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2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 1 of 122
INTRODUCTION
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INTRODUCTION
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INTRODUCTION
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INTRODUCTION
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PRODUCTION CYCLE ACTIVITIES
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PRODUCTION CYCLE ACTIVITIES
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PRODUCT DESIGN
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PRODUCT DESIGN
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PRODUCT DESIGN
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PRODUCTION CYCLE ACTIVITIES
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PLANNING AND SCHEDULING
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PLANNING AND SCHEDULING
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PLANNING AND SCHEDULING
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PLANNING AND SCHEDULING
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PLANNING AND SCHEDULING
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PLANNING AND SCHEDULING
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PLANNING AND SCHEDULING
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PLANNING AND SCHEDULING
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PLANNING AND SCHEDULING
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PLANNING AND SCHEDULING
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PLANNING AND SCHEDULING
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PRODUCTION CYCLE ACTIVITIES
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PRODUCTION OPERATIONS
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 29 of 122
PRODUCTION OPERATIONS
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 30 of 122
PRODUCTION CYCLE ACTIVITIES
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COST ACCOUNTING
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 35 of 122
COST ACCOUNTING
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COST ACCOUNTING
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COST ACCOUNTING
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COST ACCOUNTING
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COST ACCOUNTING
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COST ACCOUNTING
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COST ACCOUNTING
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COST ACCOUNTING
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COST ACCOUNTING
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COST ACCOUNTING
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COST ACCOUNTING
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COST ACCOUNTING
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COST ACCOUNTING
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COST ACCOUNTING
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 51 of 122
COST ACCOUNTING
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COST ACCOUNTING
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 53 of 122
CONTROL: OBJECTIVES, THREATS,
AND PROCEDURES
In the production cycle (or any cycle), a well-designed
AIS should provide adequate controls to ensure that the
following objectives are met:
All transactions are properly authorized.
All recorded transactions are valid.
All valid and authorized transactions are recorded.
All transactions are recorded accurately.
Assets are safeguarded from loss or theft.
Business activities are performed efficiently and effectively.
The company is in compliance with all applicable laws and
regulations.
All disclosures are full and fair.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 54 of 122
CONTROL: OBJECTIVES, THREATS,
AND PROCEDURES
There are several actions a company can take
with respect to any cycle to reduce threats of
errors or irregularities. These include:
Using simple, easy-to-complete documents with
clear instructions (enhances accuracy and
reliability).
Using appropriate application controls, such as
validity checks and field checks (enhances
accuracy and reliability).
Providing space on forms to record who completed
and who reviewed the form (encourages proper
authorizations and accountability).
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 55 of 122
CONTROL: OBJECTIVES, THREATS,
AND PROCEDURES
Pre-numbering documents (encourages recording
of valid and only valid transactions).
Restricting access to blank documents (reduces
risk of unauthorized transaction).
Using RFID tags when feasible to improve data
entry accuracy.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 56 of 122
THREATS IN PRODUCT DESIGN
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 57 of 122
THREATS IN PLANNING AND
SCHEDULING
Threats in the planning and scheduling
process include:
THREAT 2: Over- or under-production
THREAT 3: Suboptimal investment in fixed
assets
You can click on any of the threats above to get
more information on:
The types of problems posed by each threat
The controls that can mitigate the threats.
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THREATS IN PRODUCTION OPERATIONS
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THREATS IN COST ACCOUNTING
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You can click on any of the threats below to get
more information on:
GENERAL THREATS
The types of problems posed by each threat.
The controls that can mitigate the threats.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 73 of 122
PRODUCTION CYCLE INFORMATION
NEEDS
In a manufacturing environment, the focus
must be on total quality management.
Managers need info on:
Defect rates
Breakdown frequency
Percent of finished goods needing rework
Percent of defects discovered by customers
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 79 of 122
PRODUCTION CYCLE INFORMATION
NEEDS
In traditional systems, this type of data
was not well linked with financial data, and
cost accounting systems were separate
from production operations information
systems.
However, both financial and operating
information are needed to manage and
evaluate these activities.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 80 of 122
PRODUCTION CYCLE INFORMATION
NEEDS
Two major criticisms have been directed at
traditional cost accounting systems:
Overhead costs are inappropriately allocated
to products.
Reports do not accurately reflect effects of
factory automation.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 81 of 122
PRODUCTION CYCLE INFORMATION
NEEDS
Two major criticisms have been directed at
traditional cost accounting systems:
Overhead costs are inappropriately
allocated to products.
Reports do not accurately reflect effects of
factory automation.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 82 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Traditional cost accounting systems use
volume-driven bases such as direct labor
hours or machine hours to apply
overhead.
However, overhead does not vary with
production volume.
EXAMPLE: Purchasing costs vary with the
number of purchase orders processed.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 83 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Allocating overhead based on output
volume:
Overstates the costs of products
manufactured in large quantities.
Understates the costs of products
manufactured in small batches.
