center.

responsibility center
Definition

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Entity within an organization that holds responsibility for

the management of revenue, expenses, and investment funds. This center is
controlled by a responsibility manager that works with other individuals in the
organization to establish procedures and accounting practices to ensure that the
necessary expense and revenue information is reported accurately. The
responsibility center will also work with accountants to make sure that the
organization is meeting requirements set by the Internal Revenue Service.
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Managerial Accounting: Types of

Responsibility Centers
By Mark P. Holtzman from Managerial Accounting For Dummies
Responsibility centers are identifiable segments within a company for which
individual managers have accepted authority and accountability.
Responsibility centers define exactly what assets and activities each manager
is responsible for.
How to classify any given department depends on which aspects of the
business the department has authority over.
Managers prepare a responsibility report to evaluate the performance of each
responsibility center. This report compares the responsibility centers
budgeted performance with its actual performance, measuring and interpreting
individual variances. Responsibility reports should include only controllable
costs so that managers are not held accountable for activities they have no
control over. Using a flexible budget is helpful for preparing a responsibility
report.

Enlarge

1
Revenue centers

Revenue centers usually have authority over sales only and have very little control
over costs. To evaluate a revenue centers performance, look only at its revenues
and ignore everything else.
Revenue centers have some drawbacks. Their evaluations are based entirely on
sales, so revenue centers have no reason to control costs. This kind of free rein
encourages Al the concession manager to hire extra employees or to find other
costly ways to increase sales (giving away salty treats to increase drink purchases,
perhaps).

Enlarge

2
Cost centers
Cost centers usually produce goods or provide services to other parts of the
company. Because they only make goods or services, they have no control over
sales prices and therefore can be evaluated based only on their total costs.
One way for a cost center to reduce costs is to buy inferior materials, but doing so
hurts the quality of finished goods. When dealing with cost centers, you must
carefully monitor the quality of goods.

Enlarge

3
Profit centers
Profit centers are businesses within a larger business, such as the individual stores
that make up a mall, whose managers enjoy control over their own revenues and
expenses. They often select the merchandise to buy and sell, and they have the
power to set their own prices.
Profit centers are evaluated based on controllable margin the difference between
controllable revenues and controllable costs. Exclude all noncontrollable costs, such
as allocated overhead or other indirect fixed costs, from the evaluation. The beautiful

thing about running a profit center is that doing so gives managers an incentive to do
exactly what the company wants: earn profits.
Classifying responsibility centers as profit centers has disadvantages. Although they
get evaluated based on revenues and expenses, no one pays attention to their use
of assets. This scenario gives managers an incentive to use excessive assets to
boost profits.
For managers, the upside of using more assets is the resulting increases in sales
and profits. Whats the downside? Well, nothing; managers of profit centers arent
held accountable for the assets that they use.
This flaw in the evaluation of profit centers can be addressed by carefully monitoring
how profit centers use assets or by simply reclassifying a profit center as an
investment center.

4
Investment centers
You could call investment centers the luxury cars of responsibility centers because
they feature everything. Managers of investment centers have authority over and
are held responsible for revenues, expenses, and investments made in their
centers. Return on investment (ROI) is often used to evaluate their performance.
To improve return on investment, the manager can either increase controllable
margin (profits) or decrease average operating assets (improve productivity).
Using return on investment to evaluate investment centers addresses many of the
drawbacks involved in evaluating revenue centers, costs centers, and profit centers.
However, classification as an investment center can encourage managers to
emphasize productivity over profitability to work harder to reduce assets (which
increases ROI) rather than to increase overall profitability.

Add a

MANAGEMENT INFORMATION SYSTEM

SECTION A Question 1

management information system

(MIS)
Definition

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An organized approach to the study of the information needs of an organization's management at every
level in making operational, tactical, and strategic decisions. Its objective is to design and
implement procedures, processes, and routines that provide suitably detailed reports in
an accurate, consistent, and timely manner.
In a management information system, modern, computerized systems continuously gather relevant data,
both from inside and outside an organization. This data is then processed, integrated, and stored in
a centralized database (or data warehouse) where it is constantly updated and made available to all who
have the authority to access it, in a form that suits their purpose.
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MIS - management information system

Related Terms

IS manager - information systems manager

BPM - business performance management
content management system
IS - Information Systems or Information Services
SMS - Systems Management Server
Integrated Facilities Management Systems
small business CRM - customer relationship management
business service management
File System Object
system management

By Vangie Beal
MIS is short for management information system or managementinformation services.
Management information system, or MIS, broadly refers to a computer-based system that provides managers
with the tools to organize, evaluate and efficiently manage departments within an organization. In order to
provide past, present and prediction information, a management information system can includesoftware that
helps in decision making, data resources such asdatabases, the hardware resources of a system, decision
support systems, people management and project managementapplications, and any computerized processes
that enable the department to run efficiently.

Management Information System Managers

The role of the management information system (MIS) manager is to focus on the organization's information and
technology systems. The MIS manager typically analyzes business problems and then designs and maintains
computer applications to solve the organization's problems.

MIS

MIS (Management Information Systems) is the hardware and software

systems within an enterprise that provide the information that management
needs to run an enterprise.
The MIS department was originally the whole ofinformation technology. From
the 1960s to the early 1980s, practitioners and business schools referred to
MIS rather than IT. In the early days, enterprise computing's main role was to
help the CEO and CFO with information systems management for a few key
run-the-business tasks, such as order entry, accounting and budgeting. No
enterpriseapplications existed; programmers painstakingly wrote code to carry
out these functions, usually on amainframe. These systems were businesscritical, meaning that a business would fail if it had to go back to manual
accounting. If MIS failed, the business was in danger. The CFO oversaw MIS,
ensuring that the developers and administrators delivered what accounting
needed.
In the 1980s, with the advent of personal computers that ran spreadsheets,
the scope of computing's responsibilities began to change. Personal
spreadsheets took business-critical processes out of the domain of upper
management; MIS needed to service a wider range of users, deploying
external as well as internal software programs. The name of the department
changed to reflect this new set of internal customers, becoming Information
Systems (IS). The MIS department became one, still-vital part of the overall IS
department.
In the 1990s, the rise of the enterprise application brought about a new set of
IS tasks. Companies succeeded by providing better services to the consumer
than competitors, via a proper mix of enterprise applications and homegrown
ones. The applications handled a wider range of functions than the original
MIS department: order entry, accounting and budgeting, but also enterprise
resource planning, supply chain management and sales force automation.
Many of these tasks were not solely the property of the IS department -outside vendors, outsourcers and line-of-business computing departments all
claimed a share of enterprise computing. IS became more of a strategic

director of the software and underlying hardware technologies in the

enterprise's architecture, and less of a controlling central entity. Again, the
name changed to reflect the new role: Information Technology (IT) rather than
IS. Again, the original MIS department became a smaller part of the overall
whole.
Today, Management Information Systems is used broadly in various contexts
and includes but is not limited to: decision support systems, resource and
people management applications, project management, and database
retrieval applications. Although the boundaries have become fuzzy over the
years, typically MIS still covers systems that are critical to the company's
ability to survive, including accounting and order entry. Upper management
should not lose sight of this fact. In many businesses, MIS handles legacy
software and hardware, coded by programmers long since retired, who left no
documentation for the systems. The enterprise upgrades or modernizes these
systems only very carefully, and with high appreciation of the risks involved.
Therefore, MIS, and the people who support it and know its quirks, remains a
vital if under-celebrated part of enterprise IT.

Definition of Management Information Systems

by Kenneth Hamlett, Demand Media

Management information systems provide critical information used to effectively operate a business.

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Organization
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The Role of Management Information Systems in Decision-Making
Importance of the Management Information System

Many companies have entire departments devoted to managing, maintaining and

configuring their management information systems. MIS began in the late 1960s and
really gained ground in the 1990s. Because a MIS represents a significant investment for
most organizations, small businesses must perform thorough due diligence before
deciding to implement a new system or overhaul existing systems.
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Basics
Management information systems refer to the practice of integrating computer systems,
hardware and software used to meet an organizations strategic goals. A MIS basically
provides companies with four different types of information: descriptive, diagnostic,
predictive and prescriptive. A MIS has become very important in the areas of strategic
support, data processing and managing by objectives. Because a MIS provides enormous
amounts of information many companies think they make great investments. This holds

true only if the information gained from the MIS generates a change in a companys
harmful behavior.

Descriptive Information
Descriptive information provided by a MIS gives a company the what is state of the
business. Descriptive, or what is information, provides the business with pertinent
information that captures a specific moment during the companys operation. Examples
of what is information include sales reports, financial reports, production reports,
shipping, and receiving reports and customer service reports.
Related Reading: Type of Information in a Customer Service Management System

Diagnostic Information
A MIS also provides companies with diagnostic information. Think of this type of
information in terms of an automobile checkup. When a vehicle has a mechanical issue,
often it gets a diagnostic checkup to determine the problem. A MIS provides the same
type of diagnostic or what is wrong information. The diagnostic information generated
compares the what is wrong information to standardized correct information.
Companies use diagnostic information coupled with other information types to make
decisions regarding corrective actions. For example, a shipment report indicates how
many units of product X shipped (descriptive information) but the key performance
indicator report indicates that shipments have fallen below target levels (diagnostic
information).

Predictive Information
As indicated by its name, predictive information provides companies with what if
scenario analysis. Predictive information generated by a MIS doesnt always answer
what if but it does provide companies with information to help determine future
scenarios based on current information. Examples of predictive information include: What
will sales look like next quarter? Should we increase the forecast for this line? Will prices
stabilize next year?

Prescriptive Information
Prescriptive information answers the question what should be done. After the predictive
information provides a company with the what if scenario and the diagnostic
information provides the what is wrong information, the predictive information leads
the company in the direction to make an informed decision. Although predictive
information does not provide the answer to what if or what is wrong information, it
does give the company the information required to make a decision based on the
companys goals and strategic objectives.

8 Characteristics of Good
Management Information Systems
Explained!
by Smriti Chand Management

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For information to be useful to the decision maker, it must have

certain characteristics and meet certain criteria.
Some of the characteristics of good information are discussed as
follows:

Image Courtesy : uhasselt.be/images/faculteiten/bew/mis.jpeg

i. Understandable:
Since information is already in a summarized form, it must be
understood by the receiver so that he will interpret it correctly. He
must be able to decode any abbreviations, shorthand notations or
any other acronyms contained in the information.

ii. Relevant:
Information is good only if it is relevant. This means that it should
be pertinent and meaningful to the decision maker and should be in
his area of responsibility.
iii. Complete:
It should contain all the facts that are necessary for the decision
maker to satisfactorily solve the problem at hand using such
information. Nothing important should be left out. Although
information cannot always be complete, every reasonable effort
should be made to obtain it.
iv. Available:
Information may be useless if it is not readily accessible in the
desired form, when it is needed. Advances in technology have made
information more accessible today than ever before.
v. Reliable:
The information should be counted on to be trustworthy. It should
be accurate, consistent with facts and verifiable. Inadequate or
incorrect information generally leads to decisions of poor quality.
For example, sales figures that have not been adjusted for returns
and refunds are not reliable.
vi. Concise:
Too much information is a big burden on management and cannot
be processed in time and accurately due to bounded rationality.
Bounded rationality determines the limits of the thinking process
which cannot sort out and process large amounts of information.
Accordingly, information should be to the point and just enough
no more, no less.
vii. Timely:
Information must be delivered at the right time and the right place
to the right person. Premature information can become obsolete or
be forgotten by the time it is actually needed.
Similarly, some crucial decisions can be delayed because proper and
necessary information is not available in time, resulting in missed

opportunities. Accordingly the time gap between collection of data

and the presentation of the proper information to the decision
maker must be reduced as much as possible.
viii. Cost-effective:
The information is not desirable if the solution is more costly than
the problem. The cost of gathering data and processing it into
information must be weighed against the benefits derived from
using such information.

Characteristics of a Good Management Information System

by Bert Markgraf, Demand Media

Management information systems present data in useful formats.

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The purpose of a management information system -- often referred to simply as MIS -- is

to help executives of an organization make decisions that advance the organization's

goals. An effective MIS assembles data available from company operations, external
inputs and past activities into information that shows what the company has achieved in
key areas of interest, and what is required for further progress. The most important
characteristics of an MIS are those that give decision-makers confidence that their
actions will have the desired consequences.
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Relevance
The information a manager receives from an MIS has to relate to the decisions the
manager has to make. An effective MIS takes data that originates in the areas of activity
that concern the manager at any given time, and organizes it into forms that are
meaningful for making decisions. If a manager has to make pricing decisions, for
example, an MIS may take sales data from the past five years, and display sales volume
and profit projections for various pricing scenarios.

Accuracy
A key measure of the effectiveness of an MIS is the accuracy and reliability of its
information. The accuracy of the data it uses and the calculations it applies determine
the effectiveness of the resulting information. The sources of the data determine whether
the information is reliable. Historical performance is often part of the input for an MIS,
and also serves as a good measure of the accuracy and reliability of its output.
Related Reading: What Is a Management Information System?

Usefulness
The information a manager receives from an MIS may be relevant and accurate, but it is
only useful if it helps him with the particular decisions he has to make. For example, if a
manager has to make decisions on which employees to cut due to staff reductions,
information on resulting cost savings is relevant, but information on the performance of
the employees in question is more useful. The MIS has to make useful information easily
accessible.

Timeliness
MIS output must be current. Management has to make decisions about the future of the
organization based on data from the present, even when evaluating trends. The more
recent the data, the more these decisions will reflect present reality and correctly
anticipate their effects on the company. When the collection and processing of data
delays its availability, the MIS must take into consideration its potential inaccuracies due
to age and present the resulting information accordingly, with possible ranges of error.

Completeness
An effective MIS presents all the most relevant and useful information for a particular
decision. If some information is not available due to missing data, it highlights the gaps
and either displays possible scenarios or presents possible consequences resulting from
the missing data. Management can either add the missing data or make the appropriate

decisions aware of the missing information. An incomplete or partial presentation of

information can lead to decisions that don't have the anticipated effects

MIS - Introduction
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To the managers, Management Information System is an implementation of the organizational

systems and procedures. To a programmer it is nothing but file structures and file processing.
However, it involves much more complexity.
The three components of MIS provide a more complete and focused definition,
where System suggests integration and holistic view,Information stands for processed data,
and Management is the ultimate user, the decision makers.
Management information system can thus be analyzed as follows:

Management
Management covers the planning, control, and administration of the operations of a concern.
The top management handles planning; the middle management concentrates on controlling;
and the lower management is concerned with actual administration.

Information
Information, in MIS, means the processed data that helps the management in planning,
controlling and operations. Data means all the facts arising out of the operations of the concern.
Data is processed i.e. recorded, summarized, compared and finally presented to the
management in the form of MIS report.

System
Data is processed into information with the help of a system. A system is made up of inputs,
processing, output and feedback or control.
Thus MIS means a system for processing data in order to give proper information to the
management for performing its functions.

Definition
Management Information System or 'MIS' is a planned system of collecting, storing, and
disseminating data in the form of information needed to carry out the functions of management.

Objectives of MIS
The goals of an MIS are to implement the organizational structure and dynamics of the
enterprise for the purpose of managing the organization in a better way and capturing the
potential of the information system for competitive advantage.
Following are the basic objectives of an MIS:

Capturing Data: Capturing contextual data, or operational information that will

contribute in decision making from various internal and external sources of organization.

Processing Data: The captured data is processed into information needed for planning,
organizing, coordinating, directing and controlling functionalities at strategic, tactical and
operational level. Processing data means:
o making calculations with the data
o sorting data
o classifying data and
o summarizing data

Information Storage: Information or processed data need to be stored for future use.

Information Retrieval: The system should be able to retrieve this information from the
storage as and when required by various users.

Information Propagation: Information or the finished product of the MIS should be

circulated to its users periodically using the organizational network.

Characteristics of MIS
Following are the characteristics of an MIS:
It should be based on a long-term planning.
It should provide a holistic view of the dynamics and the structure of the organization.
It should work as a complete and comprehensive system covering all interconnecting
sub-systems within the organization.

 It should be planned in a top-down way, as the decision makers or the management

should actively take part and provide clear direction at the development stage of the
MIS.
It should be based on need of strategic, operational and tactical information of managers
of an organization.
It should also take care of exceptional situations by reporting such situations.
It should be able to make forecasts and estimates, and generate advanced information,
thus providing a competitive advantage. Decision makers can take actions on the basis
of such predictions.
It should create linkage between all sub-systems within the organization, so that the
decision makers can take the right decision based on an integrated view.
It should allow easy flow of information through various sub-systems, thus avoiding
redundancy and duplicity of data. It should simplify the operations with as much
practicability as possible.
Although the MIS is an integrated, complete system, it should be made in such a flexible
way that it could be easily split into smaller sub-systems as and when required.
A central database is the backbone of a well-built MIS.

Characteristics of Computerized MIS

Following are the characteristics of a well-designed computerized MIS:
It should be able to process data accurately and with high speed, using various
techniques like operations research, simulation, heuristics, etc.
It should be able to collect, organize, manipulate, and update large amount of raw data
of both related and unrelated nature, coming from various internal and external sources
at different periods of time.
It should provide real time information on ongoing events without any delay.
It should support various output formats and follow latest rules and regulations in
practice.
It should provide organized and relevant information for all levels of management:
strategic, operational, and tactical.

 It should aim at extreme flexibility in data storage and retrieval.

Nature and Scope of MIS

The following diagram shows the nature and scope of MIS:

MIS - Enterprise Resource Planning

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ERP is an integrated, real-time, cross-functional enterprise application, an enterprise-wide

transaction framework that supports all the internal business processes of a company.
It supports all core business processes such as sales order processing, inventory management
and control, production and distribution planning, and finance.

Why of ERP?
ERP is very helpful in the follwoing areas:

Business integration and automated data update

Linkage between all core business processes and easy flow of integration

Flexibility in business operations and more agility to the company

Better analysis and planning capabilities

Critical decision-making

Competitive advantage

Use of latest technologies

Features of ERP
The following diagram illustrates the features of ERP:

Scope of ERP

Finance: Financial accounting, Managerial accounting, treasury management, asset

management, budget control, costing, and enterprise control.

Logistics: Production planning, material management, plant maintenance, project

management, events management, etc.

Human resource: Personnel management, training and development, etc.

Supply Chain: Inventory control, purchase and order control, supplier scheduling,
planning, etc.

Work flow: Integrate the entire organization with the flexible assignment of tasks and
responsibility to locations, position, jobs, etc.

Advantages of ERP

Reduction of lead time

Reduction of cycle time

Better customer satisfaction

Increased flexibility, quality, and efficiency

Improved information accuracy and decision making capability

Onetime shipment

Improved resource utilization

Improve supplier performance

Reduced quality costs

Quick decision-making

Forecasting and optimization

Better transparency

Disadvantage of ERP

Expense and time in implementation

Difficulty in integration with other system

Risk of implementation failure

Difficulty in implementation change

Risk in using one vendor

MIS - Customer Relationship

Management
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CRM is an enterprise application module that manages a company's interactions with current
and future customers by organizing and coordinating, sales and marketing, and providing better
customer services along with technical support.
Atul Parvatiyar and Jagdish N. Sheth provide an excellent definition for customer relationship
management in their work titled - 'Customer Relationship Management: Emerging Practice,
Process, and Discipline':
Customer Relationship Management is a comprehensive strategy and process of acquiring,
retaining, and partnering with selective customers to create superior value for the company and
the customer. It involves the integration of marketing, sales, customer service, and the supplychain functions of the organization to achieve greater efficiencies and effectiveness in delivering
customer value.

Why CRM?

To keep track of all present and future customers.

To identify and target the best customers.

To let the customers know about the existing as well as the new products and services.

To provide real-time and personalized services based on the needs and habits of the
existing customers.

To provide superior service and consistent customer experience.

To implement a feedback system.

Scope of CRM

Advantages of CRM

Provides better customer service and increases customer revenues.

Discovers new customers.

Cross-sells and up-sells products more effectively.

Helps sales staff to close deals faster.

Makes call centers more efficient.

Simplifies marketing and sales processes.

Disadvantages of CRM

Some times record loss is a major problem.

Overhead costs.

Giving training to employees is an issue in small organizations.

MIS - Decision Support System

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Decision support systems (DSS) are interactive software-based systems intended to help
managers in decision-making by accessing large volumes of information generated from various
related information systems involved in organizational business processes, such as office
automation system, transaction processing system, etc.
DSS uses the summary information, exceptions, patterns, and trends using the analytical
models. A decision support system helps in decision-making but does not necessarily give a
decision itself. The decision makers compile useful information from raw data, documents,
personal knowledge, and/or business models to identify and solve problems and make
decisions.

Programmed and Non-programmed Decisions

There are two types of decisions - programmed and non-programmed decisions.
Programmed decisions are basically automated processes, general routine work, where:

These decisions have been taken several times.

These decisions follow some guidelines or rules.

For example, selecting a reorder level for inventories, is a programmed decision.

Non-programmed decisions occur in unusual and non-addressed situations, so:

It would be a new decision.

There will not be any rules to follow.

These decisions are made based on the available information.

These decisions are based on the manger's discretion, instinct, perception and
judgment.

For example, investing in a new technology is a non-programmed decision.

Decision support systems generally involve non-programmed decisions. Therefore, there will be
no exact report, content, or format for these systems. Reports are generated on the fly.

Attributes of a DSS

Adaptability and flexibility

High level of Interactivity

Ease of use

Efficiency and effectiveness

Complete control by decision-makers

Ease of development

Extendibility

Support for modeling and analysis

Support for data access

Standalone, integrated, and Web-based

Characteristics of a DSS

Support for decision-makers in semi-structured and unstructured problems.

Support for managers at various managerial levels, ranging from top executive to line
managers.

Support for individuals and groups. Less structured problems often requires the
involvement of several individuals from different departments and organization level.

Support for interdependent or sequential decisions.

Support for intelligence, design, choice, and implementation.

Support for variety of decision processes and styles.

DSSs are adaptive over time.

Benefits of DSS

Improves efficiency and speed of decision-making activities.

Increases the control, competitiveness and capability of futuristic decision-making of the

organization.

Facilitates interpersonal communication.

Encourages learning or training.

Since it is mostly used in non-programmed decisions, it reveals new approaches and

sets up new evidences for an unusual decision.

Helps automate managerial processes.

Components of a DSS
Following are the components of the Decision Support System:

Database Management System (DBMS): To solve a problem the necessary data may
come from internal or external database. In an organization, internal data are generated
by a system such as TPS and MIS. External data come from a variety of sources such
as newspapers, online data services, databases (financial, marketing, human
resources).

Model Management System: It stores and accesses models that managers use to
make decisions. Such models are used for designing manufacturing facility, analyzing
the financial health of an organization, forecasting demand of a product or service, etc.
Support Tools: Support tools like online help; pulls down menus, user interfaces,
graphical analysis, error correction mechanism, facilitates the user interactions with the
system.

Classification of DSS
There are several ways to classify DSS. Hoi Apple and Whinstone classifies DSS as follows:

Text Oriented DSS: It contains textually represented information that could have a
bearing on decision. It allows documents to be electronically created, revised and
viewed as needed.

Database Oriented DSS: Database plays a major role here; it contains organized and
highly structured data.

Spreadsheet Oriented DSS: It contains information in spread sheets that allows create,
view, modify procedural knowledge and also instructs the system to execute selfcontained instructions. The most popular tool is Excel and Lotus 1-2-3.

Solver Oriented DSS: It is based on a solver, which is an algorithm or procedure written

for performing certain calculations and particular program type.

Rules Oriented DSS: It follows certain procedures adopted as rules.

Rules Oriented DSS: Procedures are adopted in rules oriented DSS. Export system is
the example.

Compound DSS: It is built by using two or more of the five structures explained above.

Types of DSS
Following are some typical DSSs:

Status Inquiry System: It helps in taking operational, management level, or middle level
management decisions, for example daily schedules of jobs to machines or machines to
operators.

Data Analysis System: It needs comparative analysis and makes use of formula or an
algorithm, for example cash flow analysis, inventory analysis etc.

Information Analysis System: In this system data is analyzed and the information
report is generated. For example, sales analysis, accounts receivable systems, market
analysis etc.

Accounting System: It keeps track of accounting and finance related information, for
example, final account, accounts receivables, accounts payables, etc. that keep track of
the major aspects of the business.

Model Based System: Simulation models or optimization models used for decisionmaking are used infrequently and creates general guidelines for operation or
management.

MIS - Knowledge Management System

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All the systems we are discussing here come under knowledge management category. A
knowledge management system is not radically different from all these information systems, but
it just extends the already existing systems by assimilating more information.
As we have seen, data is raw facts, information is processed and/or interpreted data, and
knowledge is personalized information.

What is Knowledge?

Personalized information

State of knowing and understanding

An object to be stored and manipulated

A process of applying expertise

A condition of access to information

Potential to influence action

Sources of Knowledge of an Organization

Intranet

Data warehouses and knowledge repositories

Decision support tools

Groupware for supporting collaboration

Networks of knowledge workers

Internal expertise

Definition of KMS
A knowledge management system comprises a range of practices used in an organization to
identify, create, represent, distribute, and enable adoption to insight and experience. Such

insights and experience comprise knowledge, either embodied in individual or embedded in

organizational processes and practices.

Purpose of KMS

Improved performance

Competitive advantage

Innovation

Sharing of knowledge

Integration

Continuous improvement by:

o

Driving strategy

Starting new lines of business

Solving problems faster

Developing professional skills

Recruit and retain talent

Activities in Knowledge Management

Start with the business problem and the business value to be delivered first.

Identify what kind of strategy to pursue to deliver this value and address the KM
problem.

Think about the system required from a people and process point of view.

Finally, think about what kind of technical infrastructure are required to support the
people and processes.

Implement system and processes with appropriate change management and iterative
staged release.

Level of Knowledge Management

MIS - Content Management System

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A Content Management System (CMS) allows publishing, editing, and modifying content as well
as its maintenance by combining rules, processes and/or workflows, from a central interface, in
a collaborative environment.
A CMS may serve as a central repository for content, which could be, textual data, documents,
movies, pictures, phone numbers, and/or scientific data.

Functions of Content Management

Creating content

Storing content

Indexing content

Searching content

Retrieving content

Publishing content

Archiving content

Revising content

Managing content end-to-end

Content Management Workflow

Designing content template, for example web administrator designs webpage template
for web content management.

Creating content blocks, for example, a web administrator adds empower CMS tags
called "content blocks" to webpage template using CMS.

Positioning content blocks on the document, for example, web administrator positions
content blocks in webpage.

Authoring content providers to search, retrieve, view and update content.

Advantages of CMS
Content management system helps to secure privacy and currency of the content and
enhances performance by:

Ensuring integrity and accuracy of content by ensuring only one user modifies the
content at a time.

Implementing audit trails to monitor changes made in content over time.

Providing secured user access to content.

Organization of content into related groups and folders.

Allowing searching and retrieval of content.

Recording information and meta-data related to the content, like author and title of
content, version of content, date and time of creating the content etc.

Workflow based routing of content from one user to another.

Converting paper-based content to digital format.

Organizing content into groups and distributing it to target audience.

MIS - Executive Support System

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Executive support systems are intended to be used by the senior managers directly to provide
support to non-programmed decisions in strategic management.
These information are often external, unstructured and even uncertain. Exact scope and context
of such information is often not known beforehand.
This information is intelligence based:

Market intelligence

Investment intelligence

Technology intelligence

Examples of Intelligent Information

Following are some examples of intelligent information, which is often the source of an ESS:

External databases

Technology reports like patent records etc.

Technical reports from consultants

Market reports

Confidential information about competitors

Speculative information like market conditions

Government policies

Financial reports and information

Features of Executive Information System

Advantages of ESS

Easy for upper level executive to use

Ability to analyze trends

Augmentation of managers' leadership capabilities

Enhance personal thinking and decision-making

Contribution to strategic control flexibility

Enhance organizational competitiveness in the market place

Instruments of change

Increased executive time horizons.

Better reporting system

Improved mental model of business executive

Help improve consensus building and communication

Improve office automation

Reduce time for finding information

Early identification of company performance

Detail examination of critical success factor

Better understanding

Time management

Increased communication capacity and quality

Disadvantage of ESS

Functions are limited

Hard to quantify benefits

Executive may encounter information overload

System may become slow

Difficult to keep current data

May lead to less reliable and insecure data

Excessive cost for small company

MIS - Business Intelligence System

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The term 'Business Intelligence' has evolved from the decision support systems and gained
strength with the technology and applications like data warehouses, Executive Information
Systems and Online Analytical Processing (OLAP).
Business Intelligence System is basically a system used for finding patterns from existing data
from operations.

Characteristics of BIS

It is created by procuring data and information for use in decision-making.

It is a combination of skills, processes, technologies, applications and practices.

It contains background data along with the reporting tools.

It is a combination of a set of concepts and methods strengthened by fact-based support

systems.

It is an extension of Executive Support System or Executive Information System.

It collects, integrates, stores, analyzes, and provides access to business information

It is an environment in which business users get reliable, secure, consistent,

comprehensible, easily manipulated and timely information.

It provides business insights that lead to better, faster, more relevant decisions.

Benefits of BIS

Improved Management Processes.

Planning, controlling, measuring and/or applying changes that results in increased

revenues and reduced costs.

Improved business operations.

Fraud detection, order processing, purchasing that results in increased revenues and
reduced costs.

Intelligent prediction of future.

Approaches of BIS
For most companies, it is not possible to implement a proactive business intelligence system at
one go. The following techniques and methodologies could be taken as approaches to BIS:

Improving reporting and analytical capabilities

Using scorecards and dashboards

Enterprise Reporting

On-line Analytical Processing (OLAP) Analysis

Advanced and Predictive Analysis

Alerts and Proactive Notification

Automated generation of reports with user subscriptions and "alerts" to problems and/or
opportunities.

Capabilities of BIS

Data Storage and Management:

o

Data ware house

Ad hoc analysis

Data quality

Data mining

Information Delivery
o

Dashboard

Collaboration /search

Managed reporting

Visualization

Scorecard

Query, Reporting and Analysis

o

Ad hoc Analysis

Production reporting

OLAP analysis

MIS - Summary
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An efficient information system creates an impact on the organization's function, performance,

and productivity.
Nowadays, information system and information technology have become a vital part of any
successful business and is regarded as a major functional area like any other functional areas
such as marketing, finance, production and human resources, etc.
Thus, it is important to understand the functions of an information system just like any other
functional area in business. A well maintained management information system supports the
organization at different levels.
Many firms are using information system that cross the boundaries of traditional business
functions in order to re-engineer and improve vital business processes all across the enterprise.
This typical has involved installing:

Enterprise Resource Planning (ERP)

Supply Chain Management (SCM)

Customer Relationship Management (CRM)

Transaction Processing System (TPS)

Executive Information System (EIS)

Decision Support System (DSS)

Knowledge Management Systems (KMS)

Content Management Systems (CMS)

The strategic role of Management Information System involves using it to develop products,
services, and capabilities that provides a company major advantages over competitive forces it
faces in the global marketplace.
We need an MIS flexible enough to deal with changing information needs of the organization.
The designing of such a system is a complex task. It can be achieved only if the MIS is planned.
We understand this planning and implementation in management development process.
Decision support system is a major segment of organizational information system, because of
its influential role in taking business decisions. It help all levels of managers to take various
decisions.

Management information system is a set of systems which helps management at

different levels to take better decisions by providing the necessary information to
managers. Management information system is not a monolithic entity but a
collection of systems which provide the user with a monolithic feel as far as
information delivery, transmission and storage is concerned.
The different subsystems working at the background have different objectives but
work in concert with each other to satisfy the overall requirement of managers for
good quality information. Management information systems can be installed by
either procuring off the self systems or by commissioning a completely customized
solution. Sometimes, management information systems can be a mix of both, i.e., an
'off the self system but customized as per the need of the organization.
However, before we precede any further we must have a clear understanding of what
managers do in an organization and why they need management information
systems. The former issue has already been dealt with at length in the previous
sections. Only a brief overview is given here.

Managers are the key people in an organization who ultimately determine the destiny
of the organization. They set the agenda and goals of the organization, plan for
achieving the goals, implement those plans and monitor the situation regularly to
ensure that deviations from the laid down plan is controlled. This set of activity
ensures the smooth functioning of the organization and helps it attain its objectives.
Hence, these managers are vital for a successful organization. The managers in turn
conduct these activities collectively management functions. They decide on all such
issues that have relevance to the goals and objectives of the organization. The
decisions range from routine decisions taken regularly to strategic decisions, which
are sometimes taken once in the lifetime of an organization. The decisions differ in
the following degrees,
1.
2.
3.
4.
5.

Complexity
Information requirement for taking the decision
Relevance
Effect on the organization
Degree of structured behavior of the decision-making process.
The different types of decisions require different type of information as without
information one cannot decide.
They have common characteristics and even though their actual implementation in
an organization may differ according to the needs of the organization, their basic
characteristics remain the same. The information technology platform on which
management information system is based may also vary in terms of complexity and
scale but the technology component does not change the broad characteristics of
management information system. Technology is only the medium through which the
solution is delivered. Management information systems may consist of a set of
information systems working towards the common goal of achieving greater
efficiency in management decision-making for each level of management. Typically,
management information systems deal with information that is generated internally.
The in-house data is processed (summarized/aggregated) to create reports, which
helps the management at different levels in taking decisions. Today's management
information systems have a data repository at the core, which is mostly in the form of
a relational database management system. All in-house data (mostly transaction
related) are saved in this database, which is itself designed on the basis of set rules.
Over this data repository lies several tiers of logic and/or business rules which helps
in creating an interface and the various reports for use of managers at different
levels. The management information system is normally designed in order to achieve
an information flow that is based on a 'need to know' principle. This means that any

manager would be given only that type and kind of information for which he is
entitled and for which he has any use. This means, that a shop floor supervisor may
get the personal details of all people working under him but will not get to view the
salary details of the CEO as he/she is not entitled to know such information. The
floor supervisor will not get to see the personnel details of all employees working in
the human resource department as he has no use for such information. This
hierarchical rule-based information delivery to the different levels of management is
put in place to avoid both information overload and to enable information security.
Many modern systems have come up in recent times to help the manager in their
tasks, like enterprise-wide resource planning systems that is, basically, transaction
processing/ support systems but comes inbuilt with a lot of best practices of the
industry and helps in generating integrated scenarios for the managers at different
levels. Customer relationship management systems help in the management of
customers by creating profiles and making available complex analytical tools for
processing customer data to the managers. Similarly, there are systems to help
managers deal with supply chain data called supply chain management systems. All
these modern systems help in achieving greater efficiency by making the job of
management decision-making better and therefore, fall under the category of
management information system.
Conceptually, management information systems and information technology are two
very different things. Management information system is an information
management concept. Indeed technologies will change and have changed in the past
but management information system and its requirement and characteristics will
broadly remain the same. Only MIS with changing time and technology regimes will
have different technology platforms. In the early seventies MIS was mostly run on
mainframe computers with COBOL programs. In the eighties and nineties that
changed to a personal computer based solution using networking and with databases
and 4GL tools. Today MIS runs on advanced computer networks with wireless
connectivity with hugely advanced software tools but the broad characteristics of
MIS have remained the same. In the sixties and seventies it was instrumental in
providing information which helped in management decision-making just like it
provides today. Only the degree and quality of information has improved. However,
the character of MIS has not changed with changing technology. Technology has
always been and will be a platform for MIS, However, the technology intervention to
provide the platform for MIS has increasingly grown over time and some confuse
MIS with the technology on which it runs. Technology has become an integral part of
MIS but one must appreciate that MIS is a much larger concept, critical to
management decision-making.

