Chapter 10: Other business processes

Enc-of-chapter Activities - Student

End of Chapter Activities

1.  Reading review questions:

  1. What is the basic purpose of each business process discussed in this chapter (conversion, financing, human resources)?
  2. What are the similarities and differences between job costing and process costing systems? How is each system reflected in the organization of the accounting information system?
  3. What are the four common transactions associated with the financing business process? What information must be tracked for each transaction?
  4. What forms are commonly used in processing payroll transactions?
  5. How are the purposes of internal control fulfilled in each business process discussed in the chapter?
  6. Respond to the question for this chapter’s opening vignette.

·  Why is it important for accounting professionals to understand the operational aspects of an organization in designing and evaluating its accounting information system?

2.  Making choices and exercising judgment:

  1. In the last three chapters, you’ve learned about five different business processes: sales / collection, acquisition / payment, conversion, financing and human resources. Draw a diagram or write a paper that explains the connections between the five.
  2. Phil and Lil are the owners of Planters for All, a company which makes small decorative planters for homes and offices. Their planters come in various shapes, including a well with a bucket, a telephone, a wheelbarrow and others. Each shape can be made in two sizes: large and small. If you were advising Phil and Lil about setting up their production process, would you recommend a job costing system or a process costing system? Why?
  3. PKT Corporation has annual sales of $1,600,000 and a profit margin averaging 8%. The corporation employs forty people and currently does its payroll processing internally. Typically, the two accounting staff spend one day every two weeks calculating and processing payroll; each accounting staff member’s annual salary is $48,000. The president of PKT has asked your advice regarding outsourcing payroll processing. List and discuss at least three factors you would tell the president to consider in making this decision. Based on the data provided, should PKT outsource its payroll, or keep doing it internally?

3.  Field exercises:

  1. Look online or in your local Yellow Pages for a company that manufactures a product. Arrange an interview with a member of the company’s accounting staff and a tour of its production facilities. Prepare a brief presentation or paper discussing the results of your research.
  2. Contact a local human resources professional or an attorney that specializes in labor law. Ask about legislation that impacts the human resource function in organizations, such as the Americans with Disabilities Act, the Family and Medical Leave Act, the Occupational Safety and Health Act or the Immigration Reform and Control Act, or about the company’s policies with regard to sexual harassment, substance abuse testing or use of information technology. Prepare a brief presentation or paper discussing the results of your research

4.  Costing systems:

Indicate whether each of the following types of businesses would be more likely to use a job or process costing system. Justify your choices.

  1. Architect:
  2. Attorney:
  3. Dentist:
  4. Heavy equipment manufacturer:
  5. House painter:
  6. Landscaper:
  7. Magazine publisher:
  8. Management consultant:
  9. Pet groomer:
  10. Tax preparer:

5.  Transaction and business processes:

Which business process (conversion, financing or human resources) is most closely associated with each transaction listed below?

a / Payroll taxes expense
Cash / f / Retained earnings
Capital stock
b / Manufacturing overhead
Accumulated depreciation / g / Work in process
Manufacturing overhead
c / Treasury stock
Cash / h / Interest expense
Premium on bonds payable
Interest payable
d / Cash
Capital stock
Additional paid-in capital / i / Cash
Discount on bonds payable
Bonds payable
e / Payroll expense
Wages payable
Withholding taxes payable / j / Cost of goods sold
Finished goods
  1. Transaction explanations:

Explain what is happening in each transaction presented in the previous exercise. For example, in transaction (a), the company is paying its share of payroll taxes.

  1. Payroll computations and analysis:

Eric is the president and chief executive officer of his own management consulting firm. He has five employees: Jon Jones, Lupe Bana, Austin Pei, Diane Driscoll and Yu Chung Wright. Selected information for each employee is listed in the table below:

Employees have three kinds of taxes withheld from their wages: federal income, state income and social security. Social security is withheld from all employees at 9.75% of their gross pay. Single employees have federal income tax withheld at a base rate of $200 plus $50 for each withholding allowance; married employees’ federal tax withholding is $150 plus $25 for each withholding allowance. State income tax is withheld at 30% of the federal amount for each employee. Employees are paid every two weeks, and receive 1.5 times their regular hourly wage for any hours in excess of 80. In addition, Jon and Austin contribute $50 each pay period to an employee pension fund; Lupe and Diane contribute $75 each pay period for group health insurance.