Also, allocating overhead based on direct
labor input can distort costs.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 84 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Example of two products:
Product one uses:
$5 of materials
1 hour of labor
5 minutes of machine time
Product two uses:
$5 of materials
1 hour of labor
42 hours of machine time on very expensive
equipment
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 85 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Example of two products:
Product one uses:
Under a traditional
$5 of materials cost accounting
1 hour of labor system, both
products will
5 minutes of machine time appear to have the
Product two uses: same cost.
$5 of materials
1 hour of labor
42 hours of machine time on very expensive
equipment
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 86 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Solution to criticism 1: Activity Based
Costing (ABC)
ABC can refine and improve cost allocations
under either job-order or process costing
systems.
ABC traces costs to the activities that create them
and allocates them accordingly.
ABC aims to link costs to corporate strategy.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 87 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Corporate strategy results in decisions about
what goods and services to produce.
These activities incur costs.
So corporate strategy determines costs.
By measuring the costs of the basic activities,
ABC provides information to management for
evaluating the consequences of their decisions.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 88 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
ABC vs. traditional cost systems:
There are three significant differences between
ABC and traditional approaches.
Tracing of overhead costs
Number of cost pools
Identification of cost drivers
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 89 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
ABC vs. traditional cost systems:
There are three significant differences between
ABC and traditional cost accounting approaches.
Tracing of overhead costs
Number of cost pools
Identification of cost drivers
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 90 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
ABC directly traces a larger proportion of
overhead costs to products.
This tracing is made possible by advances
in IT.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 91 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
ABC vs. traditional cost systems:
There are three significant differences between
ABC and traditional cost accounting approaches.
Tracing of overhead costs
Number of cost pools
Identification of cost drivers
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 92 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
ABC uses a greater number of cost pools
EXAMPLES: Setup, inspection, and material
to accumulate indirect
handling costs. costs
(manufacturing overhead).
Accumulated for a batch and allocated to the
products in that batch.
Most systems lump all
Consequently, overhead
costs together,
per product will be less
but ABC distinguishes
when products arethree
made incategories:
larger quantities.
- Batch-related overhead
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 93 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
ABC uses aExamples:
greaterR&D, number of cost
environmental pools and
regulations,
purchasing costs.
to accumulate
Theseindirect
costs are costs
related to the diversity of the
(manufacturing overhead).
companys product line.
ABC attempts to link these costs to the products
Most systems
thatlump
generateall overhead together,
them.
but ABC distinguishes three categories:
For example, purchasing costs might be
allocated to products based on the number of
- Batch-related overhead
purchase orders generated for each product.
- Product-related overhead
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 94 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
ABC uses a greater number of cost pools
to accumulate indirect costs
(manufacturing overhead).
Most systems lump all overhead together,
but ABC distinguishes three
EXAMPLE: Rentcategories:
or depreciation.
- Batch-related overhead
These costs are applied to all products
and allocated according to departmental
- Product-related overhead
or plant rates.
- Company-wide overhead
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 95 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
ABC vs. traditional cost systems:
There are three significant differences between
ABC and traditional cost accounting approaches.
Tracing of overhead costs
Number of cost pools
Identification of cost drivers
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 96 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Benefits of ABC systems
ABC systems are more costly and complex.
But proponents argue two important benefits:
More accurate cost data result in better product
mix and pricing decisions.
More detailed cost data improve managements
ability to control and manage total costs.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 97 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Benefits of ABC systems
ABC systems are more costly and complex.
But proponents argue two important benefits:
More accurate cost data result in better
product mix and pricing decisions
More detailed cost data improve managements
ability to control and manage total costs.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 98 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Better decisions
ABC avoids problems of applying too much or
too little overhead to products and
consequently results in better price decisions.
ABC uses the data collected to improve
product design.
ABC provides management with the
information about the costs associated with
specific activities, resulting in better analysis
and decisions.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 99 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Benefits of ABC systems
ABC systems are more costly and complex.
But proponents argue two important benefits:
More accurate cost data result in better product
mix and pricing decisions.
More detailed cost data improve managements
ability to control and manage total costs.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 100 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Improved cost management
ABC measures the results of managerial
actions on overall profitability.
ABC measures both the amount spent to
acquire resources and the amount spent to
consume them.
ABC measures unused capacity:
Cost of activity capability = Cost of activity used +
Cost of unused capacity
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 101 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
EXAMPLE: A publishing company has five
employees who operate printing presses.
The employees each have annual salaries of
$25,000 for a total salary cost of $125,000.
Each employee should be able to print about 10,000
books per year.
The total capacity, therefore is 50,000 books.
The salary cost per book would be $125,000 /
50,000 books = $2.50 per book.
During the most recent year, the presses produced
47,000 books.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 102 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
EXAMPLE: A publishing company has five
employees who operate printing presses.
The costhave
of theannual
activity capability
The employees each salaries isofthe total
book capacity for the year of 50,000 books times
$25,000 for a total salary cost of $125,000.
the salary cost per book of $2.50.
Each employee should
50,000 be xable
books $2.50to= print about 10,000
$125,000.
books per year.
The total capacity, therefore is 50,000 books.