The nature of MIS is passive it only supplies information to managers. It does not
actively lead the managers to a decision. The managers take decisions with the
support of the management information system. The system only supplies the
background information on which such decisions are based. The system does not
provide active decision support. It does not have models to mimic the real life
scenarios as a proactive system like the one the decision support system has. Even
though this role of providing information is very important it is only an enabler for
better decisions.
Managers take decisions based on several triggers and in several ways. Some
managers are optimists and take an optimistic view of any situation, be it a problem
or an opportunity. While others take a completely different view in the sense that
they are pessimists at all times. They look at only the negative side of decisions. Some
managers take decisions based on instinctive reaction. Some take decisions based on
analysis of data. These data driven managers rely wholly on information systems to
provide them with the necessary data and information in the form of reports.
Nowadays, the prevailing view is that the data driven, analytics driven way of taking
decisions delivers greater value to the organization than the instinctive feeling based
decisions. In the instinctive feeling based decision-making approach, the judgment
and experience of the manager plays the most important role in his choosing an
alternative. This factis often misunderstood by the proponents of 'gut feeling' based
decision-making supporters and has been beautifully described in a book written by
Malcolm Gladwell titled 'Blink'.
Hence, the contemporary wisdom suggests that managerial decisions must be taken
on the basis of solid rationale and information. If the manager has complete
information about a problem or opportunity, then he can take an appropriate
decision. On the other hand, his decision will be based on gut feeling or judgment
which is prone to personal bias and hence, is likely to be inaccurate. Therefore,
managers in today's world are more and more data driven rather than instinct
driven.
MIS Functions
The broad functions of MIS are as given below:
1.

To improve decision-making: MIS helps management by providing

background information on a variety of issues and helps to improve the decisionmaking quality of management. The fast and accurate information supplied by MIS is
leveraged by the managers to take quicker and better decisions thereby improving
the decision-making quality and adding to the bottom line of the company.

2.

3.

To improve efficiency: MIS helps managers to conduct their tasks with

greater ease and with better efficiency. This reflects in better productivity for the
company.
To provide connectivity: MIS provides managers with better connectivity
with the rest of the organization.

Characteristics of MIS
Management information being a specialized information system conforms to certain
characteristics. These characteristics are generic in nature. These characteristics
remain more or less the same even when the technology around such management
information system changes:
Management oriented
One important feature of MIS is that MIS is designed top-down. This means that the
system is designed around the need felt by the management at different levels for
information. The focus of the system is to satisfy the information needs of
management.
Management directed
Since MIS is 'for the' management it is imperative that it also should have a very
strong 'by the' management initiative. Management is involved in the designing
process of MIS and also in its continuous review and up gradation to develop a good
qualitative system. The system is structured as per directions factored by
management. This helps in minimizing the gap between expectations of
management form the system and the actual system.
Integrated
MIS is an integrated system. It is integrated with all operational and functional
activities of management. This is an important characteristic and- requirement for a
system to qualify as MIS. The reason for having an integrated system is that
information in the managerial context for decision-making may be required from
different areas from within the organization. If MIS remains a collection of isolated
systems and each satisfying a small objective, then the integrated information need
of managers will not be fulfiller. In order to provide a complete picture of the

scenario, complete information is needed which only an integrated system can

provide.
Common data flows
Through MIS the data being stored into the system, retrieved from the system,
disseminated within the system or processed by the system can be handled in an
integrated manner. The integrated approach towards data management will result in
avoiding duplication of data, data redundancy and will help to simplify operations.
Strategic planning
MIS cannot be designed overnight. It requires very high degree of planning which
goes into creating an effective organization. The reason for this kind of planning is to
ensure that the MIS being built not only satisfies the information need of the
managers today but can also serve the organization for the next five to ten years with
modifications. Sometimes when the planning part is done away with, systems tend to
perform well in the present but they tend to become obsolete with time. Planning
helps to avoid this problem.
Bias towards centralization
MIS is required to give 'one version of the truth', i.e., it must supply the correct
version of the latest information. There is a requirement for the data repository to be
centralized. Centralized data management helps MIS to exercise version control as
well as provide an integrated common view of data to the managers. In a noncentralized system, data will get entered, updated and deleted from the system from
different locations. In such a case it becomes difficult to provide correct information
to managers. For example, in a decentralized System if a person superannuates from
an organization and his superannuating is only recorded in the human resource
system but not communicated to the finance department system, then it is quite
likely that his salary may be generated by the finance system for the next month. A
centralized system where data in entered, updated and deleted from only one
location does not suffer from such problems. In a centralized system, the
superannuating employee's details are deleted from the master file from which all
departments' access data, thereby eliminating the risk of generating his salary for the
next month.
Various authors propose various lists of metrics for assessing the quality of information. Let us
generate a list of the most essential characteristic features for information quality:

Reliability - It should be verifiable and dependable.

Timely - It must be current and it must reach the users well in time, so that important
decisions can be made in time.

Relevant - It should be current and valid information and it should reduce uncertainties.

Accurate - It should be free of errors and mistakes, true, and not deceptive.

Sufficient - It should be adequate in quantity, so that decisions can be made on its

basis.

Unambiguous - It should be expressed in clear terms. In other words, in should be

comprehensive.

Complete - It should meet all the needs in the current context.

Unbiased - It should be impartial, free from any bias. In other words, it should have
integrity.

Explicit - It should not need any further explanation.

Comparable - It should be of uniform collection, analysis, content, and format.

Reproducible - It could be used by documented methods on the same data set to

achieve a consistent result.

Characteristics of MIS
Following are the characteristics of an MIS:

It should be based on a long-term planning.

It should provide a holistic view of the dynamics and the structure of the organization.

It should work as a complete and comprehensive system covering all interconnecting

sub-systems within the organization.

It should be planned in a top-down way, as the decision makers or the management

should actively take part and provide clear direction at the development stage of the
MIS.

It should be based on need of strategic, operational and tactical information of managers

of an organization.

It should also take care of exceptional situations by reporting such situations.

It should be able to make forecasts and estimates, and generate advanced information,
thus providing a competitive advantage. Decision makers can take actions on the basis
of such predictions.

It should create linkage between all sub-systems within the organization, so that the
decision makers can take the right decision based on an integrated view.

It should allow easy flow of information through various sub-systems, thus avoiding
redundancy and duplicity of data. It should simplify the operations with as much
practicability as possible.

Although the MIS is an integrated, complete system, it should be made in such a flexible
way that it could be easily split into smaller sub-systems as and when required.

A central database is the backbone of a well-built MIS.

Characteristics of Computerized MIS

Following are the characteristics of a well-designed computerized MIS:

It should be able to process data accurately and with high speed, using various
techniques like operations research, simulation, heuristics, etc.

It should be able to collect, organize, manipulate, and update large amount of raw data
of both related and unrelated nature, coming from various internal and external sources
at different periods of time.

It should provide real time information on ongoing events without any delay.

It should support various output formats and follow latest rules and regulations in
practice.

It should provide organized and relevant information for all levels of management:
strategic, operational, and tactical.

It should aim at extreme flexibility in data storage and retrieval.

http://www.tutorialspoint.com/management_information_system/major_enterpris
e_applications.htm

Characteristics of a Management Information System

Provides reports with fixed and standard formats

Hard-copy and soft-copy reports
Uses internal data stored in the computer system
End users can develop custom reports
Requires formal requests from users

Section A QUESTION 2

Euromed Marseille School of Management, World Med MBA

Program - Information Systems and Strategy Course
You are here: Information Systems and Strategy, Session 1, Types of
Information System and the Classic Pyramid Model
[Return to Session 1]

Why are there different types of Information

System?
In the early days of computing, each time an information system was
needed it was 'tailor made' - built as a one-off solution for a particular
problem. However, it soon became apparent that many of the problems
information systems set out to solve shared certain characteristics.
Consequently, people attempted to try to build a single system that would
solve a whole range of similar problems. However, they soon realized that
in order to do this, it was first necessary to be able to define how and where
the information system would be used and why it was needed. It was then
that the search for a way to classify information systems accurately began.

How do you identify the different types of

information system in an organization?
The different types of information system that can be found are identified
through a process of classification. Classification is simply a method by
which things can be categorized or classified together so that they can be
treated as if they were a single unit. There is a long history of classification
of things in the natural world such as plants or animals, however,
Information systems are not part of the 'natural' world; they are created and
acquired by man to deal with particular tasks and problems. The
classification of information systems into different types is a useful
technique for designing systems and discussing their application; it not
however a fixed definition governed by some natural law. A 'type' or

category of information system is simply a concept, an abstraction, which

has been created as a way to simplify a complex problem through
identifying areas of commonality between different things. One of the oldest
and most widely used systems for classifying information systems is known
as the pyramid model; this is described in more detail below.

How many different kinds of Information System

are there?
As can be seen above, there is not a simple answer to this. Depending on
how you create your classification, you can find almost any number of
different types of information system. However, it is important to remember
that different kinds of systems found in organizations exist to deal with the
particular problems and tasks that are found in organizations.
Consequently, most attempts to classify Information systems into different
types rely on the way in which task and responsibilities are divided within
an organization. As most organizations are hierarchical, the way in which
the different classes of information systems are categorized tends to follow
the hierarchy. This is often described as "the pyramid model" because the
way in which the systems are arranged mirrors the nature of the tasks
found at various different levels in the organization.
For example, this is a three level pyramid model based on the type of
decisions taken at different levels in the organization.

Three level pyramid model based on the type of decisions taken at different
levels in the organization
Similarly, by changing our criteria to the differnt types of date / information /
knowledge that are processed at different levels in the organization, we can
create a five level model.

Five level pyramid model based on the processing requirement of different

levels in the organization

What are the most common types of information

system in an organization?
While there are several different versions of the pyramid model, the most
common is probably a four level model based on the people who use the
systems. Basing the classification on the people who use the information
system means that many of the other characteristics such as the nature of
the task and informational requirements, are taken into account more or
less automatically.

Four level pyramid model based on the different levels of hierarchy in the
organization

A comparison of different kinds of Information

Systems
Using the four level pyramid model above, we can now compare how the
information systems in our model differ from each other.
1. Transaction Processing Systems
What is a Transaction Processing System?

Transaction Processing System are operational-level systems at the

bottom of the pyramid. They are usually operated directly by shop
floor workers or front line staff, which provide the key data required to
support the management of operations. This data is usually obtained
through the automated or semi-automated tracking of low-level
activities and basic transactions.
Functions of a TPS

TPS are ultimately little more than simple data processing systems.
Functions of a TPS in terms of data processing requirements
Inputs

Processing

Outputs

Transactions
Events

Validation
Sorting
Listing
Merging
Updating
Calculation

Lists
Detail reports
Action reports
Summary reports?

Some examples of TPS

o Payroll systems
o Order processing systems
o Reservation systems
o Stock control systems
o Systems for payments and funds transfers
The role of TPS

o Produce information for other systems

o Cross boundaries (internal and external)
o Used by operational personnel + supervisory levels
o Efficiency oriented

2. Management Information Systems

What is a Management Information System?

For historical reasons, many of the different types of Information

Systems found in commercial organizations are referred to as
"Management Information Systems". However, within our pyramid
model, Management Information Systems are management-level
systems that are used by middle managers to help ensure the
smooth running of the organization in the short to medium term. The
highly structured information provided by these systems allows

managers to evaluate an organization's performance by comparing

current with previous outputs.
Functions of a MIS

MIS are built on the data provided by the TPS

Functions of a MIS in terms of data processing requirements
Inputs

Processing

Outputs

Internal Transactions
Internal Files
Structured data

Sorting
Merging
Summarizing

Summary reports
Action reports
Detailed reports

Some examples of MIS

o Sales management systems

o Inventory control systems
o Budgeting systems
o Management Reporting Systems (MRS)
o Personnel (HRM) systems
The role of MIS

o Based on internal information flows

o Support relatively structured decisions
o Inflexible and have little analytical capacity
o Used by lower and middle managerial levels
o Deals with the past and present rather than the future
o Efficiency oriented?

3. Decision Support Systems

What is a Decision Support System?

A Decision Support System can be seen as a knowledge based

system, used by senior managers, which facilitates the creation of
knowledge and allow its integration into the organization. These
systems are often used to analyze existing structured information and
allow managers to project the potential effects of their decisions into
the future. Such systems are usually interactive and are used to
solve ill structured problems. They offer access to databases,
analytical tools, allow "what if" simulations, and may support the
exchange of information within the organization.
Functions of a DSS

DSS manipulate and build upon the information from a MIS and/or
TPS to generate insights and new information.
Functions of a DSS in terms of data processing requirements
Inputs

Processing

Outputs

Internal Transactions
Internal Files
External Information?

Modelling
Simulation
Analysis
Summarizing

Summary reports
Forecasts
Graphs / Plots

Some examples of DSS

o Group Decision Support Systems (GDSS)

o Computer Supported Co-operative work (CSCW)
o Logistics systems
o Financial Planning systems
o Spreadsheet Models?
The role of DSS

o Support ill- structured or semi-structured decisions

o Have analytical and/or modelling capacity
o Used by more senior managerial levels
o Are concerned with predicting the future
o Are effectiveness oriented?

4. Executive Information Systems

What is an EIS?

Executive Information Systems are strategic-level information

systems that are found at the top of the Pyramid. They help
executives and senior managers analyze the environment in which
the organization operates, to identify long-term trends, and to plan
appropriate courses of action. The information in such systems is
often weakly structured and comes from both internal and external
sources. Executive Information System are designed to be operated
directly by executives without the need for intermediaries and easily
tailored to the preferences of the individual using them.
Functions of an EIS

EIS organizes and presents data and information from both external
data sources and internal MIS or TPS in order to support and extend
the inherent capabilities of senior executives.
Functions of a EIS in terms of data processing requirements
Inputs

Processing

Outputs

External Data
Internal Files
Pre-defined models

Summarizing
Simulation
"Drilling Down"

Summary reports
Forecasts
Graphs / Plots

Some examples of EIS

Executive Information Systems tend to be highly individualized and

are often custom made for a particular client group; however, a
number of off-the-shelf EIS packages do exist and many enterprise
level systems offer a customizable EIS module.
The role of EIS

o Are concerned with ease of use

o Are concerned with predicting the future
o Are effectiveness oriented
o Are highly flexible
o Support unstructured decisions

o Use internal and external data sources

o Used only at the most senior management levels

Euromed Marseille Ecole de Management, World Med MBA

Programme - Information Systems and Strategy Course
[Return to Session 1]

MBOO31 MANAGEMENT INFORMATION SYSTEMSSET 1SOLVED

ASSIGNMENT
Q 1: Define MIS ? What are the characteristics of MIS?Answer:
MIS is an Information system which helps in providing the management of
ano r g a n i z a t i o n w i t h i n f o r m a t i o n w h i c h i s u s e d b y m a n a g e m e n t f o r d e c i s i
o n making.A management information system (MIS) is a subset of the overall
internalc o n t r o l s o f a b u s i n e s s c o v e r i n g t h e a p p l i c a t i o n o f p e o p l e ,
documents,technologies, and procedures by management account
a n t s t o s o l v i n g business problems such as costing a product, service or
a business-wides t r a t e g y. M a n a g e m e n t i n f o r m a t i o n s y s t e m s a r e
d i s t i n c t f r o m r e g u l a r information systems in that they are used to anal
y z e o t h e r i n f o r m a t i o n systems applied in operational activities in the
organization. Academically,the term is commonly used to refer to the group of
information managementmethods tied to the automation or support of human
decision making,
e.g.D e c i s i o n S u p p o r t S y s t e m s , E x p e r t s y s t e m s , a n d E x e c u t i v e i n f
o r m a t i o n systems. An 'MIS' is a planned system of the collecting, processing,
storingand disseminating data in the form of information needed to carry out
thefunctions of management. According to Philip Kotler "A marketing
informations y s t e m c o n s i s t s o f p e o p l e , e q u i p m e n t , a n d p r o c e d u r e s t o
g a t h e r , s o r t , analyze, evaluate, and distribute needed, timely, and accurate information
tomarketing decision
makers." T h e t e r m s M I S a n d i n f o r m a t i o n s y s t e m a r e o f t e n c o n f u s e d . I n f o r
m a t i o n systems include systems that are not intended for decision making. The
areao f s t u d y c a l l e d M I S i s s o m e t i m e s r e f e r r e d t o , i n a r e s t r i c t i v e
s e n s e , a s information technology management. That area of study shoul
d n o t b e confused with computer science. IT service management is a
practitioner-focused discipline. MIS has also some differences with Enterprise
ResourcePlanning (ERP) as ERP incorporates elements that are not necessarily
focusedo n d e c i s i o n s u p p o r t . M I S h a s a m a j o r i m p a c t o n t h e f
u n c t i o n s o f a n y organization. The organization derives benefits from
t h e s ys t e m s i n t h e following form:a) Speedy access to information,b) Interpretation of
data,c) Quick decisions,d) Speedy actions,e) increased productivity and thereby increase in
the profitf) Reduced transaction cost.
MIS characteristics

In any organization managers will have varieties of tasks to manage. MIS

ism a i n l y d e s i g n e d t o t a k e c a r e o f t h e n e e d s o f t h e m a
n a g e r s i n t h e organization.

Organizations will have different departments like marketing,

production,s a l e s , i n v e n t o r y, m a i n t e n a n c e e t c . E a c h o f t h e s e d e p a r t m e n t s
f u n c t i o n individually and also in relationship with other departments.
Information is
1

available in abundance. MIS aids in integrating the information generated byvarious

departments of the organization.

MIS helps in identifying a proper mechanism of storage of data. The data ismaintained in
such a way that the unnecessary duplication of data is avoided.

MIS also helps in establishing mechanism to eliminate redundancies ind

ata.

MIS as a system can be broken down into sub systems. Each such
s u b system may be programmed. This results in easy access of data, accuracy of data and
information. It helps in maintaining the consistency of data.
Function of MIS
The main function of MIS is to help the managers and the executives in
theorganization in decision-making.

Large quantities of data like customers information, comp

e t i t o r s information, personnel records, sales data, accounting data etc is
collectedfrom internal sources like the

Company records and external sources like annual reports and publications.

The collected data is organized in the form of a database.

The data from the database is processed and analyzed by using different tools and
techniques.

The results of the analysis are properly presented to the managers to helpthem in
decision-making.
================================
Q 2: Explain strategic MIS categories in detail. Give relevant
examples.Answer:Strategic Information System
A Strategic Information System (SIS) is a system to manage information and assist instrategic
decision making. A strategic information system has been defined as, "Theinformation system
to support or change enterprise's strategy."A S I S i s a t y p e o f I n f o r m a t i o n S ys t e m
t h a t i s a l i g n e d w i t h b u s i n e s s s t r a t e g y a n d structure. The alignment increases the

capability to respond faster to

environmentalc h a n g e s a n d t h u s c r e a t e s a c o m p e t i t i v e a d v a n t a g e . A n e a r l y
example was
thefavorable position afforded American and United Airlines by their re
s e r v a t i o n systems, Sabre and Apollo. For many years these two systems ensured that the
twoc a r r i e r s ' f l i g h t s a p p e a r e d o n t h e f i r s t s c r e e n s o b s e r v e d b y t r a v e l a g e
n t s , t h u s increasing their bookings relative to competitors. A major source of
controversysurrounding SIS is their sustainability.SISs are different from other comparable
systems as:1) they change the way the firm competes.2) they have an external (outward
looking) focus.3) they are associated with higher project risk.4) they are innovative (and
not easily copied).
2
It is mainly concerned with providing and organization and its members
anassistance to perform the routine tasks efficiently and effectively. One of themajor issue
before any organization is the challenge of meeting its goals
ando b j e c t i v e s . S t r a t e g i c I S e n a b l e s u c h o r g a n i z a t i o n i n r e a l i z i n g t h e i r g
o a l s . Strategic Information System (SIS) is a support to the existing system
andh e l p s i n a c h i e v i n g a c o m p e t i t i v e a d v a n t a g e o v e r t h e o r g
a n i z a t i o n s competitors in terms of its objectives. This unit deals with the critical
aspectso f t h e s t r a t e g i c i n f o r m a t i o n s y s t e m . T h i s u n i t s i n d i c a t e s t h e t h e o r
e t i c a l concepts and the way in which the same are realized in practice. The flow of the unit
is in such a way that it starts with the development of
contemporaryt h e o r y a b o u t s t r a t e g i c u s e s o f c o r p o r a t i o n s ' i n t e r n a l i n f o r m a t
i o n s ys t e m s l e a d i n g t o s y s t e m s w h i c h t r a n s c e n d t h e b o u n d a r i
e s o f p a r t i c u l a r organizations. The process whereby strategic i
n f o r m a t i o n s y s t e m s a r e created or identified is then examined. A number
of Weaknesses in the existing body of theory are identified, and
suggestionsm a d e a s t o d i r e c t i o n s i n w h i c h k n o w l e d g e i s o r m a y b e
p r o g r e s s i n g . A strategic information system is concerned with systems
which contributesignificantly to the achievement of an organization's overall
objectives. Thebody of knowledge is of recent origin and highly dynamic, and
the area hasan aura of excitement about it. The emergence of the key ideas, the
processwhereby strategic information systems come into being is assessed, areas
of weakness are identified, and directions of current and future
developments u g g e s t e d . I n f o r m a t i o n s y s t e m i s r e g a r d e d a s a t o o l t o p r o v i
d e v a r i o u s services to different management functions. The tools have been
developingy e a r b y y e a r a n d t h e a p p l i c a t i o n o f t h e t o o l h a s b e c o m e m o r e
a n d m o r e diverse. In management it is now a very power means to manage and
controlv a r i o u s a c t i v i t i e s a n d d e c i s i o n m a k i n g p r o c e s s . T h e o
riginal idea of a u t o m a t i n g m e c h a n i c a l p r o c e s s e s g o t
q u i c k l y s u c c e e d e d b y t h e rationalization and integration of
systems. In both of these forms, IS
wasregarded primarily as an operational support tool, and secondarily a
s a service to management. Subsequent to the development, it was during the last
few years that an additional potential was discovered. It was found
that,i n s o m e c a s e s , i n f o r m a t i o n t e c h n o l o g y ( I T ) h a d b e e n c r
i t i c a l t o t h e i m p l e m e n t a t i o n o f a n o r g a n i z a t i o n ' s s t r a t e g y. A n o r g a n i z
a t i o n s s t r a t e g y supported by information system fulfilling its business objectives came to

beknown as Strategic Information System. The strategic

information systemconsists of functions that involved gathering, maintenance
and analysis
of d a t a c o n c e r n i n g i n t e r n a l r e s o u r c e s , a n d i n t e l l i g e n c e a b o u t c o m p e t i t o r
s , suppliers, customers, government and other relevant organizations.
================================================
Q 3: Write a detailed note on the planning and development of MIS?Answer:
Information is a corporate resource, as important as the capital, labour,
know-how etc. and is being used for decision-making. Its quality, therefore, isrequired to be
very high. A low quality information would adversely affect
theo r g a n i z a t i o n a l p e r f o r m a n c e a s i t a f f e c t s d e c i s i o n - m a k i n g . T h e q u a l i t y
o f information is the result of the quality of the input data, processing
design,system design, system and procedures which generate such a data, and
them a n a g e m e n t o f t h e d a t a p r o c e s s i n g f u n c t i o n . Q u a l i t y, u n l i k e a n y o t h e
r product, is not an absolute concept. Its level is determined with reference to
3
the context and its use, and the user. Perfect quality just
a s p e r f e c t information is nonachievable and has costbenefit implications.H o w e v e r , i t i s p o s s i b l e t o m e a s u r e t h e q u a l i t y
o f i n f o r m a t i o n o n c e r t a i n p a r a m e t e r s . Al l t h e s e p a r a m e t e r s n e e d n o t
h a v e a v e r y h i g h v a l u e . S o m e parameters may have lesser importance in the total
value on account of theirrelevance in the information and its
use. T h e q u a l i t y p a r a m e t e r s w h i c h a r e g e n e r a l l y c o n s i d e r e d a r e s h o w n i n
t h e table The quality of these important parameters is ensured by conducting a
propersystems analysis, designing a suitable information system and ensuring
itsm a i n t e n a n c e f r o m t i m e t o t i m e , a n d a l s o s u b j e c t i n g i t t o a u d i t c h e c k s
t o ensure the system integrity. The quality of the parameters is assured if the following steps
are taken.
4

1. All the input is processed and controlled, as input and process design.2 . A l l u p d a t i n g
a n d c o r r e c t i o n s a r e c o m p l e t e d b e f o r e t h e d a t a p r o c e s s i n g begins.3. Inputs
(transactions, documents, fields and records) are subject to
validitychecks.4 . T h e a c c e s s t o t h e d a t a f i l e s i s p r o t e c t e d a n d s
e c u r e d t h r o u g h a n authorization
scheme.5 . I n t e r m e d i a t e p r o c e s s i n g c h e c k s a r e i n t r o d u c e d t o e n s u r e
t h a t t h e complete data is processed right through, i.e. run to run controls.6. Due attention
is given to the proper file selection in terms of data, periodsand so on.7. Backup of the
data and files are taken to safeguard corruption or loss
of data.8 . T h e s y s t e m a u d i t
i s c o n d u c t e d f r o m t i m e t o t i m e t o e n s u r e t h a t t h e information system
specifications are not violated.9. The system modifications are approved by following a set
procedure whichbegins with authorization of a change to its implementation
followed by
anaudit.1 0 . S y s t e m s a r e d e v e l o p e d w i t h a s t a n d a r d s p e c i f i c a t i o n o f d e s i g
n a n d development.11. Information system processing is controlled through programme
control,process control and access
control.1 2 . E n s u r e M I S m o d e l c o n f i r m s c o n s i s t e n c y t o b u s i n e s s p l a
n s a t i s f y i n g information needs to achieve business goals. The assurance of quality is
a continuing function and needs to be evolved over a period and requires to be
monitored properly. It cannot be assessed inphysical units of measure. The user of
the information is the best judge of thequality.
===================================================================
Q 4 : Explain in detail the necessity and importance of System
D e s i g n i n MIS.Answer:
=====================================================================
Q 5: Explain the challenges before an E-business management.Answer:Managing an Ebusiness & Challenges before an E-business Due to Internetcapabilities and web technology, traditional business organization
definitionhas undergone a change where scope of the enterprise now includes
otherc o m p a n y l o c a t i o n s , b u s i n e s s p a r t n e r s , c u s t o m e r s a n d v e n d o r s . I t h a
s n o geographic boundaries as it can extend its operations where Internet
works.All this is possible due to Internet and web moving traditional paper
drivenorganization to information driven Internet enabled E-business enterprise. Ebusiness enterprise is open twenty-four hours, and being
i n d e p e n d e n t , managers, vendors; customers transact business any time from
anywhere.I n t e r n e t c a p a b i l i t i e s h a v e g i v e n E - b u s i n e s s e n t e r p r i s e a
c u t t i n g e d g e capability advantage to increase the business value. It has
opened newc h a n n e l s o f b u s i n e s s a s b u y i n g a n d s e l l i n g c a n b e d o n
e on Internet. Ite n a b l e s t o r e a c h n e w m a r k e t s a c r o s s
t h e w o r l d a n y w h e r e d u e t o communication capabilities. It ha
s empowered customers and vendor
suppliers through secured access to information to act, wherever
necessary. T h e c o s t o f b u s i n e s s o p e r a t i o n s h a s
c o m e d o w n s i g n i f i c a n t l y d u e t o t h e elimination of paper-driven
processes, faster communication and effectivecollaborative working. The effect of
these radical changes is the reduction inadministrative and management

overheads, reduction in inventory, fasterdelivery of goods and services to the

customers.
In
E-business enterprise traditional people organization based on
'CommandControl'
principle is absent. It is replaced by people organization that is empoweredby
information and knowledge to perform their role. They are supported
byinformation systems, application packages, and decision-support systems. Itis no longer
functional, product, and project or matrix organization of peoplebut E-organization where
people work in network environment as a team orwork group in virtual mode. Ebusiness enterprise is more process-driven, Technology-enabled and uses its own
information and knowledge to
perform.I t i s l e a n i n n u m b e r , f l a t i n s t r u c t u r e , b r o a d i n s c o p
e a n d a l e a r n i n g organization. In E-business enterprise, most of the things are
electronic, usedigital technologies and work on databases, knowledge bases, directories
andd o c u m e n t r e p o s i t o r i e s . T h e b u s i n e s s p r o c e s s e s a r e c o n d u c t e d
t h r o u g h enterprise software like ERP, SCM, and CRM supported by data
warehouse,decision support, and knowledge management systems. Today most of
thebusiness organizations are using Internet
technology, network, and wirelesstechnology for improving the business
performance measured in terms of cost, efficiency, competitiveness and profitability.
They are using Ebusiness,E c o m m e r c e s o l u t i o n s t o r e a c h f a r a w a y l o c a t i o n s t o d e l i v e r p r o d u
c t a n d s e r v i c e s . T h e e n t e r p r i s e s o l u t i o n s l i k e E R P, S C M , a n d C R M r u n
o n I n t e r n e t (Internet / Extranet) &
Wide Area Network
(WAN). The business processesa c r o s s t h e o r g a n i z a t i o n a n d o u t s i d e r u n o n E t e c h n o l o g y p l a t f o r m u s i n g digital technology. Hence today's business firm is also
called E-enterprise orDigital firm. The paradigm shift to E-enterprise has brought four
transformations, namely:

Domestic business to global business.

Industrial manufacturing economy to knowledge-based service economy.

Enterprise Resource Management to Enterprise Network Management.

