CHAPTER 5: EXPENDITURE SYSTEM 10.

G/L department posts from the AP journal

voucher to the general ledger & reconciles the
DFD of Purchases System inventory amount with the account summary
received from inventory control

DFD of Cash Disbursements

Purchase Requisition
Purchase Order MANUAL CASH DISURSEMENT SYSTEM
Blind Copy Purchase Order 1. A/P searches the open vouchers payable file for
Receiving Report items with payments due
A/P sends the voucher and supporting
MANUAL PURCHASES SYSTEM documents to Cash Disbursements Dept
1. Begins in Inventory Control when inventory levels A/P updates the AP subsidiary ledger
drop to reorder levels
2. Purchase requisition (PR) is prepared and copies Inventory Subsidiary Ledger
to sent to Purchasing and Accounts Payable (A/P) Cash Disbursement Voucher
3. Purchasing prepares a purchase order (PO) for Voucher Register
each vendor and sends copies to Inventory Control,
A/P, and Receiving 2. Cash Disbursements (prepares the check)
4. Upon receipt, Receiving counts & inspects the - records the information in a check register (CDJ)
goods. - returns paid vouchers to AP & mails the check to
- A blind copy of the PO is used to the supplier
force workers to count the goods. - sends a journal voucher to G/L:
Accounts Payable (DR)
5. A Receiving Report (RR) is prepared and copies Cash (CR)
sent to the raw materials storeroom, Purchasing, 3. G/L department receives:
Inventory Control, and A/P. -the journal voucher from cash disbursements
6. A/P eventually receives copies of the PR, PO, RR, - a summary of the AP subsidiary ledger from A/P
and the supplier’s invoice.
7. A/P reconciles these documents, posts to the The JV is used to update the GL.
purchases journal, and records the liability in the The AP control account is reconciled with the
accounts payable subsidiary ledger. subsidiary summary.
8. A/P periodically summarizes the entries in the
purchases journal as a journal voucher which is sent Computer-Based Accounting Systems
to the General Ledger (G/L) department. CBAS technology can be viewed as a continuum with
Inv-Control or Purchases DR two extremes:
Accts Payable-Control CR 1. Automation - use technology to improve
9. A/P also prepares a cash disbursements voucher efficiency and effectiveness
and posts it in the voucher register. 2. Re-engineering – use technology to restructure
business processes and firm organization
Expenditure Cycle Database
Master Files
1. supplier (vendor) master file
2. AP master file
3. merchandise inventory master file
Transaction and Open Document Files
1. purchase order file
open purchase order file
2. supplier’s invoice file
3. open vouchers file
4. cash disbursements file
Other Files
1. supplier reference and history file
2. buyer file
3. accounts payable detail file

Computer-Based Purchases
** Data Processing dept. performs routine
accounting tasks.

Purchasing - a computer program identifies

inventory requirements General Internal Controls
Organization controls (segregation of duties)
The following methods are used for authorizing and 1. Documentation
ordering inventories: 2. Asset Accountability Controls
1. system prepares POs and sends them to 3. Management Practices
Purchases for review, signing, and distributing 4. Data Center Operations Controls
2. system distributes POs directly to the 5. Authorization Controls
vendors and internal users, bypassing Purchases 6. Access Controls
3. system uses electronic data interchange
(EDI) and electronically places the order without POs Manual Authorization Controls
** Purchases of inventory should be authorized by
Other tasks performed automatically by the the Inventory Control department, not by
computer: purchasing agents
1. updates the inventory subsidiary file from the
receiving report ** Accounts Payable authorizes the payments of
2. calculates batch totals for general ledger update bills, not the cash disbursements clerk, who writes
3. closes the corresponding records in the open PO the checks
file to the closed PO file
4. validates the voucher records against valid Computer-Based Authorization Controls
vendor files ** Authorizations are automated (programmed
decision rules must be debugged)
Computer-Based Cash Disbursements ** Automating inventory in EDI and JIT (faulty
Tasks performed automatically by the computer: inventory model can lead to over-purchasing or
1. System scans for vouchers currently due under-purchasing)
2. prints checks for these vouchers ** Cash disbursements may automate check
3. records these checks in the check register printing and signing. (programming logic must be
4. batch totals are prepared for the general ledger flawless & automated signing only below a dollar
update procedure threshold)

