Summary with Accounting Information Systems and Internal Control - Vaassen - 2nd edition


Typology of organizations - Chapter 12

Typologies

In the typology approach we identify risks and controls by the type of organization. We base the typologies of organizations on the relationship between the flow of goods and the flow of money. The presence of a flow of goods ensures a higher position in the model of typologies. There are two categories: organizations with a dominant flow of goods and organizations without a dominant flow of goods. There is a special place reserved for public or non-profit organizations. Sometimes organizations fall into multiple categories. However, this does not mean that an organization in a particular category contains all the characteristics of that category.

Organizations are a unique collection of different processes. Every organization has a few processes like a purchase process, a production process and a sales process.

A typology of organizations provides a framework to help classify organizations or parts of organizations in such a way that for each type, a set of standard internal control measures can be derived.
We need to understand that sometimes there is an ecological fallacy. An ecological fallacy occurs when we assume that every organization in a certain category exhibits all the characteristics of that particular category.

Some organizations have a dominant flow of goods. We distinguish two different kinds of organizations: trade organizations and production organizations.

Trade organizations

This type of organization buys goods, stores them temporarily and sells them again. This is done through cash sales or credit sales. One risk is that goods go away without a cash inflow (for example due to fraud or inadvertent error, or if no account is sent). Selling on credit may be irrecoverable since it entails goods leaving the organization without a subsequent corresponding inflow of money. This may occur as a result of unintentional errors. The stock at the end of the period must be equal to the stock at the beginning + purchase - sell. The stock is counted according to the four-eyes principle: at least two people count the stock. Examples of trade organizations are supermarkets and wholesalers.

Production organizations

Production organizations transform raw materials, man hours and machine hours into finished products through a technical transformation process. There are supplies of raw materials and finished goods. Production orders are detailed descriptions of what and how much should be produced in the next edition. It also contains the quantities of materials that are needed, and the expected start and end time of the production and task descriptions for the staff. We also include the agricultural and waste collection companies in this category. These companies have some risks, because they are highly dependent on environmental conditions (such as weather, natural disasters and environmental laws) and yields are difficult to predict. Another risk is the gradually declining accuracy of standards for raw materials, man hours, and machine hours when production is more tailored to the requirements of specific customers. A special category includes the organizations that assemble standardized components products based on specific customer orders (mass customization). Here we must think of Dell. Other examples of production organizations are farms, breweries, car factories and shipyards.

Not all organizations have a dominant flow of goods. Organizations without a dominant flow of goods can be devided into four types of organizations: service organizations with a limited flow of goods, service organizations that provide space and electronic capacity, service organizations that put knowledge and skills at their customers’ disposal and governmental and other not-for-profit organizations.

Service organizations with a limited flow of goods

These organizations generate income by complementing a flow of goods with services. These services would not exist if there was no flow of goods. A risk in such organizations is that services do not meet the customers’ demand because the primary documentation of the customer order was inadequate. Examples of this type of organization are a restaurant and a repair shop.

Service organizations that provide space and electronic capacities

This type of organizations rent capacity to customers for a current period of time. One risk is that the services are not invoiced. These invoices need to be checked through one of the employees. To verify that the revenue should be complete, three groups of data are linked: customer data, data rates and capacity utilization data. If the use of the capacity cannot be measured well (swimming pool, museum), we use a quasi-goods movement. These goods have value because it gives the holder the right to a service or product, like a card that gets value if it is sold. Examples of this type of organization are a theatre, a hotel, a swimming pool or the use of a telephone network.

Service organizations that put knowledge and skills at their customers’ disposal

Service organizations that provide knowledge and skills at their customers’ disposal generate income by selling man hours, deploying intellectual property or selling financial products. Organizations that use intellectual property rely on their computer systems. This type of organizations must therefore be additionally secured. It is necessary to manage the product development and the costs and the progress of the process. The cost of intellectual property should be higher than the development. Examples of this type of organizations are cleaning companies, software manufacturers and insurance companies.