Manual document driven business process to paperless, automate

d , electronically transacted business process. These transformations have made conventional
organization design obsolete.I n E e n t e r p r i s e , b u s i n e s s i s c o n d u c t e d e l e c t r o n i c a l l y. B u y e r s a n d s e l l e r s throu
gh Internet drive the market and Internet-based web systems. Buyingand selling
is possible on Internet. Books, CDs, computer, white goods
andm a n y s u c h g o o d s a r e b o u g h t a n d s o l d o n I n t e r n e t . T h e n e w c h
annel of b u s i n e s s i s w e l l - k n o w n a s E c o m m e r c e . O n t h e
s a m e l i n e s , b a n k i n g , insurance, healthcare are being managed throu
gh Internet E-banking, E-billing, E-audit, & use of Credit cards, Smart
c a r d , ATM , E - m o n e y a r e t h e examples of the Ecommerce application. The digital firm,
which uses Interneta n d w e b t e c h n o l o g y a n d u s e s E b u s i n e s s a n d E c o m m e r c e s o l u t i o n s , i s a reality and is going to increase in

number.MIS for E-business is different compared to conventional MIS design of

ano r g a n i z a t i o n . T h e r o l e o f M I S i n E - b u s i n e s s o r g a n i z a t i o n i s t o
d e a l w i t h changes in global market and enterprises. MIS produces more
knowledge6
based products. Knowledge management system is formally recognized as
ap a r t o f M I S . I t i s e f f e c t i v e l y u s e d f o r s t r a t e g i c p l a n n i n g f o r s u r v i v a l
a n d g r o w t h , i n c r e a s e i n p r o f i t a n d p r o d u c t i v i t y a n d s o o n . To a c h i e v e
the saidb e n e f i t s o f E b u s i n e s s o r g a n i z a t i o n , i t i s n e c e s s a r y t o r e d e s i g n t h e organiz
ation to realize the benefits of digital firm. The organization structures h o u l d b e l e a n
a n d f l a t . G e t r i d o f r i g i d e s t a b l i s h e d i n f r a s t r u c t u r e s u c h a s branch office or
zonal office. Allow people to work from anywhere. Automateprocesses after
reengineering the process to cut down process cycle time.Make use of groupware
technology on Internet platform for faster response processing. Another challenge is to
convert domestic process design to
workf o r i n t e r n a t i o n a l p r o c e s s , w h e r e i n t e g r a t i o n o f m u l t i n a t i o n a l i n f o r m
ations y s t e m s u s i n g d i f f e r e n t c o m m u n i c a t i o n s t a n d a r d s , c o u
n t r y - s p e c i f i c accounting practices, and laws of security are to be adhered
strictly.Internet and networking technology has thrown another challenge to enlargethe
scope of organization where customers and vendors become part
of theorganization. This technology offers a solution to communicate,
coordinate,and collaborate with customers, vendors and business partners. This is
justnot a technical change in business operations but a cultural change in
them i n d s e t o f m a n a g e r s a n d w o r k e r s t o l o o k b e y o n d t h e c o n
ventionalorganization. It means changing the organization
b e h a v i o r t o t a k e competitive advantage of the E-business
technology. T h e l a s t b u t n o t t h e l e a s t i m p o r t a n t i s t h e c h a l l e n
g e t o o r g a n i z e a n d implement information architecture and information tec
hnology platforms,considering multiple locations and multiple information needs
arising due toglobal operations of the business into a comprehensive MIS.
E-COMMERCE
i s a s e c o n d b i g a p p l i c a t i o n n e x t t o E R P. I t i s e s s e n t i a l d e a l s
w i t h b u y i n g a n d s e l l i n g o f g o o d s . W it h t h e a d v e n t o f i n t e n t
a n d w e b t e c h n o l o g y, E - Commerce today covers an entire
commercial scope online including design anddeveloping, marketing, selling,
delivering, servicing, and paying for goods. Some E-Commerce application add order
tracking as a featurefor customer to know the delivery status of the order. The entire model
successfully works on web platform and uses internet technology.ECommerceprocess has
two participants, namelyBuyer andSeller, like in traditional business model.And unique and
typical to E-commerce there is one more participant to seller by authorizationAnd
authentication of commercial transaction.E-Commerce process model can be viewed in four
ways and categories:

B2C: Business Organization to Customer

B2B: Business Organization to Business

C2B: Customer to Business Organization

C2C: Customer to Customer

In
B2C Model,
business organization uses websites or portals to offer
informationa b o u t p r o d u c t , t h r o u g h m u l t i m e d i a c l i p p i n g s , c a t a l o g u e s , p r o
d u c t c o n f i g u r a t i o n guidelines, customer histories and so on. A new customer interacts
with the site anduses interactive order processing system for order placements. On
placements of order, secured payment systems comes into operation to authorize and
authenticatepayment to seller. The delivery system then take over to execute the
delivery tocustomer.
7
In
B2B Model,
buyer and seller are business organizations. They exchange technical& commercial
through websites and portals. Then model works on similar line likeB2C. More
advanced B2B model uses Extranet and Conducts business transaction based on the
information status displayed on the buyers application server.In
C2B Model,
customer initiates actions after logging on to sellers website or to server. On the
server of the selling organization, E-Commerce application are presentfor the use of the
customer. The entire Internet banking process work on C2B
modelw h e r e a c c o u n t h o l d e r s o f t h e b a n k t r a n s a c t a n u m b e r o f r e q u i r e m e n
t s s u c h a s seeking account balance, payment and so on.In
C2C model,
Customer Participates in the process of selling and buying through the
auctionw e b s i t e . I n t h i s m o d e l , w e b s i t e i s u s e d f o r p e r s o n a l a d v e r t i s i n g o f
p r o d u c t s o r services. E-Newspaperwebsite is an Example of advertising and selling of
goods to customer.In
B2B Model,
the participants in E-business are two organization with relations asbuyer=seller, distributordealer and so on.
E-Collaboration
every business has a number of work scenarios where group of people work
together to complete the tasks and to achieve a common objective. Thegroup could be
teams or virtual teams with different member strength. They
comet o g e t h e r t o p l a t f o r m a t a s k t o a c h i e v e s o m e r e s u l t s . T
h e p r o c e s s i s c a l l e d Collaboration. The Biggest Advantage of
E-Collaboration
is that it taps the collective wisdom, knowledge and experience of the members.
Thec o l l a b o r a t i o n t e a m o r g r o u p c o u l d b e w i t h i n t h e o r g a n i z a t i o n a n d b e t
w e e n t h e organization as well.Since, E-Collaboration works on an internet platform and
uses web technology, workgroup/team need not be at one physical location.E-collaboration
uses E-Communication capabilities to perform collaborative tasks
orp r o j e c t a s s i g n m e n t . I t s e f f e c t i v e n e s s i s i n c r e a s e d b y s o f t w a r e G r o u p
War e t h a t enables the membersof the group to share information, invoke an application
and work together to createdocumentsand share them and so on.E-Collaboration helps work

effectively on applications like calendaring and schedulingtasks, event, project management,

workflow application, work group application.E-collaboration system components are
internet, Intranet, Extranet and LAN, WAN networks forcommunication
through GroupWare tools, browser.Let us illustrate the model using an event in the business
such as receipt of materialfor a job
tob e p r o c e s s e d o n t h e s h o p f l o o r . I n t h i s e v e n t t h e r e i s a t r a n s a c t
i o n r e c e i p t o f material, whichneeds to be processed, and then a workgroup will
use this information of materialreceipt. Eachmember of this workgroup has a
different goal.=====================================
6 : What is an internet? Explain the differences between internet,
intranetand extranet.
8
Answer:Internet
is a global network of interconnected computers, enabling users to
sharei n f o r m a t i o n a l o n g m u l t i p l e c h a n n e l s . Typ i c a l l y, a c o m p u t e r t h a t c o
n n e c t s t o t h e Internet can access information from a vast array of available
servers and othercomputers by moving information from them to the computer's
local memory.
Thes a m e c o n n e c t i o n a l l o w s t h a t c o m p u t e r t o s e n d i n f o r m a t i o n t o
s e r v e r s o n t h e network; that information is in turn accessed and potentially modified by
a variety of other interconnected computers. A majority of widely accessible information on
theInternet consists of inter-linked hypertext documents and other resources
of theWor l d Wi d e Web ( W W W ) . C o m p u t e r u s e r s t y p i c a l l y m a n a g e s e n t a
n d r e c e i v e d information with web browsers; other software for users' interface
with computernetworks includes specialized programs for electronic mail, online chat, file
transferand file
sharing. T h e m o v e m e n t o f i n f o r m a t i o n i n t h e I n t e r n e t i s a c h i
e v e d v i a a s y s t e m o f interconnected computer networks that share data
by packet switching using
thes t a n d a r d i z e d I n t e r n e t P r o t o c o l S u i t e ( T C P / I P ) . I t i s a " n e t w o r k o f n e t
works" thatconsists of millions of private and public, academic, busines
s , a n d g o v e r n m e n t networks of local to global scope that are linked by copper wires,
fiber-optic cables,wireless connections, and other technologies.
Difference between internet, intranet and extranet as follow:Extranet :
An extranet is a private network that uses the Internet protocols and the
p u b l i c telecommunication system to securely share part
of a business's information oroperations with suppliers, vendors, partners,
customers, or other businesses. Anextranet can be viewed as part of a company's
intranet that is extended to users outside the company. An extranet requires security and
privacy.A new buzzword that refers to an intranet that is partially accessible to
authorizedoutsiders. Whereas an intranet resides behind a firewall and is
accessible only topeople who are members of the same company or organization, an
extranet providesvarious levels of accessibility to outsiders. You can access an
extranet only if youhave a valid username and password, and your identity
determines which parts of the extranet you can
view.A n e x t r a n e t i s s o m e w h a t v e r y s i m i l a r t o a n i n t r a n e t . E x t r a n e
t s a r e d e s i g n e d specifically to giveexternal, limited access to certain files of
your computer systems to:


Certain large or priviledged customers.

Selected industry partners.

Suppliers and subcontractors...

etc. T h e r e f o r e , a c a r e f u l l y d e s i g n e d e x t r a n e t c a n b r i n g a d d i t i o n a l b u s i n e
s s t o y o u r company.Intranets and extranets all have three things in common:

They both use secured Internet access to the outside world.

Both can drastically save your company or organization a lot of money.

Both need a user ID & password to control access to the whole system. The professional
development team at My Web Services has the expertise and the right toolsto
design the right intranet or extranet that will meet your exact needs, both
fortoday and thefuture.
Intranet:
9
An internal use, private network inside an organisation that uses the same kind
of softwarewhich would also be found on the Internet.Inter-connected network within one
organization that uses Web technologies for thesharing of information internally, not
world wide. Such information might include organization policies andprocedures,
announcements, or information about new products.An intranet is a restricted-access
network that works like the Web, but isn't on it. Usually ownedand managed by a
company, an intranet enables a company to share its resources with itsemployees
without confidential information being made available to everyone
withInternetaccess.A network based on TCP/IP protocols (an internet) belonging
to an organization,usually acorporation, accessible only by the organization's
members, employees, or otherswithauthorization. An intranet's Web sites look and act
just like any other Web sites, butthe
firewalls u r r o u n d i n g a n i n t r a n e t f e n d s o f f u n a u t h o r i z e d a c c e s s . L i k e t h e I n
t e r n e t i t s e l f , intranets areused to
share information.A n i n t r a n e t i s a n i n f o r m a t i o n p o r t a l d e s i g n e d s
p e c i f i c a l l y f o r t h e i n t e r n a l communications of small, medium or large
businesses, enterprises, governments, industries or financialinstitutionsof any size
or complexity. Intranets can be custom-designed to fit the exact needs of businesses no matter
where they are situated. Users of intranets consists mainly of:

Members of the executive team.

Accounting and order billing.

Managers and directors.

Sales people and support staff.

Customer service, help desk, etc..

Internet:
An electronic network of computers that includes nearly e
v e r y u n i v e r s i t y , government, andresearch facility in the world. Also included are
many commercial sites. It started withfourinterconnected computers in 1969 and was known
as ARPAnet.A network of computer networks which operates world-wide using a common
set of communications protocols. The vast collection of inter-connected networks
across the world that all use the TCP/IPprotocols.A global network connecting millions
of computers.A worldwide network of computer networks.It is an interconnection of
large and small networks around the globe. The Internet began in1962 as a resilient
computer network for the US military and over time has grown into a
globalcommunication tool of more than 12,000 computer networks that share a common
addressingscheme.
INFO1400 Chapter 3 Review Questions 1. Which features of organizations do managers need
to know about to build and use information systems successfully? What is the impact of
information systems on organizations? Define an organization and compare the technical
definition of organizations with the behavioral definition. Students can make use of Figures
32 and Figure 33 in answering this question. The technical definition defines an
organization as a stable, formal social structure that takes resources from the environment and
processes them to produce outputs. This definition of an organization focuses on three
elements: Capital, labor, and production and products for consumption. The technical
definition also implies that organizations are more stable than an informal group, are formal
legal entities, and are social structures. The behavioral definition states that an organization is
a collection of rights, privileges, obligations, and responsibilities that are delicately balanced
over a period of time through conflict and conflict resolution. This definition highlights the
people within the organization, their ways of working, and their relationships. The technical
definition shows us how a firm combines capital, labor, and information technology. The
behavioral definition examines how information technology impacts the inner workings of
the organization. Identify and describe the features of organizations that help explain
differences in organizations use of information systems. Common features for organizations
include: Routines and business processes: Standard operating procedures have been
developed that allow the organization to become productive and efficient thereby reducing
costs over time. Organizational politics: Divergent viewpoints about how resources,
rewards, and punishments should be distributed bring about political resistance to
organization change. Organizational culture: Assumptions that define the organizational
goals and products create a powerful restraint on change, especially technological change.
Organizational environments: Reciprocal relationships exist between an organization and
environments; information systems provide organizations a way to identify external changes
that might require an organizational response. Organizational structure: Information
systems reflect the type of organizational structure - entrepreneurial, machine bureaucracy,
divisionalized bureaucracy, professional bureaucracy, or adhocracy. Describe the major
economic theories that help explain how information systems affect organizations. The two
economic theories discussed in the book are transaction cost theory and agency theory. The
transaction cost theory is based on the notion that a firm incurs transaction costs when it buys
goods in the marketplace rather than making products for itself. Traditionally, firms sought to
reduce transaction costs by getting bigger, hiring more employees, vertical and horizontal
integration, and small-company takeovers. Information technology helps firms lower the cost
of market participation (transaction costs) and helps firms shrink in size while producing the
same or greater amount of output. The agency theory views the firm as a nexus of contracts

among interested individuals. The owner employs agents (employees) to perform work on his
or her behalf and delegates some decisionmaking authority to the agents. Agents need
constant supervision and management, which introduces management costs. As firms grow,
management costs rise. Information technology reduces agency costs by providing
information more easily so that managers can supervise a larger number of people with fewer
resources. Describe the major behavioral theories that help explain how information systems
affect organizations. Behavioral theories, from sociology, psychology, and political science,
are useful for describing the behavior of individual firms. Behavioral researchers theorize that
information technology could change the decision-making hierarchy by lowering the costs of
information acquisition and distribution. IT could eliminate middle managers and their
clerical support by sending information from operating units directly to senior management
and by enabling information to be sent directly to lower-level operating units. It even enables
some organizations to act as virtual organizations because they are no longer limited by
geographic locations. One behavioral approach views information systems as the outcome of
political competition between organizational subgroups. IT becomes very involved with this
competition because it controls who has access to what information, and information systems
can control who does what, when, where, and how. Explain why there is considerable
organizational resistance to the introduction of information systems. There is considerable
organizational resistance to new information systems because they change many important
organizational dimensions, such as culture, structure, politics, and work. Leavitt puts forth a
model that says that changes in technology are absorbed, deflected, and defeated by
organizational task arrangements, structures, and people. In this model the only way to bring
about change is to change the technology, tasks, structure, and people simultaneously. In a
second model, the authors speak of the need to unfreeze organizations before introducing an
innovation, quickly implementing the new system, and then refreezing or institutionalizing
the change. Describe the impact of the Internet and disruptive technologies on organizations.
The Internet increases the accessibility, storage, and distribution of information and
knowledge for organizations; nearly any information can be available anywhere at any time.
The Internet increases the scope, depth, and range of information and knowledge storage. It
lowers the cost and raises the quality of information and knowledge distribution. That is, it
lowers transaction costs and information acquisition costs. By using the Internet,
organizations may reduce several levels of management, enabling closer and quicker
communication between upper levels of management and the lower levels. The Internet also
lowers agency costs. Disruptive technologies caused by technological changes can have
different effects on different companies depending on how they handle the changes. Some
companies create the disruptions and succeed very well. Other companies learn about the
disruption and successfully adopt it. Other companies are obliterated by the changes because
they are very efficient at doing what no longer needs to be done. Some disruptions mostly
benefit the firm. Other disruptions mostly benefit consumers. 2. How does Porters
competitive forces model help companies develop competitive strategies using information
systems? Define Porters competitive forces model and explain how it works. This model
provides a general view of the firm, its competitors, and the firms environment. Porters
model is all about the firms general business environment. In this model, five competitive
forces shape the fate of the firm: traditional competitors new market entrants substitute
products and services customers suppliers Describe what the competitive forces model
explains about competitive advantage. Some firms do better than others because they either
have access to special resources that others do not, or they are able to use commonly
available resources more efficiently. It could be because of superior knowledge and
information assets. Regardless, they excel in revenue growth, profitability, or productivity
growth, ultimately increasing their stock market valuations compared to their competitors.

List and describe four competitive strategies enabled by information systems that firms can
pursue. The four generic strategies, each of which is often enabled by using information
technology and systems include: Low-cost leadership: Lowest operational costs and the
lowest prices. Product differentiation: Enable new products and services, or greatly change
the customer convenience in using existing products and services. Focus on market niche:
Enable a specific market focus and serve this narrow target market better than competitors.
Strengthen customer and suppliers: Tighten linkages with suppliers and develop intimacy
with customers. Describe how information systems can support each of these competitive
strategies and give examples. Low-cost leadership: Use information systems to improve
inventory management, supply management, and create efficient customer response systems.
Example: Wal-Mart. Product differentiation: Use information systems to create products
and services that are customized and personalized to fit the precise specifications of
individual customers. Example: Google, eBay, Apple, Lands End. Focus on market niche:
Use information systems to produce and analyze data for finely tuned sales and marketing
techniques. Analyze customer buying patterns, tastes, and preferences closely in order to
efficiently pitch advertising and marketing campaigns to smaller target markets. Example:
Hilton Hotels, Harrahs. Strengthen customer and supplier intimacies: Use information
systems to facilitate direct access from suppliers to information within the company. Increase
switching costs and loyalty to the company. Example: IBM, Amazon.com Explain why
aligning IT with business objectives is essential for strategic use of systems. The basic
principle of IT strategy for a business is to ensure the technology serves the business and not
the other way around. The more successfully a firm can align its IT with its business goals,
the more profitable it will be. Business people must take an active role in shaping IT to the
enterprise. They cannot ignore IT issues. They cannot tolerate failure in the IT area as just a
nuisance to work around. They must understand what IT can do, how it works, and measure
its impact on revenues and profits. 3. How do the value chain and value web models help
businesses identify opportunities for strategic information system applications? Define and
describe the value chain model. The value chain model highlights specific activities in the
business where competitive strategies can best be applied and where information systems will
most likely have a strategic impact. The model identifies specific, critical leverage points
where a firm can use information technology most effectively to enhance its competitive
position. The value chain model views the firm as a series of basic activities that add a
margin of value to a firms products or services. The activities are categorized as either
primary or support activities. Primary activities are most directly related to production and
distribution of the firms products and services, which create value for the customer. Support
activities make the delivery of primary activities possible and consist of organization
infrastructure. A firms value chain can be linked to the value chains of its suppliers,
distributors, and customers. Explain how the value chain model can be used to identify
opportunities for information systems. Information systems can be used at each stage of the
value chain to improve operational efficiency, lower costs, improve profit margins, and forge
a closer relationship with customers and suppliers. Organizations can use information
systems to help examine how value-adding activities are performed at each stage of the value
chain. Information systems can improve the relationship with customers (customer
relationship management systems) and with suppliers (supply chain management systems)
who may be outside the value chain but belong to an extended value chain. Information
systems can help businesses track benchmarks in the organization and identify best practices
of their particular industries. After analyzing various stages in the value chain, an
organization can devise a list of candidate applications for information systems. Define the
value web and show how it is related to the value chain. A value web is a collection of

independent firms that use information technology to coordinate their value chains to
collectively produce a product or service. It is more customer driven and operates in a less
linear fashion than the traditional value chain. The value web is a networked system that can
synchronize the business processes of customers, suppliers, and trading partners among
different companies in an industry or in related industries. Explain how the value web helps
businesses identify opportunities for strategic information systems. Information systems
enable value webs that are flexible and adaptive to changes in supply and demand.
Relationships can be bundled or unbundled in response to changing market conditions. Firms
can accelerate their time to market and to customers by optimizing their value web
relationships to make quick decisions on who can deliver the required products or services at
the right price and location. Information systems make it possible for companies to establish
and operate value webs. Describe how the Internet has changed competitive forces and
competitive advantage. The Internet has nearly destroyed some industries and severely
threatened others. The Internet has also created entirely new markets and formed the basis of
thousands of new businesses. The Internet has enabled new products and services, new
business models, and new industries to rapidly develop. Because of the Internet, competitive
rivalry has become much more intense. Internet technology is based on universal standards
that any company can use, making it easy for rivals to compete on price alone and for new
competitors to enter the market. Because information is available to everyone, the Internet
raises the bargaining power of customers, who can quickly find the lowestcost provider on
the Web. 4. How do information systems help businesses use synergies, core competencies
and network-based strategies to achieve competitive advantage? Explain how information
systems promote synergies and core competencies. A large corporation is typically a
collection of businesses that are organized as a collection of strategic business units.
Information systems can improve the overall performance of these business units by
promoting synergies and core competencies. Describe how promoting synergies and core
competencies enhances competitive advantages. The concept of synergy is that when the
output of some units can be used as inputs to other uni other units, or two organizations can
pool markets and expertise, these relationships lower costs and generate profits. In applying
synergy to situations, information systems are used to tie together the operations of disparate
business units so that they can act as a whole. A core competency is an activity for which a
firm is a world-class leader. In general, a core competency relies on knowledge that is gained
over many years of experience and a first-class research organization or simply key people
who stay abreast of new external knowledge. Any information system that encourages the
sharing of knowledge across business units enhances competency. Explain how businesses
benefit by using network economics. In a network, the marginal costs of adding another
participant are almost zero, whereas the marginal gain is much larger. The larger the number
of participants in a network, the greater the value to all participants because each user can
interact with more people. The availability of Internet and networking technology has
inspired strategies that take advantage of the abilities of the firm to create networks or
network with each other. In a network economy, information systems facilitate business
models based on large networks of users or subscribers that take advantage of network
economies. Internet sites can be used by firms to build communities of users that can result in
building customer loyalty and enjoyment and build unique ties to customers, suppliers, and
business partners. Define and describe a virtual company and the benefits of pursuing a
virtual company strategy. A virtual company uses networks to link people, assets, and ideas,
enabling it to ally with other companies to create and distribute products and services without
being limited by traditional organizational boundaries or physical locations. One company
can use the capabilities of another company without being physically tied to that company.
The virtual company model is useful when a company finds it cheaper to acquire products,

services, or capabilities from an external vendor or when it needs to move quickly to exploit
new market opportunities and lacks the time and resources to respond on its own. 5. What are
the challenges posed by strategic information systems and how should they be addressed?
List and describe the management challenges posed by strategic information systems.
Information systems are closely intertwined with an organizations structure, culture, and
business processes. New systems disrupt established patterns of work and power
relationships, so there is often considerable resistance to them when they are introduced.
Implementing strategic systems often requires extensive organizational change and a
transition from one sociotechnical level to another. Such changes are called strategic
transitions and are often difficult and painful to achieve. Moreover, not all strategic systems
are profitable. They are expensive and difficult to build because they entail massive
sociotechnical changes within the organization. Many strategic information systems are easily
copied by other firms so that strategic advantage is not always sustainable. The complex
relationship between information systems, organizational performance, and decision making
must be carefully managed. Explain how to perform a strategic systems analysis. Managers
should ask the following questions to help them identify the types of systems that may
provide them with a strategic advantage. 1. What is the structure of the industry in which the
firm is located? Analyze the competitive forces at work in the industry; determine the basis of
competition; determine the direction and nature of change within the industry; and analyze
how the industry is currently using information technology. 2. What are the business, firm,
and industry value chains for this particular firm? Decide how the company creates value for
its customers; determine how the firm uses best practices to manage its business processes;
analyze how the firm leverages its core competencies; verify how the industry supply chain
and customer base are changing; establish the benefit of strategic partnerships and value
webs; clarify where information systems will provide the greatest value in the firms value
chain. 3. Have we aligned IT with our business strategy and goals? Articulate the firms
business strategy and goals; decide if IT is improving the right business processes and
activities in accordance with the firms strategy; agree on the right metrics to measure
progress toward the goals.

Strategic Level
This level is
concerned with
formulating
policies and long
term
goals. Peoplewho
make the big

decisions for the entire

company belong to
this level. The
information needed at
this level should be a
comprehensive,
summarized report of
the statistics and
standing of a company.
The information at this
level is a summary of
the information

gathered at tactical
level, whose objective
is to meet the goals
set by the strategic
level.It should present
trends over a period of
time i.e. quarter, a
semester, or a
year.Examples of stra
tegic level managem
ent information syste
ms are Executive

Information
Systems. These
systems
present the enterpris
e wide performance
of the company for
executive analysis
and decision-making.

EXPERT SYSTEMS

Photo by: AlienCat

Expert systems are computer applications that combine computer equipment,

software, and specialized information to imitate expert human reasoning and advice.
As a branch of artificial intelligence, expert systems provide discipline-specific
advice and explanation to their users. While artificial intelligence is a broad field
covering many aspects of computer-generated thought, expert systems are more
narrowly focused. Typically, expert systems function best with specific activities or
problems and a discrete database of digitized facts, rules, cases, and models. Expert
systems are used widely in commercial and industrial settings, including medicine,
finance, manufacturing, and sales.
As a software program, the expert system integrates a searching and sorting program
with a knowledge database. The specific searching and sorting program for an expert
system is known as the inference engine. The inference engine contains all the
systematic processing rules and logic associated with the problem or task at
hand. Mathematical probabilities often serve as the basis for many expert systems.
The second componentthe knowledge databasestores necessary factual,
procedural, and experiential information representing expert knowledge. Through a
procedure known as knowledge transfer, expertise (or those skills and knowledge
that sustain a much better than average performance) passes from human expert to
knowledge engineer. The knowledge engineer actually creates and structures the
knowledge database by completing certain logical, physical, and psychosocial tasks.
For this reason, expert systems are often referred to as knowledge-based information
systems. By widely distributing human expertise through expert systems, businesses
can realize benefits in consistency, accuracy, and reliability in problem-solving
activities.
Decision support systems are used most often in specific decision-making activities,
while expert systems operate in the area of problem-solving activities. But this
distinction may be blurry in practice, and therefore investigation of an expert system
often implies research on DSS as well.
Four interactive roles form the activities of the expert system:

diagnosing

interpreting

predicting

instructing

The systems accomplish each of these by applying rules and logic specified by the
human expert during system creation or maintenance or determined by the system
itself based on analysis of historical precedents. Instruction, in particular, emerges as
a result of the expert system's justification system. Synthesizing feedback with
various combinations of diagnostic, interpretative and predictive curriculum, the
expert system can become a finely tuned personal tutor or a fully developed and
standardized group class. Computer-aided instruction (CAI) thrives as a field of
inquiry and development for businesses.
Transcript
1. T o p ic X Expert System 8 LEARNING OUTCOMES By the end of this topic, you
should be able to: 1. Describe what an Expert System is and its applications; 2. Describe
the steps involved in producing rules and information gathering; 3. List the 11 main
characteristics of an Expert System; and 4. Differentiate between conventional
information systems and the Expert System.
X INTRODUCTION
In this topic, you will learn about one of the branches of artificial intelligence,which is
the Expert System. The Expert System is also known as the knowledge-based System.
The Expert System comprises many types of Systems based on rules, frames and
fuzzy sets. In this topic, you will also be exposed to the most popular expert system,
the System based on rules. Definition Expert System is an information system that is
capable of mimicking human thinking and making considerations during the process
of decision-making. It is an information system that has been used to solve a problem
that usually requires an expert to solve.
2. TOPIC 8 EXPERT SYSTEM W 153 8.1 WHAT IS AN EXPERT SYSTEM? SELFCHECK 8.1
Currently, the Expert System is a popular topic in the Management Information
System. In your own words, explain what is an Expert System.According to Efraim
Turban (2001), the Expert System comes from the Knowledge-Based Expert System
terminology. Expert System (ES) is a System that uses human knowledge stored
inside a computer to solve problems that requires human expertise to solve. A good
ES is a system that can copy the process of reasoning in a human. What is meant by
an expert? An expert is a person that has the expertise and knowledge of his
specialised field. Examples of experts are a heart specialist and a mathematics expert.

Through experience, an expert expands his skills to enable him to solve problems
heuristically, efficiently and effectively.
8.1.1 Expert System Definition Prof. Edward Feigenbaum (1983, p.?) from Stanford
University, a famous researcher on ES defines ES as: "an intelligent computer
programme that uses knowledge and reasoning procedures to solve difficult problems
that need certain expertise to solve the problems. "ES is developed to model the
ability of an expertise in solving problems. In the process of modelling the method
which an expert uses to solve a problem, ES must be able to provide users with the
services and facilities that an expert can usually provide.
8.1.2 Why is an Expert System Needed? You must be thinking of the rationale behind
the process of transferring the knowledge of an expert to a computer. Table 8.1 will
answer your query by comparing the Expert System to that of humans.
3. 154 X TOPIC 8 EXPERT SYSTEM Table 8.1: Comparisons between an Expert System
and that of a Human Expert Factor Human Expert Expert System Time (can be obtained)
Working days only Anytime Geography Local Anywhere Safety Cannot be replaced Can
be replaced Damages Yes No Speed and Efficiency Changes Consistent Cost High
Intermediate An Expert System is built because of two factors: either to replace or to help
an expert. Some of the reasons for the need of an Expert System to replace an expert are:
x To enable the use of expertise after working hours or at different locations. x To
automate a routine task that requires human expertise all the time unattended, thus
reducing operational costs. x To replace a retiring or an leaving employee who is an
expert. x To hire an expert is costly.
ACTIVITY 8.1
Has your car ever broken down? Think about how an Expert system can help a car
owner. Discuss this with your course mates. The Expert System is used to: x Help
experts in their routine to improve productivity. x Help experts in some of their more
complex and difficult tasks so that the problem can be managed effectively. x Help an
expert to obtain information needed by other experts who have forgotten about it or
who are too busy to search for it.
4. TOPIC 8 EXPERT SYSTEM W 1558.1.3
Expert System Application Expert System is widely used in all types of fields and
sectors like medicine, engineering, education, marketing, tax planning and more. We
will study several other applications in the financial, production and military sectors.
x Banking and Financial sector Application of EIS System used: - An Expert System
that helps bank managers in making decisions on granting loans. - An Expert System
that advises bank managers in giving housing loans. - An Expert System that advises
insurance companies on the risks involved in insuring a customer or a company. - An
Expert System that helps banks decide on whether a customer is entitled for a credit
card or not. - An Expert System that identifies computer fraud and controls it. x
Production industries and Military Application of EIS Type of Expert System used: An Expert System capable of diagnosing some technical malfunctions in airplanes,
gas turbines and helicopters. - An Expert System that helps identify threats that may
put security at risk. - An Expert System that helps form and produce small mechanical
items.
5. 156 X TOPIC 8 EXPERT SYSTEM SELF-CHECK 8.2
Differentiate between human expertise and the Expert system: Factor Human
Expertise Expert System Time (which can be obtained) Geography Security
Malfunctions Performance and speed Cost Table 8.2: Problem-Solving Paradigm
Problem-Solving Paradigm Example of Expert System application Control

Controlling the Behaviour of the system according to specification. Design Aligning

objects following limits. Diagnosis Providing reasons for system malfunction based
on observation. Instruction Diagnosing and improving behaviour of students.
Translation Providing reasons for situations based on data given. Assessment
Comparing observation data with expectations. Planning Designing a plan of action.
Prediction Providing reasons on the cause and effect of a certain decision based on
situation. Selection Identifying the best selection from all alternatives and
probabilities. Prescription Suggesting solution to improve a malfunction system.
6. TOPIC 8 EXPERT SYSTEM W 157Table 8.2 lists ten (10) paradigms in problemsolving that an Expert System is capable of solving.8.2 KNOWLEDGE SELFCHECK 8.3
Knowledge helps humans solve problems. How is knowledge used in a system?
Around the 1970s, computer scientists accepted the fact that in order to enable a
machine to solve intellectual problems, a machine must know how to first solve it. In
other words, it had to have the how-to knowledge to solve problems in a specific
domain. x What is knowledge? Definition Knowledge is a theoretical or practical
understanding of a subject or domain. Knowledge is a combination and mix of
information that is already known, and knowledge is power. Anyone who has a certain
amount of knowledge may be considered an expert. Experts are people who have
power in the organisation. In any successful company, there are a certain number of
first class experts and the companies will not succeed without them. As an example,
Sun Microsystem has James Gosling, the founder of Java programming. x Who is fit
to be called an expert? Anyone can be called an expert as long as that person has a
vast knowledge of the particular field and has practical experience in a certain
domain. However, the person is restricted to his or her own domain. For example,
being an IT expert does not mean that the person is an expert in all IT domains but she
may be an expert in intelligence systems or an expert in only the development of an
intelligence agent.
7. 158 X TOPIC 8 EXPERT SYSTEM
x How does an expert think? The human mental process is too complex and
complicated to be drafted as an algorithm. Many experts can only create rules in
solving certain problems. We will learn more about the steps in referencing the
knowledge acquired from an expert with the rules when we learn about the basic
architecture of an Expert System. On the other hand, Figure 8.1 and 8.2 below show
the different thinking of an expert and a machine. Knowledge Domain Longterm Memory Advisor: Conclusion based on Short-term Memory Cases/Facts
Conclusion Result Facts/Cases Reasoning Figure 8.1: Human problem-solving
architectural structure Knowledge Database Domain Knowledge User: Conclusion
based on Working Memory Cases/Facts Conclusion Reasoning Facts/Cases Figure
8.2: An expert system problem-solving architectural structure SELF-CHECK 8.4
Write down the differences between the human problem-solving architecture and
those of the Expert System.
8. TOPIC 8 EXPERT SYSTEM W 159 8.3 EXPERT SYSTEM ARCHITECTURE
Figure 8.3: Basic components of an Expert System An ES merges knowledge, facts
and reasoning techniques in producing a decision. In order to produce a decision, an
ES fundamental architecture is required, as shown in Figure 8.3. The components are:
x Knowledge base x Inference engine x Explanation facility x Knowledge acquisition
facility8.3.1 Knowledge Base A knowledge database stores two important things:
facts, and rules or heuristic rules. x Stored facts are information or data in a

designated field. x Rules or heuristic rules explain procedures of reasoning used to

solve a certain problem. Knowledge representation has been earlier discussed. It is a
procedure used to manage knowledge. A knowledge database is quite different from
the conventional database. A knowledge database does not store information like
numbers, texts, logical values and others, as found in a normal database. On the other
hand, it stores concepts and dedicated procedures that need to be done in order to
solve a problem. There are several different methods of storing knowledge in a
database. Some of the methods are predicate calculus, semantic network, script and
mainframe.
9. 160 X TOPIC 8 EXPERT SYSTEM(a) Rules Creation Rules are divided into two
operators: x IF, called before (a premise or condition); and x THEN, it is called effect
(conclusions or actions). In general, rules can have a few conditions by relating each
condition to the keywords AND, OR or a combination (AND and OR). On the
contrary, it is better to avoid combining both in one rule. The example below shows
how a few conditions are related to AND. IF<condition 1> AND<condition 2> x x
AND<condition n> THEN<action> The next example shows how a few conditions
are related to AND and OR. IF<condition 1> AND<condition 2> OR<condition 3>
THEN <action> According to Durkin, rules can represent a relationship, suggestion,
instruction, strategy and heuristic. Relationship IFtank is empty THEN car cannot
startSuggestionsIF monsoon seasonAND cloudy skyAND weather station predicted
rainTHEN you are advised to bring an umbrellaInstructionsIF car cannot startAND
tank is emptyTHEN put petrol in the tank
10. TOPIC 8 EXPERT SYSTEM W 161StrategyIF car cannot startAND tank is
emptyTHEN put petrol in the tankStep 1 is doneIF Step 1 is doneAND tank is
fullTHEN check the car batteryStep 2 is doneHeuristicIF fluid spillsAND pH of the
spill < 6AND smells acidic or sourTHEN the spills is an acetic acid8.3.2 Knowledge
Acquisition Definition Knowledge acquisition is a process of gathering and
transfering problem- solving expertise from all sources of knowledge in a
computer programme.The expert information that has been acquired will be used to
develop andexpand the base knowledge. The source of knowledge stated here
includesexperts, journals, the Internet, online databases or research reports
andexperiments.8.3.3 Inference EngineThe inference engine is the most important
component and is considered thebrain of an ES. The inference engine is the
knowledge process that is modelledon the methods of human expert reasoning. It is a
process in the Expert Systemthat pairs the facts stored in the working memory with
the knowledge domainthat is stored in the knowledge database, to get the method
from the problem. Itis also known as the control structure or the rule interpreter for an
ES base rule.
11. 162 X TOPIC 8 EXPERT SYSTEM Definition Inference engine is a computer
programme that drives to the conclusion or solution and at the same time provides the
reasoning methodology for information stored in the knowledge database. Inference
engine also provides a guideline on using the knowledge in ES by developing an
agenda that manages and controls the steps needed for solving a problem during the
consultation process executed by the user. There are two strategies used by the
inference engine when making decisions or conclusions. These strategies are forward
and backward chaining.
ACTIVITY 8.2 An interesting explanation of the use of strategic forward and backward
chaining which includes a few related examples can be obtained from:
http://geminga.it.nuigalway.ie/~f_smith/ES.pptThe strategy of forward chaining can
obtain a decision and produce more information with fewer questions compared to

backward chaining. Thus, it is always used for large scale and complex ES. However, the
weakness in this approach is the long duration taken for processing. Certain ES developed
employs a combination of both the strategies of chaining, which is called the mixed
chaining.
(i)
Forward chaining strategy the inference engine starts reasoning from the facts
provided and moves on until it achieves its decision or conclusion. This strategy is
guided by the provided facts in the memory space and the premises which it can
obtain them from. The inference engine will try to match the required premise (IF)
for all rules in the knowledge database with the facts given, which are in its
memory. If there are several rules that match, the solving procedures will be used.
The inference engine will repeatedly match the rules of the basic knowledge to the
data stored in its memory.
(ii)
(ii) Backward chaining strategy this strategy is the opposite of the forward
chaining strategy. It starts from the decision and moves backward to obtain
supporting facts for the decision made. If there are no matching facts
12. TOPIC 8 EXPERT SYSTEM W 163 that support the chosen decision, the decision
will be rejected and another decision will be selected. The process continues until a
suitable decision and the facts that support it are obtained. SELF-CHECK 8.5 Is the
inference engine reasoning process the same as your reasoning process? Which will
you use to solve a problem? Can both processes be used?8.3.4 Explanation Facility
This component acts to help the user understand how an ES reaches a certain decision
or conclusion of the problem that needs to be solved. The user can obtain the logic or
rationale for a certain decision that it makes. This component is capable of answering
questions like: - Why is this question being addressed by the system? - How is a
decision made? - On what basis is the decision made? - Why are certain alternatives
rejected from being a decision or solution? Example ES : Is the car going to start?
User : Why? ES : If I know my car will not start, I may assume that the problem is
due to the failure of the electronic system of the car. An expert will act based on what
he or she can conclude from the answers whereas ES responds to the question of
WHY by displaying the rules it is executing.(a) Explanation of WHY Apart from
providing the final decision, an ES can explain how it comes to a decision.
Developing a conventional system is done based on the defined problems but it is not
the same for an Expert System. Thus, ES needs a justification facility to explain to the
user all the decisions it makes.
13. 164 X TOPIC 8 EXPERT SYSTEM As an example: ES : The battery of your car
has failed. User of ES : HOW? ES : It is because your car cannot be started, thus, the
system assumes that the electronic system in your car has failed. When the system
finds that the voltage level is below 10V thus it is proven that your car battery has
failed. The ES responds by stepping back to the rules that the system uses to achieve
the decision. Stepping back to the rules is how the Expert System does the reasoning.
8.3.5 The User Interface SELF-CHECK 8.6 In your opinion, what are the differences
between a user interface in an Expert system and in other information systems like MIS?
The user communicates with the Expert System through the user interface. It enables the
user to query the system, input information and receive advice. The Expert System aims
to provide communication between the system and the user, as if the user were interacting
with the expert. However, the Expert System is still unable to understand normal
language and general knowledge. Occasionally, ES process language which enables
interaction and communication between the user and ES in a user-friendly manner. When
ES was first introduced, the ES interface was only text based. However, a language that
was more similar to the human language made communication more natural. Now, certain

ES provide Graphical User Interface like menus and graphics in the Windows
environment.8.3.6 Working Memory Another important component in an ES is the
working memory. It contains facts of problems that are happening during the consultation
process with the Expert System. The system will match the information found with the
knowledge stored
14. TOPIC 8 EXPERT SYSTEM W 165 in the knowledge database to consider the
new facts. The conclusion obtained will be stored in the working memory. Thus, the
working memory contains the information that is supplied by the user, or the
reasoning done by the Expert System itself. SELF-CHECK 8.7 Compare and contrast
the strategic forward chaining and strategic backward chaining. 8.4 THE EXPERT
SYSTEM CHARACTERISTICS An Es is usually designed to have these
characteristics:
(a) The Highest Level of Expertise This characteristic is most useful. This expertise in
an ES is comes from the knowledge and problem solving steps provided by the best
experts in their own domains. This will lead towards efficiency, accuracy and
imaginative problem solving.
(b) Right on Time Reaction An Expert System must function and interact in a very
reasonable period of time with the user. The total time must be less than the time
taken by an expert to solve the same problem.
(c) Accepting Incorrect Reasoning This type of application is used when the
information used for the solution is unclear, vague or cannot be obtained and not in a
domain that is very clear.
(d) Good Reliability The expert system must be reliable and it must be improbable for
the system to make a mistake.
(e) Easily Understood The Expert System must be able to explain the reasoning steps
during the execution or the inference process for the user to better understand what is
happening. An ES must be able to explain why such actions are taken the same way
an expert would explain the decision he made.
15. 166 X TOPIC 8 EXPERT SYSTEM
(f) Flexible Due to the large amount knowledge possessed by an ES, it is important
for the ES to have an efficient mechanism to administer the compilation of the
existing knowledge in it.
(g) Symbolic Reasoning The Expert system represents knowledge in symbolic terms
by using one set of symbols that represents all the concepts of the problem in the
specific domain. All the symbols, when combined or paired, will demonstrate a
relationship between the problems. When this relationship is represented in a
programme they are called structured symbols. For example Statement : Ahmad has a
fever Rule : IF a person has a fever, THEN take Panadol Conclusion : Ahmad takes
Panadol
(h) Heuristic Reasoning An expert does efficient problem solving by relating to
experience as the basis of reasoning. If the problem encountered is new, then the
expert combines the knowledge and experience to solve the problem.(i) An example
of heuristic reasoning used by an expert: x I will usually check the electronic system
first. x Humans will not usually be infected with flu during summer. x If I suspect
cancer in a patient, I will check the patient s family background first.(j) Making
Mistakes Since most of the knowledge in the ES database was input by humans it is
subject to human error. This might happen due to the rules, facts, or steps not being
considered or being wrongly input during the process of acquiring of knowledge.

