ERP Ch 5

Inter-company Transactions

a transaction that occurs between a parent company and one of its subsidiaries or between different subsidiaries.

standard costs are also called

cost variances

Cost Variance

- Difference between the actual incurred cost and the standard cost. - calculated by comparing actual expenses for material, labor, utilities, rent, and so on, with predicted standard costs.

Financial Accounting

- Documenting all transactions of a company that have an impact on the financial state of the firm - Using documented transactions to create reports for external parties and agencies - Reports, or financial statements, must follow prescribed rules and guidelines of various agencies - External sources: IRS, stockholders

Benefits of ERP and inventory cost accounting

- Employees throughout the company would have recorded costs in a company-wide database as they occurred -ERP system configurations allow analysts to track costs using many bases

Common financial statements

- balance sheets - income statements

Key pieces of information in cost analysis are

- direct material costs -direct labor costs

What are some problems with unintegrated information systems?

-Accounting data might not be current •Can cause problems for sales representatives trying to make operational decisions -Data can be inaccurate •Can affect decision making and therefore profitability

What is an Use of an important management-reporting benefit of integrated system and a common database to record accounting data?

-Built-in drill-down and query tools available

What are the important inventory cost-accounting benefits of using an integrated IS and a common database to record accounting data?

-Can lead to more accurate product cost calculations -Can help managers determine which products are profitable and which are not

Quarterly financial statement

-Close books -Closing entries to nominal accounts -Nominal accounts - zero balance to start next cycle -Ensure accounts accurate and up-to-date -"Adjusting" entries •Integrated information system advantage -Simplifies process of closing books and preparing financial statements

Accounting Problems associated with unintegrated systems:

-Data sharing usually did not occur in real time •Accounting's data were often out of date -Accounting personnel had to do significant research

Managerial accounting

-Determine costs and profitability of company's activities -Provide managers with detailed information •Informed decisions •Create budgets •Determine profitability -Information that managers use to control day-to-day activities, develop long-term plans - Internal reporting

What are the 2 Areas of Accounting?

-Financial accounting -Managerial accounting

Industrial Credit Management requires a good balance between

-Granting sufficient credit to support sales and -Making sure that the company does not lose too much money •Setting a limit on how much money a customer can owe at any one time -Monitoring that limit as orders come in and payments are received

Advantages of using SAP ERP to manage credit

-Process is automated -Data are available in real time

Many SAP ERP modules cause transaction data to be entered into general ledger, including:

-Sales and Distribution (SD) -Materials Management (MM) -Financial Accounting (FI) -Controlling (CO) -Human Resources (HR) -Asset Management (AM)

Tolerance Groups

-Setting limits on the size of transaction an employee -Preset limits on an employee's ability to post transactions -Set limits on the dollar value for a single item in a document as well as the total value of document

Income statement (Profit and loss (P&L) statement)

-Shows company's sales, cost of sales, and profit or loss for a period of time (typically a quarter or year)

Balance Sheet

-Statement that shows account balances such as: •Cash held •Amounts owed to company by customers •Cost of raw materials and finished-goods inventory •Long-term assets such as buildings •Amounts owed to vendors, banks, and other creditors •Amounts owners have invested in company

Sarbanes-Oxley Act, 2002 U.S. federal regulation

-Written and passed in the wake of Enron collapse -Promoted management accountability by requiring extra financial approval and reporting -ERP systems can help companies meet the requirements of this legislation

Name some trends in financial reporting.

-XBRL -XML -ERP systems accept data in XML and XBRL into database

In-memory computing

-aggregation of data is not required -detailed record (opposed to aggregated data) are maintained in a separate system so the ERP performance is not effected and - thus there is no limit on the types of analyses that can be performed.

Direct costs

-materials and labor •Can be estimated fairly accurately

What does "Closing the books" mean?

-means zeroing out temporary accounts

Indirect costs

-overhead items •Difficult to associate with specific product(s)

never actually

Actual costs _______ __________equal expected costs.

What is the Balance sheet equation?

Assets = Liabilities + Equity

Cost of Goods Manufactured (COGM) + sales and administrative cost =

Cost of goods Sold (COGS)

Operational Decision-Making Problem:

Credit Management •Unintegrated information system -Out-of-date or inaccurate accounting data can cause problems when a company is making operational decisions

simultaneously

In the SAP ERP system, input to general ledger occurs____________________ with business transactions

simplifies

Integrated information system _______________ the process of closing the books and preparing financial statements

What is the Income Statement equation?