Government and other non-profit organizations

Government and other non-profit organizations have a special position. There is often no direct relationship between supply (the offer) and the revenues. The budget of the organizations also plays an important role. One risk is that there is unsatisfactory compliance procedures, contracts, laws or regulation. Not all processes in these organizations have characteristics of this type of organization, like issuing a passport. In nonprofit organizations, the workers are often volunteers. Each board has at least a president, treasurer and secretary. In addition, activities are often financed by government grants. It is necessary to check this also externally. Exanmples of fovernment en non-profit organizations are universities, ministries and the police.

Trade organisation - Chapter 13

Trade Organizations

Within trading companies, we distinguish three different processes: the purchasing process, the inventory process and the sales process. The management measures should be implemented for each process. These are only effective if certain administrative and organizational requirements are met, like:

  • Computer security

  • Segregation of duties

  • Management guidelines

  • Budgets

Trade with cash sales

In these type of organizations, customers visit a store, grab the goods and pay the employees of the company. Suppliers deliver the different types of goods and get their money for delivering the goods.

The relationship between the flow of goods and money will then be limited to:

Stock (t0) + purchases - sales = stock (t1)

Cash (t0) + sales - purchases = cash (t1)

But most purchases are paid by card:

Cash (t0) + cash receipts - cash payments = Cash (t1)

Creditors (t0) + purchases - cash payments payable = (t1)

Risks that can occur in the purchasing process are bribes, secret commissions or other forms of incentives to suppliers. Management measures for this are a detailed control of the purchase and analytical review of the purchase prices. There may also be fluctuating prices by supply and demand.

A risk in the inventory process is theft from the stock. Physical access controls to the store, supervision by store personnel and periodic physical inventory counts are important controls to mitigate the risks related to the inventories on display. Good inventory counting procedures are important in order to mitigate risks arising from unreliable inventory records, billing errors and other risks that affect the completeness of revenue.

Risks that occur in the sales process is theft of the shipped finished goods to other countries or other places.

Denoted cycle counting is a full stock count method. This means that the total inventory is counted at the same time. If there is a specialization, counts can be done per product separately. For example, when the stock is minimal. If a product is held at various places in the organizations the stock should be counted simultaneously, to prevent movement between locations.

A risk to the sales process is theft of cash. Control measures include segregation of duties between registration, storage and authentication of cash and unexpected money counts. The cashier has control over money and is responsible for the presence of money. He keeps the transactions in a ledger.

A risk here is lapping: the withholding of money. This can be prevented by segregation.

There must be separation of functions between:

  • The purchase of goods

  • Receiving goods

  • Preparing receipt reports

  • Checking the quality of goods

  • Monitoring of goods

  • Sales of goods

  • Monitoring cash

  • Recording transactions

  • Checking whether the transactions are properly recorded

These tasks are divided into different functions:

  • Authorization

  • Execution

  • Control

  • Monitoring

  • Data collection

Budgets are drawn up for sales, cost per unit, the amount of cash and procurement.

Policies should be drawn regarding the safety of goods and money:

  • Maximum amount of money in the till

  • Acceptance of forms of money; check, credit card etc.

  • Deposit of cash in safes

  • Access to finished product by employees

  • Movement of goods between the warehouse and the store

Trade on credit sales

In these organizations, visit customers the store usually not a carrier brings the goods, and customers pay another time.

That leads to creditors / debtors:

Stock (t0) + purchases - sales = stock (t1)

Debtors (t0) + sales - cash revenue = accounts receivable (t1)

Cash (t0) + cash receipts - cash payments = Cash (t1)

Creditors (t0) + purchases - cash payments payable = (t1)

In this type of organizations customers do not visit the store, which is often the case for wholesalers. In this type of organisation, again, we distinguish risks for each process. There are no differences in risks in purchasing and inventory process towards trade organizations with cash sales. The sales process is different from trade organizations with cash sales. There are a few risks in the sales process. The major risk is the creditworthiness of customers. This risk could lead to illegal sales and loss of income. This must therefore be checked first. Another risk is that the mere existence of accounts receivable leads to uncertainty about the organization’s cash position. When the goods are transported or shipped errors or complaints from customers may exist. The last risk are billing errors. Billing errors can also lead to loss of revenue and complaints.