(k) Expanding with Tolerable Difficulties The problems that an ES needs to solve
must be complex and difficult but at a tolerable level. However, the problem must not
be too easy.
16. TOPIC 8 EXPERT SYSTEM W 167(l) Focus Expertise Most experts are skilful
and knowledgeable in their own field only. The ES must be made to focus on a
specific domain and not mix up the knowledge of two experts from different domains.
Table 8.3: The Differences between the Conventional System and the Expert System
Conventional System Expert System Knowledge database and the processing
Knowledge and processing are combined mechanism (inference) are two different in
one programme. components. Programme does not make errors (only The ES
programme may be make a programming error). mistake. Usually it will not explain
why the data needs to be input or how the decision is Explanation is part of an ES
component. achieved. System is operational only when fully An ES can operate with
small amount of developed. rules. Step by step execution according to fixed
Execution done logically and algorithms is necessary. heuristically. Can operate with
sufficient or insufficient Needs complete and full information. information.
Manipulates a large and effective Manipulates a big and effective database. database.
Referencing and use of data. Referencing and use of Knowledge. Main objective is
efficiency. Main objective is effectiveness. Easily operated with quantitative data.
Easily operated with qualitative data. SELF-CHECK 8.8 List three (3) main
characteristics of an Expert system and define them.
17. 168 X TOPIC 8 EXPERT SYSTEM 8.5 EXPERT SYSTEM DEVELOPMENTAn
Expert system team must consist of:x A domain expertx Knowledge engineerx
User(a) Domain Expert Definition A domain expert is a person who has the
knowledge, experience, skills, steps special consultation skills. in a certain field or a
particular subject. He should also be able to guide and possess unique problem
solving methods and is b tt th th t f l i th fi ld Even though an Expert system usually
models the expertise of either one or more experts, an ES also models expertise based
on other alternative sources such as printed material (books, manuals, journals and
others). The prerequisites to be a domain expert are: x Knowledgeable in a particular
field x Has skills in solving problems. x Is competent in presenting knowledge x Has
time management skills x Must be cooperative(b) Knowledge Engineer A knowledge
engineer is a person who is responsible for creating, developing and testing the Expert
system. The prerequisites to become a knowledge engineer are: x Must have
engineering knowledge (the art and science to develop an Expert System) x Has good
communication skills x Able to match problems with software x Have technical
knowledge (programming) in developing an expert system
18. TOPIC 8 EXPERT SYSTEM W 169(c) User The user is one who uses the Expert
System when it has been fully developed. He or she will help during the knowledge
acquiring process by explaining their problems to the knowledge engineer.8.5.1 The
Software and Tools in Expert System Development SELF-CHECK 8.9 In your
opinion, can the methodology used in developing a conventional system be applied in
developing an expert system?An expert system developer can choose three different
approaches in developingan ES, which are:x Using programming languagex Using an
Expert System shellx Using the tools in an artificial environment(a) The
Programming Language An ES can be developed using a symbolic language such as
LISP or PROLOG, or a conventional higher-level language such as FORTRAN, C and
PASCAL. LISP All ES developed in the early days used LISP, or tools written using
the LISP language. PROLOG The on-going research of artificial intelligent has given
birth to the programming language PROLOG. PROLOG is the acronym for

Programming in Logic. A programme using PROLOG can be assumed to be a

knowledge database that stores facts and rules. SELF-CHECK 8.10 Compare and
contrast PROLOG and LISP software.
19. 170 X TOPIC 8 EXPERT SYSTEM(b) Expert System Shell An Expert System shell
is a programme used to develop an Expert system. The Expert System Shell executes
three (3) main functions:
(i) Helps the programmer build a knowledge database by permitting the developer to
input knowledge in the knowledge representation structure.
(ii) Provides the procedures for inference or reasoning deductions based on the
information stored in the information database and new facts input by the user.
(iii) Provides the interface to let the user prepare reasoning tasks and questions to be
queried to the system on strategic reasoning.
8.5.2 The Tools and Environment of Artificial Intelligence Compared to the programming
language and shell, this tool is extremely expensive and powerful. The advantage of using
this tool is that it provides a variety in knowledge representation techniques such as rules
and frames. ACTIVITY 8.3 For additional reading, you are encouraged to visit:
http://www.denniskennedy.com/kmai01.htm to see how an artificial environment is
created for a law firm. 8.6 THE ADVANTAGES AND DISADVANTAGES OF AN
EXPERT SYSTEMThere are advantages and disadvantages of an Expert system. They
are listednext.
20. TOPIC 8 EXPERT SYSTEM W 1718.6.1 The Expert System Advantages ES usage
provides many advantages. Some of the advantages are
a) Consistency One of the advantages of an ES is that the results given are consistent.
This might be due to the fact that there are no elements such as exhaustion and
emotions as experienced by humans.
(b) Hazardous Working Environment Through an ES, we can avoid exposing
ourselves to a toxic or radioactive environment. An ES can take over the place of an
expert to handle problems in a high-risk area such as a nuclear power plant.
(c) Ability to Solve Complex and Difficult Problems A very difficult problem
encountered by an organisation, if not taken seriously, can cause an adverse impact
such as losses or cancellation of a business deal. Sometimes, the problems need to be
attended to quickly. The problems can become more complicated when individuals or
experts involved in solving them are absent or cannot be contacted. Thus, an ES
serves as an alternative to experts.
(d) Combination of Knowledge and Expertise from Various Sources As discussed
earlier, one of the important components in an ES is the knowledge base. This
component contains the accumulated knowledge and acquired or transferred expertise
from many experts. Thus, an ES is sometimes more superior than an expert because
its knowledge and expertise have come from many sources.
(e) Training Tool for Trainees An ES can be used by trainees to learn about the
knowledge-based system. Trainee who uses an ES would be able to observe how an
expert solves a problem.
8.6.2 Disadvantages and Weaknesses of Expert System SELF-CHECK 8.11 The Expert
system also has weaknesses and flaws. In your opinion, do these weaknesses influence
the quality of an Expert system?
21. 172 X TOPIC 8 EXPERT SYSTEM
Listed below are several weaknesses concerning the use of ES.

(a) Not Widely Used ES is not widely used in business firms or organisations. Due to
limited usage, firms are still in doubt about the capability and, most definitely, the
high cost involved in investing in an ES..
(b) Difficult to Use Using an ES is very difficult and learning and mastering it
requires a long time. This discourages managers from using ES. In one aspect,
developing an ES that is user-friendly is the biggest challenge for ES developer..
(c) Limited Scope This is the most obvious weakness in an ES; its scope is very
limited to its field only. In the development aspect, the ES built is best developed
because of its high accuracy. However, usage-wise decision makers face constantly
changing problems which involve different fields that are inter- related.
(d) Probable Decision Error The main source of the knowledge is experts. Humans
make mistakes. If the experts input wrong information into the Expert system, this
will have a negative impact on the results produced.
(e) Difficult to Maintain The information in ES must be constantly updated to solve
new problems. Every new problem that occurs needs new knowledge and expertise.
This means that there must be an on-going relationship between the domain experts
and the ES developer. This situation requires the domain experts update the source of
knowledge and expertise to suit the current situation.
(f) Costly Development The cost to consult a group of experts is not cheap, what if ES
was built traditionally without involving the use of an Expert System shell? On the
other hand, programming cost is high because the artificial intelligence technique is
difficult to master and needs a very skilful programmer.
(g) Legal and Ethical Dilemma We must be responsible for our actions and decisions.
An expert has to take responsibility for the information he or she provides. . The
difficult question here is who should shoulder the responsibility if a decision
suggested by ES results in a negative outcome.
22. TOPIC 8 EXPERT SYSTEM W 173 SELF-CHECK 8.12 1. There are 10 paradigms
involved in solving problems using an Expert system. List five paradigms. 2. State five
main factors that distinguish humans from an Expert system. 3. Define knowledge. 4.
State the structural differences between human problem solving and the Expert system. 5.
State the types of rules below. Do the rules below represent relation, suggestion,
instruction, strategy or heuristic? IF car cannot start ANDcar voltage < 10
ANDhorn not functioning THUS the battery is weak IF the battery is weak THENthe
solution is to install a new battery (Please use your own piece of paper)x Expert System
(ES) is a system that mimics the human capability to think and reason for decisionmaking.x An ES combines the use of knowledge, facts and reasoning techniques for
decision-making.x An Expert system is built for two main reasons - to replace an expert
or to help an expert.x The Expert system is used in various applications in multiple fields
and sectors like medicine, engineering, education, manufacturing, marketing, tax
planning, and many more.x Knowledge is understanding a subject or domain through
theory or practice.
23. 174 X TOPIC 8 EXPERT SYSTEMx Knowledge is also the combination and mix of
information that is already known, and knowledge is power. From the experts
knowledge, the rules are formed.x Rules as knowledge representation consists of two
parts - the IF part, called before (condition or premise) and the THEN part, called effect
(conclusion or action).x The architecture of an ES is from the knowledge base, inference
engine, explanation facility and knowledge acquisition facility.x The existence of ES
provides positive and negative effects that need to be considered in the development of an
Expert System.

It is a solved assignment of MIS for MB0031 of SMU MBA. The question is related to What is the
significance of quality in planning and development of MIS for an organization? We already have
explained about SIS for a Manager, Value Chain in MIS, Classification of Information and Decision
Support Systems. Now, I am going to share an assignment about Planning of MIS and
Development
of
Management
Information
Systems.
Planning

of

information

systems:

Many organizations have purchased computers for data processing and for meeting the statutory
requirements of filling the returns and reports to the government. Computers are used mainly for
computing and accounting the business transactions and have not been considered as tool for
information
processing.
The organizations have invested on computers and expanded its use by adding more or bigger
computers to take care of the numerous transactions in the business. In this approach, the
information processing function of the computers in the organization never got its due regard as
an important asset to the organization. In fact, this function is misinterpreted as data processing
for expeditious generation of reports and returns, and not as information processing for
management
action
and
decisions.
However, the scene has been changing since late eighties when the computers become more
versatile, in the function of storage, communication, intelligence and language. The computer
technology is so advanced that the barriers of storage, distance understanding of language and
speed
are
broken.
In short, we need a management information system flexible enough to deal with the changing
information needs of the organization. It should be conceived as an open system continuously
interacting with the business environment with a built-in mechanism to provide the desired
information as per the new requirements of the management. The designing as such in open
system is a complex task. It can be achieved only if the MIS is planned, keeping in view, the plan
of
the
business
management
of
the
organization.
Development

of

information

systems:

Once the plan of MIS is made, the development of the MIS calls for determining for the strategy of
development. As discussed earlier, the plan consists of various systems and sub systems. The
development strategy determines where to begin and what sequence the development can take
place
with
the
sole
objective
of
assuring
the
information
support.
The choice of the system or the sub-system depends on its position in the total MIS plan, the size
of the system, the user understands of the systems and the complexity and its interface with other
systems. The designer first develops systems independently and starts integrating them with other
systems, enlarging the system scope and meeting the varying information needs.
Determining the position of the position of the system in the MIS is easy. The real problem is the

degree of structure, and formalization in the system and procedures which determine the timing
and duration of development of the system.
Posted by Elzu at 8:07 PM

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Transcript

1. Management Information System (MIS) Presented By: Navneet Jingar

2. Contents Data, Information and System Information System (IS)
Components of an IS Types of IS Interrelationship among systems Management
Information System (MIS) Information a critical resource Data and Information
Types and Characteristics of useful Information System Broader Definitions and concepts
Output of MIS Functional View Impact of MIS MIS Planning and Development
MIS Development outlook Pointers for MIS Design MIS Planning Software Development
Life Cycle Software Development Methodologies: Approaches
3. Information is critical The information we have is not what we want, The information we
want is not the information we need, The information we need is not available.
4. Information is a Resource It is scarce It has a cost It has alternative uses There is
an opportunity cost factor involved if one does not process information
5. Why need Information? To ensure effective and efficient decision - leading to prosperity
of the Organization.
6. Data and Information Data vs. Information Data A given, or fact; a number, a
statement, or an image Represents something (quantities, actions and objects) in the
real world The raw materials in the production of information Information Data that
have meaning within a context Data that has been processed into a form that is
meaningful to the recipient and is of real or perceived value in the current or in the
prospective actions or decisions of the recipient. Data Manipulation Example: customer
survey Reading through data collected from a customer survey with questions in
various categories would be time-consuming and not very helpful. When manipulated,
the surveys may provide useful information.
7. Types and classification of Information Information classification Action v/s no-action
v/s non recurring Internal v/s external Planning Information: standards, norms,
specifications Control information reporting the status of an activity thru feedback
mechanism Knowledge information library reports, research studies Recurring
8. Characteristics of Useful Information
9. Information Presentation (An Art) Data may be collected in the best possible way and
processed analytically, however, if not presented properly, it may fail to communicate any
value to recipient. Communication of Information is affected by the methods of
transmission, the manner of information handling and the limitations & constraints of
recipients. The methods used to improve communication are: a) Summarization: Too
much information causes noise and distortion i.e confusion, misunderstanding and
missing of purpose. Summarization suppresses the noise and distortion. b) Message
routing: The principal here is to distribute information to all those who are accountable for
the subsequent actions in any manner. This is achieved by sending the copies of the
reports or documents to all the concerned people or users.

10. System System: A set of components that work together to achieve a common goal.
Computer-based Information Systems take data as raw material, process it, and produce
information as output.
11. Contents Data, Information and System Information System (IS)
Components of an IS Types of IS Interrelationship among systems Management
Information System (MIS) Information a critical resource Data and Information
Types and Characteristics of useful Information System Broader Definitions and concepts
Output of MIS Functional View Impact of MIS MIS Planning and Development
MIS Development outlook Pointers for MIS Design MIS Planning Software Development
Life Cycle Software Development Methodologies: Approaches
12. Components of an Information System
13. A Networked Information System: Three-Tier Architecture Corporate Databases
Corporate Headquarters Marketing and Sales Finance Mainframe Divisional
Minicomputers with Divisional Databases Production Divisional Databases Regional
Office Workstations Plant Minicomputers Salesforce Notebooks Local Area Network: PCs
with Local Databases Telecommunications Link
14. Types of Information Systems
15. Types of Information Systems Operational-level systems support operational
managers by keeping track of the elementary activities and transactions of the
organization, such as sales, receipts, cash deposits, payroll, credit decisions, and the
flow of materials in a factory. Management-level systems serve the monitoring,
controlling, decision-making, and administrative activities of middle managers. The
principal question addressed by such systems is this: Are things working well? Strategiclevel systems help senior management tackle and address strategic issues and long-term
trends, both in the firm and in the external environment.
16. Types of Information Systems
17. Transaction Processing System Transaction Processing Systems (TPS): Basic
business systems that serve the operational level A computerized system that performs
and records the daily routine transactions necessary to the conduct of the business
18. Management Information System Serve middle management Structured and
semi-structured decisions Provide reports on firms current performance, based on data
from TPS Past and Present Data Internal Orientation Provide answers to routine
questions with predefined procedure for answering them Typically have little analytic
capability
19. Decision Support System Serve middle management Support non-routine
decision making E.g. What is impact on production schedule if December sales
doubled? Often use external information as well as information from TPS and MIS
Processing is interactive in nature Output in form of Decision analysis Example:
Contract Cost Analysis
20. Executive Support Systems Support senior management Strategic
Level Address non-routine decisions requiring judgment, evaluation, and insight
Incorporate data about external events (e.g. new tax laws or competitors) as well as
summarized information from internal MIS and DSS User "seductive" interfaces; Users'
time is a premium What if capabilities abound Input in form of Aggregate data Processing
is interactive and output in form of projections Examples ESS that provides minute-to-

minute view of firms financial performance as measured by working capital, accounts

receivable, accounts payable, cash flow, and inventory. 5-year operating plan
21. Interrelationship Among Systems The various types of systems in the organization
have interdependencies. TPS are major producers of information that is required by many
other systems in the firm, which, in turn, produce information for other systems. These
different types of systems are loosely coupled in most business firms, but increasingly
firms are using new technologies to integrate information that resides in many different
systems.
22. Contents Data, Information and System Information System (IS)
Components of an IS Types of IS Interrelationship among systems Management
Information System (MIS) Information a critical resource Data and Information
Types and Characteristics of useful Information System Broader Definitions and concepts
Output of MIS Functional View Impact of MIS MIS Planning and Development
MIS Development outlook Pointers for MIS Design MIS Planning Software Development
Life Cycle Software Development Methodologies: Approaches
23. MIS - Definition and Concept Right Information To the right person At the right place
At the right time In the right form At the right cost The three sub-components
Management, Information and System - together bring out the focus clearly & effectively.
System emphasizing a fair degree of integration and a holistic view; Information stressing
on processed data in the context in which it is used by end users; Management focusing
on the ultimate use of such information systems for managerial decision making.
24. MIS Definition and Concept A management information system (MIS) is system of
collecting, processing, storing, disseminating and utilizing data in the form of information
needed to carry out the functions of management. Today, the term is used broadly in a
number of contexts and includes (but is not limited to): Decision support
systems, Resource and people management applications, Enterprise Resource Planning
(ERP), Supply Chain Management (SCM), Customer Relationship Management (CRM),
project management and database retrieval applications.
Difference between management information systems and information systems The
terms MIS and IS are often confused. IS may include systems that are not intended for
decision making. In effect, MIS must not only indicate how things are going, but why they
are not going as well as planned where that is the case Information system
applied to management context is called MIS. IS can be applied to any area of business
while MIS is applicable for managerial decision-making. IS means use of hardware and
software for any business. MIS can be used in any form - even manual reports, which aid
decisionmaking MIS is used to analyze other information systems applied in operational
activities in the organization. MIS summarize and report on the companys basic
operations. The basic transaction data from TPS are compressed and reported
26. Outputs of MIS Scheduled reports Key Indicator Report Summarizes the
previous days critical activities Demand Report Produced periodically, or on schedule
(daily, weekly, monthly) Gives certain report at manager's request Exception Report
Automatically produced when a situation is unusual or requires management action
27. MIS Functional View
28. How MIS Obtain Data from TPS: How MIS Obtain their Data from the Organizations
TPS: In the system illustrated by this diagram, three TPS supply summarized transaction
data to the MIS reporting system at the end of the time period. Managers gain access to

the organizational data through the MIS, which provides them with the appropriate
reports.
29. Sample MIS Report This report, showing summarized annual sales data, was
produced by the MIS in previous slide
30. Impact of MIS Management of marketing, finance, production and
personnel becomes more efficient, the tracking and monitoring becomes easy Helps in
understanding of business itself, MIS begins with definition of data and its attributes
uses data dictionary and brings common understanding of terms and terminology in
organization MIS calls for systemization of business operations leads to streamlining of
operations, brings discipline in its operations everyone is required to follow Since the
goals of MIS are driven from organization goals, it helps indirectly pulling everyone in
organization towards corporate goals by providing relevant information to the people in
organization MIS helps to monitor results and performances MIS provides alerts, in some
cases daily, to managers at each level of the organization, on all deviations between
results and pre-established objectives and budgets. IT enabled MIS is partly responsible
for the PARADIGM shift (A change, a new model,) from support to contributing to an
organizations profitability
31. Contents Data, Information and System Information System (IS)
Components of an IS Types of IS Interrelationship among systems Management
Information System (MIS) Information a critical resource Data and Information
Types and Characteristics of useful Information System Broader Definitions and concepts
Output of MIS Functional View Impact of MIS MIS Planning and Development
MIS Development outlook Pointers for MIS design MIS Planning Software Development
Life Cycle Software Development Methodologies: Approaches
32. MIS Development Outlook Security Corporate Corporate Strategy Strategy Ethics/
Ethics/ Privacy Privacy MIS Strategy and Plan Internal Systems Development Internal
Systems Operations Implementation Outsourced Systems Development Outsourced
Systems Operations Infrastructure
33. Pointers for MIS Design To take care for data problems (bias and error) by high
level validations, checking and controlling the procedures. Due regard to the
communication theory of transmitting the information from the source to the destination.
To provide specific attention to quality parameters Utility, Satisfaction, Error and
Bias Handling of noise and distortion by summarization and message routing
Ensuring that no information is suppressed or over emphasized By controlling inputs to
the MIS on the factors of impartiality, validity, reliability, consistency and age Should make
a distinction between the different kinds of information for the purpose of communication.
Say an action, a decision oriented information should be distinguished from a non
action/knowledge-oriented information. To recognize some aspects of human capabilities
as a decision maker. Capabilities differ from manager to manager and the designer
should skillfully deal with them. It should meet the needs of the total organization.
Recognizing that the information may be misused if it falls into wrong hands, the MIS
design should have the features of filtering, blocking, suppressions, and delayed delivery.
34. MIS Planning A very important fundamental concept of MIS planning is that the
organization's strategic plan (Business Plan) should be the basis for MIS strategic plan.
Alignment of MIS strategy with organizational strategy is one of the central problems of
MIS planning. The Information Master Plan establishes a framework for all detailed

information system planning. Information Master Plan typically has one long-range plan
for three to five years (or more) and one a short-range plan for one year. The long-range
portion provides general guidelines for direction and shortrange portion provides a basis
for specific accountability as to operational and financial performance. In general, plan
contains four major sections: Information system goals, objectives and
architecture (assessment of organizational context); Inventory of current capabilities;
Forecast of development affecting the plan; The specific plan.
35. Systems Development Life Cycle (SDLC) Activities that go into production of an MIS
to an organizational problem or opportunity: Project definition Determines whether or
not the organization has a problem and whether or not the problem can be solved by
launching a system project. Systems study Analyzes the problems of existing systems,
defines the objectives to be attained by a solution and evaluates various solution
alternatives. Design Logical and physical design specifications for the systems solution
are produced. Programming Specifications from design stage translated into program
code. Installation The final steps required to put a system into operation or production:
testing, training and conversion. Post-implementation System is used and evaluated
while in production and is modified to make improvements or meet new requirements.
36. SDLC
37. Project definition & Systems study Systems Analysis (study) The analysis of a
problem that the organization will try to solve with an information system; describes what
a system should do. Feasibility study A way to determine whether the solution is
achievable, given the organization's resources and constraints. Technical feasibility
Determines whether a proposed solution can be implemented with available hardware,
software, and technical resources. Economic feasibility Determines whether the
benefits of a proposed solution outweigh the costs. Operational feasibility Determines
whether a proposed solution is desirable within the existing managerial and
organizational framework. Information requirements A detailed statement of the
information needs that a new system must satisfy; identifies who needs what information,
and when, where and how the information is needed
38. Systems Design Phase of detailing how a system will meet the information
requirements determined by the systems analysis. This phase is broken into two sub
phases: 1. Logical design 1st phase, lays out the components of the information system
and their relationship to each other as they would appear to users. 2. Physical design 2nd
phase, the process of translating the abstract logical model into the specific technical
design for the new system Tools and Techniques used for designing: Flow Chart Dataflow
Diagrams (DFDs) Data Dictionary Structured English Decision Table Decision Tree
Design specifications include: Output, Input, User interface, Database design, Manual
procedures , Documentation etc..
39. Construction (Programming & Testing) Programming The process of translating the
system specifications prepared during the design stage into code Test plan Prepared by
the development team in conjunction with the users; it includes all of the preparations for
the series of tests to be performed on the system. Testing The exhaustive and thorough
process that determines whether the system produces the desired results under known
conditions. Unit testing The process of testing each program separately in the
system. Sometimes called program testing. System testing Tests the functioning of the
information systems as a whole in order to determine if discrete modules will function

together as planned. Acceptance testing Provides the final certification that the system is
ready to be used in a production setting. Documentation Descriptions of how an
information system works from both the technical and the end-user standpoint.
40. Installation Conversion The process of changing from the old system to
the new system. Conversion plan Provides a schedule of all activities required to install a
new system. Parallel strategy A safe and conservative conversion approach where both
the old system and its potential replacement are run together for time until everyone is
assured that the new one functions correctly. Direct cut-over A risky conversion approach
where the new system completely replaces the old one on an appointed day. Pilot study A
strategy to introduce the new system to a limited area of the organization until it is proven
to be fully functional; only then can the conversion to the new system across the entire
organization take place. Phased approach Introduces the new system in stages either by
functions or by organizational units.
41. Post-implementation Production The stage after the new system is installed and
the conversion is complete; during this time the system is reviewed by users and
technical specialists to determine how well it has met its original goals. Maintenance
Changes in hardware, software, documentation, or procedures to production system to
correct errors, meet new requirements, or improve processing efficiency
42. Software Development Methodology: Approaches The software development
methodology is an approach used by organizations and project teams to apply the
software development methodology framework.
43. Development Approach Waterfall Model STAGES END PRODUCTS
Planning/definition Project proposal report Study/analysis System proposal report Design
Design specifications Program code Programming Installation Maintenance Milestone 2
Design solution decision Milestone 1 Project initiation Year 1 Testing and installation
Postimplementation audit Milestone 4 Production decision OPERATIONS Milestone 3
Design specification sign-off Year 2 3-8 year lifespan
44. Development Approach Waterfall Model Sequential development approach, in
which development is seen as flowing steadily downwards (like a waterfall). Advantages
Simple and easy to use. Easy to manage due to the rigidity of the model each phase
has specific deliverables and a review process. Phases are processed and completed
one at a time. Works well for smaller projects where requirements are very well
understood. Disadvantages Adjusting scope during the life cycle can kill a project No
working software is produced until late during the life cycle. High amounts of risk and
uncertainty. Poor model for complex and object-oriented projects. Poor model for long
and ongoing projects. Poor model where requirements are at a moderate to high risk of
changing.
45. Development Approach Incremental Model
46. Development Approach Incremental Model The incremental model is an intuitive
approach to the waterfall model. Multiple development cycles take place here, making the
life cycle a multi-waterfall cycle. Cycles are divided up into smaller, more easily
managed iterations. Each iteration passes through the requirements, design,
implementation and testing phases. Advantages Generates working software quickly
and early during the software life cycle. More flexible less costly to change scope and
requirements. Easier to test and debug during a smaller iteration. Easier to manage
risk because risky pieces are identified and handled during its iteration. Each iteration is

an easily managed milestone. Disadvantages Each phase of an iteration is rigid and do

not overlap each other. Problems may arise pertaining to system architecture because
not all requirements are gathered up front for the entire software life cycle.
47. Development Approach - Spiral Model
48. Development Approach Spiral Model The spiral model is similar to the incremental
model, with more emphasis placed on risk analysis. The spiral model has four phases:
Planning, Risk Analysis, Engineering and Evaluation. A software project repeatedly
passes through these phases in iterations (called Spirals in this model). The baseline
spiral, starting in the planning phase, requirements are gathered and risk is assessed.
Each subsequent spirals builds on the baseline spiral. Advantages High amount of risk
analysis Good for large and mission-critical projects. Software is produced early in
the software life cycle. Disadvantages Can be a costly model to use. Risk analysis
requires highly specific expertise. Projects success is highly dependent on the risk
analysis phase. Doesnt work well for smaller projects.
49. Development Approach : Prototyping Prototype: Preliminary working version of
information system for demonstration, evaluation purposes Prototyping: Process of
building experimental system quickly for demonstration and evaluation. Small-scale
mock-ups of the system are developed following an iterative modification process until the
prototype evolves to meet the users requirements Advantages: Useful in designing
systems end user interface Often faster Attempts to reduce inherent project risk by
breaking a project into smaller segments and providing more ease-of-change during the
development process User is involved throughout the development process, which
increases the likelihood of user acceptance of the final implementation. Problems:
Omission of basic requirements. Lack of documentation, testing. Prototyping tools
may not be capable of developing complex systems.
50. Alternative Methodology: ObjectOriented Development: Uses the object as
the basic unit of systems analysis and design Objects combine data, and processes used
on the data Use class and inheritance to group objects and apply common embedded
procedures Development is iterative and incremental Analysis identifies objects, classes
of objects, and behavior of objects.
51. Alternative Methodology: End-User Development Development by end
users with little or no help formal assistance from technical specialist Allows users to
specify their own business needs Doesnt require IT staff so is more rapid Appropriate
mainly for smaller applications Generally not well designed, easily maintained or efficient
software Creates islands of software in firm, and redundancies
52. Alternative Methodology: Acquiring Software Packages Commercial Off the Shelf
(COTS) Packages Set of prewritten application software programs that are
commercially available Modification of software package to meet organizations needs
may be required Customization: Tailor and off the rack suit Great if you are a close
fit Ends up more trouble than worth if you arent close fit..
53. Alternative Methodology : Outsourcing The purchase of an externally produced good
or service that was previously produced internally Advantages Economy
Predictability Frees up human resources Disadvantages Loss of control Vulnerability
of strategic information Dependency
54. Thank You

Assign A Question 5
The question is related to Explain the challenges before an e-business management. The
question is also related to MBA Assignments of Sikkim Manipal University. You already have
gottenDevelopment of MIS for an Organization, Value Chain in MIS, Classification of
Information and Decision Support Systems assignment questions of SMU MBA. Now, I have
decided to share an assignment about Explain the challenges before an e-business management.
The scope of E-business is limited to executing core business process of the organization. The
process would have external interface life suppliers, customers, contractors, consultants and so on.
The core business process of the organization is procurement, manufacturing, selling, distribution,
delivery and accounting. These core process are best run by application packages like enterprise
definition is made wider including customer, suppliers and distributors, application package like
supply chain management (SCM) is best suited for planning and execution of entire business
process.
In addition to these core business process, organizations use internet enabled systems and other
technologies to handle these process more effectively. Transaction processing workflow, work
group and process control applications are the backend support systems to main ERP/SCM
enterprise
management
systems.
E-business systems scope manages cross-functional application systems as a single business
process. It integrates cross functions seamlessly, automates the tasks, and updates the
information is real time the ERP/SCM and now customer Relations management system (CRM) is a
family of software solution packages dedicated to care management of functions of business. They
are supported by front-end and back-end systems and applications designed for transaction
processing. Work flow management, work group processing and automated process control, Ebusiness systems use client/server architecture and run an internet platform. E-business systems
lay foundation for other Enterprise applications, namely E-commerce, E-communications, and Ecollaboration.
In Accounting and finance system, IT application is very strong. E-business applications in this
area are capable of accounting every business entity such as material, men, machines, cash,
customer, vendor and so on, all process which deal with transaction, computing, accounting and
analysis are automated using system intelligence and knowledge driver intelligent systems.
Posted by Elzu at 7:37 PM

0 comments:

Assign A Question 5

E-business challenges of today

1 September 2004
All businesses work differently, but the leaders in their respective fields all have one thing in common they must give their customers more than the competition does.
And although e-business is still relatively early in adoption rates, there are early success stories amazon.com, eBay, eToys and Dell to name a few. All these companies automated their businesses (not
just computerised them) and they provide good value to their customers.
This fundamental business principle was addressed early on in the development of their e-business, and
the same should apply to your adoption of e-business. To do this, you need to consider six fundamental
challenges:

* Become customer-centric.
* Recognise the death of mass marketing.
* Identify the right tasks to automate.
* Emulate the best practices of your top performers.
* Get everyone to work together.
* Adopt an integrated approach.
Becoming customer-centric
In order to develop an effective e-business strategy, a company must make the shift from being
product-centric to becoming customer-centric. By placing customer needs at the centre of every decision
and tactic, the entire e-business strategy will become more effective and profitable for the company, by
fostering an atmosphere of customer loyalty and long-term relationships.
A company which fails to become customer-centric will make decisions that do no make it easier for their
customers to do business with them - and the sad result will be that their customers may well turn
around and do business with one of their competitors. After all, all they have to do is type in a new URL
to get to a competitor's website.
The death of mass marketing
The age of mass marketing is coming to a close - long gone are the days of revising campaigns and
strategies on an annual basis. Companies need to act and react instantaneously in this new frontier
because they are effectively working with target markets of one. Today, the popular buzzwords are 'oneto-one' and 'speed' marketing. This new reality poses exciting opportunities for today's business, but it
brings with it the fear of operating in unknown territory.
Identifying the right tasks to automate
An e-business strategy, combined with a comprehensive e-business system can automate the majority
of repetitive and manual tasks performed by sales and marketing personnel every day. But take care to
ensure that the processes and tasks you automate represent your company's best practices and reflect a
truly customer-centric approach. If you automate a bad process, you just end up doing the wrong thing
a lot faster.
Emulating best practices
Two primary reasons for poor Web sales performance are incorrect prospect targeting and ineffective
sales support while customers are trying to buy. To go beyond electronic catalogues and help solve a
customer's problem, a website must provide guidance and advice to help customers define their problem
or question and evaluate potential solutions. Therefore, if your website uses technologies to emulate the
skills of your top salespeople, you will be more effective in generating revenue.
Getting everyone to work together
Who owns customer information? Who owns the website? These are questions which many companies
are struggling with, and you need to answer them to carry out an effective e-business strategy. An ebusiness initiative typically involves participation and buy-in from sales, marketing, customer support,
accounting, MIS, and senior management. Everyone must agree on the overall goals of the project,
including the shift towards becoming a customer-centric organisation.
Adopting an integrated approach
One of the biggest challenges facing companies today is the temptation to isolate Internet/Web
marketing and website initiatives (and also the whole e-business strategy) from traditional, or off-line
marketing strategies. To succeed, you must integrate your e-business activities with other traditional
sales and marketing activities, from telephone sales to print advertising.
Having addressed these six fundamental business issues, your business will then be able to incorporate
e-business readily and successfully into its existing processes.