Advantages of Real-Time Data Input & Processing Traditional Segregation of Duties

Over Batch Processing Warehouse (stores)
1. Shortens the time-lag in record-keeping; hence, Inventory control
records are more current Accounts payable
2. Eliminates much of the routine manual General ledger
procedures Requisitioning
3. Eliminates much of the storage & shuffling of Purchases
paper documents Purchases returns and allowances
4. Reduces data entry correction procedures Cash disbursements
 cash (direct)
Manual Segregation of Functions accounting records (indirect)
Custody of the asset, inventory, by the Warehouse
must be separate from record keeping for the assets Computer-Based Access Controls
by the Inventory Control. Magnetic records are vulnerable to both
Custody of the asset, cash, by Cash Disbursements authorized and unauthorized exposure and
must be kept separate from record keeping for the should be protected (must have limited file
asset by A/P. accessibility & programs must be safeguarded and
monitored)
Computer-Based Segregation of Functions
Extensive consolidation by the computer of tasks Manual Independent Verification
traditionally segregated A/Payable dept. verifies much of the work done
Computer programs: within the expenditure cycle.
- authorize and process purchase orders PR, PO, RR, and suppliers’ invoices must be
- authorize and issue checks to vendors checked and verified by A/P.

Manual Supervision G/Ledger dept. verifies the total obligations

Within the expenditure cycle, supervision is of recorded equal the total inventories received,
highest importance in the Receiving department, total reductions in AP equal the total
where the inventory arrives and is logged in by a disbursements of cash
receiving clerk.
Need to minimize: Computer-Based Independent Verification
- failures to properly inspect the assets Automating the accounting function reduces the
- theft of the assets need for verification by reducing the chances of
fraud and error in the expenditure cycle.
Computer-Based Supervision
1. Automation often leads to a collapsing of the
traditional segregation of duties. (requires greater
supervision) CHAPTER 6 : EXPENDITURE SYSTEM FIXED ASSETS
2. Supervision takes on new aspects as technology Fixed assets are the property, plant, and equipment
advances (Like electronic monitoring) used in the operation of a business
3. Supervision because more difficult as the workplace
becomes more sophisticated. (employees may have 3 parts:
advanced IT training) Asset Acquisition - obtaining a new asset or
replacing an existing one.
Manual Accounting Records Asset Maintenance - depreciation schedule is a
Must maintain adequate records for: record used to initiate depreciation calculations.
Accounts payable, vouchers payable, Asset Disposal - when an asset has reached the end
checks, general ledger, & subsidiary ledgers of its useful life or when management decides to
dispose of it, the asset must be removed from the
fixed asset subsidiary ledger.
Computer-Based Accounting Records
** Accounting records rest on the reliability and
security of stored digitalized data. Accountants should
be skeptical about the accuracy of hard-copy
printouts.

Backups - the system needs to ensure that backups of

all files are continuously kept

Most automated systems still have a lot of paper

documents. This is good for audit trail purposes but is
often inefficient.

As system becomes increasing paperless, maintaining

an audit trail becomes more difficult.

Manual Access Controls

Access to: inventories (direct)
Acquisition Procedures Production Department
When the fixed asset accounting clerk receives a Job tickets are mechanisms to capture the
RR & cash disbursement voucher. time that individual workers spend on each
** These documents provide evidence that production job.
the firm has physically received the asset Time cards are a tool to capture the time
and show its cost. the employee is at work.
Asset Maintenance
The fixed asset system uses the depreciation Update WIP Account
schedules to record end-of-period depreciation Labor distribution summary is a
transactions automatically. summarization of labor costs in work-in-process
Disposal Procedures accounts.
The disposal report formally authorizes the fixed
asset department to remove from the ledger an
asset disposed of by the user department.