Using Access or Excel, prepare a payroll register based on the preceding data. Then, prepare a report for Eric that shows the average gross pay and the average hourly wage for all five employees. Finally, prepare a pie-chart graph for each employee showing the breakdown of gross pay into each amount withheld and net pay. (An example for Jon is shown below.)

8.  Payroll forms data:

Several data items that might be included on a payroll form are listed below on the left. The standard payroll forms discussed in the chapter are listed below on the right. For each data item, indicate the form(s) on which you’d find it.

ã McGraw-Hill Companies, 2008

Chapter 10 12

Chapter 10: Other business processes

Enc-of-chapter Activities - Student

  1. Address of employee
  2. Employee name
  3. Employer identification number
  4. Federal income tax withheld:
  5. Location of employer
  6. Marital status
  7. Number of withholding allowances
  8. Social security number
  9. State income tax withheld
  10. Unemployment tax paid—federal

1.  Form 940

2.  Form 941

3.  Form 1099

4.  Form W-2

5.  Form W-4

ã McGraw-Hill Companies, 2008

Chapter 10 12

Chapter 10: Other business processes

Enc-of-chapter Activities - Student

9.  Forms design:

  1. Use Access (or another software tool specified by your instructor) to design a form that captures basic data for the human resource process. At a minimum, it should include the employee’s name, address and phone; department or job classification; and e-mail address. Populate the form with data from yourself and three of your friends.
  2. Design a materials requisition form for the conversion process. The materials requisition form should include the requestor’s name and department, the date of the request, and the type and amount of material issued. It may also include a place to indicate the type and amount of any material returned to the warehouse.
  3. Design a labor time ticket for a job costing environment. The document should include the employee’s name and identification number, as well as the hours worked on each job. It should also incorporate the date(s) worked.
  1. Risk analysis and internal controls:

In each independent situation below, identify and describe at least three risks. For each risk, suggest two internal controls to address it.