Marcus Potts, managing director of Maximizer Software

For more information contact Marcus Potts, Maximizer Software, info@max.co.uk

Challenges in E-Business : Chapter 25

The rapidly changing business environment has led
several companies to adopt e-commerce. E-Business
brings about a lot of changes in the way firms work. It
also throws up challenges that they have to meet in
order to reap the benefits of e-commerce. The various
challenges to businesses include technological
challenges, legal and regulatory challenges, behavioral
and educational challenges, and other miscellaneous
challenges. Various issues pertaining to the
implementation of new technology include security
issues, choice of Internet payment instrument and its
inter-operability, inter-operability of technology and
technological application, comparative buying
capabilities, richness and depth of information available
over the Internet, lack of reliable network infrastructure,
lack of e-commerce standards, deployment of public key
infrastructure to enable identity authentication, technical
integration of new technology with existing applications,
and high cost of bandwidth. Challenges associated with
legal and regulatory framework include the difficulty in
regulating and enforcing standards, due to lack of
consistent rules and policies; customs and taxation
uncertainties; and government intervention.
Changes in attitudes of consumers result in behavioral challenges to businesses. These
challenges include lack of trust of customers and their fear of intrusion of privacy which
makes them reluctant to involve in e-transactions. In addition, the rampant frauds taking
place over the Internet and lack of awareness of customers about the availability of
services poses a challenge to businesses. Miscellaneous challenges such as channel
conflict, the problem of attracting and retaining a critical mass of customers, and the
need to improve the order fulfillment process, are the other aspects that have become a
cause of worry to businesses.

Transcript

1. Chapter 9:DEVELOPMENT PROCESS OF MIS

2. LEARNING OBJECTIVES Process of mis development Linkage of business
goals to MIS goals Relationship between Business goals and business
stretergy Mis goal and stretergy Mis to generate all classes of information

for all users Methods for handling uncertaintity and risk Approach to MIS
development Implementation of MIS MIS: Factors of success and
FailuresPage 2
3. Development of long range plan of mis To achieve success it is necessary
to make plan first Constructing MIS plan take information as resource Use
proper data entry methods and plan can be made from proper resources of
organizations In short mis plan is flexible enough to deal with changing
according to time, Situation and adopt latest technology Mis plan can
contain following major elements- Deal with business plan- Strategy for plan
achievement- The architecture of mix- The system development scheduleHardware versus software planPage 3
4. Contents of the mis plan A long range MIS plan provides direction for the
development of the systems It provide basis for achieving the specific
targets or tasks against a time frame. Pan is strectly related with goals and
objectives of the mis which are as under given below- Provide an online
information of everything- Quick process of query- The focus of system will be
on end user- Information support system will contain stretegic,tactical and
operational area of businessPage 4
5. MIS Plan vs Business plan Business plan MIS plan Business goals and
objectives Mis,objectives,business goals Business plan and strategy
Information strategy for business plan ,implementation playing a supportive
role Strategy planning and decisions Architecture for mis to support decision
Management plan for execution and Sytem development schedule,matching
control the plan execution Operation plan for execution Hardware and
software plan for implementationPage 5
6. Strategy for plan achievement The designer has to take number of
strategic decision to achieve goal and objective of organization the strategy
are:a)Development strategy: An online, a batch, a real time. Technology
platformb)System development strategy: Any approach to the system
development- operational versus functional, Accounting versus analysis,
database versus multiple databasesc)Resources for system development: In
house versus external,Customised development versus the use of
packages.d)Manpower composition: Analyst, programmer skill and knowhowPage 6
7. The Architecture of the MIS*The architecture of the mis plan provide a
system structure and their input, output and linkages- It also provide a way to
handle the system or subsystems by way of simplification, coupling and
decoupling of subsystems- It spells out in detail the subsystems from the data
entry to procesing,analyst to modeling and storage to printingPage 7
8. The System Development Schedule A schedule is made for the
development of the system Preparing information schedule first importance
is given to the system requirement The development schedule is changed
according to be weighted against the time scale for achieving certain
requirement. Which is linked with business plan Schedule can be revised
according to performance of businessPage 8
9. Hardware and Software plan Feasibility studies can effect on planning of
MIS The hardware and software which is selected for mis plan should be
technically sound and up to date Selection of proper hardware and software
should be part of strategic level decisions Proper selection of hardware and
software should link with goals and objectives of organizationsPage 9
10. A Model of the mis plan Contents Particulars Focus Corporate Information
Business environment Where are We? and current operations Mission, Goal
and Current mission, goal and Where do we want to Objectives objectives

reach? Business risks and Risk analysis and current What is risk? rewards
status Policy and strategy Details of policies and How do we achieve status
goals? Information needs Strategic planning What is key information?
Architecture of plan IT detail What are tools of achievement? Schedule of
development Detail of system and When it will achieve? subsystem Budget
and Roi Detail of investment What is cost of budgetPage 10 schedule and
benefits and roi?
11. Ascertaining class of information Information Class Example User
Organizational Employee,products,servi Many users at all levels
ces,location,turnover etc Functional Purchase,sales,producti Functional heads
and ons,stocks,marketing etc others Managerial Payable,outstanding,bud
Middle and top level get,statutory information management Knowledge Entire
organization Middle ,top and bottom level management Decision Support
Status of information, Middle and low level various standard etc management
Operational Information on Operational and production,sales management
supervisorPage 11 ,purchase etc
12. Determining the information requirement The difficulty to determine to
determine a correct and complete sets of information is on account of the
factor given below:1)The capability constraint of human being as an
information processor2)The nature and the variety of information in prcised
terms3)Reluctance of decision maker to spell out the information4)The ability
of the decision makers to specify information There are 4 methods of
determining information requirements1)Asking or interviewing2)Determining
from existing system3)Analyzing the critical success factors4)Experimentation
and modelingPage 12
13. Methods of handling Uncertainty Levels of uncertainty Level of
management Method Low Operational Interview management A risk situation
Middle management Determine from existing system Very risky Middle and
top Determine threw critical management success factors High Top
management Experiment ,modeling and sensitivity analysisPage 13
14. Development and implementation of MIS The plan consists of various
system and subsystems The choice of the subsystem depends on the its
positions in the total mis plan The designer first develops systems
independently and start integrated them with other systems Basically 2
approaches effected on MIS1)Prototype approach2)Life cycle approachPage
14
15. Prototype approach It is useful for complex system Prototyping is a
process of progressively ascertaining the information needs, developing
methodology, trying it out on a smaller scale with respect to the data and the
complexity. Designers task is complex and full of difficult in this approach
Multiple user can involve in this approachPage 15
16. Development process model of prototype approach Mission, Goals Identify
Refine the Modify information review needs prototype Define Develop Develop
System Implement And test Revised boundries In parallel prototype Define
Initial System Satisfy? Prototype training objectives Examine Develop Develop
Feasibility prototype application documentationPage 16
17. Life Cycle Approach It is useful when there are periodic review of system
take place It is useful in modification of system required after particular time
period It provide system a stability with regular evaluation This approach is
based on rules and regulation on which system follows and it can not allow
significant change in system. It is used in closed system where outcome of
system is already decided before implementation of systemPage 17
18. Development process model of Lifecycle approach System, Application
Assess Physical Install Feasibility Design System Information System Req.

Conduct Specification analysis Training Define Program Operate System

Specification System objectives Conceptual Physical Review Design Design
And AuditPage 18
19. Prototype VS Lifecycle Approach Prototype Approach Lifecycle Approach
Useful in open system where high Useful in closed system which have amount
of uncertainty about information certain information is there. Necessary to try
out some assumption No need to try out any assumption in decision making
process Experiment is necessary and control the No need to experiment
anything cost before system has been implemented Tryout system before it
commits on The user is confident enough about specific information
requirements system so no need to try anything System is custom oriented
The system is universalPage 19
20. Implementation of MIS There are certain guidelines to user about proper
implementation of system in organization which are as given beloved No
question beyond limit the information need to user Dont forget his role is to
offer service not demand Give priority to user not designer Dont mix
technical need with information need Impress upon user global nature in
system design with provide attractiveness in system design Dont challenge
application of information in decision making Maintain quality of information
in system Provide information as corporate resource and contribute you as a
user Take regular feedback of user with proper interaction with userPage
20
21. Implementation of MIS Ensure the overall system effort has management
acceptance Enlist users participation time to time Realize user that threw
serving they are true guide of system Allover proper change in system time
to time Identify role of user in system Conduct periodic meeting with user
time to time Provide proper training to user with proper guidelines about
usage of systemPage 21
22. Management of information quality in the MIS The quality of parameters
is assured if following steps are taken.1)All the input is process and controlled
as input and pricess design2)All updating and correction are completed the
data processing begins3)Inputs are subjected with validity checks4)Access of
data file is protected and secured threw authorization scheme5)Ensure that
complete data is processed in one transaction6)Due attention is given to the
proper file namePage 22
23. Management of information quality in the MIS7) Back up of data and files
are taken safeguard corruption or loss of data8) Time to time audit
constructed9) Modification of system is necessary10) System are developed
within standard specification of design and development11) Information
system is controlled threw program and provide perticular access control12)
Mis model will provide consistency into business plan so that information
needs to acheiee its goals.Page 23
24. Quality parameters of information Parameter of quality Example
comments Complete data of all All invoice of the month Achieves integrity of
data transaction with voucher with respect to time period Valid transaction
and Only correct transaction is Validity of data input data allowed Accuracy
and precision of Correct use of formula Results are accurate results with
relevant data Relevance to the user Concentrate strategic Relevance towards
the and decision maker areas of business goal of organization Timely
information Information of sales, Information should be up dispatch etc to
date Meaningful and complete Production information is Incomplete
information information about quality with proper makes user wrong format
and so on decisions.Page 24

25. Organization for development of mis There are some major issues
involved in interaction of mis with organization the issues are:1)Whether the
mis function should be handled as centralized or decentralized activity2)The
allocation of the hardware and software resources3)The maintaince of the mis
service levels at an appropriate level4)Fitting the organization of the mis in
the corporate organization, its culture and the management philosophy.Page
25
26. Organization for development of mis The question of centralization
versus decentralization is depends on information resource management in
the organization In a centralized set the responsibility of acquisition of the
data, of the information to the users becomes the centralized function In a
decentralized set of responsibility information is at second level so priority is
given to the requirement and other things. The development process model
is divided into centralized and decentralized organization which are as
mentionPage 26
27. Development process model of mis Centralized model of mis Selections,
expansition Hardware and Technology MD Software Upgarate decision
Information System planning Head of Centralized system MIS Developement
Training Management and developement Operations, Day to day maintaince
operationPage 27 System,software maintaince
28. Development process model of mis Decentralized model of mis
Selections, Distributed or expansitiondecisions Decentralized Hardware and
Management of HW Technology MD Software Upgarate decision Information
Selection of System planning Hardware solution Head of Centralized system
Hw & Sw Techno Training Selection of OS MIS Developement Management and
developement Corporate Operations, Users in System Day to day DBMS
maintaince Developement operation Training and System,softwarePage 28
Problem solving maintaince
29. Features of Contributing Success of mis It focus major issues of business
and also adequate development resources are provided and barrier are
removed An appropriate information processing technology, required to
meet the data processing and analysis needs of users of the mis,is selected
Mis defined users requirement and its operational validity is ensured Mis is
kept under continuous surveliance,so that its open system design is modified
according to changing information needs. Mis focus on business objectives
and goal. Mis is not allowed to end up into an information generation mill
avoiding the noise in the information and communication system Mis will
consider all human behaviour factors in the process of management Mis is
focused on different information needs for different objectivesPage 29
30. Features of Contributing Success of mis Mis is interacted with term
globalization so that it should be prepared with lattest technology. Mis is
easy to operate Mis design provide basic capability for user to deal with
complex situation The mis concentrate on the development the information
support to manage critical success factors in organizations Mis concentrates
on the mission critical applications serving the need of the top
management.Page 30
31. Features of Contributing Failures of mis The mis is conceived as a data
processing and not an information processing system Mis is not those
information that manager needs instead of it provide those information that
function calls. Mis is not provide proper way to deal with system complexity
instead of it recognized its successful implementation Mis is not concentrate
on system control and its neglect basic system tools which are input, process
and output The mis is developed without streamlining the BPS in

organization Mis is not concentrate towards the training aspects of users

The mis does not meet certain critical and key factors of the users such as a
response to the query on database.Page 31
32. Features of Contributing Failure of mis Mis is not fully guaranteed that it
will provide complete problem solving mechanism in the organization
Sometimes lack of capability of developers makes mis an unused product in
organization The mis does not give perfect information to all the users in the
organization. Mis is assumption of developer so sometime this assuming
becomes reason for failures.Page 32
33. Approach to MIS developement Identify business goals Determine
critical success factors Determine business stretergy Identify critical
business application Make decision analysis Develop business performance
indicators Identify information entities to decision support for business
Build mis superset as precribed I the general model of misPage 33
34. Mis develop process model Study business environment Study
organization and structure Identify missions and goal Identify critical
success factors Identify critical business applications Ascertain the
business strategy Identify business decisions Develop key performance
indicators Determine mis goals supporting business goals Developed it
strategy to meet goals Develop it support structure to meet data and
information needs. Determine mis superetPage 34
35. Mis develop process model Link and map mis and information outcome
to business goals and strategy Design KMS & BI systems Design
information reporting structure- Periodic reports- Exception reports- Control
reportsPage 35
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Contents
1. Main Phases
2. System Main Features For
3. Integrated Manufacturing Information System
4. Costing System
5. Financial Accounting/Asset Management System
6. Logistics, Inventory Management and Purchasing Management

1. Main Phases
a. Review the Diagnostic Study and the outcome of the Business plan:
Vision, Mission Statement, Strategic Objectives, SWOT Analysis and
Recommended Actions for each Company (Strategic Business Unit
SBU).

b. Define the framework for Management Information System MIS and its
subsystems that could fulfill the requirements for the implementation of
the Business Plan for each SBU:

Executive Information System EIS

for Strategic & Business Planning Needs. The EIS should
perform the following functions: Enterprise (or SBU) Wide
Multiple Factor Analysis, Integrated Measurement over
Database Dimensions, and Define Relational Viewpoint from
Factor Measure to Transaction Component.

Decision Support System DSS

To help higher-level management in Decision making for
unstructured problems. DSS facilities support a variety of
analytical techniques such as "What-If" analysis, optimization
modeling and others. OnLine Analytical Processing OLAP is decision support
software that allows the user to quickly analyze information
that has been summarized into multidimensional data views
and hierarchies.

8 Ways That Web-Based Point of Sale

Software Can Benefit Your Business
Written by Nicholas Hanna
Your choice in POS software is one of the most important considerations for your business, regardless of whether
you're running an upstart new mom-and-pop shop or a well-established chain. Many business owners are finding
the solutions they need in web-based POS software, which can offer comprehensive service with a smaller price
tag. To help you judge whether or not web-based POS is the right answer for your business, here is a list of 8
benefits of a web-based platform.
1. Faster, Easier and Cheaper Installation
Many POS systems put a bad taste in your mouth before they're even up and running, with the installation often
taking many hours of trial-and-error, and requiring a substantial number of phone calls to customer support. And
of course, this is usually after you have already spent thousands of dollars on new POS hardware that is needed
just to run the system. With a web-based POS program, however, there is almost zero installation necessary.
Web-based POS is hosted, which means that all the software is on the provider's end.
In addition to requiring little installation, web-based POS also gives you freedom from the necessity of IT tasks,
meaning that there is no need for you to worry about software updates, nightly backups, and dreaded system
reconfigurations. Spending less time figuring out how to run your computer system gives you more time to
properly run your business.
The cost for all this? Significantly less than you would have paid for a traditional system. Web-based POS can run
from virtually any computer with an active Internet connection, a quality which by itself saves thousands of dollars
that you may have needed to have invested in new equipment. In addition, there is no need to purchase backup
software, backup hard drives, or a server.
2. Improved Cash Flow
With just about any standard POS system, you are mandated to pay up-front for the hardware and software,
which can be a drain on your capital and initial cash flow. There is always the option of leasing, of course, but this
tends to incur a relatively large monthly payment which often ends up totalling much higher than the purchase
price of the system. With a web-based point of sale platform, however, costs are typically derivative of a small
monthly subscription fee. In addition, this subscription will usually include software updates, maintenance, and
technical support - all free of charge.
3. Enhanced Inventory Management
With a web-based POS system, you can track your inventory in real-time, rather than seeing numbers that are
updated hourly or daily, like most traditional systems. This includes seeing which items are on-hand, in-transit,
and on-order. You can quickly and easily judge how many of an item you need to order, which can save you
money that would have been lost a result of over or under buying.

As well, if your business runs at multiple locations, you can easily check inventory at other stores. This allows you
to place orders for all stores from one location, saving you from having to essentially draft orders for the same
item multiple times As well, if a customer asks for an item that is out of stock at the location they're in, a staff
member can quickly and easily check if the item is available at a different store - all right in front of the customer's
eyes.
As an additional benefit, many web-based POS solutions are capable of automatically generating orders for new
shipments of items. Since all inventory amounts are updated in real-time, the system can accurately judge when a
new shipment might be necessary, and can write up an order that can quickly and easily be approved by a
manager.
4. Quick and Comprehensive Reporting
As a result of the instantaneously updated inventory amounts, a web-based POS system can produce remarkably
accurate reports, telling you by the week, day, or hour how your business is doing. Overall sales, profit after
markup, sales attributed to each employee, and many more specifications can all be monitored. This allows you
to quickly see if a new sales tactic is working, or if an employee is under performing on a given day, without
having to wait until the store is closed. With this information in hand, you can address any quantifiable issues, and
potentially raise your sales by the end of the day.
5. Reduced Paperwork
With a web-based POS system, sales for all stores can be tracked in the same database, meaning that each
store is not required to generate their own individual paperwork in regards to sales. As well, since orders for
multiple stores can be placed together, fewer invoices are generated, which can help the accounting process
operate more smoothly.
6. Easier Customer Management
Information regarding purchases a customer made at other stores is easily accessible with a web-based POS
system. This relieves headaches in regard to the return and exchange processes, resulting in quicker transactions
and happier customers. They can return their purchase at any location, even if they literally bought it just a
minutes prior at a different outlet. Additionally, implementation of a chain-wide gift card system is made easier, as
their use at any location is instantly updated.
7. Improved Sales
Web-based POS software allows sales associates to immediately access customer information from other
locations. They can use this information to quickly make valuable inferences as to what a customer's preferences
might be, by looking at what they've bought in the past. This allows the associate to provide service that is
tailored to each customer, and dramatically increases their opportunities for both up-selling and cross-selling.
8. Off-Site Access
If you're the type who can't avoid work even when you're under the weather, web-based POS gives you an
opportunity to monitor and manage your business from home. In addition to tracking sales, you can also update
pricing and place orders. This ability means that going on a business trip doesn't create a temporary disconnect
between you and your employees. Whether you're in the cafe across the street, or halfway across the globe, you
have the exact same information as if you were in your office.

Due to the fact that web-based POS systems operate over the Internet, there are a few minor issues which need
to be addressed. Some businesses find it useful to have a secondary Internet provider, so they don't need to be
offline for more than a couple minutes in the event of a lost connection. That being said, broadband internet has
become extremely stable over time and outages seem to happen rarely if ever in recent years.
Most business owners have in mind a good return on their investment when they purchase a POS system. Your
ROI is determined by many factors with a web-based POS platform. It is necessary to look for a provider that has
a reputation for substantial customer service and technical support. As well, you'll want to ensure that their
product is specialized to be beneficial to the size of your business, and the industry within which you operate. The
ideal POS package will give you all the features you find necessary, and few if any that are unnecessary. Take the
time to compare between various POS software providers, to find the solution that is the best fit for your company.

The Benefits of Extranet

Extranets offer many different benefits ranging from lowered costs, producing faster results and
improving the service quality being offered to customers. The typical benefits being experienced by
organizations having an Extranet include:

Effective collaboration with trading partners, allowing all members (partnered organisations)
to effectively work together on common documents and sets of data.

Improved services by allowing users to access and resolve their own queries.
Increased number of integrated supply chains through online ordering, inventory management
and order tracking.

Highly improved business relationships with trading partners as a result of close collaborative
work.

Improved security and communication between business owners and partners.

Reduced expenditure on producing technical documentation and manuals.

Single user interface between business owners and partners.

Flexible and easy access to information and systems, irrespective of location or time zone.

Features of MIS
Management information systems can be used as a support to managers to provide a competitive
advantage. The system must support the goals of the organization. Most organizations are
structured along functional lines, and the typical systems are identified as follows:
1. Accounting management information systems:
All accounting reports are shared by all levels of accounting managers. The management of the
information which at the accounting department is one of the most important factors in determines
the effectiveness and efficiency of the department. The information that gathers included the invoice,
account document, payment, draft, banking document and etc. It is important to ensure the validity
and the accuracy of the information that provided to the department.
The information is usually arrange and manage by computer system compare to the human power
which written down in black and white. The software and system which use for the management of
the information in accounting were UBS system, SQL system and other relevant system that can
manage the accounting information files. The system using especially the SQL system is the most
suitable system to maintain and reorder the accounting department information. The information that

gather mixed or not in order is easily recognize by the system and determine the detail and type it's
use to be.
In the accounting department, the information is an important element that running the operation of
the department. The accounting department is relying on the information as well as other department
that rely on it in the other way around. It is important that other department give the invoice and other
accounting relevant document to the accounting department for management and kept. It is also vital
that the accounting department provide the right and accurate information to the organization and
other department. The reliability and prediction of the information determine the future of the
organization and the trustee of public to the organization.
2. Financial management information systems:
The financial management information system provides financial information to all financial
managers within an organization including the chief financial officer. The chief financial officer
analyzes historical and current financial activity, projects future financial needs, and monitors and
controls the use of funds over time using the information developed by the MIS department.
The information that has for financial department will determine the budget and the planning for the
organization. In establish or development for the organization, the financial information that gathers
will determine the size of the company. The information that gathers also shows the financial status
of the organization in development feature. In order to make sure the security of the information of
the organization, the information is well keep and in choosing for the ordinate for the financial
department, only those who are qualifies will be chosen.
The information systems cost estimating is an important management concern. An estimate helps to
cost justify individual proposals, to schedule their development, to staff them, to control and monitor
their progress, and to evaluate estimators and implementers. Through a case study of a chemical
manufacturer, the investigation reported in this article facilitates a better understanding of the
management of the cost estimating process. Interviews with 17 information systems managers and
staff members, and four user managers confirm that the practice of cost estimating can be viewed in
terms of both a Rational Model and a Political Model, can identify impediments to accurate
estimating, and can provide suggestions and warnings for managers and future researchers.
Benetton , for example, operates a network of 4,000 shops in 62 countries with estimated revenues
of $1.2 billion in 1989. The company uses a communication network that transfers daily retail sales
data to corporate headquarters. Using advanced information systems, information specialists
analyze large amounts of data to capture ever-changing consumer trends, and new fashion products
are designed using CAD systems. Production is also highly computerized, and distribution processes
are aided by robots. Each year 50 million pieces of clothing are distributed. Operations of this scale
and agility were previously unheard of in the garment industry. In spite of its large-scale of operation,
however, Benetton has only 1,500 employees and relies on a VAP consisting of hundreds of outside
contractors and subcontractors employing 25,000 people scattered throughout the world. However,
that the impact of new technology in computers and networking is not limited to the reduction of
external coordination costs but extends to the reduction of internal coordination costs
3. Manufacturing management information systems:
More than any functional area, operations have been impacted by great advances in technology. As
a result, manufacturing operations have changed. For instance, inventories are provided just in time
so that great amounts of money are not spent for warehousing huge inventories. In some instances,

raw materials are even processed on railroad cars waiting to be sent directly to the factory. Thus
there is no need for warehousing.
The modern input subsystem of the business organization relies heavily on information systems in
order to function efficiently and effectively. Input subsystems secure raw material, subassemblies and
assemblies from different and remote sources based on the just-in-time (JIT) philosophy same as
mention above. In a JIT environment, information systems are needed to communicate with vendors
in order to ensure that the right quality and quantity of material are received as needed in a timely
manner.
The management of information system is also important for the total quality management concept
(TQM). TQM is a philosophy for continues improving of the quality of the goods and services. The
important of TQM differs from organization to organization and to the single organization from time to
time. The different weight that each dimension holds is a function of the component in the
organization TQM we at the specific time. The information system is also important in term of
business process reengineering (BPR), also known as business process to achieve dramatic
improvements in performance (Hammer, 1990).
For example, information systems in the automation of manufacturing processes in forms of
computer integrated manufacturing (CIM) and its related technologies such as computer aided
design (CAD), computer aided manufacturing (CAM) and flexible manufacturing (FMI) is dramatically
changing the nature of the process subsystem and significantly impacting on organizational
strategies. Information systems are the backbone of this wave of automation. Information systems
integrate the different components of automation to enhance the efficiency and effectiveness of the
process subsystem.
4. Marketing management information systems:
A marketing management information system supports managerial activity in the area of product
development, distribution, pricing decisions, promotional effectiveness, and sales forecasting. More
than any other functional areas, marketing systems rely on external sources of data. These sources
include competition and customers. The information gather is also important to determine the
strategies for marketing. In order to analyze the impact of information systems on organizations, we
categorize the role of information systems in a firm, determine what effects modern IT has on the
cost structure of a firm, and examine, from the perspective of agency theory and transaction cost
economics, how these effects result in changes to various attributes of the firm.
Further more, information systems are used to scan the global business environment, providing the
organization with valuable feedback regarding business opportunities, market and consumer
demographics as well as cultural and political information. Such feedback is critical for formulating
and implementing business and marketing strategies that match organizational strengths with
environmental opportunities. In addition, information systems link and co-ordinate the different
operations of the organization globally facilitating overall internal efficiency.
The output subsystems of the business organization also have been changing in response to
sophisticated customers who are demanding high quality and environmentally sound products.
Quality assurance systems are being implemented and alternative packaging materials are being
used in response to customer needs and wants. Information systems are critical for the management
of quality assurance systems and the evaluation of the environmental impact of alternative packaging
materials. Automated ware housing and distribution world, of course, be impossible without

significant investments in information systems.

Transaction costs" used here synonymously with "external coordination costs" means the
coordination costs involved in using an outside market) The costs of writing
a contract and securing means to enforce it are examples of market transaction costs. Suppose a
company hires an outside software developer to develop and install some
software. The software contract would typically include a large number of items specifying terms and
conditions: functional specifications, acceptance-testing procedures,
a timetable of the delivery process, protection of trade secrets, repairs and maintenance
responsibilities, liabilities due to failures, required documentation, price and payment schedules,
options to terminate the agreement, and so forth.
5. Human resources management information systems:
Human resources management information systems are concerned with activities related to workers,
managers, and other individuals employed by the organization. Because the personnel function
relates to all other areas in business, the human resources management information system plays a
valuable role in ensuring organizational success. Activities performed by the human resources
management information systems include, work-force analysis and planning, hiring, training, and job
assignments.
For more specific example, the organization uses the information gather to divide the most suitable
role for the most suitable person in the organization. As same as other, this will enhanced the
efficiency and the effectiveness of the organization. In managing the organization, this will reduce the
error and conflict between the workers themselves.
The above are examples of the major management information systems. There may be other
management information systems if the company is identified by different functional areas.

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What is Waterfall model- advantages,

disadvantages and when to use it?
808

60

98
?

The Waterfall Model was first Process Model to be introduced. It is also referred to as
a linear-sequential life cycle model. It is very simple to understand and use. In a
waterfall model, each phase must be completed fully before the next phase can begin.
This type of model is basically used for the for the project which is small and there are
no uncertain requirements.At the end of each phase, a review takes place to determine if
the project is on the right path and whether or not to continue or discard the project. In
this model the testing starts only after the development is complete. In waterfall model
phases do not overlap.

Diagram of Waterfall-model:

Advantages of waterfall model:

This model is simple and easy to understand and use.

It is easy to manage due to the rigidity of the model each phase has specific

deliverables and a review process.

In this model phases are processed and completed one at a time. Phases do not

overlap.
Waterfall model works well for smaller projects where requirements are very well

understood.
Disadvantages of waterfall model:

Once an application is in the testing stage, it is very difficult to go back and

change something that was not well-thought out in the concept stage.
No working software is produced until late during the life cycle.

High amounts of risk and uncertainty.

Not a good model for complex and object-oriented projects.

Poor model for long and ongoing projects.

Not suitable for the projects where requirements are at a moderate to high risk of

changing.
When to use the waterfall model:

This model is used only when the requirements are very well known, clear and
fixed.
Product definition is stable.

Technology is understood.

There are no ambiguous requirements

Ample resources with required expertise are available freely

The project is short.

Very less customer enter action is involved during the development of the product. Once
the product is ready then only it can be demoed to the end users. Once the product is
developed and if any failure occurs then the cost of fixing such issues are very high,
because we need to update everywhere from document till the logic.
Also see: V-Model

made by Friden is actually able to use gears and levers to extract square roots.

1963 -- Bell Punch Co. LTD and Sumlock-Comptometer LTD of England introduce the
is claimed to be the world's first fully electronic desk-top calculator. The machine we
pounds and uses dozens of vacuum tubes (called valves in England) along with hun
discrete components. Although the Anita is as large as many mechanical models, it
breakthough since it is silent (no moving parts) and very fast. In the USA, the Fride
released at about the same time. It used a CRT (cathode ray tube ) television tube
display and was also one of the first fully electronic calculators in the world.

1964 -- In March, Japan's Sony Corporation claims to perfect the world's first all-tra
vacuum tube) desk-top electronic calculator. Quite a hit when it was displayed at th
York World's Fair, their model MD-5 was capable of 8-digit computations and used m
(transistorized) switching with a Nixie tube display. Beginning from this R & D devel
later improved functional operations and operating systems through several later m
finally deciding several years later that their SOBAX ("solid state abacus") line of de
calculators was far less profitable than anticipated. Before exiting from the calculato
however, Sony forever left its mark on technological history by not only being "first"
development of SOBAX features used in virtually all later calculators, i.e., disappear
left of displayed digits), floating decimal, the "rounding off" feature, percentage com
reciprocals.

1964 -- Victor Business Machines contracts with General Micro-electronics (USA) to

metal-oxide semiconductor (MOS), integrated circuit (IC) based desk-top calculator.
never able to resolve enough of their process manufacturing problems to deliver the
did briefly sell some pocket and portable calculators during the early 1970's, but ap
were made for them by other companies.)

1964-67 -- The first large electronic desk-top calculators begin to replace electro-m
machines. Those models, based on the newest electronic technology, use thousands
cost thousands of dollars, and weighed 30-60 pounds. Sharp's Compet CS-10A and
Canola 130 are two early electronic calculators among the offerings from over thirty
manufacturers in an intense international competition to offer the most advanced pr
reference to the Sony information above, Sharp also claims to have the first all-tran
machine.) Meanwhile, some innovators begin to dream about using this technology
electronic calculator that would be small enough to hold in your hand.

1965 -- Texas Instruments (USA) begins work on a hand-held calculator, code name
It was to be developed as a prototype to show the potential of TI's recently-develop
circuits (which were not selling as well as they had hoped). The "Cal-Tech" featured
calculations (+, -, x, /) and used a thermal paper tape printout.

1967 -- North American Rockwell (USA) begins work on MOS ICs for Japan's Sharp
(then named Hayakawa Electric). Sharp's plan was to reduce the electronic requirem
desk-top calculator to 4 or 5 ICs: possibly leading to smaller and portable electronic
Texas Instrument's "Cal-Tech" prototype calculator was completed in March 1967. T
this as a demonstration tool for their IC design and production capability.

1968 -- Hewlett-Packard releases the fully-electronic model 9100 desk-top calculato

$4,900. The 9100 used a CRT (cathode ray tube) display and was about the size of
typewriter. Bill Hewlett congratulates the development team but allegedly comment
world needs a similar machine that would fit in a shirt pocket. Amazingly, the HP en
accomplish this new challenge within four years (the HP-35 in 1972)!