FIXED ASSET SYSTEM RISKS AND CONTROLS

Authorization Controls
Fixed asset acquisitions should be formal and
explicitly authorized.
Supervision Controls
Management supervision is an important element in
the physical security of fixed assets.
Independent Verification Controls
Periodically, the internal auditor should review the
asset acquisition and approval procedures to
determine the reasonableness of factors used in such
decisions.

PAYROLL SYSTEM GENERAL TASKS

CHAPTER 6 : EXPENDITURE SYSTEM PAYROLL Prepare Payroll
Payroll processing is actually a special-case Employee payroll records is the system an
purchases system in which the organization employer uses to calculate, track, and report
purchases labor rather than raw materials or employee pay.
finished goods for resale. Paychecks are a bank check given as salary.
Payroll register is a document showing
The nature of payroll processing, however, creates the gross pay, deductions, overtime pay, and net pay.
need for specialized procedures for the following Distribute Paycheck
reasons: Prepare Accounts Payable
1. A firm can design general purchasing and Prepare Cash Disbursement
disbursement procedures that apply to all vendors Payroll imprest account is an account into
and inventory items. which a single check for the entire amount of the
2. General expenditure activities constitute a relatively payroll is deposited.
steady stream of purchasing and disbursing
transactions.
3. Writing checks to employees requires special UPDATE GENERAL LEDGER
controls. GL function receives the labor distribution
summary from cost accounting, Disbursement
PAYROLL SYSTEM GENERAL TASKS voucher from accounts payable, & journal voucher
Personnel Department from cash disbursements.
Personnel action forms is a document
identifying employees authorized to receive a The debits and credits from these entries must be
paycheck; the form is used to reflect changes in pay equal.
rates, payroll deductions, and job classification.
When equality has been verified, the clerk files the
voucher and labor distribution summary.
 Proximity cards are similar to swipe cards
The Physical Payroll System but don’t require the user to slide the card through
1. Review of the operational features and control a reader.
issues pertinent to a basic technology system. Mobile remote devices allow employees to
2. Features and controls of an integrated system that clock in using handheld devices (PDA or cell phone)
uses advanced technologies. or web browsers from laptop computers. This option
is popular among businesses with employees in the
BASIC TECHNOLOGY PAYROLL SYSTEM field who travel between clients.
Key tasks of a basic technology system:
1. Personnel action and time and attendance Data Processing
information from the personnel and production Employee records file comprises the
departments, respectively, initiate the payroll additions of new employees, deletions of
process. terminated employees, changes in work
2. Payroll department reconciles this dependents, changes in with holdings, and changes
information, calculates the payroll, and sends the in job status such as job title and pay rate. Human
paychecks to the paymaster for distribution to resources clerks enter data into the employee records
employees. file in real time from terminals.
3. Cost accounting receives information
regarding the time spent on each job from PAYROLL SYSTEM RISKS & INTERNAL CONTROLS
production Risk of Inaccurately Recording Transactions
4. AP receives payroll summary information Physical Controls
(payroll register) from the payroll department ACCOUNTING RECORDS
and authorizes the cash disbursements INDEPENDENT VERIFICATION
department to deposit a single check, in the IT Controls
amount of the total payroll, in a bank imprest DATA INPUT EDITS
account on which the payroll is drawn. ERROR MESSAGES
5. GL department reconciles summary FILE BACKUP
information from cost accounting & AP. AUTOMATED POSTING TO ACCOUNTS