Trade organizations with credit sales must segregate virtually the same functions as trade organizations with cash sales. There are no differences.

Also there must be no additional budgets created when compared to trade organizations with cash sales.

The policy for making payments to creditors and balancing these receipts from debtors must be formalized via management guidelines.

A specific preventive measure is a pre-billing system to ensure that goods are transported without an invoice. There are a few different billing systems.

The first billing system is pre billing. Invoices are prepared in accordance with the authorized sales orders. From an administrative department, the invoice is issued to collect the goods.

Advantage: no goods transported without an invoice. However, it is only possible if the stock is available for the collection and packaging.

Another type of billing is post-billing. This means that the warehouse picks and packs the goods based on copies of authorized orders, and the invoice is prepared on the basis of the shipping notice. The invoice is issued after the goods have been shipped. It is often used when not all the information of the goods is known by the company.

The last type of billing is interim billing. This is a combination of the pre billing and post-billing system. Invoices are prepared in accordance with the customer order. At the same time the goods are collected and packed on the basis of a copy of the customer's order.

Customers are urged to pay through follow-up letters, phone calls, e-mails, visits or eventually they will be handed over to a collection agency.

In addition to the functions that organizations with cash sales must separate, they must also segregate the following functions:

  • Checking the creditworthiness of the customer

  • Transporting goods

  • Invoicing the customers

  • Protecting debtors

  • Receiving payments.

No additional budgets have insisted upon, but the budget of the amount of cash is less predictable. Also, the same guidelines apply. However, there must be discussed what to do with the transport of goods when the payment has not been executed yet.

Production Organizations - Chapter 14

Processes of production organisations

The purchase process, production process and the sales process are processes of production organisations.

We distinguish four types of production organizations: organizations that produce to stock, organizations with mass customization, agrarian and extractive organizations and organizations that produce to order.

Production to stock

Production organizations use production standards in their technical transformation processes. The amount of raw and auxiliary materials, man hours and machine hours to be used for a certain quantity of finished goods can be determined.

Risks in the production process: unauthorized production, the complex flow of goods, work-in-progress, insufficient alignment between production and demand and misalignment between product design and sales.

Risks in the production planning: capacity planning, occupation planning and detailed production plans.
Measurement of production efficiency: the segregation between pre-calculation, actual production and post calculation.

Production reports: the results of the production process in a production report. It contains raw and auxiliary materials received from the warehouse and used in the production process, man and machine hours used, the amount of produced finished goods and the amount of waste and breakdown.
Segregation of functions: develop products, production planning, pre calculation, purchase raw materials, receive raw materials, check the quality of the raw materials, guard the raw materials, produce finished goods, sell goods, post calculation, register transactions and check registered transactions.

Management guidelines: pre- and post-calculation, minimum occupy rate of machinery, calculation of the production efficiency, maintaining machinery, safety and environment circumstances, quality of raw materials, selling prices and destroy or sell trash.

The controller or the head of the accounting department compares these actual results to the standards from the pre-calculation and prepares a performance report for the organization’s management. Other data on the progress of the production process are obtained from the warehouse, the maintenance or technical department and the quality inspector. Validity and completeness of production data is established by means of reconciliations.

Mass customization

Many production organizations are confronted with two seemingly conflicting challenges. They need to deliver high quality products, and they also need to produce at low cost. With mass customization, products are specifically tailored to customer needs by assembling components that are produced to stock. Mass customization is comparable to production to stock, but from an internal control perspective it is slightly more complex due to the more complicated technical transformation process in which components are assembled into final products.

From a risk perspective, organizations with mass customization are quite similar to organizations that produce to stock. Many risks associated with production to stock also apply to organizations with mass customization. We distinguish the following risks:

  • Misalignment between produced goods and customer orders. This risk can be mitigated by adequate recording of product specifications per order, or by independent checks on alignment between customer orders and product specifications, independent quality checks, follow-up procedures on customer complaints and implementation of a customer complaints procedure.