1969 -- The first Large Scale Integration (LSI) calculator, Sharp's QT-8, began prod
chips made by Rockwell. The USA debut of this AC-powered, four function calculator
engineering trade show in New York City in March 1970. It sold for $495 at the time
continues between Sharp and Rockwell to reduce the size of the calculator towards
portable unit. A later version of the QT-8 (the QT-8B from 1970) included a recharg
pack in order to make it portable.

1969 -- Impressed with the "Cal-Tech" prototype and Texas Instruments' IC product
Canon (Japan) begins work with TI on the electronics for a small, hand-holdable cal
would be called the "Pocketronic."

1969 -- Busicom (Japan) contracts with both Intel (USA) and Mostek (USA) to deve
electronic calculator. Intel completes the task with a single microprocessor chip, the
used by Busicom for a desk-top electronic calculator. Intel eventually buys back the
4004 for use in other devices. The modern-day Pentium IC links back to this early c
Meanwhile, Mostek develops a complete "calculator-on-a-chip" which will be used in
hand-held model (Handy LE-120) later in 1971.

1970's The Pocket Calculator Revolution

1970 -- The first battery-operated "hand-held" calculators are sold. Most are too lar
be considered "pocket calculators," but they are far smaller than anything seen befo
1970, Sharp begins to sell the QT-8B which, by using rechargeable batteries, is a po
of their desk-top QT-8. Canon's "Pocketronic" sales begin in the Fall of 1970 in Japa
1971 in the USA. Canon used Texas Instruments' ICs and thermal printer. Selling fo
$400, the "Pocketronic" was a four function, hand-held, printing calculator, with the
being the printed tape running out of the side of the machine. It looks much like the
prototype (see 1965). The unit was rechargeable, used a disposable tape cartridge,
1.8 lbs. Later that year, Sharp begins to market the EL-8, a "small" hand-holdable c
four function calculating power, 8 numeric tubes for a display, and rechargeable bat
Redesigned from the QT-8 series, the unit is smaller and weighs 1.7 lbs. It was mar
as early as late 1970, but USA advertisements began in February 1971, pricing it at
only version (without the batteries) cost $299.

1970-71 -- Sanyo (Japan) markets a large, portable calculator, the ICC-0081, with 4
rechargeable nicad batteries, and an 8 digit tube display with a flip-up display cover
listed for $425. Sanyo also made a smaller unit (the ICC-802D) for Dictaphone (USA
Dictaphone 1680 (in 1970). Sanyo would also label their ICC-804D model as the Dic

1971 -- In the Fall, Bowmar (USA) begins shipping their first "cigarette pack" sized
901B. Priced initially at $240, it was the lowest priced unit on the market and was a
smallest. It featured the standard four math functions, an 8 digit red LED display, a
rechargeable batteries. The integrated circuit (IC) and Klixon keypad were both mad
was then solely a parts supplier -- not a rival calculator manufacturer. Craig (USA) a
Commodore (England) also sold the Bowmar-made calculator under their own labels
4501 and C110 respectively) at the same time. Bowmar, until then a LED maker, int
first model to potential distributors at a business trade show in May. Bowmar would
become the leading producer and marketer of pocket calculators in the USA before
unfortunate slide into bankruptcy in the mid-1970's. Also in 1971, Busicom (Japan)
Handy LE-120A, the world's smallest hand-held calculator, to that point in time. Bro
Addo (Sweden), and a few other companies begin making portable models.

1972 -- Scores of companies rush into the pocket calculator business as demand for
new product soars. Prices begin to fall as competition grows. Average price for a ba
function model is down to about $150 by the end of the year. A few models, includin
Casio (Japan), Rapid Data (Canada), and Digitrex, sell for below $100. In Decembe
files a patent application for the hand-held calculator with the inventors listed as Jac
Merryman, and James Van Tassel. HP introduces their first pocket calculator, the HP
world's first pocket calculator with scientific (transcendental) functions. Slide rule sa

1973-74 -- Competition to produce cheaper pocket calculators reaches a frenzy. Ma

begin to sell for under $100. Some calculator companies, unable to reduce their cos
forced out of business.

1974 -- On June 25, 1974, the U.S. Patent office grants Texas Instruments the pate
for a "miniature electronic calculator." However, years of international debate would
Japan will not grant TI a similar patent until 1978.

1975 -- The pocket calculator is widely used by students as some simple four-functi
break the $20 price barrier. Controversy flares as some teachers demand that the d
banned from classrooms for fear that students will not learn math. Almost anyone c
a new technology that was not available only five years earlier.

1976 -- Liquid crystal displays (similar to those used in today's pocket calculators) a
refined and reliable enough for common usage. LCDs had some moderate use on ca
early as 1972 (see models by Lloyds and Sharp) but manufacturing and reliability is
their use. LCD displays use far less current than LED or fluorescent models and allo
calculator to run for months rather than hours without charging or changing batterie

1977 -- The TI-30, perhaps the most common LED scientific calculator ever made is
for under $20. LCD models become more common.

1978 -- LCD calculators begin to capture the market with their simple, compact cas
functions. Also, solar-powered calculators are becoming more available. Power-hung
models are becoming obsolete. The pocket calculator becomes a common household

simple function calculators break the $10 price barrier.

1979 -- Stores begin to liquidate their remaining stock of LED and fluorescent pocke
In July, HP introduces their final LED models along with their first LCD model (the H
end of the decade symbolically marks the virtual end of the line for pocket calculato
and fluorescent displays.

Calculator laboratory
First calculator

Electronic handheld calculator invented

During the early 1960s, Pat Haggerty discussed the possibility of a handheld calculator with
Jack Kilby on a business trip. There were other priorities, but in 1964, Dean Toombs, head of
semiconductor R&D, formed a team consisting of Kilby, Jim Van Tassel, and Jerry Merryman
to develop a calculator small enough to fit in the palm of a hand, yet powerful enough to
perform basic math functions.
By December 1966, the team had a working model, and, within a year, Kilby, Van Tassel, and
Merryman filed a patent application, which would be issued eight years later. The functional
heart of the first miniature calculator was circuitry able to perform addition, subtraction,
multiplication, and division. It had a small keyboard with 18 keys and a visual output that
displayed up to 12 decimal digits.

Copyright 1996-2008 Texas Instruments Incorporated. All rights reserved.

Trademarks | Privacy Policy | Terms of Use

The first handheld calculator was invented at TI in 1967. The project was code-named Cal
Tech. This model, which shows the application of TI's thermal printhead to the calculator, resides today at the Smithsonian in
Washington, D.C.

System Infrastructure Development

Life Cycle for Enterprise Computing
Systems
Full TextSign-In or Purchase

Author(s)

Min Jiang ; Sch. of Inf. Technol., Illinois State Univ., Normal, IL, USA ; Jong, C.J. ; Poppell,
P. ; Budhathoky, K.
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Service oriented organizations rely on resilient computing systems to assist them not
only in automating their business but also extending their operation hours to 24 by 7.
Two major categories of their computing systems are software and hardware. Many
researchers have worked on the software development to improve the performance of
business processes on the application level. However, without proper system
infrastructure the effectiveness of these improvements will be reduced significantly. The
system infrastructure design should fully support the application's requirements which
are derived from the business objectives. In this paper we present a methodology for
system software and hardware integration design, System Infrastructure Development
Life Cycle. We apply this methodology to the research and education infrastructure
development project for the Enterprise Computing Systems program at our school. Two
pilot tasks, "Hardware and System Software Installation and Configuration" and "Building
a Networking and Supporting Environment" are used to validate the process.
Published in:
Computational Intelligence and Software Engineering, 2009. CiSE 2009. International
Conference on
Date of Conference:
11-13 Dec. 2009

ELECTRONIC DATA INTERCHANGE

Why Should I do EDI?
There are many immediate advantages of EDI and long term benefits of EDIsuch as:

Customer service improvement by strengthening the link with your Trading Partner.

Reduced errors, improved error detection, increased efficiency, and increased information
integrity by reducing manual data-entry errors, discrepancies, and misinterpretations.

Reduced clerical work by needing one-time only data entry (in most cases, no data entry!), and
increased productivity with automatic reconciliation and faster management reporting.

Faster response time by increasing speed of document transfer and thereby increasing response

time.

Increased competitiveness in the marketplace (some Trading Partners require faster response
time or they will not do business with you).
Decreased costs by reduced clerical effort and less paper usage.

Improved delivery of goods and services as orders will be processed more quickly and
accurately.

Migration from paper to electronic transactions in order to realize savings and decrease lead
times, fulfillment cycles, inventory levels, and paper use. One of the big benefits of EDI is that it's a
green technology good for the environment.

Reduced inventory with more accurate and timely data that is critical for the implementation of
just-in-time inventory and manufacturing.
Better product planning and forecasting as your link with your Trading Partner is strengthened.

Phases of System Development Life Cycle

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ICT Applications

Let us now describe the different phases and the related activities of system development life cycle in
detail.
Contents
[hide]

1 System Study
2 Feasibility Study
3 Detailed System Study
4 System Analysis
5 System Design
6 Coding

7 Testing
8 Implementation
9 Maintenance

System Study
Preliminary system study is the first stage of system development life cycle. This is a brief investigation of
the system under consideration and gives a clear picture of what actually the physical system is? In
practice, the initial system study involves the preparation of a System proposal which lists the Problem
Definition, Objectives of the Study, Terms of reference for Study, Constraints, Expected benefits of the new
system, etc. in the light of the user requirements. The system proposal is prepared by the System Analyst
(who studies the system) and places it before the user management. The management may accept the
proposal and the cycle proceeds to the next stage. The management may also reject the proposal or
request some modifications in the proposal. In summary, we would say that system study phase passes
through the following steps:

problem identification and project initiation

background analysis

inference or findings

Feasibility Study
In case the system proposal is acceptable to the management, the next phase is to examine the feasibility
of the system. The feasibility study is basically the test of the proposed system in the light of its workability,
meeting users requirements, effective use of resources and of course, the cost effectiveness. These are
categorized as technical, operational, economic, schedule and social feasibility. The main goal of feasibility
study is not to solve the problem but to achieve the scope. In the process of feasibility study, the cost and
benefits are estimated with greater accuracy to find the Return on Investment (ROI). This also defines the
resources needed to complete the detailed investigation. The result is a feasibility report submitted to the
management. This may be accepted or accepted with modifications or rejected. In short, following decision
are taken in different feasibility study:
Economic feasibility - The likely benefits outweigh the cost of solving the problem which is generally
demonstrated by a cost/ benefit analysis.
Operational feasibility - Whether the problem can be solved in the users environment with existing and
proposed system workings?
Organizational feasibility Whether the proposed system is consistent with the organizations strategic
objectives?
Technical feasibility - Whether the problem be solved using existing technology and resources available?
Social feasibility Whether the problem be solved without causing any social issues? Whether the
system will be acceptable to the society?

Detailed System Study

The detailed investigation of the system is carried out in accordance with the objectives of the proposed
system. This involves detailed study of various operations performed by a system and their relationships
within and outside the system. During this process, data are collected on the available files, decision points
and transactions handled by the present system. Interviews, on-site observation and questionnaire are the
tools used for detailed system study. Using the following steps it becomes easy to draw the exact boundary
of the new system under consideration:

Keeping in view the problems and new requirements

Workout the pros and cons including new areas of the system

All the data and the findings must be documented in the form of detailed data flow diagrams (DFDs), data
dictionary, logical data structures and miniature specifications. It includes planning for the new system,
analysis of requirement, system constraints, functions and proposed system architecture, prototype of the
proposed system and its analysis.

System Analysis
Systems analysis is a process of collecting factual data, understand the processes involved, identifying
problems and recommending feasible suggestions for improving the system functioning. This involves
studying the business processes, gathering operational data, understand the information flow, finding out
bottlenecks and evolving solutions for overcoming the weaknesses of the system so as to achieve the
organizational goals. System Analysis also includes subdividing of complex process involving the entire
system, identification of data store and manual processes.
The major objectives of systems analysis are to find answers for each business process:
What is being done?
How is it being done?
Who is doing it?
When is he doing it? Why is it being done?
How can it be improved?
It is more of a thinking process and involves the creative skills of the System Analyst. It attempts to give
birth to a new efficient system that satisfies the current needs of the user and has scope for future growth
within the organizational constraints. The result of this process is a logical system design. System analysis
is an iterative process that continues until a preferred and acceptable solution emerges.

System Design
Based on the user requirements and the detailed analysis of a new system, the new system must be
designed. This is the phase of system designing. It is the most crucial phase in the development of a
system. The logical system design arrived at as a result of system analysis and is converted into physical
system design. In the design phase the SDLC process continues to move from thewhat questions of the
analysis phase to the how . The logical design produced during the analysis is turned into a physical
design - a detailed description of what is needed to solve original problem. Input, output, databases, forms,
codification schemes and processing specifications are drawn up in detail. In the design stage, the
programming language and the hardware and software platform in which the new system will run are also
decided. Data structure, control process, equipment source, workload and limitation of the system,

Interface, documentation, training, procedures of using the system, taking backups and staffing
requirement are decided at this stage.
There are several tools and techniques used for describing the system design of the system. These tools
and techniques are: Flowchart, Data flow diagram (DFD), Data dictionary, Structured English, Decision
table and Decision tree which will be discussed in detailed in the next lesson.

Coding
The system design needs to be implemented to make it a workable system. his demands the coding of
design into computer language, i.e., programming language. This is also called the programming phase in
which the programmer converts the program specifications into computer instructions, which we refer to as
programs. It is an important stage where the defined procedures are transformed into control specifications
by the help of a computer language. The programs coordinate the data movements and control the entire
process in a system. A well written code reduces the testing and maintenance effort. It is generally felt that
the programs must be modular in nature. This helps in fast development, maintenance and future changes,
if required. Programming tools like compilers, interpreters and language like c, c++, and java etc., are used
for coding .with respect to the type of application. The right programming language should be chosen.

Testing
Before actually implementing the new system into operations, a test run of the system is done removing all
the bugs, if any. It is an important phase of a successful system. After codifying the whole programs of the
system, a test plan should be developed and run on a given set of test data. The output of the test run
should match the expected results. Sometimes, system testing is considered as a part of implementation
process.
Using the test data following test run are carried out:

Program test

System test

Program test : When the programs have been coded and compiled and brought to working conditions,
they must be individually tested with the prepared test data. All verification and validation be checked and
any undesirable happening must be noted and debugged (error corrected).
System Test : After carrying out the program test for each of the programs of the system and errors
removed, then system test is done. At this stage the test is done on actual data. The complete system is
executed on the actual data. At each stage of the execution, the results or output of the system is analyzed.
During the result analysis, it may be found that the outputs are not matching the expected output of the
system. In such case, the errors in the particular programs are identified and are fixed and further tested for
the expected output. All independent modules be brought together and all the interfaces to be tested
between multiple modules, the whole set of software is tested to establish that all modules work together
correctly as an application or system or package.
When it is ensured that the system is running error-free, the users are called with their own actual data so
that the system could be shown running as per their requirements.

Implementation
After having the user acceptance of the new system developed, the implementation phase begins.
Implementation is the stage of a project during which theory is turned into practice. The major steps
involved in this phase are:

Acquisition and Installation of Hardware and Software

Conversion

User Training

Documentation

The hardware and the relevant software required for running the system must be made fully operational
before implementation. The conversion is also one of the most critical and expensive activities in the
system development life cycle. The data from the old system needs to be converted to operate in the new
format of the new system. The database needs to be setup with security and recovery procedures fully
defined.

During this phase, all the programs of the system are loaded onto the users computer. After loading the
system, training of the user starts. Main topics of such type of training are:

How to execute the package?

How to enter the data?

How to process the data (processing details)?

How to take out the reports?

After the users are trained about the computerized system, working has to shift from manual to
computerized working. The process is called Changeover. The following strategies are followed for
changeover of the system.
1. Direct Changeover: This is the complete replacement of the old system by the new system. It is a
risky approach and requires comprehensive system testing and training.
2. Parallel run : In parallel run both the systems, i.e., computerized and manual, are executed
simultaneously for certain defined period. The same data is processed by both the systems. This
strategy is less risky but more expensive because of the following facts:

Manual results can be compared with the results of the computerized system.

The operational work is doubled.

Failure of the computerised system at the early stage does not affect the working of the
organization, because the manual system continues to work, as it used to do.

(iii) Pilot run: In this type of run, the new system is run with the data from one or more of the previous
periods for the whole or part of the system. The results are compared with the old
system results. It is less expensive and risky than parallel run approach. This strategy builds the confidence
and the errors are traced easily without affecting the operations.

The documentation of the system is also one of the most important activity in the system development life
cycle. This ensures the continuity of the system. Generally following two types of documentations are
prepared for any system.

User or Operator Documentation

System Documentation

User Documentation: The user documentation is a complete description of the system from the users
point of view detailing how to use or operate the system. It also includes the major error messages likely to
be encountered by the user.
System Documentation: The system documentation contains the details of system design, programs,
their coding, system flow, data dictionary, process description, etc. This helps to understand the system and
permit changes to be made in the existing system to satisfy new user needs.

Maintenance
Maintenance is necessary to eliminate errors in the system during its working life and to tune the system to
any variations in its working environments. It must meet the scope of any future enhancement, future
functionality and any other added functional features to cope up with the latest future needs. It has been
seen that there are always some errors found in the systems that must be noted and corrected. It also
means the review of the system from time to time. The review of the system is done for:
knowing the full capabilities of the system
knowing the required changes or the additional requirements
studying the performance.
If a major change to a system is needed, a new project may have to be set up to carry out the change. The
new project will then proceed through all the above life cycle phases.

Systems Development Life Cycle (SDLC) puts emphasis on decision making processes that affect system
cost and usefulness. These decisions must be based on full consideration of business processes,
functional requirements, and economic and technical feasibility. The primary objectives of any SDLC is to
deliver quality system which meets or exceed customer expectations and within cost estimates, work
effectively and efficiently within the current and planned infrastructure, and is an inexpensive to maintain.
SDLC establishes a logical order of events for conducting system development that is controlled,
measured, documented, and ultimately improved. Any software is not all complete and there are enough
rooms to add new features to existing software.

marketing research process

Definition

Add to FlashcardsSave to FavoritesSee Examples

A set of defined stages through which marketing information is collected. Typical steps
include: 1) identifying and defining the need or problem; 2) developing an approach

to serving the need or solving the problem; 3) designing the research framework; 4)
conducting data collection (called "field work"); 5) preparing the data for analysis; and
6) reporting the analysis.
Read more: http://www.businessdictionary.com/definition/marketing-research-process.html#ixzz3aeVuJMrg

Types of Research Design

Now lets look specifically at the types of research designs that are utilized. By understanding
different types of research designs, a researcher can solve a clients problems more quickly and
efficiently without jumping through more hoops than necessary. Research designs fall into one of
the following three categories:
1.

Exploratory research design

2. Descriptive research design

3. Causal research design (experiments)
An exploratory research design is useful when you are initially investigating a problem but you
havent defined it well enough to do an in-depth study of it. Perhaps via your regular market
intelligence, you have spotted what appears to be a new opportunity in the marketplace. You
would then do exploratory research to investigate it further and get your feet wet, as the saying
goes. Explorat
ory research is less structured than other types of research, and secondary data is often utilized.
The depth interviewengaging in detailed, one-on-one, question-and-answer sessions with
potential buyersis an exploratory research technique. However, unlike surveys, the people
being interviewed arent asked a series of standard questions. Instead the interviewer is armed
with some general topics and asks questions that are open ended, meaning that they allow the
interviewee to elaborate. How did you feel about the product after you purchased it? is an
example of a question that might be asked. A depth interview also allows a researcher to ask
logical follow-up questions such as Can you tell me what you mean when you say you felt
uncomfortable using the service? or Can you give me some examples? to help dig further and

shed additional light on the research problem. Depth interviews can be conducted in person or
over the phone. The interviewer either takes notes or records the interview.
Focus groups and case studies are often utilized for exploratory research as well. A focus group is
a group of potential buyers who are brought together to discuss a marketing research topic with
one another. A moderator is used to focus the discussion, the sessions are recorded, and the main
points of consensus are later summarized by the market researcher. Textbook publishers often
gather groups of professors at educational conferences to participate in focus groups. However,
focus groups can also be conducted on the telephone, in online chat rooms, or both, using
meeting software like WebEx. The basic steps of conducting a focus group are outlined below.

The Basic Steps of Conducting a Focus Group

1.

Establish the objectives of the focus group. What is its purpose?

2. Identify the people who will participate in the focus group. What makes them qualified to
participate? How many of them will you need and what they will be paid?
3. Obtain contact information for the participants and send out invitations (usually e-mails
are most efficient).
4. Develop a list of questions.
5. Choose a facilitator.
6. Choose a location in which to hold the focus group and the method by which it will be
recorded.
7. Conduct the focus group. If the focus group is not conducted electronically, include name
tags for the participants, pens and notepads, any materials the participants need to see,
and refreshments. Record participants responses.
8. Summarize the notes from the focus group and write a report for management.

A case study looks at how another company solved the problem thats being researched.
Sometimes multiple cases, or companies, are used in a study. Case studies nonetheless have a
mixed reputation. Some researchers believe its hard to generalize, or apply, the results of a case
study to other companies. Nonetheless, collecting information about companies that encountered
the same problems your firm is facing can give you a certain amount of insight about what
direction you should take. In fact, one way to begin a research project is to carefully study a
successful product or service.
Two other types of qualitative data used for exploratory research are ethnographies and
projective techniques. In an ethnography, researchers interview, observe, and often videotape
people while they work, live, shop, and play. The Walt Disney Company has recently begun using
ethnographers to uncover the likes and dislikes of boys aged six to fourteen. This is a financially
attractive market segment for Disney, but one in which the company has been losing market
share. The ethnographers visit the homes of boys, observe the things they have in their rooms to
get a sense of their hobbies, and accompany them and their mothers when they shop to see where
they go, what the boys are interested in, and what they ultimately buy. (The children get seventyfive dollars out of the deal, incidentally.)Brook Barnes, Disney Expert Uses Science to Draw Boy
Viewers, New York Times, April 15, 2009,
http://www.nytimes.com/2009/04/14/arts/television/14boys.html?pagewanted=1&_r=1
(accessed December 14, 2009).
Projective techniques are used to reveal information research respondents might not reveal by
being asked directly. Asking a person to complete sentences such as the following is one
technique:
People who buy Coach handbags __________.
(Will he or she reply with are cool, are affluent, or are pretentious, for example?)
KFCs grilled chicken is ______.
Or the person might be asked to finish a story that presents a certain scenario. Word associations
are also used to discern peoples underlying attitudes toward goods and services. Using a word-

association technique, a market researcher asks a person to say or write the first word that comes
to his or her mind in response to another word. If the initial word is fast food, what word does
the person associate it with or respond with? Is it McDonalds? If many people reply that way,
and youre conducting research for Burger King, that could indicate Burger King has a problem.
However, if the research is being conducted for Wendys, which recently began running an
advertising campaign to the effect that Wendys offerings are better than fast food, it could
indicate that the campaign is working.
Completing cartoons is yet another type of projective technique. Its similar to finishing a
sentence or story, only with the pictures. People are asked to look at a cartoon such as the one
shown in Figure 10.8 "Example of a Cartoon-Completion Projective Technique". One of the
characters in the picture will have made a statement, and the person is asked to fill in the empty
cartoon bubble with how they think the second character will respond.
Figure 10.8 Example of a Cartoon-Completion Projective Technique

In some cases, your research might end with exploratory research. Perhaps you have discovered
your organization lacks the resources needed to produce the product. In other cases, you might
decide you need more in-depth, quantitative research such as descriptive research or causal
research, which are discussed next. Most marketing research professionals advise using both
types of research, if its feasible. On the one hand, the qualitative-type research used in
exploratory research is often considered too lightweight. Remember earlier in the chapter when
we discussed telephone answering machines and the hit TV sitcom Seinfeld? Both product ideas
were initially rejected by focus groups. On the other hand, relying solely on quantitative
information often results in market research that lacks ideas.

Video Clip
The Stone WheelWhat One Focus Group Said

(click to see video)

Watch the video to see a funny spoof on the usefulnessor lack of usefulnessof focus groups

Descriptive Research
Anything that can be observed and counted falls into the category of descriptive research design.
A study using a descriptive research design involves gathering hard numbers, often via surveys,
to describe or measure a phenomenon so as to answer the questions of who, what, where, when,
and how. On a scale of 15, how satisfied were you with your service? is a question that
illustrates the information a descriptive research design is supposed to capture.
Physiological measurements also fall into the category of descriptive design. Physiological
measurements measure peoples involuntary physical responses to marketing stimuli, such as an
advertisement. Recall in Chapter 3 "Consumer Behavior: How People Make Buying Decisions" we
explained that researchers have gone so far as to scan the brains of consumers to see what they
really think about products versus what they say about them. Eye tracking is another cuttingedge type of physiological measurement. It involves recording the movements of a persons eyes
when they look at some sort of stimulus, such as a banner ad or a Web page. The Walt Disney
Company has a research facility in Austin, Texas, that it uses to take physical measurements of

viewers when they see Disney programs and advertisements. The facility measures three types of
responses: peoples heart rates, skin changes, and eye movements (eye tracking).Todd Spangler,
Disney Lab Tracks Feelings, Multichannel News 30, no. 30 (August 3, 2009): 26.
Figure 10.9

A woman shows off her headgear for an eye-tracking study. The gears not exactly a fashion
statement but . . .
Source: http://www.jasonbabcock.com/eyetracking_hardware.html.

A strictly descriptive research design instrumenta survey, for examplecan tell you how
satisfied your customers are. It cant, however, tell you why. Nor can an eye-tracking study tell
you why peoples eyes tend to dwell on certain types of banner adsonly that they do. To answer
why questions an exploratory research design or causal research design is needed.James
Wagner, Marketing in Second Life Doesnt WorkHere Is Why! GigaOM, April 4, 2007,
http://gigaom.com/2007/04/04/3-reasons-why-marketing-in-second-life-doesnt-work
(accessed December 14, 2009).

Causal Research
Causal research design examines cause-and-effect relationships. Using a causal research design
allows researchers to answer what if types of questions. In other words, if a firm changes X
(say, a products price, design, placement, or advertising), what will happen to Y (say, sales or
customer loyalty)? To conduct causal research, the researcher designs an experiment that
controls, or holds constant, all of a products marketing elements except one. The one variable
is changed, and the effect is then measured. Sometimes the experiments are conducted in a
laboratory using a simulated setting designed to replicate the conditions buyers would
experience. Or the experiments may be conducted in a virtual computer setting.
You might think setting up an experiment in a virtual world such as the online game Second Life
would be a viable way to conduct controlled marketing research. Some companies have tried to
use Second Life for this purpose, but the results have been somewhat mixed as to whether or not
it is a good medium for marketing research. The German marketing research firm Komjuniti was
one of the first real-world companies to set up an island in Second Life upon which it could
conduct marketing research. However, with so many other attractive fantasy islands in which to
play, the company found it difficult to get Second Life residents, or players, to voluntarily visit the
island and stay long enough so meaningful research could be conducted. (Plus, the residents, or
players, in Second Life have been known to protest corporations invading their world. When the
German firm Komjuniti created an island in Second Life to conduct marketing research, the
residents showed up waving signs and threatening to boycott the island.)James Wagner,
Marketing in Second Life Doesnt WorkHere Is Why! GigaOM, April 4, 2007,

http://gigaom.com/2007/04/04/3-reasons-why-marketing-in-second-life-doesnt-work/
(accessed December 14, 2009).
Why is being able to control the setting so important? Lets go back to our American flag
example. Suppose prior to 9/11 Walmart had been in the process of conducting an experiment to
see where in its stores American flags should be placed so as to increase their sales. Obviously,
the terrorist attacks in the United States would have skewed the experiments data.
An experiment conducted in a natural setting such as a store is referred to as a field experiment.
Companies sometimes do field experiments either because it is more convenient or because they
want to see if buyers will behave the same way in the real world as in a laboratory or on a
computer. The place the experiment is conducted or the demographic group of people the
experiment is administered to is considered the test market. Before a large company rolls out a
product to the entire marketplace, it will often place the offering in a test market to see how well
it will be received. For example, to compete with MillerCoors sixty-four-calorie beer MGD 64,
Anheuser-Busch recently began testing its Select 55 beer in certain cities around the
country.Jeremiah McWilliams, A-B Puts Super-Low-Calorie Beer in Ring with Miller, St. Louis
Post-Dispatch, August 16, 2009, http://www.stltoday.com/business/next-matchup-lightweights-a-b-puts-super-low-calorie/article_47511bfe-18ca-5979-bdb9-0526c97d4edf.html
(accessed April 13, 2012).
Figure 10.10 Select 55 beer: Coming soon to a test market near you? (If youre on a diet, you have
to hope so!)

 2010 Jupiterimages Corporation

Many companies use experiments to test all of their marketing communications. For example,
the online discount retailer Overstock.com carefully tests all of its marketing offers and tracks the
results of each one. One study the company conducted combined twenty-six different variables
related to offers e-mailed to several thousand customers. The study resulted in a decision to send
a group of e-mails to different segments. The company then tracked the results of the sales
generated to see if they were in line with the earlier experiment it had conducted that led it to
make the offer.

3 Types of Survey Research, When to

Use Them, and How they Can Benefit
Your Organization!
Posted by Rick Penwarden June 3, 2014 Categories: Survey Design, Research
Design, Best Practices
Most research can be divided into three different
categories; exploratory, descriptive and causal. Each serves a different end purpose
and can only be used in certain ways. In the online survey world, mastery of all three
can lead to sounder insights and greater quality information. Over the next couple
weeks well be taking a look into all these forms of research and how you can
incorporate each in your organizations strategies for improvement and growth as
well as measuring your companys level of success. Today, lets do a quick overview
of all three types of research, and how they fit in a research plan.

Exploratory Research
Exploratory research is an important part of any marketing or business strategy. Its
focus is on the discovery of ideas and insights as opposed to collecting statistically
accurate data. That is why exploratory research is best suited as the beginning of
your total research plan. It is most commonly used for further defining company
issues, areas for potential growth, alternative courses of action, and prioritizing areas
that require statistical research.

When it comes to online surveys, the most common example of exploratory research
takes place in the form of open-ended questions. Think of the exploratory questions
in your survey as expanding your understanding of the people you are surveying.
Text responses may not be statistically measureable, but they will give you richer
quality information that can lead to the discovery of new initiatives or problems that
should be addressed.

Descriptive Research
Descriptive research takes up the bulk of online surveying and is considered
conclusive in nature due to its quantitative nature. Unlike exploratory research,
descriptive research is preplanned and structured in design so the information
collected can be statistically inferred on a population.
The main idea behind using this type of research is to better define an opinion,
attitude, or behaviour held by a group of people on a given subject. Consider your
everyday multiple choice question. Since there are predefined categories a
respondent must choose from, it is considered descriptive research. These questions
will not give the unique insights on the issues like exploratory research would.
Instead, grouping the responses into predetermined choices will provide statistically
inferable data. This allows you to measure the significance of your results on the
overall population you are studying, as well as the changes of your respondents
opinions, attitudes, and behaviours over time.

Causal Research
Like descriptive research, causal research is quantitative in nature as well as
preplanned and structured in design. For this reason, it is also considered conclusive
research. Causal research differs in its attempt to explain the cause and effect
relationship between variables. This is opposed to the observational style of
descriptive research, because it attempts to decipher whether a relationship is causal
through experimentation. In the end, causal research will have two objectives: 1) To
understand which variables are the cause and which variables are the effect, and 2)
to determine the nature of the relationship between the causal variables and the
effect to be predicted.
For example, a cereal brand owner wants to learn if they will receive more sales with
their new cereal box design. Instead of conducting descriptive research by asking
people whether they would be more likely to buy their cereal in its new box, they
would set up an experiment in two separate stores. One will sell the cereal in only its
original box and the other with the new box. Taking care to avoid any outside sources

of bias, they would then measure the difference between sales based on the cereal
packaging. Did the new packaging have any effect on the cereal sales? What was
that effect?

Distinguishing Between
Descriptive & Causal Studies

by Adam Jefferys, Demand Media

Descriptive studies do not explore specific cause and effect relationships.

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Descriptive and causal studies answer fundamentally different kinds of questions.
Descriptive studies are designed primarily to describe what is going on or what exists.
Causal studies, which are also known as experimental studies, are designed to
determine whether one or more variables causes or affects the value of other variables.
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Directionality of Hypothesis
A causal studys hypothesis is directional -- it does not simply claim that two or more
variables are related, but predicts that one variable or set of variables, called
independent variables, will affect another variable or set of variables, known as
dependent variables, in a certain way. An example of a directional hypothesis would be,
I predict that increased levels of exercise will lead to weight loss. A non-directional

hypothesis, which would be suitable for a descriptive study, would simply predict that
there exists some relationship between the variables amount of exercise and weight
loss.

Variable Manipulation and Controls

In a causal study, researchers manipulate the set of independent variables to determine
their effect, if any, on dependent variables. Researchers in causal studies also typically
make use of a control -- a case in which the independent variables have not been
manipulated, to allow researchers to compare the effects of manipulating the
independent variables to the effects of leaving them the same. A descriptive study does
not typically involve variable manipulation or a control.

Data Collection Methods: Descriptive Studies

Descriptive studies make use of two primary sorts of data collection: cross-sectional
studies and longitudinal studies. The cross-sectional study attempts to give a snapshot of
data at a certain moment in time -- variables in a cross-sectional study are measured
only once. The longitudinal study, on the other hand, involves a fixed, relatively stable
sample measured repeatedly over time. In both cases, methods used might include mail,
online or in-person surveys or interviews.

Data Collection Methods: Causal Studies

Case studies likewise make use of two primary sorts of data collection: laboratory
experiments and field experiments. Laboratory experiments are conducted in artificial
environments which allow researchers to carefully control exactly which variables are
manipulated while keeping other factors constant. Field experiments are conducted in
the field, in a natural or realistic environment. Field experiments allow researchers to
test how their hypotheses apply to the real world. However, it is often impossible for
researchers to control for all possible variables in field experiments, making it harder for
researchers to say with confidence exactly what produced a given effect.

Practical Projective Techniques

for Focus Groups and Depth Interviews
In qualitative marketing research, projective techniques explore associations with
brands, symbols, products, advertising, and images.
It explores peoples subconscious feelings, beliefs, and desires.
Respondents project their feelings and beliefs about other people or objects. In doing so,
they reveal feelings and beliefs about themselves.
With sensitive subjects, the technique works well.
Four Practical Projective Techniques
Here are four practical and simple techniques. This is not an exhaustive list.