The salary cost per book would be $125,000 /
50,000 books = $2.50 per book.
During the most recent year, the presses produced
47,000 books.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 103 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
EXAMPLE: A publishing company has five
employees who operate printing presses.
The employees each have annual salaries of
$25,000 for a total salary cost of $125,000.
The cost of the activity used is the number of
Each employeebooksshould be able
actually to print
produced about
times 10,000
the salary cost
books per year.per book of $2.50.
47,000 books x $2.50 = $117,500.
The total capacity, therefore is 50,000 books.
The salary cost per book would be $125,000 /
50,000 books = $2.50 per book.
During the most recent year, the presses produced
47,000 books.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 104 of 122
CRITICISM 1: INAPPROPRIATE
The unused capacity is the difference between
the activity capability ($125,000) and the cost of
ALLOCATION OF OVERHEAD
the activity used ($117,500). COSTS
$125,000 - $117,500 = $7,500 unused capacity.
EXAMPLE: A publishing
Alternately, company has five
unused capacity can be calculated
employees whoasoperate
the cost printing presses.
per book of $2.50 times the
The employeesdifference
each between the books that could be
have annual salaries of
produced and the books that were actually
$25,000 for a total salary cost of $125,000.
produced.
Each employee should
$2.50 be able
x (50,000 to print
possible about
books 10,000
47,000 actual
books per year.books) = $7,500 unused capacity.
The total capacity, therefore is 50,000 books.
The salary cost per book would be $125,000 /
50,000 books = $2.50 per book.
During the most recent year, the presses produced
47,000 books.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 105 of 122
CRITICISM 1: INAPPROPRIATE
ALLOCATION OF OVERHEAD COSTS
Management may be able to improve
profitability by:
- Applying the unused capacity to other
revenue-generating activities; or
- Eliminating the unused capacity.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 106 of 122
PRODUCTION CYCLE INFORMATION
NEEDS
Two major criticisms have been directed at
traditional cost accounting systems:
Overhead costs are inappropriately allocated
to products.
Reports do not accurately reflect effects of
factory automation.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 107 of 122
CRITICISM 2: REPORTS DO NOT ACCURATELY
REFLECT EFFECTS OF AUTOMATION
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 109 of 122
CRITICISM 2: REPORTS DO NOT ACCURATELY
REFLECT EFFECTS OF AUTOMATION
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 110 of 122
THROUGHPUT: A MEASURE OF
PRODUCTION EFFECTIVENESS
Throughput = Productive Capacity x
Productive Processing Time x Yield
Productive Capacity = Total Units
Produced / Processing Time
Can be improved by:
Improving machine or labor efficiency.
Improving factory layout.
Simplifying product design specifications.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 111 of 122
THROUGHPUT: A MEASURE OF
PRODUCTION EFFECTIVENESS
Throughput = Productive Capacity x
Productive Processing Time x Yield
Productive Capacity = Total Units Produced /
Processing Time
Productive Processing Time = Processing
Time / Total Time
The opposite of downtime.
Can be improved by:
Better maintenance to reduce machine downtime.
Better scheduling of deliveries to reduce wait time.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 112 of 122
THROUGHPUT: A MEASURE OF
PRODUCTION EFFECTIVENESS
Throughput = Productive Capacity x
Productive Processing Time x Yield
Productive Capacity = Total Units Produced /
Processing Time
Productive Processing Time = Processing
Time / Total Time
Yield = Good Units / Total Units
Can be improved by:
Using better raw materials.
Improving worker skills.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 113 of 122
THROUGHPUT: A MEASURE OF
PRODUCTION EFFECTIVENESS
Throughput = Productive Capacity x Productive
Processing Time x Yield
Productive Capacity = Total Units Produced / Processing Time
Productive Processing Time = Processing Time / Total Time
Yield = Good Units / Total Units
EXAMPLE: Manster Co. produced 1,000 bottles of Zithmowash in
a 10-hour period. During this period there was a total of 1 hour
of machine downtime and waiting time for materials. One
hundred of the bottles were defective.
PRODUCTIVE CAPACITY = 1,000 bottles / 9 productive hours =
111.11 bottles / hour.
PRODUCTIVE PROCESSING TIME = 9 productive hours / 10 total
hours = .90.
YIELD = 900 good units / 1,000 total units = .90
THROUGHPUT = 111.11 x .90 x .90 = 90
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QUALITY CONTROL
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QUALITY CONTROL
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QUALITY CONTROL
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QUALITY CONTROL
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QUALITY CONTROL
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SUMMARY
Youve learned about the basic business
activities and data processing operations that
are performed in the production cycle, including:
Product design
Production planning and scheduling
Production operations
Cost accounting
Youve learned how IT can improve the
efficiency and effectiveness of these processes.
2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 120 of 122
SUMMARY
Youve learned about decisions that need to be
made in the production cycle and the information
required to make these decisions.
Youve also learned about the major threats that
present themselves in the production cycle and
the controls that can mitigate those threats.
Finally, youve learned how the companys cost
accounting system can help in achieving the
entitys objectives.
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