  • Insufficient quality of the components used. This risk can be mitigated by independent quality checks on components by the quality inspector, implementation of destruction procedure of rejected components and implementation of customer satisfaction measurement system.

  • Insufficient inventory of components. This risk can be mitigated by adequate inventory planning of components based on sales forecasts of customized products. Another way is by reliable inventory records, the use of sufficiently high re-order points and purchase of components from reliable vendors.

  • Fluctuation in product demand. A way to mitigate this risk is by the use of reliable sales forecasts by sales department, cash planning in order to survive times of low demand.

The administrative and organizational conditions of organizations with mass customization are virtually the same as those of organizations that produce to stock. Compared with organizations that produce to stock no additional budgets must be created. There will be more uncertainty about product demand and the specific products that are ordered, rendering the sales and inventory budgets less predictable.

Organizations with mass customization require additional guidelines on the use of re-order points and the purchase of components from reliable vendors since it is essential for an efficient production process that components are readily available in inventory. The other management guidelines are the same as those discussed for production to stock.

We distinguish four main processes in organizations with mass customization

  • Purchasing process

  • Inventory process

  • Production process

  • Sales process

We will not discuss the production process for mass customization, because it is comparable to organizations that produce to stock.

Agrarian and extractive organizations

Agrarian and extractive organizations are considered production organizations, and they possess characteristics of production to stock and production to order. Agrarian and extractive organizations produce vegetables, dairy products, meat, wood, minerals, oil and gas to stock. The agrarian and extractive organizations have three characteristics in common:

  1. These organizations are subject to heavy and detailed regulation. Regulation in this sector vary from production quotas to environmental laws regulating the exploration of minerals and oil and gas.

  2. Due to environmental circumstances and capabilities, agrarian and extractive organizations are subjected to a high degree of uncertainty in the relationship between offers and yields. Revenues or yields of agrarian and extractive organizations are difficult to predict due to weather conditions and technical capabilities. The weather conditions heavily influence the relationship between offers and yields. The technical capabilities of a former of fisherman are another crucial component in the ultimate yield.

  3. Long-range planning is difficult as these organizations are heavily influenced by external factors. They are often faced with environmental pressure groups, and these groups can have an impact on the agrarian or extractive yield or production. Also the political climate influences agrarian and extractive organizations as governments can behave in a more or less protectionist fashion or a more or less environmentally friendly fashion cost and benefits of agrarian and extractive organizations. Another external factor is the diseases that affect agrarian organizations.

To establish the completeness of revenues of agrarian and extractive organizations, three common factors are distinguished:

  1. The value cycle is instrumental in reconciling the completeness of revenues by linking the flow of goods and the flow of money. The reconciliations between the flows of goods at agrarian and extractive organizations will be performed according to the following formula:
    amount of natural resources * production standard = amount of finished goods
    The natural resources and finished goods differ however between agrarian and extractive organizations.

  2. Agrarian and extractive organizations need to have a system of lot recording. It will exhibit quality differences. Because high-quality goods will lead to higher revenues than low-quality goods, agrarian and extractive organizations need to distinguish these quality differences.

  3. These organizations need to have contract files including all contracts with suppliers. To facilitate the checks on the completeness of revenues of agrarian and extractive organizations, these organizations need to have contract files including all contracts with suppliers.

Many of risks for production to stock and mass customization also apply to agrarian and extractive organizations. Specific for these types of organizations are the risks of the uncertainty of revenues, seasonal production patterns, disturbances in climate control systems, changing weather conditions and the availability of minerals.

The administrative and organizational conditions of agrarian and extractive organizations are practically similar to those or organizations that produce to stock. We will only discuss the ones that differ.
The main difference from organizations that produce stock is the degree of uncertainty about the production standards and the quantity of goods produced. The production budget will be less predictable, and will thus contain various scenarios.

Most of the management guidelines that apply to production to stock also apply to agrarian and extractive organizations. Agrarian and extractive organizations will have additional or more specific management guidelines with respect to how to deal with environmental conditions. They will also have additional guidelines on the compliance with applicable laws and regulations and on the calculation of production efficiency as they need to correct for wheater circumstances, production quotas etc.