Sales revenue - expenses = net income

What is the Securities and Exchange Commission (SEC)?

The agency of the U.S. government that oversees U.S. financial markets and accounting standard-setting bodies.

What is the Internal Revenue Service (IRS)?

The branch of the U.S. Treasury Department in charge of collecting taxes

What is the Financial Accounting Standards Board (FASB)?

The primary accounting standard-setting body in the United States.

US GAAP

United States Generally Accepted Accounting Principles

sales information system (SIS) and Logistics Information System (LIS)

come embedded in SAP ERP and use special summary tables to improve report efficiency

Materials Management (MM)

controls purchasing and records inventory changes. The receipt of goods from a purchase order creates a -accounts payable entry: • general ledger which indicates the company has an obligation to pay for goods it has received.

Cost variances

differences between actual costs and standard costs

Cost of Goods Manufactured (COGM)

direct materials + production overhead + direct labor

drill down

enables users to view details behind a summary of information.

Business Warehouse (BW)

improves the ability to analyze data without reducing system performance.

Asset Management (AM)

manages fixed-asset purchases (plant and machinery) and the related depreciation.

Financial Accounting (FI)

manages the accounts receivable and accounts payable items created in the SD and MM modules. - where the general ledger accounts are closed at the end of a fiscal period(quarter of year) used to generate financial statements.

Human Resources (HR)

manages the recruiting, hiring, compensation, termination, and severance of employees; -also manages benefits and generates payroll.

Product cost variant

method for developing a product cost in an ERP system

Sales and Distribution (SD)

records a sale then creates an - accounts receivable entry: • a general ledger document that indicates a customer owes money for the goods received by the customer

IFRS (International Financial Reporting Standards)

rules of accounting created by the international accounting standards board for international use

direct material costs are determined from

the bill of material (BOM) "recipe"

direct labor costs are determined from

the product routing, which documents the machines and work centers used in production of the product along with equipment set up time, production rates, and labor requirements.

Why do companies need accounting systems?

to record transactions and generate financial statements

Controlling (CO)

tracks the costs associated with producing products. - to make a profit, a company must have an accurate picture of its product costs so it can make correct decisions about product pricing and promotions, as well as capital investments

general ledger

where a company's accounts are kept in a record in traditional accounting

Name 6 Income Statement Expenses.

• Cost of goods sold (COGS) • Selling, general, and administrative expense • research and development • interest expense • pretax income • income tax expense • a minus

Standard costs for a product are established by:

• Studying historical direct and indirect cost patterns • Taking into account the effects of current manufacturing changes

Name the Balance Sheet Assets and what are the effects?

• cash, accounts receivable, inventories, plant and equipment, land • a plus

Name the Balance Sheet Stockholder's Equity and what are the effects?

• contributed capital, retained earnings • a plus

What are 3 main reasons for inaccurate or incomplete data in Product Profitability Analysis?

• inconsistent bookkeeping • inaccurate inventory costing system • problems consolidating data from subsidiaries.

Name the main plus in the Income Statement.

• sales revenue

Companies with Subsidiaries

•Account balances for each entity must be compiled and forwarded to the home office •Consolidated statement for the company as a whole must be created •Currency translation -Problems when currency translation is needed for a subsidiary's accounts •Intercompany transactions -Transactions that occur between companies and their subsidiaries

Activity-based costing and ERP

•Accountants identify activities associated with overhead cost generation and then keep records on costs and on activities -ABC requires more bookkeeping than traditional costing methods

Built-In Management-Reporting and Analysis Tools

•Accounting records maintained in the common database •Advantage of using a database is the ability to query the records to: -Produce standard reports -Answer ad hoc questions •SAP provides a data warehouse within each major module -Data warehouse: repository for data from various sources

Product Profitability Analysis

•Business managers use accounting data to perform profitability analyses of a company and its products •When data are inaccurate or incomplete, the analyses are flawed •Main reasons for inaccurate or incomplete data -Inconsistent recordkeeping -Inaccurate inventory costing systems -Problems consolidating data from subsidiaries

difficult, easy

•Closing the books at the end of an accounting period can be ________ with an unintegrated IS, but is relatively _____ with an integrated IS