Risk of Misappropriation of Cash through Payroll

ADVANCED TECHNOLOGY PAYROLL SYSTEM Fraud
Human resource management (HRM) system Physical Controls
captures and processes a wide range of personnel TRANSACTION AUTHORIZATION
related data, including employee benefits, labor SEGREGATION OF DUTIES
resource planning, employee relations, employee SUPERVISION
skills, and personnel actions (pay rates, deductions, ACCESS CONTROL
and so on), as well as payroll. IT Controls
1. Limit tests to detect excessive hours
HRM systems need to provide real-time access to reported per period.
personnel files for purposes of direct inquiries and 2. Biometric scanners, swipe cards, and PINs
recording changes in employee status as they occur. reduce the risk of payroll fraud by ensuring that
Human Resources individuals clocking into the system are valid
Cost Accounting employees.
The labor usage file is a file in which the cost 3. Automated tests to validate employee time
accounting department enters job cost data (real cards against a valid and up-to-date employee file.
time or daily). 4. Paycheck direct deposit options for
employees.
Employee Timekeeping
Time and attendance file is generated by Risk of Unauthorized Access to Payroll Records
employees directly entering timekeeping data in and Confidential Employee Data
real time. Payroll information is at risk to unauthorized access
Biometric time clocks verify employees’ from outsiders as well as employees of the
identities by using fingerprint or hand-vein scan organization.
technology. IT Controls
Magnetic swipe ID cards work like a credit PASSWORDS
card. Each employee is issued an ID card that has a MULTILEVEL SECURITY
magnetic strip containing employee information. Outsourcing the Payroll Function
Advantages and Risks Associated with Payroll
Outsourcing
 perform production operations
maintain inventory control
perform cost accounting
Batch Production System
CHAPTER 7 : CONVERSION CYCLE Production Planning and Control
Conversion cycle transforms (converts) input Materials and operations requirements
resources, such as raw materials, labor, and Production scheduling
overhead, into finished products or services for sale. Materials and Operations Requirements
Materials requirement – the difference
Consists of two subsystems: between what is needed and what is available in
Physical activities – the production system inventory
Information activities – the cost accounting system Operations requirements – the assembly
and/or manufacturing activities to be applied to the
Materials requirements planning (MRP) systems product
are used to determine how much raw materials are
required to fulfill production orders. Production Scheduling
Coordinates the production of multiple
The conversion cycle consists of both physical and batches
information activities related to manufacturing Influenced by time constraints, batch size, and
products for sale. other specifications

Work Centers and Store keeping

Production operations begin when work
centers obtain raw materials from storekeeping.
It ends with the completed product being sent
to the finished goods (FG) warehouse .

Inventory Control
Objective: minimize total inventory cost while
ensuring that adequate inventories exist of
production demand
1. Provides production planning and control
with status of finished goods and raw materials
inventory
2. Continually updates the raw material
inventory during production process
Production System - Involves the planning, 3. Upon completion of production, updates
scheduling, and control of the physical product finished goods inventory
through the manufacturing process
- determining raw materials requirements Documents in the Batch Processing System
- authorizing the release of raw materials The production schedule is the formal plan and
into production authorization to begin production.
- authorizing work to be conducted in the
production process Bill of materials (BOM) is a document that specifies
- directing the movement of work through the types and quantities of the raw materials and
the various stages of production sub-assemblies used in producing a single unit of
finished product.
Production Methods Route sheet is a document that shows the
Continuous Processing creates a homogeneous production path a particular batch of products
product through a continuous series of standard follows during manufacturing.
procedures. Work order (or production order) is a document
Batch Processing produces discrete groups that draws from bills of materials and route sheets
(batches) of products. to specify the materials and production for each
Make-to-Order Processing involves the fabrication batch.
of discrete products in accordance with customer Move ticket is a document that records work done
specifications. in each work center and authorizes the movement
of the job or batch from one work center to the next.
Traditional Batch Production Model
4 basic processes:plan and control production
Materials requisition is a document that authorizes
the storekeeper to release materials to individuals 4. Receipt of last move ticket signals completion of the
or work centers in the production process. production process
clerk removes the cost sheet from WIP file
prepares a JV to transfer balance to a finished
goods inventory account & forwards to GL
department