Purchasing processes. This process relates to the so-called raw materials such as sowing seeds, flower bulbs or cattle. It also relates to the acquisition of extracting capacity.

The production process. It starts with a cultivation plan in case of agricultural and horticultural organizations, or a breeding plan in case of cattle farming. These plans indicate the production output that needs to be achieved in a certain period of time, and the actions that need to be taken to achieve that output.

Produce to order

The most complex type of production organization is an organization that produces to order. Compared with production to stock, agriculture and extraction, and mass customization, production planning, job preparation, production, and production progress control are more complex due to the non-repetitive nature of the technical transformation process. The project-based character of production to order results in softer standards and less detailed production planning, compared with production to stock and mass customization. The production to order rates will need to be adjusted more often. The transformation process is similar to production to stock.

There are a few risks

  • Insufficiently reliable product standards

  • Insufficient production due to the project-based character of production

  • Misalignment between good produced and customer order

  • Shifting of revenues and costs between projects

  • Excessive processing time of projects

  • Potentially complex projects

The administrative and organizational conditions of organizations that produce to order are virtually the same as those of organizations that produce to stock because organizations that produce to order must segregate the same functions as organizations that produce to stock.

No additional budgets are required compared with organizations that produce to stock. Since there is more uncertainly about the production standards and the costs of goods sold, the production budget will be less predictable.

Organizations with production to order will issue additional management guidelines with respect to the acceptance of large projects and the calculations of project costs.

For organizations that produce to order, acquisition is important because orders trigger the production process. Orders received by the sales department are communicated to the operations office. This office prepares a detailed technical pre-calculation.

To maintain a grip on the production process, large projects are technically subdivided into sequential stages. Determination of a product’s or project’s cost price is important for the planning and control of production processes.

Service Organizations with a limited flow of goods - Chapter 15

Service Organizations with a limited flow of goods

To some extent, service organizations with a limited flow of goods are comparable to trade and production organizations. The flow of goods is the starting point for controlling a major part of the information flows within these service organizations. These organizations are usually characterized by some kind of transaction process, and there are similarities with the production process in production organizations.

In service organizations, capacity is put directly at the customer’s disposal, whereas in production firms it is only indirectly employed to satisfy customers’ needs by using it in technical transformation processes. The relationship between capacity usage and revenues is usually less tight in service organizations. Capacity plays an important role in controlling this type of service organizations, additional attention should be paid to the planning of activities that contribute to an optimization of capacity usage on the one hand, and to an enhanced alignment between capacity and revenues on the other.

In the typology we distinguish two types of service organizations with a limited flow of goods:

  1. Organizations that have a limited flow of their own goods

  2. Organizations where these goods belong to third parties

This difference only affects the risks, exposures, and internal controls stemming from the absence of a cash outflow to pay vendor invoices in the second category of service organizations.

From an internal control perspective, we distinguish three main processes within service organizations with a limited flow of goods: a purchasing process, a service process and a sales process. For each of these processes, internal controls need to be implemented to mitigate the risks while achieving the organizational objectives. Risks for service organizations with a limited flow of goods relate to the incomplete documentation of orders, theft of cash or service products or unreliable inventory goods.

As for any organization, internal controls that are put in place will only be effective if certain administrative and organizational conditions are met. These conditions relate to computer security, segregation of duties, management guidelines and budgeting.

We distinguish a huge variety of organizations with a limited flow of own goods, ranging from fast-food chains and a la cart restaurants to publishers. A common feature of these organizations is that they all have a purchasing process, a service process and a sales process.

Because there is a relationship between offers and yields, the reconciliations between the flows of goods and the flows of money are quite similar to those of production organizations:

Inventory ingredients at t0 + purchases -/- ingredients delivered to kitchen = inventory ingredients at t1
Ingredients delivered to kitchen + standard (recipe) = meals prepared by kitchen = meals sold
Cash at t0 + sales (meals sold * price per meals) -/- purchases (ingredients) = cash at t1

The value cycle is instrumental in assuring the completeness of revenues. In restaurants, there is still a link between the flow of goods and the flow of money. Ingredients that are purchased are subsequently sold, implying that the revenues are associated with the ingredients purchased and meals sold.