  1. Midwest Electronics Corp. manufactures computers. Recently, its products have met stiff competition from lower-priced imports, and the firm is seeking ways to improve its workers’ productivity in order to maintain its market share. Over lunch in the company cafeteria, Alice Kumar (manager of the Accounting Department) and Greg Mossman (manager of the Sales Department) recently discussed a presentation made to the management of Midwest by a consultant on employee motivation. In the course of the conversation, Kumar recalled what happened at Spokane Computer Associates, her former employer. A national labor union had sought repeatedly to unionize the workers at the plant but had never succeeded. There was very little turnover among the workers, and the plant was considered a safe and pleasant place to work. Salaries were relatively high, and workers earned not only a base salary but incentive bonuses based on their individual output and company profits. (CMA adapted, June 1992)
  2. Alaire Corporation manufactures several different types of printed circuit boards; however, two of the boards account for the majority of the company’s sales. The first of these boards, a television circuit board, has been a standard in the industry for several years. The market for this type of board is competitive and, therefore, price sensitive. Alaire plans to sell 65,000 television circuit boards next year at a price of $150 each. The second high-volume product, a personal computer circuit board, is a recent addition to the company’s product line. Because it incorporates the latest technology, it can be sold at a premium price; next year’s budget calls for the sale of 40,000 personal computer boards at a price of $300 each. (CMA adapted, June 1992)
  3. Microtronics Inc. is a private company involved in genetic engineering. The company was started several years ago by Joseph Graham, a scientist, and is financed by a group of venture capitalists. Microtronics has had some successful research, and one of its products recently received approval from the Federal Drug Administration (FDA). Two other products have been submitted to the FDA and are awaiting approval. Because of these successes, the investors believe the time is right for preparing the company for a public stock offering. (CMA adapted, December 1991)
  4. Princess Corporation grows, processes, packages and sells three apple products: sliced apples that are used in frozen pies, applesauce and apple juice. The outside skin of the apple, which is removed in the Cutting Department and processed as animal feed, is treated as a by-product. In the company’s conversion process, the Cutting Department washes the apples and removes the outside skin. The apples are then cored and trimmed for slicing; the three main products and the by-product are recognizable after processing in the Cutting Department. Each product is then transferred to a separate department for final processing. The trimmed apples are forwarded to the Slicing Department where they are sliced and frozen. Any juice generated during the slicing operation is frozen with the slices. The pieces of apple trimmed from the fruit are processed into applesauce in the Crushing Department. Again, the juice generated during this operation is used in the applesauce. The core and any surplus apple generated from the Cutting Department are pulverized into a liquid in the Juicing Department. The outside skin is chopped into animal feed and packaged in the Feed Department. (CMA adapted, December 1991)
  5. Damian Information Inc. is a four-year old information processing and software development company serving a number of small clients in the Midwestern United States. As its customer base has grown, DAI has increased its staff to thirty employees. The company has been considering an arrangement whereby they would lease employees. Currently, there are in excess of four hundred employee leasing companies in the United States representing nearly one million workers. The major users of this service are companies that need fewer than one hundred workers. If DAI were to enter into an employee-leasing arrangement, all of DAI’s current employees would become employees of the leasing company and then leased back to DAI. (CMA adapted, June 1994)
  6. Richmond Inc. operates a chain of department stores located in the northwest. The first store began operations in 1965 and the company has steadily grown to its present size of 44 stores. Two years ago, the Board of Directors of Richmond approved a large-scale remodeling of its stores to attract a more upscale clientele. Before finalizing these plans, two stores were remodeled as a test. Linda Perlman, assistant controller, was asked to oversee the financial reporting for these test stores, and she and other management personnel were offered bonuses based on the sales growth and profitability of these stores. Based on the apparent success of the test (sales growth for the two stores was reported at 11%, and profitability showed a 14% increase), the Board is now considering two alternatives for financing the balance of the remodeling effort. Alternative One involves pure debt financing. The company would make a public offering of bonds with a face value of $30 million with a stated interest rate of 11%. Alternative Two is a combination alternative. It would involve $12 million, 9% bonds, common stock of $14.5 million and retained earnings of $4.5 million. The current market value of Richmond’s common stock is $30 per share; the dividends per share have held steady at $3.00 per share for the last year, but investors are expecting growth of 6% in the dividend. (CMA adapted, June 1994)

11.  Systems documentation:

a.  Consider this chapter’s opening vignette, Mhlume Sugar Company Ltd. Prepare a systems flowchart or Level Zero data flow diagram that illustrates the sugar refining process.

b.  The opening vignettes for Chapters 8 and 9 introduced you to Dreambox Creations; Dreambox partners with Automatic Data Processing Inc. (ADP) for its payroll processing. Dreambox employs Internet-based time tracking. Employees log in and log out based on the client for whom they’re working; in that way, the company can track billable hours which feed into the sales / collection process. (The concept of billable hours is also important in other professional organizations, such as law firms and CPA firms.) Dan, in charge of operations and information technology, summarizes each employee’s hours on a bi-weekly basis. He transmits them to ADP electronically or via telephone; ADP then processes the payroll, including all tax withholdings and deposits. ADP also handles Dreambox’s year-end reporting via W-2 forms. Dreambox maintains a payroll account separate from its regular operating cash account for internal control purposes. ADP sends paper checks drawn on the payroll account back to Dan, who distributes them to the employees. The checks lag the pay period by one week; for example, checks for the pay period January 10 to January 21 are distributed on January 28. Prepare a systems flowchart or Level Zero data flow diagram depicting the process.

c.  Point your web browser to www.sba.gov, the web site for the Small Business Administration. The SBA is a federal organization which helps entrepreneurs start and manage businesses. Click the link for “Financing Your Business.” Browse the topics under “Financing Eligibility Topics,” and prepare a systems flowchart or data flow diagram that summarizes the information you find.