Manufactured item's cost has three elements:

•Cost of raw materials •Cost of labor employed directly in production of item •Overhead: all other costs

Key Features of the Sarbanes-Oxley Act

•Designed to encourage top management accountability in firms that are publicly traded in the United States •Title IX -Financial statements filed with the Securities and Exchange Commission must include a statement signed by the chief executive officer and chief financial officer, certifying that the financial statement complies with SEC rules •Title II -Auditor independence •Limits non-audit services that an auditor can provide •Title IV -More stringent requirements for financial reporting

Financial Transparency

•ERP systems provide the ability to drill down from a report to the source documents (transactions) that created it -Makes it easier for auditors to confirm the integrity of reports •With a properly configured and managed ERP system, there are direct links between the company's financial statements and individual transactions that make up the statements -Fraud and abuse can be detected more easily

Name some Trends in Financial Reporting

•Extensible Business Reporting Language (XBRL) -Standards based language -Extensible Markup Language (XML) coded data directly from web page into database -Reports processed faster and validated easier -ERP systems accept data in XML and XBRL

Management Reporting with ERP Systems

•Generating the right reports for the right situation is often challenging •Without an ERP system, the job of tracking all the numbers that need to go into a report is a monumental undertaking •With ERP system, vast amount of information is available for reporting purposes

The Enron Collapse

•October 16, 2001: Enron was one of the world's largest electricity and natural gas traders -Reported a $618 million third-quarter loss and disclosed a $1.2 billion reduction in shareholder equity •U.S. Securities and Exchange Commission (SEC) inquiry into possible conflict of interest related to company's dealings with partnerships run by CFO Fastow

Many companies with unintegrated accounting systems analyze their cost variances infrequently which means...

•Often, they do not know how much it actually costs to produce a unit of a product

Correctly calculating inventory costs

•One of the most important and challenging accounting tasks in any manufacturing company

What are problems with unintegrated record keeping?

•Paper records might be inaccurate or missing, making validity of the final report questionable •Without integrated information systems, accounting and reporting to management requires: -Working around limitations of information systems to produce useful output •ERP system minimizes or eliminates these problems

User Authorizations

•SAP ERP has sophisticated user administration tools that allow different levels of authorization management -Ensure that employees can perform only the transactions required for their jobs •Profile Generator -Provides a simple method for selecting functions that a user should be allowed to perform

Archiving

•SAP ERP software offers very few ways to delete items •Data are removed from SAP ERP system only after they have been recorded to media (tape backup, DVD-R) for permanent storage •Archive: permanent storage •SAP ERP systems keep track of when data are created or changed -Change Record

Credit Management in SAP ERP

•SAP ERP would allow FS to set a credit limit for each customer •Company can configure any number of credit-check options in SAP ERP system

Outcome of the Enron Scandal

•Shareholders lost an estimated $40 billion dollars •Thousands of workers lost their jobs •31 individuals were either charged or pled guilty to criminal charges •Jurors convicted accounting firm Arthur Andersen for obstructing justice by destroying Enron documents •U.S. Congress passed Sarbanes-Oxley Act of 2002 -Act was designed to prevent the kind of fraud and abuse that led to the Enron downfall

Implications of the Sarbanes-Oxley Act for ERP Systems

•To meet the internal control report requirement, a company must: -Document the controls that are in place -Verify that the controls are not subject to error or manipulation •Companies with ERP systems in place will have an easier time complying with the Sarbanes-Oxley Act than will companies without ERP

The Enron Collapse

•Volume of financial contracts was far greater than volume of contracts to actually deliver commodities •Some partnerships were faked to mask billions of dollars in debt •Enron's financial statements had been audited by Arthur Andersen, a highly regarded accounting firm •Andersen employees on the Enron engagement team were instructed to destroy documentation relating to Enron

Document Flow for Customer Service

•With an ERP system, all transactions in all areas of a company get posted in a centralized database •Each transaction posted in SAP ERP gets its own unique document number -Allows quick access to the data •In SAP ERP, document numbers for related transactions are associated in the database -Provides an electronic audit trail

Name the Balance Sheet liabilities and what are the effects?

•accounts payable, notes payable •a minus