We distinguish risks in the three main processes: the purchasing process, the service process, and the sales process.

The most important risk in the purchasing process is probably that restaurants work with perishable products, which can lead to loss of value of ingredients when the ingredients are not used in time. An internal control to mitigate this risk is an adequate warehouse facility.
In the service process, misalignment between meals ordered by guests and meals prepared by the kitchen is a major risk. It creates customer dissatisfaction.

The incomplete documentation of orders by waiters is a prominent risk in the sales process of restaurants. Internal controls to mitigate this risk are segregation of duties between order acceptance, the preparation of meals, and the recording of all activities. Another control is supervision by the manager of the proper documentation of orders by waiters.

Example: Restaurants

From an internal control perspective, restaurants have to segregate a number of functions. Segregation of all these duties will only be possible and is only efficient in larger restaurants. In most restaurants, the owner will supervise his personnel and perform many duties himself, ranging from purchasing ingredients to preparing the meals or taking orders and serving meals.

In restaurants, budgeting revolves around the annual master budget and some constituent budgets, including the sales budget, the purchase budget, the cost budget split into personnel cost, accommodation costs, depreciation costs and costs of ingredients.

Management guidelines for restaurants relate to meal prices, handling of cash, purchasing of ingredients, and storage of perishable ingredients. The management will issue guidelines with respect to:

  • Prices for meals and drinks

  • Use of discounts for meals and drinks

  • Level or re-order points for ingredients and drinks

  • Storage of perishable ingredients and related destruction procedures

  • Access to ingredients by employees

  • Selection of suppliers of ingredients

  • Order acceptance by waiters

  • Maximum amount of cash in the cash drawers

  • Dress code for waiters

  • Handling tips

  • Cash procedure and the deposit of received cash into a safe

  • Health and hygiene regulation

  • Dealing with customer complaints

For restaurants, the service process mainly consists of a transformation process in which meals are produced using all kinds of ingredients. As indicated, this is similar to the production process in a production organizations, and also from an administrative and internal control perspective. Restaurants use receipts for the preparation of each meal and these receipts specify the ingredients to be used.

An important difference with production organizations, is the fact that restaurants work with perishable ingredients. Therefore, a rejection and destruction procedure needs to be implemented. They should draw up a protocol of destruction, which is documented in the warehouse file. The protocol contains information on the ingredients destroyed and contains the electronic signature of both the chef de cuisine and the accounting clerk. The controller or the head of the accounting department should regularly perform analytical reviews of the ingredients that are destroyed.

As organizations with a limited flow of own goods, there is a great variety of organizations with a limited flow of goods owned by third parties, ranging from garage businesses and bicycle repair shops to auctioneers. There are again three processes: a purchasing process, a service process and a sales process. The exact nature of these processes depends on the specific type of organization. therefore, we do not provide a typical type of service organizations with a limited flow of goods owned by third parties instead: a garage business. More specifically: we focus on the car repair activities on the garage in the next sections.

Example: Garage business

Revenues of garage business generally come from two sources: man hours and spare parts. That is, when customers bring their car to the garage for repairs, the repair costs usually relate to spare car parts necessary for the repair job and the man hours spent on that job by the mechanics.

Completeness of revenues from man hours worked can be established based on the documentation of hours worked by the mechanics who deliver services. The difference between the shop time and job time is the number of hours that cannot be billed to customers. The controller or the head of the accounting department should perform the following reconciliations:
shop time -/- indirect hours = job time
Job time * rate = soll position of revenues

The reconciliation between the flow of goods and the flow of money is as follows:
Inventory spare parts at t0 + purchases -/- sales = inventory spare parts at t1

As this reconcilication shows, the value cycle is instrumental in assuring the completeness of revenues from spare parts. Spare parts are purchased and subsequently sold.