Batch Production Activities

- PRODUCTION PLANNING AND CONTROL
- MATERIALS AND OPERATIONS REQUIREMENTS
- PRODUCTION SCHEDULING
- WORK CENTERS AND STOREKEEPING
- INVENTORY CONTROL:
Economic order quantity (EOQ) model is
an inventory model designed to reduce total INTERNAL CONTROLS
inventory costs.
Reorder point (ROP) is the lead time Transaction authorizations
multiplied by daily demand. Work orders – reflect a legitimate need
Safety stock is additional inventories based on sales forecast and the finished goods on
added to the reorder point to avoid unanticipated hand
stock-out conditions. Move tickets – signatures from each work
- Cost Accounting Activities station authorize the movement of the batch through
the work centers
Cost Accounting System Materials requisitions – authorize the
Records the financial effects of the events warehouse to release materials to the work centers
occurring in the production process
Segregation of duties
1. Initiated by the work order 1. production planning and control department is
2. Cost accounting clerk creates a new cost record separate from the work centers
for the batch and files in WIP file 2. inventory control is separate from materials
3. Records are updated as materials and labor are storeroom & finished goods warehouse
used 3. cost accounting function accounts for WIP and
should be separate from the work centers in the
production process

Supervision
1. work center supervisors oversee the usage of
raw materials to ensure that all released materials
are used in production and waste is minimized
2. employee time cards and job tickets are
checked for accuracy

Access control
1. direct access to assets
controlled access to storerooms, production work
centers, and finished goods warehouses
quantities in excess of standard amounts require Inventory Reduction – hallmark of lean
approval manufacturing
Inventories cost money
Inventories can mask production problems
2. indirect access to assets Inventories can precipitate overproduction
controlled use of materials requisitions, excess
materials requisitions, and employee time cards Production Flexibility – reduce setup time to a
minimum, allowing for a greater diversity of
Accounting records products, without sacrificing efficiency
pre-numbered documents Established Supplier Relations – late deliveries,
work orders defective raw materials, or incorrect orders will
cost sheets shut down production since there are inventory
move tickets reserves
job tickets Team Attitude – each employee must be vigilant of
material requisitions problems that threaten the continuous flow of the
WIP and finished goods files production line

Independent verification
cost accounting reconciles material usage Lean Manufacturing Model
(material requisitions) & labor usage (job tickets) Achieve production flexibility by means of:
with standards - Changes in the physical organization of
variances are investigated production facilities
GL dept. verifies movement from WIP to Employment of automated technologies
FG by reconciling JV from cost accounting and (CIM, AS/RS, robotics, CAD, and CAM)
inventory subsidiary ledgers from inventory control Use of alternative accounting models
Internal and external auditors periodically (ABC and value stream accounting)
verify the raw materials and FGs inventories through Use of advanced information systems
a physical count (MRP, MRPII, ERP, and EDI)

Physical Reorganization of the Production

Facilities
1. Inefficiencies in traditional plant layouts increase
handling costs, conversion time, and excess
inventories.
2. Employees tend to feel ownership over their
stations, contrary to the team concept.
3. Reorganization is based on flows through cells
which shorten the physical distance between
activities.
4. This reduces setup and processing time, handling
costs, and inventories.