Metaphors, Analogies, and Similes

Third-Party Projections

Role-Playing

Associations
Metaphors, Analogies, and Similes
A metaphor represents or explains something in terms of another. Metaphors explain
complex or new subjects [target domains] by using a familiar subject [source domain].
Metaphors are a window to the mind. The purpose of understanding metaphors is to
understand peoples mindset and feelings about something.
Most importantly, metaphors can reveal underlying emotions about a target domain
such a product or brand. And, one can infer whether emotions are positive, negative, or
neutral.
You can use the results from metaphor techniques to develop advertising, brands, sales
pitches, and to support product or brand positioning.
Here is a simple sentence completion exercise using similes. Ask respondents to
complete the sentence.

My cell phone is like a

Here are some results at the category level for cell phones.

A cell phone is like a best friend.

My cell phone is part of my body.
A cell phone is like my wallet. I would never leave home without it.
A cell phone is like a lifeline now. Leaving it behind is like cutting off the oxygen
supply.
A cell phone is like a leash.
The results show cell phones are a necessity for a segment of consumers. A minority find
them annoying.
Besides sentence completion, you can also ask respondents to associate a product or
brand to pictures and images.
And, you can ask them to draw pictures. Another way to elicit metaphors is to ask
respondents to complete storyboards.
Look for metaphors, analogies and similes. Think about what feelings and emotions they
reveal. Judge if they are positive, neutral or negative.
Third-Party Projections
With this technique, you ask respondents to describe what other people are doing,
thinking, feeling, believing, and saying. Ask respondents to project to a third-party.

Here are some example questions.

What does your friend think about brand X?

What does company X think about you?
Who uses brand X? What is the real reason they use it?
Ask follow-up questions and probe answers, using the third person.
Use third-party projections for sensitive subjects. In other words, when people hide or
deny their real thoughts, feelings, or beliefs.
Role Playing
You ask respondents to assume a role and act the part. It is a variant of third-party
projection.

If you were the product manager, what would you do to improve the product?
If you were the CEO of this company, what would you do to reduce customer
complaints?
If you were the creative director, what would your ad say?
If you were in your friends shoes, what would you do?
Use role-playing when asking for product or advertising recommendations.
Associations
You ask respondents to link a word or image to a category, product, brand, or event.
Then ask how the association ties to the topic.
You get people to bind one concept to another. Often associations produce metaphors,
analogies, and similes.
Some association techniques include word associations, imagery associations, and
personifications.
Here are examples,
Word Associations
Provide a prompt in the form of a word, phrase, or sentence and ask respondents to
associate something with it.

When you think of your service provider, what is the first thing that comes to mind?
What comes to mind when you hear the term customer service?
When you see brand X, what image comes to mind?

Imagery Associations
Show people an image, or ask them to bring or select an image.
Images are pictures, drawings, or illustrations. Then, ask people to describe the image.
Ask how it links to a product, brand, object, or person. Also, ask the respondents to
imagine an image and describe it.

Please select a picture that best represents product X. How does the picture speak
about product X?
How does the image describe product X?
What does each person in this picture feel about brand Y?
Ask several follow-up questions about how the association relates, and probe to clarify.
Personification Associations
Personification asks respondents to give human characteristics to products, services, or
brands.

If your Volvo could talk, what would it say to you?

If brand X were a person, what would he or she look like?
How does your digital camera feel about you?
Personification is fun. The challenge of personification is interpretation of data and
analysis.
Use associations to understand imagery and stimulate memory recall.
Advanced Projective Techniques
Some advanced techniques include the Rorschach Inkblot Tests and Thematic
Appreciation Tests.
Projective techniques have their roots in psychoanalytic psychology. Several
psychoanalytic theories abound. The more advanced techniques require training in
application and especially in analysis. Analysis of sophisticated techniques involves
judgment based on training an experience, and is often open to interpretation and
debate.
Projective Techniques and Laddering
In product or service marketing research, laddering works well as technique to identify
how people perceive functional and emotional benefits of a product or service.
The advantage of laddering is it clearly links specific product features, benefits, and
emotional benefits together.

People buy product features, functional benefits, high order benefits and emotional
benefits. They are primary drivers of wants and needs.
Use projective techniques to complement laddering.
Use practical projective techniques in focus groups and depth interviews to gain new
perspective and to dig into underlying feelings and emotions.

Instant Focus Group Questions e-book is packed with hundreds focus group questions,
including projective techniques.
The e-book is a practical handbook about qualitative marketing research, with tips,
techniques, and questions you can use. Click on the e-book to learn more now.

Return to Develop Questions from projective techniques

Market Surveys
8

Comment

ENTREPRENEUR STAFF

Definition: The study of the spending characteristics and purchasing power

of the consumer who are within your business's geographic area of
operation; a research method for defining the market parameters of a
business. .
Market survey--where you actually speak to members of your target
audience--are an important part of market research. You can choose to hire a
company to do it for you, but conducting the interviews yourself will most
likely give you a much better idea of the needs of your target audience and
will provide you with insights that you might not otherwise have gleaned.
If you're going the do-it-yourself route, you'll probably want to act as the
focus group moderator. As the moderator, you'll want to encourage an openended flow of conversation and be sure to solicit comments from quieter
members, or you may end up getting all your information from the talkative
participants only. Also, when conducting any type of survey, whether it's a
focus group, a questionnaire or a phone survey, pay particular attention to
customers who complain or give you negative feedback. You don't need to
worry about the customers who love your product or service, but the ones
who tell you where you're going wrong provide valuable information to help
you improve.
Telephone interviews: This is an inexpensive, fast way to get information
from potential customers. Prepare a script before making the calls to ensure
you cover all your objectives. Most people don't like to spend a lot of time on
the phone, so keep your questions simple, clearly worded and brief. If you
don't have time to make the calls yourself, hire college students to do it for
you.
Direct-mail interviews: If you want to survey a wider audience, direct mail
can be just the ticket. Your survey can be as simple as a postcard or as
elaborate as a cover letter, questionnaire and reply envelope. Keep

questionnaires to a maximum of one page, and ask no more than 20

questions. Ideally, direct-mail surveys should be simple, structured with
"yes/no" or "agree/disagree" check-off boxes so respondents can answer
quickly and easily. If possible, only ask for one or two write-in answers at
most.
Fax/e-mail interviews: Many of the principles used in direct-mail interviews
also apply to these surveys. One exception: Never send an unsolicited fax
that is more than one page. Give clear instructions on how to respond, and be
appreciative in advance for the data you get back.

Survey methodology
From Wikipedia, the free encyclopedia

For the Statistics Canada publication, see Survey Methodology.

A field of applied statistics, survey methodology studies the sampling of individual units from
a population and the associated survey data collection techniques, such asquestionnaire
construction and methods for improving the number and accuracy of responses to surveys.
Statistical surveys are undertaken with a view towards making statistical inferences about the
population being studied, and this depends strongly on the survey questions
used.Polls about public opinion, public health surveys, market research surveys, government
surveys and censuses are all examples of quantitative research that use contemporary survey
methodology to answer questions about a population. Although censuses do not include a
"sample", they do include other aspects of survey methodology, like questionnaires, interviewers,
and nonresponse follow-up techniques. Surveys provide important information for all kinds of
public information and research fields, e.g., marketingresearch, psychology, health
professionals and sociology.[1]
Contents
[hide]

1 Overview

2 Survey methodology topics

o

2.1 Selecting samples

2.2 Modes of data collection

2.3 Cross-sectional and longitudinal surveys

2.4 Response formats

2.5 Nonresponse reduction

2.6 Interviewer effects

3 See also

4 References

5 Further reading

6 External links

Overview[edit]
A single survey is made of at least a sample (or full population in the case of a census), a method
of data collection (e.g., a questionnaire) and individual questions or items that become data that
can be analyzed statistically. A single survey may focus on different types of topics such as
preferences (e.g., for a presidential candidate), opinions (e.g., should abortion be legal?),
behavior (smoking and alcohol use), or factual information (e.g., income), depending on its
purpose. Since survey research is almost always based on a sample of the population, the
success of the research is dependent on the representativeness of the sample with respect to a
target population of interest to the researcher. That target population can range from the general
population of a given country to specific groups of people within that country, to a membership
list of a professional organization, or list of students enrolled in a school system (see
also sampling (statistics) and survey sampling).
Survey methodology as a scientific field seeks to identify principles about the sample design,
data collection instruments, statistical adjustment of data, and data processing, and final data
analysis that can create systematic and random survey errors. Survey errors are sometimes
analyzed in connection with survey cost. Cost constraints are sometimes framed as improving
quality within cost constraints, or alternatively, reducing costs for a fixed level of quality. Survey
methodology is both a scientific field and a profession, meaning that some professionals in the
field focus on survey errors empirically and others design surveys to reduce them. For survey
designers, the task involves making a large set of decisions about thousands of individual
features of a survey in order to improve it.[2]

Survey methodology topics[edit]

The most important methodological challenges of a survey methodologist include making
decisions on how to:[2]

Identify and select potential sample members.

Contact sampled individuals and collect data from those who are hard to reach (or
reluctant to respond)

Evaluate and test questions.

Select the mode for posing questions and collecting responses.

Train and supervise interviewers (if they are involved).

Check data files for accuracy and internal consistency.

Adjust survey estimates to correct for identified errors.

Selecting samples[edit]
Main article: Survey sampling
Survey samples can be broadly divided into two types: probability samples and non-probability
samples. Stratified sampling is a method of probability sampling such that sub-populations within
an overall population are identified and included in the sample selected in a balanced way.

Modes of data collection[edit]

Main article: Survey data collection
There are several ways of administering a survey. The choice between administration modes is
influenced by several factors, including
1. costs,
2. coverage of the target population,
3. flexibility of asking questions,
4. respondents' willingness to participate and
5. response accuracy.
Different methods create mode effects that change how respondents answer, and different
methods have different advantages. The most common modes of administration can be
summarized as:[3]

Telephone

Mail (post)

Online surveys

Personal in-home surveys

Personal mall or street intercept survey

Hybrids of the above.

Cross-sectional and longitudinal surveys [edit]

There is a distinction between one-time (cross-sectional) surveys, which involve a single
questionnaire or interview administered to each sample member, and surveys which repeatedly
collect information from the same people over time. The latter are known as longitudinal surveys.
Longitudinal surveys have considerable analytical advantages but they are also challenging to
implement successfully.

Consequently, specialist methods have been developed to select longitudinal samples, to collect
data repeatedly, to keep track of sample members over time, to keep respondents motivated to
participate, and to process and analyse longitudinal survey data [4]

Response formats[edit]
Usually, a survey consists of a number of questions that the respondent has to answer in a set
format. A distinction is made between open-ended and closed-ended questions. An open-ended
question asks the respondent to formulate his or her own answer, whereas a closed-ended
question has the respondent pick an answer from a given number of options. The response
options for a closed-ended question should be exhaustive and mutually exclusive. Four types of
response scales for closed-ended questions are distinguished:

Dichotomous, where the respondent has two options

Nominal-polytomous, where the respondent has more than two unordered options

Ordinal-polytomous, where the respondent has more than two ordered options

(Bounded) continuous, where the respondent is presented with a continuous scale

A respondent's answer to an open-ended question can be coded into a response scale

afterwards,[3] or analysed using more qualitative methods.

Nonresponse reduction[edit]
The following ways have been recommended for reducing nonresponse [5] in telephone and faceto-face surveys:[6]

Advance letter. A short letter is sent in advance to inform the sampled respondents about
the upcoming survey. The style of the letter should be personalized but not overdone. First, it
announces that a phone call will be made/ or an interviewer wants to make an appointment
to do the survey face-to-face. Second, the research topic will be described. Last, it allows
both an expression of the surveyor's appreciation of cooperation and an opening to ask
questions on the survey.

Training. The interviewers are thoroughly trained in how to ask respondents questions,
how to work with computers and making schedules for callbacks to respondents who were
not reached.

Short introduction. The interviewer should always start with a short instruction about him
or herself. She/he should give her name, the institute she is working for, the length of the
interview and goal of the interview. Also it can be useful to make clear that you are not selling
anything: this has been shown to lead led to a slightly higher responding rate. [7]

Respondent-friendly survey questionnaire. The questions asked must be clear, nonoffensive and easy to respond to for the subjects under study.

Brevity is also often cited as increasing response rate. A 1996 literature review found mixed
evidence to support this claim for both written and verbal surveys, concluding that other factors
may often be more important.[8] A 2010 study looking at 100,000 online surveys found response
rate dropped by about 3% at 10 questions and about 6% at 20 questions, with drop-off slowing
(for example, only 10% reduction at 40 questions)[9] Other studies showed that quality of
response degraded toward the end of long surveys.[10]

Interviewer effects[edit]
Survey methodologists have devoted much effort to determining the extent to which interviewee
responses are affected by physical characteristics of the interviewer. Main interviewer traits that
have been demonstrated to influence survey responses are race, [11] gender,[12] and relative body
weight (BMI).[13] These interviewer effects are particularly operant when questions are related to
the interviewer trait. Hence, race of interviewer has been shown to affect responses to measures
regarding racial attitudes,[14] interviewer sex responses to questions involving gender issues,
[15]
and interviewer BMI answers to eating and dieting-related questions.[16] While interviewer
effects have been investigated mainly for face-to-face surveys, they have also been shown to
exist for interview modes with no visual contact, such as telephone surveys and in videoenhanced web surveys. The explanation typically provided for interviewer effects is social
desirability bias: survey participants may attempt to project a positive self-image in an effort to
conform to the norms they attribute to the interviewer asking questions.

BRIEF NOTES ON TYPES OF SURVEY

Types of Survey
Sarah Mae Sincero 118.9K reads

There are various types of surveys you can choose from. Basically, the
types of surveys are broadly categorized into two: according to
instrumentation and according to the span of time involved. The types of
surveys according to instrumentation include the questionnaire and the
interview. On the other hand, the types of surveys according to the span of
time used to conduct the survey are comprised of cross-sectional surveys
and longitudinal surveys.

According to Instrumentation
In survey research, the instruments that are utilized can be either a questionnaire or
an interview (either structured or unstructured).

1. Questionnaires
Typically, a questionnaire is a paper-and-pencil instrument that is administered to the
respondents. The usual questions found in questionnaires are closed-ended questions, which
are followed by response options. However, there are questionnaires that ask open-ended
questions to explore the answers of the respondents.
Questionnaires have been developed over the years. Today, questionnaires are utilized in
various survey methods, according to how they are given. These methods include the selfadministered, the group-administered, and the household drop-off. Among the three, the selfadministered survey method is often used by researchers nowadays. The self-administered
questionnaires are widely known as the mail survey method. However, since the response rates
related to mail surveys had gone low, questionnaires are now commonly administered online, as
in the form of web surveys.

Advantages: Ideal for asking closed-ended questions; effective for market or consumer
research
Disadvantages: Limit the researchers understanding of the respondents answers;
requires budget for reproduction of survey questionnaires

2. Interviews
Between the two broad types of surveys, interviews are more personal and probing.
Questionnaires do not provide the freedom to ask follow-up questions to explore the answers of
the respondents, but interviews do.
An interview includes two persons - the researcher as the interviewer, and therespondent as the
interviewee. There are several survey methods that utilize interviews. These are the personal or
face-to-face interview, the phone interview, and more recently, the online interview.

Advantages: Follow-up questions can be asked; provide better understanding of the

answers of the respondents

Disadvantages: Time-consuming; many target respondents have no public-listed phone

numbers or no telephones at all

According to the Span of Time Involved

The span of time needed to complete the survey brings us to the two different types of surveys:
cross-sectional and longitudinal.

1. Cross-Sectional Surveys
Collecting information from the respondents at a single period in time uses the cross-sectional
type of survey. Cross-sectional surveys usually utilize questionnaires to ask about a particular
topic at one point in time. For instance, a researcher conducted a cross-sectional survey asking
teenagers views on cigarette smoking as of May 2010. Sometimes, cross-sectional surveys are
used to identify the relationship between two variables, as in a comparative study. An example of
this is administering a cross-sectional survey about the relationship of peer pressure and
cigarette smoking among teenagers as of May 2010.

2. Longitudinal Surveys
When the researcher attempts to gather information over a period of time or from one point in
time up to another, he is doing a longitudinal survey. The aim of longitudinal surveys is to collect
data and examine the changes in the data gathered. Longitudinal surveys are used in cohort
studies, panel studies and trend studies.

KWAMANA
Selecting the Survey Method
Sarah Mae Sincero 18.7K reads

There are various types of survey method, and each one of them has its
own advantages and disadvantages. The success of conducting a survey
always involves choosing the most suitable survey method by means of

balancing the pros and cons and considering other factors related to the
survey methods.
In order to choose the best survey method for a particular survey project, you need to consider
the following:

Population and Sampling

Before you choose a survey method, you need to point out the characteristics of people who
belong to your target population. Literacy levels, language issues, geographic restrictions must
be analyzed first. If the target population is composed of college students, you may choose the
online survey method. However, if the target population is comprised of homeless people, online,
telephone or mail surveys are not suitable, but a personal interview survey is.
In terms of sampling issues, consider the number of respondents in the sample when choosing a
survey method. Online surveys are best for surveys requiring a hundred or a thousand
responses, while telephone surveys are ideal for 10 to 20 responses.

Questions
The types of questions that will be asked matter in choosing the right survey method. A survey
that asks mostly closed-ended questions needs paper-and-pencil survey,online
survey or telephone survey, whereas a survey containing more open-ended questions requires a
focus group survey or a personal interview survey. The length and type of the response scales to
be used are also considered along with thequestion types.

Bias Issues
One of the bias issues that you need to look at is social desirability. Many respondents might
answer questions that make them look good even when their responses are not really true.
Social desirability is a serious concern when conducting a personal interview survey or a focus
group survey, but can also be present in self-administered online or mail surveys.
Another bias issue is concerned with how the interviewer asks the questions. Judgments may be
created if the interviewer already has strong opinions about the topic and might not listen to what
the respondent has to say.
Seen also: Hawthorne Effort.
Personal interview survey makes sure that you are getting the responses from the very person
that is included in the sample. On the other hand, false respondent bias may come to fore when
using a mail survey or an online survey, as it is more difficult to verify the person who really gave
the responses with these methods. A countermeasure often include that a each participant get a
token or a code which they enter in the beginning of the survey and researchers may match to
the individual.

Resources
Other factors that you need to consider when choosing a survey method include the costs and
budget for the survey, the facilities and equipment needed to conduct and process the survey,
the time allotted, and the manpower the survey demands.

Personal Interview Survey

Sarah Mae Sincero 57.3K reads

The Face-to-Face Method

A personal interview survey, also called as a face-to-face survey, is a
survey method that is utilized when a specific target population is involved.
The purpose of conducting a personal interview survey is to explore the
responses of the people to gather more and deeper information.
Personal interview surveys are used to probe the answers of the respondents and at the same
time, to observe the behavior of the respondents, either individually or as a group. The personal
interview method is preferred by researchers for a couple of advantages. But before choosing
this method for your own survey, you also have to read about the disadvantages of
conducting personal interview surveys. In addition, you must be able to understand the types of
personal or face-to-face surveys.

Advantages of Personal Interview Survey

1. High Response Rates
One of the main reasons why researchers achieve good response rates through this method is
the face-to-face nature of the personal interview survey. Unlike administering questionnaires,
people are more likely to readily answer live questions about the subject (for instance, a product)
simply because they can actually see, touch, feel or even taste the product.

2. Tolerable Longer Interviews

If you wish to probe the answers of the respondents, you may do so using a personal interview
approach. Open-ended questions are more tolerated through interviews due to the fact that the
respondents would be more convenient at expressing their long answers orally than in writing.

3. Better Observation of Behavior

Market researchers can benefit from personal interview survey because it presents a greater
opportunity to observe the attitude and behavior of the respondents / consumers toward a
product.

Disadvantages of Personal Interview Survey

1. High Costs
Face-to-face interview surveys are considerably more expensive than paper-and-pencil
questionnaire surveys, online surveys and other types of surveys.

2. Time-consuming
Personal interview surveys are not usually time-bounded, so the gathering of data from
the respondents can take a longer time. Another thing that makes this method time-consuming is
when there is a need to travel and meet the respondents at either single or different locations.

Types of Personal Interview Survey

Basically, there are two-types of personal interview survey according to how the interviewer
approaches the respondents: intercept and door-to-door interviews. In an intercept approach, the
interviewer usually conducts a short but concise survey by means of getting the sample from
public places such as malls, theaters, food courts, or tourist spots. On the other hand, a door-to-

door interview survey involves going directly to the house of the respondent and conduct the
interview either on-the-spot or at a scheduled date.

Telephone Survey
Sarah Mae Sincero 24.5K reads

A telephone survey is one of the survey methods used in collecting data

either from the general population or from a specific target population.
Telephone numbers are utilized by trained interviewers to contact and
gather information from possible respondents.

Telephone Survey, Jaypeg

The telephone survey approach is usually utilized when there is a need to collection information
via public opinion polling. In other words, phone surveys are ideal for data gathering which takes
anyone from the general population as potentialrespondents. This means that the contacted
people will become included in the sample once they agree to participate in the phone survey.
Let us see the different advantages and disadvantages of the telephone survey method.

Advantages of Telephone Survey

1. High Accessibility
Market researchers can benefit from conducting a telephone survey because of the large scale
accessibility associated with it. Over 95% of the American population has a phone at their
respective homes. People who do not have access to the Internet such as those who live in
remote areas can still become respondents through their telephones.

2. Good Quality Control

Trained interviewers can ask the questions to the respondents in a uniform manner, promoting
accuracy and precision in eliciting responses. The phone interviews are also recorded, which
means that the analyst has an opportunity to observe and analyze the behavior or attitude of the
respondents toward controversial issues (e.g. state disputes, preferred presidential candidates,
etc.) or new concepts (new products, laws to be passed, etc.).

3. Anonymous Respondents
The telephone survey approach provides perhaps the highest level of anonymity for respondents
who wish to hold their opinions in confidentiality. This facilitates accuracy in responses,
especially in controversial topics.

4. Quick Data Processing and Handling

The emergence of the computer-assisted telephone interviewing or CATI has led to a faster
manner of processing, handling and storing the data gathered from phone interviews. Both realtime data and past data can be rapidly analyzed using CATI.

Disadvantages of Telephone Survey

1. Time-Constrained Interviews
Since telephone surveys may interrupt the personal time of the respondents, interviews via
phone are to be conducted no longer than 15 minutes. This calls for a single open-ended
question needing a lengthy answer to be changed into a few close-ended questions.

2. Hard-to-Reach Respondents
Many people use call screening to accept only calls that they are expecting. These people
include credit-challenged ones who screen not only the calls from their creditors, but also those
calls from unknown numbers. Also, extremely busy people often screen calls to accept only those
from their business partners or family members and significant others.

3. Unseen Product
In market research, it is more ideal to conduct a face-to-face interview survey rather than a
telephone survey because better responses can be elicited when the participants could see, feel
or taste the product.

Online Surveys
Sarah Mae Sincero 26.8K reads

One of the most widely utilized survey methods, an online survey is the
systematic gathering of data from the target audience characterized by the
invitation of the respondents and the completion of the questionnaire over
the World Wide Web.
For the past few years, the Internet has been used by many companies in conducting all sorts of
studies all over the world. Whether it is market or scientific research, theonline survey has been a
faster way of collecting data from the respondents as compared to other survey methods such as
paper-and-pencil method and personal interviews. Other than this advantage, the web-based

survey also presents other pros and benefits for anyone who wishes to conduct a survey.
However, one should consider the drawbacks and disadvantages of an online survey method.
See also: Web Survey Tools.

Advantages of Online Survey

1. Ease of Data Gathering
The Internet is a vast virtual world that connects all kinds of people from around the globe. For
this reason, a survey that requires a hundred or more respondents can be conducted faster via
the Internet. The survey questionnaire can be rapidly deployed and completed by the
respondents, especially if theres an incentive that is given after their participation.

2. Minimal Costs
Traditional survey methods often require you to spend thousands of dollars to achieve the
optimal results. On the other hand, studies show that conducting an Internet survey facilitates
low-cost and fast data collection from the target population. Sending email questionnaires and
other online questionnaires are more affordable than the face-to-face method.

3. Automation in Data Input and Handling

With online surveys, the respondents are able to answer the questionnaire by means of inputting
their answers while connected to the Internet. Then, the responses are automatically stored in a
survey database, providing hassle-free handling of data and a smaller possibility of data errors.

4. Increase in Response Rates

Online survey provides the highest level of convenience for the respondents because they can
answer the questionnaire according to their own pace, chosen time, and preferences.

5. Flexibility of Design
Complex types of surveys can be easily conducted through the Internet. The questionnaire may
include more than one type of response format in such a way that the respondents would not get
discouraged from the changes in the manner they answer the questions.

Disadvantages of Online Survey

1. Absence of Interviewer
An online survey is not suitable for surveys which ask open-ended questions because there is no
trained interviewer to explore the answers of the respondents.

2. Inability to Reach Challenging Population

This method is not applicable for surveys that require respondents who do not have an access to
the Internet. Some examples of these respondents include the elderly and people who reside in
remote areas.

3. Survey Fraud

Survey fraud is probably the heaviest disadvantage of an online survey. There are people who
answer online surveys for the sake of getting the incentive (usually in the form of money) after
they have completed the survey, not with a desire to contribute to the advancement of the study.

Preparing an Online Survey

Sarah Mae Sincero 5K reads 1 Comment

The online survey method has been widely used by different fields of
science as well as business throughout the years. The process of creating
and conducting an online survey is similar to performing a traditional
pencil- and-paper survey, but with more convenience and faster results.
Preparing an online survey involves several steps, starting with reviewing the survey goals and
ending with administering the survey to all the online respondents.

Step 1: Review the Survey Goals

It is necessary to verify the survey goals and objectives first before preparing the survey
questionnaire. The survey goals determine whether an online survey questionnaire is the best
method of data collection for this particular survey or not.
Preparing an online survey involves several steps, starting with reviewing the survey goals and
ending with administering the survey to all the online respondents.

Step 1: Review the Survey Goals

It is necessary to verify the survey goals and objectives first before preparing the survey
questionnaire. The survey goals determine whether an online survey questionnaire is the best
method of data collection for this particular survey or not.

Step 2: Prepare Draft Questions

List draft questions that you can juice out from the survey goals. These can be questions asking
about the demographic information of the respondents to make sure that they are eligible to
participate in the survey. Draft questions can also be the main questions you would like to ask
about the issue or product.

Step 3: Use a Web Survey Tool

There are various web survey tool providers in the Internet, so you must set some criteria in
order to choose the most suitable one for your survey. If your main concern is the budget for the
survey, you can utilize free web survey tools such as Google Forms. For better and more
accurate survey results, you may use paid web survey tools from SurveyMonkey, LimeSurvey,
and many others.

Step 4: Create the Survey Layout

The layout of the survey can be done through a computer application such as Microsoft Word,
PowerPoint, Visual Basic, and others. The survey can then be uploaded to the Internet. However,
it is more convenient to use one of the ready-made templates offered by web survey tool
providers wherein you just have to type the questions and the survey provider will be the one to
organize them into a professional-looking online survey.

Step 5: Expand the Questionnaire

Subject the draft questions you wrote earlier to brainstorming in order to simplify them and make
them more concise and accurate. The questions should be short and simple to facilitate higher

response and completion rates. In addition, the questions should be arranged from the easiest
question to answer (e.g. demographic data) to the most complex one. For higher completion
rates, make the questionnaire answerable within 5 to 10 minutes. Therefore, you are limited to
ask only 15 to 30 questions at a rate of 3 to 4 questions per minute.

Step 6: Pretest the Online Survey

Administer the survey to 2 to 10 eligible participants (pending on the scale of the survey) for pilot
testing. Ask if there are any vague or very complicated questions and response options. Using
the respondents feedbacks, revise the online survey.

Step 7: Administer the Survey to All Respondents

Paid web survey tool providers are usually responsible in finding eligible respondents and
administering the survey questionnaire to them. For higher response rates, you may post links to
the survey in various major social networks such as Facebook and Twitter.

Web Survey Tools

Sarah Mae Sincero 5.1K reads 2 Comments

A web survey tool is an online service provided for a faster, more efficient
data collection. Different survey companies have introduced their own web
survey tools with almost similar basic features.
Web survey tools provide an easier way to get your desired responses, whether it is as low as 10
responses to as high as 1,000 responses or more. What set their web survey tools apart include
the add-on features, perks, freebies, price and other factors. In this article, we will feature the top
five web survey tools.

1. LimeSurvey
One of the most popular web survey tools, LimeSurvey offers unlimited number of questions in
one survey, unlimited number of surveys to be conducted at the same time and the option to
unlimited number of participants in a single survey. LimeSurvey also features multi-lingual survey
templates and over 20 varying question types. Movies and pictures can be included in a survey,
and a WYSIWYG editor is available. User and quota management systems, conditional logic,
auto-validation and assessment tools are also included in the service package. The Partners
DIPR Datacenter hosts LimeSurvey, making it one of the most secured web survey providers.
Theres a drawback, though; you need to have a server as well as technical skills and knowledge
to use LimeSurvey to the fullest.

2. SurveyGizmo
SurveyGizmo features affordable and effective web survey tools which can be used by both
small and large companies and organizations. In addition, SurveyGizmo is known for the
proficient training service they offer for companies who want to come up with their own survey
team.

3. WuFoo
The survey process is made simpler and easier by WuFoo. It allows fully flexible features that
make the creation of web questionnaire a lot easier and customizable. What makes WuFoo
standout is the improved payment system, which allows not only payment from credit and debit
cards, but also via PayPal, Authorize.net and Google Checkout. As of the moment, the company
provides a generous 50 percent discount for new customers.

4. Google Forms

Google offers a variety of ways to present your Internet questionnaire with its Google Forms.
With this free survey service, you can create unlimited number of surveys and acquire more than
1,000 responses. Google Forms also provides various survey themes that may boost the interest
of the respondents. Google Forms can be accessed by creating a new form at your Google Docs
account.

5. SurveyMonkey
One of the most widely used web survey provider, SurveyMonkey allows users to create multiple
surveys and navigate through them without any problem. This web survey company provides
heavy-duty security assurance, efficient keyword search and usable question logic features.
There are other web survey tool providers that can be utilized for a more convenient survey
process. In order to choose the most suitable web survey tool, consider the features, prices and
customer feedbacks.

Focus Groups - Pros and Cons

Sarah Mae Sincero 14.9K reads

A focus group survey is a survey method wherein the respondents from the
target population are typically put in a single group and interviewed in an
interactive manner. The participants in a focus group are given the
opportunity to freely talk about and discuss their ideas and opinions
towards the object of the survey.
The term focus group was created by Ernest Dichter, a famous market expert and
psychologist. Robert K. Merton, a sociologist and the associate director of the Bureau of Applied
Social Research headed the first focus groups in the United States. When used as a survey
method, the focus group approach presents various pros, strengths and benefits, as well as
cons, weaknesses and drawbacks.

Advantages of Focus Group Survey

One of the advantages of a focus group survey is that it is effective for a group of respondents
that comprise of young children, people who use English as a second language and people with
lower literacy levels. Another advantage of this type of survey is that respondents can answer
and build on each others responses, improving the richness of data being gathered.

Disadvantages of Focus Group Survey

A major disadvantage of a focus group survey is that it the survey results may not fully represent
the opinion of the larger target population. In addition, the facilitator must be well-trained to
handle any situation that may arise from the focus group interaction.

Types of Focus Group Survey

1. Single and Two-way
First, there is the single, one-way or traditional focus group wherein all the respondents are
placed in just one focus group to interactively discuss the object of the survey. This typical focus
group is composed of 6 to 12 members. On the other hand, the two-way focus group involves

two focus groups one focus group discussing the object, and the other focus group observing
and discussing the interactions of the members of the first focus group.

2. Dual Moderator, Dueling Moderator, and Respondent Moderator

The dual moderator focus group involves two moderators one moderator monitoring the
smooth progression of the focus group session, and another moderator observing if all the
questions in the survey are asked during the discussion. In contrast, the dueling moderator focus
group includes two moderators who purposely get on opposing sides regarding the object. For
example, one moderator is saying that the product is effective, whereas the other moderator is
arguing that it is ineffective. On the other hand, one of the respondents temporarily becomes the
moderator of the focus group in respondent moderator type.

3. Teleconference and Online

Focus groups can be conducted either in a telephone network or in an online or Web network.
Free online video providers such as Skype can be used in this subtype of focus group survey.

Panel Study
Sarah Mae Sincero 7.2K reads

The survey method is commonly utilized in many types of studies, both in

scientific and marketing purposes. One of the specific types of research
that make use of the survey method is a panel study, also called as a cohort
study.
A panel study, also known as cohort study, is a type of observational and longitudinal study that
is utilized in various scientific fields and marketing areas. With a clinical study design, the cohort
study is utilized in order to determine risk factors, life histories and other aspects related to a
group of people being studied.

What is a Cohort?
The focus of a panel study is a group of people who have a common attribute, experience or
characteristic in a particular time period. This group is called the cohort. People that share the
fact of being born on the same day, month, year or era may belong to a birth cohort. Other kinds
of cohort can be formed depending on the common denominator of the participants.

Types of Cohort Study

In order to create a survey or questionnaire that will satisfy the purpose of the study, one must be
able to determine whether the study calls for a retrospective cohort study or a prospective one.
The main difference that sets these two types of cohort study apart is the time duration involved.

A. Retrospective Study
A retrospective cohort study includes gathering of past data related to the subject of the study
before creating cohort groups of participants. The retrospective cohort study uses archived
records as a guide in forming groups of respondents. Thus, a retrospective cohort study is also
called as a historical study. For instance, a researcher would like to study the effects of a disease
endemic to a province. The first step of his study is to identify and collect data regarding the
occurrence of the disease after it struck the location. After analyzing the data, the researcher

would form two groups of subjects one cohort group comprised of people who contracted the
disease and another group who did not experience the illness.

B. Prospective Study
The prospective cohort study follows the typical pattern arranging the cohort groups first before
gathering the data required. For example, the Oxford Family Planning Association Study
conducted in the United Kingdom included groups of couples who utilize the various methods of
contraception.
Over the years, the household panel survey emerged as a sub-type of cohort studies. In a
household panel survey, the sampling is performed in a draw lots method in order to gather
households to survey. These households are followed by the researchers or interviewers on a
yearly basis. Some examples of household panel survey include the British Household Panel
Survey and the US Panel Study of Income Dynamics.

Advantages and Disadvantages

Cohort studies are able to gather comprehensive information regarding the exposure of the
participants to the object of the study (e.g. a disease, a product, etc) as well as the real
experience after the exposure. The research process involved in the cohort studies are easily
understood by laymen. On the other hand, cohort studies are significantly expensive to conduct
because of the large number of participants needed in most cases. In addition, follow up rates
are hard to maintain or increase due to the length of time involved.

How to Conduct a Survey

Sarah Mae Sincero 10.6K reads

There are a variety of ways through which a survey can be conducted. Each
method of conducting surveys present their own advantages and
disadvantages which are to be considered and weighed carefully before the
actual execution of administering the survey. In addition to the method of
administration, there are other factors that may influence the response
rates and results of the survey.

Methods of Administering Survey

1. Personal Approach

A. Face-to-Face Structured Interview

Pros: Questions on the survey that are asked directly to the respondent by the researcher
usually produces good response rates if visual materials are required during the survey. This also
provides a great opportunity for the researcher to observe the participants.
Cons: Theres a higher chance of bias due to the interaction between the respondent and the
interviewer. The principle of anonymity is also lost. It is neither ideal if the participants are located
in different geographical areas.

B. Telephone Survey

Pros: This method can be used for asking consequential questions. It provides anonymity better
than face-to-face interviews.
Cons: Telephone surveys are not ideal for data gathering which requires the participants to see a
visual material. In addition, telephone calls for survey purposes are not appropriate if long
questions are to be asked.

2. Self-Administered Approach

A. Paper-and-Pencil Survey
Pros: A traditional survey administration method, the paper-and-pencil survey is ideal for
respondents who are not computer literate or do not have an access to the Internet.
Cons: The paper-and-pencil self-administered technique usually requires the researcher to be
present during the administration, and also necessitates doing the expensive reproduction of
survey questionnaires and the tiring manual distribution of the questionnaires to the respondents.

B. Online Survey
Pros: The online survey technique is ideal for a survey requiring a huge sample size and/or a
sample whose members live in wide geographical areas. This is also less expensive compared
to sending survey through mail. Also, many survey companies can help you conduct the survey
online with decent precision.
Cons: The members of the sample must be computer literate in order to answer the survey
questions online. This method may also require giving an incentive to the participants.

C. Mail Survey
Pros: This method facilitates easy administering of the survey. The visual quality of the
instrument is also controlled by reviewing the mails before they are sent. Anonymity can also be
easily achieved through this technique.
Cons: Mail surveys are not as popular as they were years ago because there were increasingly
lower response rates from the participants.

Increasing Response Rates

There are various ways by which the researcher can encourage participants to respond and
complete the survey:

1.

Compensate the participants effort by means of providing an incentive. The usual

incentive given by researchers is money, ranging from as little as $1 to as much as
$50 per completed survey. However, some give donations or small gifts after
completing the survey.

2.

Maintain a professional-looking survey questionnaire. Double-check the

instructions, spacing, layout, and printed look of the survey before administering them.

3.

Follow the KISS principle. KISS stands for Keep It Short and Simple. Higher
response and completion rates are associated with concise, simple, and easy-toanswer survey questionnaires.

4.

Ensure confidentiality (and anonymity, if it applies). Assure the participants that all
their answers will be kept confidential and will only be used for the purpose of the
survey.

5.

Look professional, courteous and polite. Participants are more likely to cooperate
if the researcher practices professionalism whether in appearance or behavior. Saying
please, and thank you as well as guiding the respondent politely are also helpful in
motivating the participant to finish the survey.

6.

Pilot Survey

7. Sarah Mae Sincero 25.8K reads 1 Comment

8.

9. One of the key elements in conducting surveys and other data

gathering methods is efficiency. It is important to utilize money, time
and effort in the most efficient way possible to achieve success in
performing surveys, especially those that require a large number of
participants. To promote efficiency in conducting surveys,
researchers usually perform a pilot survey.

10.

What is a Pilot Survey?

11. A pilot survey is a strategy used to test the questionnaire using a smaller sample
compared to the planned sample size. In this phase of conducting a survey, the
questionnaire is administered to a percentage of the total sample population, or in more
informal cases just to a convenience sample.

12.

Advantages of a Pilot Survey

13. Conducting a pilot survey prior to the actual, large-scale survey presents many benefits
and advantages for the researcher. One of these is the exploration of the particular
issues that may potentially have an antagonistic impact on the survey results. These
issues include the appropriateness of questions to the target population.
14. A pilot survey also tests the correctness of the instructions to be measured by whether all
the respondents in the pilot sample are able to follow the directions as indicated. It also
provides better information on whether the type of survey is effective in fulfilling
the purpose of the study. Practically speaking, pilot surveys save financial resources
because if errors are found in the questionnaire or interview early on, there would be a
lesser chance of unreliable results or worse, that you would need to start over again after
conducting the survey.
15. All in all, the main objective of a pilot study is to determine whether conducting a largescale survey is worth the effort.
16. Read also: The Pilot Study.

17.

Types of Pilot Survey

18. A. According to Organization

19. There are two types of pilot survey according to organization external and internal. An
external pilot survey intends to administer the questionnaire to a small group of target
participants who will not be included in the main survey. On the other hand, an internal
pilot survey will consider the respondents in the pilot as the first participants in the main
survey.

20. B. According to Respondent Participation

21. There are two types of pilot survey according to the participation of the respondents
undeclared and participatory. In an undeclared pilot survey, you administer the survey to
a certain number of respondents as if it is the real and full scale survey, not a pretest one.
On the other hand, participatory pilot surveys involve informing the respondents that they
are in the pre-test phase. The respondents are to be asked what they can say about the
questionnaire, specifically their reactions, comments and suggestions. For instance, you
may ask them about how clear the instructions are or which questions are hard to
answer. Converse and Presser (1986) recommend using the participatory pilot survey
first, and then conducting the undeclared pilot.

22.

The Results of a Pilot Survey

23. After obtaining and analyzing the results of the pilot survey, logistical, technical and other
issues or problems can be addressed. The questionnaire or interview format can be
revised, or the type of survey may be altered into a more suitable one. After the revision
of the survey, the researcher may opt to conduct a second pilot survey to determine
whether the errors and issues are effectively solved. If the problems were minor, then the
large-scale survey can be executed.

24. Increasing Survey Response

Rates
25. Sarah Mae Sincero 5.3K reads
26.

27.There are many strategies and techniques that you can utilize in
order to increase the survey response rates. These tactics vary from
the way you create the questions to the manner by which you
approach the respondents.
28. Boosting the survey response rates is necessary to complete the data gathering process
in a survey or a research study. The higher the response rates, the more data can
be analysed and interpreted. Towards the end of the survey, this eventually lead to the
greater advancement of the object of the survey (e.g. a product, a controversial issue,
etc.) based on the target populations perceptions, beliefs and behaviours.

29. The following are proven strategies that increase survey response rates:

30. 1. Choose the Appropriate Type of Survey.

31. Each type of survey differs in terms of their characteristics, advantages and
disadvantages. For instance, the online survey method is ideal if your target population
includes people age 13 to 18 years old, but not if the survey requires elderly people since
the latter dont usually have an access to the Internet. Selecting the right type of survey
based on your survey goals is crucial in achieving your expected survey response rates.

32. 2. Follow the Kiss Principle.

33. KISS stands for Keep It Short and Simple. Create a questionnaire that is brief and
concise and does not contain complicated questions. Such complex questionsinclude
lengthy or too many open-ended questions. In terms of conducting aninterview survey,
make the interview as structured as possible by means of asking thought-out questions
and only a few probing ones. When it comes to the cover page, only include a brief
greeting, information about you and your organization, thepurpose of the survey and the
pledge of anonymity or confidentiality (optional).

34. 3. Add a Personal Touch to the Invitations.

35. Studies show that there is an increase of 5% or more in the survey response rates when
the invitations in email, web-based, or interview surveys contain personal salutation
pertaining to the potential respondent. Instead of Dear Subscriber, respondents prefer
to be addressed as Dear Mr.Smith by the researcher or interviewer.

36. 4. Provide Incentives.

37. Nowadays, people are more likely to respond to surveys if there is a concrete benefit
from the survey for their participation and completion. The incentives, which raise
response rates by 10% to 15 %, can be in cash or in-kind. In web surveys, participants
are given a cash incentive that range from $1 to $50. Some give incentives lower than $1
(e.g. 1-minute surveys) or higher than $50 (VIP surveys or those answered by medical
professionals, degree holders, etc.). In-kind incentives can be gift certificates, movie
passes, small tokens, prizes, and others.

38. 5. Follow Up and Remind the Respondents.

39. According to the study conducted by Quintessential, an increase in survey response
rates may come from reminding non-participating recipients or non-completing
respondents within 10 days after sending the first invitation.

Analysis and Handling Survey Data

Sarah Mae Sincero 25K reads

After administering the survey, the next step in survey research process is
to analyze the responses of the participants. Handling survey data includes
conducting a precise survey data analysis which lets you interpret the
results accurately.
Survey data analysis is a process that involves five steps:

1.

data validation

2.

response partitioning

3.

coding

4.

standard analysis

5.

ordinal and nominal data analysis

Data Validation
Data validation ensures that the survey questionnaires are completed and present consistent
data. In this step, you should not include the questions that were not answered by most
respondents in the data analysis as this would result to bias in the results. However, in the case
of incomplete questionnaires, you must count the actual number of respondents that were able to
answer a particular question. This should be the same for the rest of the questions.

Response Partitioning
Homogenous subgrouping of the responses makes data analysis faster and easier. Based on the
demographic data gathered from the survey, you may partition the responses into subgroups. For
instance, you may want to compare the answers of male and female respondents, or young and
old participants.

Data Coding
Before inputting the survey data into electronic data files, data coding must be done. Data coding
simply means converting the nominal and ordinal scale data in such a way that the statistical
package to be used can handle the survey data accurately. This step is actually performed when
you design the questionnaire, but the data codes become helpful during data analysis. In order to
perform data coding, read through the responses and group them into categories. For instance,
responses that are related to customer service can be coded under the category Customer
Service.
Unlike closed-ended questions, open-ended questions are more difficult to code since it needs
human expertise to determine if one response is equivalent to another. In this case, several
experts are asked to code the responses in order to minimizebias.

Standard Data Analysis

The type of survey method used as well as the type of response formats are two factors that
affect the specific method of data analysis the survey requires. Basically, standard data analysis
includes computing for the proportion of variables andstandard errors.

Analyzing Ordinal and Nominal Data

Numerical survey data can be easily handled and analyzed straightforwardly usingstatistical
equations. On the other hand, ordinal and nominal data need a different way of analyzing survey
results. It is a usual practice that ordinal scales (five-point scale, seven-point scale, etc) are
converted into their numerical equivalents, as in a five-point scale, where in strongly agree is
equivalent to 5 whereas strongly disagree is equal to 1. On the other hand, it is best to use
advanced statistical procedures such as Spearmans rank correlation and Kendalls tau to
determine the relationship among the ordinal scale variables.
Handling nominal data usually includes identifying the percentage of responses per
category. Chi-square tests and multi-way tables are commonly used to measure the relationship
between nominal scale variables.

Conclusion of a Survey
Sarah Mae Sincero 24.2K reads 1 Comment

Drawing conclusions from the survey results is one of the last steps in
conducting a survey. Most researchers find writing the conclusion as hard
as creating the introduction to the survey because these two segments act
as the frame of the study.

The Importance of the Conclusion

What do the survey results mean? Why do the findings matter? Are the survey resultssatisfactory
in relation to the survey goals? The conclusion answers all of these questions and more. With
just one or two paragraphs of text, the conclusion can emphasize the significance of the findings
and create a positive impression on the eyes of the readers.
Being the final portion of your survey report, the conclusion serves as the researchers final say
on the subject of the survey. The conclusion should be able to wrap up the entire survey from the
formulation of survey goals up to the satisfaction of such objectives. As much as possible, no
issue related to the subject should be left unanswered, which is why you must carefully choose
the words to utilize whendrawing conclusions.

How to Write an Effective Conclusion

A conclusion is considered effective only when the readers feel that they have gained
something new and interesting from reading the survey and its results. An effective conclusion is
one that makes an impact regarding the issue at hand, and is able to drive people to create
decisions and take action related to the subject of the survey.
Here are some strategies that can help you write an effective conclusion for your survey:

1. Focus On Satisfying Your Survey Goal

The conclusion must answer the queries presented by your survey goals and objectives. In
writing the conclusion, your mind must be set on fulfilling the very purpose of conducting the
survey. With the survey goal in mind, you will be able to avoid common mistakes such as adding
new information that were not previously stated earlier in the survey, or worse, creating a new
thesis.

2. Make a Synthesis, not a Summary

Oftentimes, the conclusion is mistaken as the summary of the survey report. Although it contains
the vital points of the survey, the conclusion must be a synthesis of the survey results, the
interpretation of such, and the proposal of a course of action or solution to the issues that
emerged from the survey.

3. Use an Academic Tone in Writing the Conclusion

Surveys are performed for scientific or marketing purposes, thus, they must be written using a
professional and academic style. With this in mind, the tone of the conclusion should match that
of the results and the rest of the data collection process. Doing this will boost the credibility of
your survey, rather than adding anecdotes or jokes in hopes of increasing the appeal of the
results.

4. Avoid Sentimentality
A conclusion of a survey must not be drawn from emotions in order to make the survey more
appealing to the readers. The conclusion must be written in an interesting yet academic manner.
Emotional praise is not ideal, but a refined commentary on the subject is acceptable.

Presenting Survey Results

Sarah Mae Sincero 19.7K reads

The survey process does not end at formulating a conclusion based on the
results of the study. The final step in utilizing the survey method is the
presentation of survey findings. In presenting survey results, you must be
able to deliver the findings to the audience as accurate and stimulating as
possible.
The presentation of survey results is an integral part of survey research because it is the path
towards communicating the results to the appropriate individuals, organizations or government
agencies that can take action regarding the results of the survey. Presenting survey
results involves the introduction and background of the survey, the methodology or data
collection process, the presentation and analysis of results and the conclusion and
recommendations.
In addition, this step also includes incorporating effective techniques on how to make the
presentation more interesting and appealing to the audience.

Introduction and Background

To start with the presentation, show the factors that served as your motivation to perform the
survey. These may include statistical or descriptive data that can make the audience understand
the significance of the survey. Then, state the purpose of the study, the survey goals, and the
complete title of the survey. Identify the objectives that were met, and those that were not
satisfied along the process.

Data Collection Process

In this part, you must state which type of survey method you had utilized in gathering data. Also,
describe the sampling method done, the number of participants, any inclusion and exclusion
criteria, the questionnaire formation, pilot testing, real survey execution, and data handling and
storage. When presenting the data collection process, make use of tables, graphs and charts to
create a better visual impact and make the audience fully understand the process.

Results and Analysis

As in the presentation of the data collection process, showing the audience your results and
analysis must include the use of graphical presentation through tables and graphs. Emphasize
the significant findings by means of highlighting them and explaining them further.

Conclusion and Recommendations

Presenting the conclusion and recommendations includes reviewing the survey goals and
objectives and relating the survey results to them. In your presentation, the conclusion must
comprise of concise but eloquent words that will lead the panel to make proper decisions or
interpretations regarding the survey results.

Media Presentation
Aside from the printed report containing the research results, you must be keen at preparing your
media presentation. You may use Microsoft PowerPoint or any other presentation software to
present the information in a slide format, making them look organized and professionally done.
An ideal PowerPoint presentation of survey results ranges from 20 to 50 slides using bullet points
and tables for descriptive data, and charts or graphs for numerical data.

Observational techniques
From Wikipedia, the free encyclopedia

This article does not cite any references or sources. Please help improve this
article by adding citations to reliable sources. Unsourced material may be
challenged and removed. (January 2007)
In marketing and the social sciences, observational research (or field research) is a social
research technique that involves the direct observation of phenomena in their natural setting.
This differentiates it from experimental research in which a quasi-artificial environment is created
to control for spurious factors, and where at least one of the variables is manipulated as part of
the experiment.
Contents
[hide]

1 Observational techniques in context

2 Three Approaches

3 In Marketing Research

4 See also

Observational techniques in context[edit]

Compared with quantitative research and experimental research, observational research tends to
be less reliable but often more valid[citation needed]. The main advantage of observational research is
flexibility. The researchers can change their approach as needed. Also it measures behavior
directly, not reports of behavior or intentions. The main disadvantage is it is limited to behavioral
variables. It cannot be used to study cognitive or affective variables. Another disadvantage is that
observational data is not usually general

Three Approaches[edit]
Generally, there are three types of observational research:

Covert observational research - The researchers do not identify themselves. Either

they mix in with the subjects undetected, or they observe from a distance. The advantages of
this approach are: (1) It is not necessary to get the subjects cooperation, and (2) The
subjects behaviour will not be contaminated by the presence of the researcher. Some
researchers have ethical misgivings with the deceit involved in this approach.

Overt observational research - The researchers identify themselves as researchers

and explain the purpose of their observations. The problem with this approach is subjects
may modify their behaviour when they know they are being watched. They portray their
ideal self rather than their true self. The advantage that the overt approach has over the
covert approach is that there is no deception (see PCIA-II; Holigrocki, Kaminski, & Frieswyk,
1999, 2002).

Researcher Participation - The researcher participates in what they are observing so as

to get a finer appreciation of the phenomena.

In Marketing Research[edit]
In marketing research, the most frequently used types of observational techniques are:

Personal observation

observing products in use to detect usage patterns and problems

observing license plates in store parking lots

determining the socio-economic status of shoppers

determining the level of package scrutiny

determining the time it takes to make a purchase decision

Mechanical observation

eye-tracking analysis while subjects watch advertisements

oculometers - what the subject is looking at

pupilometers - how interested is the viewer

electronic checkout scanners - records purchase behaviour

on-site cameras in stores

Nielsen box for tracking television station watching

voice pitch meters - measures emotional reactions

psychogalvanometer - measures galvanic skin response

Audits

retail audits to determine the quality of service in stores

inventory audits to determine product acceptance

shelf space audits

Trace Analysis

credit card records

computer cookie records

garbology - looking for traces of purchase patterns in garbage

detecting store traffic patterns by observing the wear in the floor (long term) or the
dirt on the floor (short term)

exposure to advertisements
Content analysis

observe the content of magazines, television broadcasts, radio broadcasts, or

newspapers, either articles, programs, or advertisements

See also[edit]

RESEARCH INSTRUMENTS
In collecting primary data, marketing researchers have a choice of two main research
instrumentsthe questionnaire and mechanical devices. The questionnaire is by far
the most common instrument. A questionnaire consists of a set of questions
presented to a respondent for his or her answers. In preparing a questionnaire, the
marketing researcher must decide what questions to ask, the form of the questions,
the wording of the questions, and the ordering of the questions. Each question
should be checked to see that it contributes to the research objectives.
Although questionnaires are the most common research instrument, mechanical
instruments are also used. Two examples of mechanical instruments are people
meters and supermarket scanners. These techniques are not widely used because
they tend to be expensive, require unrealistic advertising exposure conditions, and
are hard to interpret.

Read more: http://www.referenceforbusiness.com/management/Mar-No/MarketingResearch.html#ixzz3b9slWxI7

Observation Approach
Most texts clarify observation methods as a separate "family" of research
design. (Hair, Bush and Ortinau)
Natural versus contrived observation

In natural observation,
customers' reactions and
behaviors are observed as they
occur naturally in a real-life
situation (Parasuraman, Grewal,
Krishnan).
In contrived observation,
observations are conducted in
an environment artificially set
up by the researcher
(Parasuraman, Grewal,
Krishnan).
Disguised Versus Nondisguised Observation
Disguised observation is
observation of which
respondents are unaware.
In nondisguised observation,
respondents are aware they are
being observed.
Being observed may change
behavior.
Human versus mechanical
observation
Human observation involves
people taking observations
(Parasuraman, Grewal,
Krishnan).
Mechanical observation
involves machines and devices
taking observations
(Parasuraman, Grewal,
Krishnan).

Eye-Tracking equipment - Devices to measure response latency - (the

speed with which a respondent provides an answer)
Instruments to conduct voice pitch analysis - This method is used to
determine how strongly a respondent feels about an answer or how
much emotional commitment is attached to it.
People meter - This method is used for monitoring television viewing
behavior -- who is watching which shows. This method is better than
older tracking methods based on which shows were turned on, even
if no one was in the room or watching. In this method each person
has a button, also buttons for visitors, to "login" when watching.
Web-based observational methods is the Internet-based tracking of
customers. When it is disguised it happens and you do not know it. If
an "opt in" method is used the observation is nondisguised.
Direct versus indirect observation
Direct observation captures the actual behavior or phenomenon of
interest (Parasuraman, Grewal, Krishnan).
Indirect observation examines the results or consequences of the
behavior or phenomenon under study (Parasuraman, Grewal, Krishnan).
Structured versus nonstructured observation
Observation is structured observation when a study's data requirements
are well established and can be broken into a set of discrete, clearly
defined categories. (Parasuraman, Grewal, Krishnan)
Observation is non-structured observation when a study's data
requirements cannot be broken into a set of discrete clearly defined
categories. (Parasuraman, Grewal, Krishnan)

Designing an Observation Study

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There are many different ways to design an observation study, depending on the objective of your
study, the type of data you are trying to collect, and the resources you have available for your study.
Following are five different features that you should consider when designing the ideal observation
study for your project:

Natural vs. Contrived Settings:

Conducting the study in a natural setting essentially means that you are simply observing your
subjects in their "real life" environments. Because you have no way of influencing what your subjects
are doing, this method can be time consuming to gather the information that you are specifically trying
to obtain for your project. Alternatively, the data that is collected in a natural setting does have more
accuracy in reflecting "real life" behavior rather than "contrived" behavior.
A contrived setting is one where the specific situation being studied is created by the observer. The
contrived setting offers you, the observer, greater control over the gathering of data and specifically

will enable you to gather the information more quickly and efficiently. However, it may be questionable
as to whether or not the data collected does truly reflect a "real life" situation.

Disguised vs. Non-disguised Observation:

When subjects do not know they are being observed, this is called a disguised observation. Subjects
in disguised observations tend to act more naturally and the data collected tends to reflect their true
reactions. The primary concern with disguised observation is the ethical concern over recording
behavioral information that would normally be private or not voluntarily revealed to a researcher.
However, if you are simply observing a subject's behavior in a public setting then by definition, their
behavior is no longer private.
When subjects know they are being observed, this is called a non-disguised observation. Using the
non-disguised observation technique alone alleviates ethical concerns, however, since the subjects
are aware that they are being watched, the advantages of using the observational technique are
neutralized and a survey technique would be equally effective. There is one exception: the nondisguised approach offers the advantage of allowing the researcher to follow up the observations with
a questionnaire in order to get deeper information about a subject's behavior.

Human vs. Mechanical Observation:

Human observation is self explanatory, using human observers to collect data in the study.
Mechanical observation involves using various types of machines to collect the data, which is then
interpreted by researchers. With continuing improvements in technology, there are many "mechanical"
ways of capturing data in observation studies, however, these new "gadgets" tend to be extremely
expensive. The most commonly used and least expensive means of mechanically gathering data in
an observation study is a video camera. A video camera offers a much more precise means of
collecting data than what can simply be recorded by a human observer.

Direct vs. Indirect Observation:

Direct observations involve looking at the actual behavior or occurrence rather than a result of that
occurrence, which would be an indirect observation. For example, if you were interested in seeing
how much candy was purchased by a particular neighborhood, you could gather the information in
one of the two following ways:
Direct observation: observe customers in a store and count how many bags of candy they purchase.
Indirect observation: look through trash cans on garbage day to see how many empty candy bags are
in each trash bin
Indirect observation tends to be used when the data cannot be gathered through direct means, or
when gathering the data through direct observation tends to be too expensive.

Structured vs. Non-structured Observation:

Structured observations are made when the data that is being collected can be organized into clear
categories or groups so that the observer can record the data by simply marking off or checking a

category on an observation form. Non-structured observations are not looking for specific facts or
actions, but rather are capturing everything that occurs. For example, if the US Postal Service were
interested in knowing the gender and racial profile of the people that use a particular post office, they
could post an observer at the front door and simply record the data as people entered the post office.
This would be a structured observation, where the observer would simply be marking off boxes on an
observation form. However, if the US Postal Service were interested in knowing the general level of
satisfaction with service in a particular post office, they could post an observer in that office to capture
more general data such as the length of the line during various times of day, the general change in
customer demeanor as the line grows longer, the change in customer demeanor when there are one,
two, or three windows open, etc....

Credits

Exploratory research and its methods

Exploratory research is conducted to clarify ambiguous problems. Management may have
discovered general problems, but research is needed to gain better understanding of the
dimensions of the problems. Exploratory studies provide information to use in analyzing a
situation, but uncovering conclusive evidence to determine a particular course of action is not
the purpose of exploratory research. Usually, exploratory research is conducted with the
expectation that subsequent research will be required to provide conclusive evidence, It is a
serious mistake to rush into detailed surveys before less expensive and more readily available
sources of information have been exhausted.
In an organisation considering a program to help employees with childcare needs, for
example, exploratory research with a small number of employees who have children might
determine that many of them have spouses who also work and that these employees have
positive reactions to the possibility of an on-site child-care program. In such a case
exploratory research helps to crystallize a problem and identify information needs for future
research.
Exploratory research methods:
The quickest and the cheapest way to formulate a hypothesis in exploratory research is by
using any of the four methods:

Literature search

Experience survey

Focus group

Analysis of selected cases

Literature Search

This refers to referring to a literature to develop a new hypothesis. The literature referred
are trade journals, professional journals, market research finding publications, statistical
publications etc Example: Suppose a problem is Why are sales down? This can quickly be
analyzed with the help of published data which should indicate whether the problem is an
industry problem or a firm problem. Three possibilities exist to formulate the hypothesis.

The companys market share has declined but industrys figures are normal.

The industry is declining and hence the companys market share is also declining.

The industrys share is going up but the companys share is declining.

If we accept the situation that our companys sales are down despite the market showing an
upward trend, then we need to analyse the marketing mix variables.
Example 1: A TV manufacturing company feels that its market share is declining whereas the
overall television industry is doing very well.
Example 2: Due to a trade embargo imposed by a country, textiles exports are down and
hence sales of a company making garment for exports is on the decline.
The above information may be used to pinpoint the reason for declining sales.
Experience Survey
In experience surveys, it is desirable to talk to persons who are well informed in the area
being investigated. These people may be company executives or persons outside the
organisation. Here, no questionnaire is required. The approach adopted in an experience
survey should be highly unstructured, so that the respondent can give divergent views. Since
the idea of using experience survey is to undertake problem formulation, and not conclusion,
probability sample need not be used. Those who cannot speak freely should be excluded from
the sample.
Examples :
1) A group of housewives may be approached for their choice for a ready to cook product.
2) A publisher might want to find out the reason for poor circulation of newspaper introduced
recently. He might meet (a) Newspaper sellers (b) Public reading room (c) General public (d)
Business community; etc.
These are experienced persons whose knowledge researcher can use.
Focus Group
Another widely used technique in exploratory research is the focus group. In a focus group, a
small number of individuals are brought together to study and talk about some topic of
interest. The discussion is co-ordinated by a moderator. The group usually is of 8-12 persons.
While selecting these persons, care has to be taken to see that they should have a common

background and have similar experiences in buying. This is required because there should not
be a conflict among the group members on the common issues that are being discussed.
During the discussion, future buying attitudes, present buying opinion etc., are gathered.
Most of the companies conducting the focus groups, first screen the candidates to determine
who will compose the particular group. Firms also take care to avoid groups, in which some
of the participants have their friends and relatives, because this leads to a biased discussion.
Normally, a number of such groups are constituted and the final conclusion of various groups
are taken for formulating the hypothesis. Therefore, a key factor in focus group is to have
similar groups. Normally there are 4-5 groups. Some of them may even have 6-8 groups. The
guiding criteria is to see whether the latter groups are generating additional ideas or repeating
the same with respect to the subject under study. When this shows a diminishing return from
the group, the discussions stopped. The typical focus group lasts for 1-30 hours to 2 hours.
The moderator under the focus group has a key role. His job is to guide the group to proceed
in the right direction.
Analysis of selected cases
Analysing a selected case sometimes gives an insight into the problem which is being
researched. Case histories of companies which have undergone a similar situation may be
available. These case studies are well suited to carry out exploratory research. However, the
result of investigation of case histories arc always considered suggestive, rather than
conclusive. In case of preference to ready to eat food, many case histories may be available
in the form of previous studies made by competitors. We must carefully examine the already
published case studies with regard to other variables such as price, advertisement, changes in
the taste, etc.

Exploratory Research Unlocks

Product Potential
April 28, 2011 - Article
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by Latesha Richards

An important part of any natural ingredients sustainability and longevity lies in the discovery
phase, where new ideas and opportunities are conceived. During this stage, sponsors can
determine whether the ingredient is functional as a nutritious food additive, is clinically
effective in a topical agent, and if the product will successfully target a different population,
among other important considerations.
Unlocking a products potential essentially begins with determining the commercial
feasibility of the idea and then confirming a hypothesis with research. That research may be
composed of published literature, but may require a method that will provide real-time,
product-specific data. Exploratory clinical research is a viable pathway for obtaining such
data and exploring new market opportunities. Four main activities can be used to unlock a
products potential:
1. Literature Research
First, the sponsor must assess if there is a strong case for pursuing studies to test for attributes
or efficacy from peer-reviewed literature, previously conducted clinical trials and/or market
research data. After evaluating these sources, the sponsor should have some initial supporting
data for safety and efficacy to drive follow-up testing of efficacy and dosing in a research
study.
Sponsors must also evaluate whether peer-reviewed literature on the ingredients alone is
convincing enough to base a marketing message on, or if a product-specific trial is necessary.
Sponsors must assess what the protocol designs were of those studies and how they were
conducted to determine how statistically significant the data is. These assessments will
determine whether future studies are needed and if randomized, double blind or control arms
need to be incorporated into future study designs.
2. Market Assessment
There is no set timeframe for conducting literature searches and market assessment, but they
should transpire simultaneously, as scientific literature and market indicators investment are
time-worthy and involve the efforts of the R&D and marketing teams. Information about
markets, customers and competitors will reveal a product ideas potential in the given market.
The marketing team should ask questions such as: Does it make sense statistically to target
this new market? Will this new application/delivery system be accepted by users? Will this
new formulation be commercially viable in todays market?
3. Research Hypothesis
The sponsor must then come up with a hypothesis based on the expected outcomes revealed
from the literature data that can be tested in a clinical study. Before a study is done, the
sponsor must assess which potential clinical endpoints or definitive endpoints will be tested
in order to test the hypothesis. The research question should be novel in that it has the ability
to confirm or refute previous findings, extend previous findings or provide new ones, and
relevant to the new product idea and endpoints being tested. At this point, all roads lead to an
exploratory clinical study.

4.

Exploratory Clinical Efficacy Study

An exploratory clinical efficacy study is a pilot study that measures clinical outcomes of a
product in humans. The hopeful outcome of this study is to demonstrate efficacy for purposes
of making a quick assessment of the commercial potential of the product in the new
indication, delivery system or market. The resulting data is then used to formulate a
hypothetical structure/function claim, create a marketing message and to determine if there is
enough evidence of clinical efficacy to warrant larger clinical trials.
The clinical efficacy study employs a targeted group of no greater than 100 subjects and short
intervention/treatment period that will yield data in a relatively short time frame, depending
on the number and type of clinical parameters measured. Studies can utilize a traditional
randomized, placebo-controlled and/or blinded study design to test the product against a
control. The exploratory clinical efficacy study begins to test human response to a single dose
or escalating doses, which would be used to determine optimal dosing for future studies.

Exploratory research
Exploratory research has the objective of giving a better understanding of the research
problem. This includes helping to identify the variables which should be measured within the
study. When we have little understanding of the topic we find it impossible to formulate
hypotheses without some exploratory research. The techniques of exploratory research
include reviews of secondary sources of data, informal interviews and focus group
interviews.
To illustrate the point, consider the following case. Crop residues such a straw are high in
lignin, a wood like substance, and low in nutrients. This makes it a poor animal feed since
the lignin acts against digestibility and the low nutrient content means poor food value.
However, if treated in a strong alkali, with the action of internal heat, the lignin breaks down
and the nutrient content increases. A company was established to exploit this technology
and did so successfully for 4 seasons. After this period sales began to slow down. Three
other manufacturers had entered the market by this time. The company, Animal Feed
Systems, did not know whether the whole industry had slowed down or if only their product
was suffering. Nor did they know if the problem was temporary in that perhaps the market
comprised of early adopters had been saturated but it was only a matter of time before
other farmers began to buy their systems when they saw how well they worked. It was also
possible that if a problem did exist it could lie in any one of a number of areas; animal
populations might be declining, distributors may not be promoting the product aggressively,
customers may be experiencing difficulties in getting the chemicals, and so on and so on.
This is a good example of where insufficient is known to develop clear objectives since the
problem cannot be articulated with any precision. Thus the any research would be of an
exploratory nature. Such research can take the form of literature searches, informal personal
interviews with distributors and users/non-users of the product and/or focus group interviews
with prospective customers and/or distributors. Exploratory research is intend to help in the
task of formulating a researchable problem and testable hypotheses.
IDENTIFYING NEED WITH MARKET RESEARCH TECHNIQUES

Many existing market research techniques can be readily adapted to identifying

various market segments and ranking the segments in terms of profit potential,
suitability for existing distribution channels, etc. Identifying specific needs of
these market segments can also be accomplished using existing techniques.
However, because in the past these techniques have been used almost
exclusively for evaluating existing or proposed product attributes, market
researchers must reorient their perspective to one which does not focus on the
product and its attributes but rather on basic consumer need structures.
Research techniques such as depth interviewing, projective methods of word
association, thematic application tests, sentence completion, and so forth have
provided ways in which information can be obtained from consumers concerning
their thoughts and feelings about product characteristics. The task now facing
market research is to adapt these proven techniques to provide specific
information concerning problems perceived by consumers in their present
methods of achieving goals. The authors have utilized such tried and true
techniques as in-depth interviews, questionnaires, and focus groups to identify
specific areas of need. These and other techniques are also useful in defining
with precision the psychological or "felt" needs of consumers.

Common reasons for product failures

In addition to a faulty concept or product design, some of the most
common reasons for product failures typically fall into one or more of
these categories:

High level executive push of an idea that does not fit the
targeted market.

Overestimated market size.

Incorrectly positioned product.

Ineffective promotion, including packaging message,

which may have used misleading or confusing marketing
message about the product, its features, or its use.

Not understanding the target market segment and the

branding process that would provide the most value for that
segment.

Incorrectly pricedtoo high and too low.

Excessive research and/or product development costs.

Underestimating or not correctly understanding

competitive activity or retaliatory response.

Poor timing of distribution.

Misleading market research that did not accurately reflect

the actual consumers behavior for the targeted segment.

Conducted marketing research and ignored those findings.

Key channel partners were not involved, informed, or both.

Lower than anticipated margins.

Using these potential causes of a product or brand failure may help to

avoid committing those same errors. Learning from these lessons can
be beneficial to avoid some of these pitfalls and increase the chance for
success when you launch that next product or brand.
New Product Development and Technological Oversights The aim of Marketing is
to know and understand the customer so well that the product or service fits him
and sells itself
Peter Drucker
The factors that emerge as being the most important to success of a
technological innovation are those related to the importance of need satisfaction.
Rothwell
-but always, regardless of the amount, R&D money has gone to the development
of instruments for which there was a real need.
Hewlett-Packard