Automating Manufacturing
Traditional Approach to Automation
1. Consists of many different types of
World-Class Companies machines which require a lot of setup time
- are highly customer oriented 2. Machines and operators are organized in
- have undergone fundamental changes functional departments
- often adopt a lean manufacturing model 3. WIP follows a circuitous route through the
different operations
Principles of Lean Manufacturing
Pull Processing – products are pulled from the Islands of Technology
consumer end (demand), not pushed from the 1. Stand alone islands which employ
production end (supply) computer numerical controlled (CNC) machines that
Perfect Quality – pull processing requires zero can perform multiple operations with less human
defects in raw material, WIP, and FG inventories involvement
Waste Minimization – activities that do not add
value or maximize the use of scarce resources are Computer Numerical Controlled (CNC) Machines
eliminated
 1. Reduce the complexity of the physical Activity-based costing (ABC) is an information system
layout that provides managers with information about
2. Arranged in groups & in cells to produce an activities and cost objects.
entire part from start to finish An activity driver is a factor that measures the activity
3. Need less set-up time consumption by the cost object.
Computer Integrated Manufacturing (CIM) Advantages
1. Completely automated environment which More accurate costing of products/services,
employs automated storage and retrieval systems customers, and distribution channels
(AS/RS) and robotics Identifying the most and least profitable products and
Automated Storage and Retrieval Systems customers
(AS/RS) Accurately tracking costs of activities and processes
1. Replaces traditional forklifts and their Equipping managers with cost intelligence to drive
human operators with computer-controlled conveyor continuous improvements
systems Facilitating better marketing mix
2. Reduce errors, improved inventory control, Identifying waste and non-value-added activities
and lower storage costs Disadvantages
Too time-consuming and complicated to be practical
Robotics Promotes complex bureaucracies in conflict with lean
1. Use special CNC machines that are useful in manufacturing philosophy
performing hazardous, difficult, and monotonous
tasks
VALUE STREAM ACCOUNTING
Computer-Aided Design (CAD)
1. Increases engineers’ productivity Value stream accounting is an accounting technique
2. Improves accuracy that captures cost data according to value stream
3. Allows firms to be more responsive to rather than by department.
market demands Value stream – all the steps in a process (both value
4. Interfaces with CAM and MRPII systems added (VA) & non-VA (NVA) that are essential to
producing a product from raw material to FG.
Computer Aided Manufacturing (CAM) Makes no distinction between direct and indirect
Uses computers to control the physical manufacturing costs Including labor costs
process Product families share common processes from the
Provides greater precision, speed, and control than point of placing the order to shipping the finished
human production processes goods to the customer.

Achieving World-Class Status Information Systems That Support Lean

The world-class firm needs new accounting methods Manufacturing
and new information systems that:
show what matters to its customers Materials requirements planning (MRP) are systems
identify profitable products used to plan inventory requirements in response to
identify profitable customers production work orders.
identify opportunities for improving operations and Manufacturing resources planning (MRP II) is a
products system that incorporates techniques to execute the
encourage the adoption of value-added activities and production plan, provide feedback, and control the
processes and identify those that do not add value process.
efficiently support multiple users with both financial Enterprise resource planning (ERP) is a system
and nonfinancial information assembled of prefabricated software components.

Value Stream Mapping MATERIALS REQUIREMENT PLANNING

A company’s value stream includes all the steps in the MRP is an automated production planning and control
process that are essential to producing a product. system used to support inventory management. Its
A value stream map (VSM) is a graphical operational objectives are to:
representation of the business process to identify Ensure that adequate raw materials are available to
aspects that are wasteful and should be removed. the production process.
Maintain the lowest possible level of inventory on
hand.
ACTIVITY-BASED COSTING Produce production and purchasing schedules and
other information needed to control production.
MRP II is an extension of MRP that has evolved
beyond the confines of inventory management.
MRP II integrates product manufacturing, product
engineering, sales order processing, customer billing,
human resources, and related accounting functions.
Benefits of the MRP II:
Improved customer service
Reduced inventory investment
Increased productivity
Improved cash flow
Assistance in achieving long-term strategic goals
Help in managing change (e.g., new product
development or specialized product development for
customers or by vendors)
Flexibility in the production process

Enterprise Resource Planning (ERP) Systems

Huge commercial software packages that support the
information needs of the entire organization, not just
the manufacturing functions
Automates all business functions along with full
financial and managerial reporting capability
Electronic Data Interchange (EDI)
External communications with its customers and
suppliers via Internet or direct connection