We identify three main processes in garage business:

  • The purchasing process

  • The service process

  • The sales process

A significant risk in the purchasing process relates to insufficient inventory of spare parts since this can result in inability to execute repairs. Internal controls to mitigate this risk are adequate inventory planning of spare parts, the use of sufficiently high re-order points and the selection of reliable vendors who can make daily deliveries on request.

Unreliable pre-calculation by the foreman responsible for planning the repairs, might lead to inadequate decision-making with respect to targets and efficiency. This risk can be mitigated by proper segregation of duties between planning of repairs by the foreman and execution of repairs by the mechanics.

Garage businesses need to segregate the following functions to assure the completeness of revenues:

  • Purchasing of spare parts

  • Safeguarding spare parts

  • Acceptance of repair orders

  • Planning repairs

  • Executing car repairs

  • Quality checks of the repairs

  • Billing customers

  • Receipt of customer payments

  • Transactions recording

  • Checking all processes

Segregation of all these duties is possible and efficient only in larger garage businesses.

Garage businesses determine their master budget based on the goals to be achieved, the activity level of past years and the availability repair capacity. The investment and cash budgets are derived from the master budget, and subsequently the annual sales, purchase and cost budgets are drafted.

Garage businesses should develop management guidelines on workshop rates, prices for spare parts, purchasing and storage of spare parts, quality checks or repairs and the handling of cash. More specificially, management should issue guidelines with respect to:

  • Workshop rate and prices for spare parts

  • Use of discounts for repair jobs

  • Level of re-order points for spare parts

  • Cash procedures and deposit of cash receipts into a safe

  • Quality checks on repair jobs

  • Access to spare parts by employees

As with restaurants, within garage business we distinguish three main processes:

  • The purchasing process applies to spare parts and is identical to the purchasing process discussed earlier.

  • The service process applies to the execution of car repairs and is comparable to production to order.

  • The sales process is initiated by a customer who goes to the reception desk. The reception clerk formally accepts the car for the repair job and inputs all relevant information into the repair order file. A programmed procedure automatically assigns a number to the repair job. The foreman then assesses the necessary repairs and also enters this information in the repair order file.

Service Organizations that put Space and Electronic Capacity at their Customers Disposal - Chapter 16

Service Organizations & Space and Electronic Capacity

This chapter discusses the internal control structure of service organizations that put space and electronic capacity at their customers disposal. In the typology of organizations, we distinguish three categories of service organizations with disposition of capacity of space:

  1. Organizations with disposition of specific space

  2. Organizations with disposition of specific electronic capacity

  3. Organizations with disposition of nonspecific space

Given the variety of organizations in each category, we do not provide a universal discussion of service organizations in each of the three categories. Instead of each category, we discuss a particular type of organization. In these organizations, we distinguish two processes: the investment process (investment in fixed assets / sales) and the sales process.

For organizations with disposition of specific space we discuss a transport organization.

For organizations with disposition of specific electronic capacity we discuss a telephone operater.

For organizations with disposition of nonspecific space we discuss a museum.

Organizations with disposition of specific space

These organizations have access to a specific area such as a hotel or transportation. These organizations seek to optimize the use of their maximum capacity.

Available transport capacity - vacant occupation =

* Occupancy rate per capacity unit = income (soll position)

A risk that plays an important role in the investment process is that the carrier must make substantial investments in transport facilities. This may have important consequences for the working capital. To mitigate this risk, organizations must adhere to their investment budget or when a budget is exceeded, there must be authorized by management.

We can find another risk in the sales process: the transport of goods for their own purpose (shop in shop). Control measures include segregation of duties, clear communication with customers that orders must always be accepted by the "order acceptance department, and monitoring of transport routes through GPS.

There are a few functions that need to be separated:

  • Making investments

  • Investment calculations

  • Monitoring of trucks, vans, buses and other transportation facilities

  • Maintenance of transport means

  • Order acceptance

  • Order fulfillment

To prepare budgets are first predicted sales including an investment plan, maintenance plan and staffing plan. The cost budget is prepared on the basis thereof. There should also be drawn up various guidelines about working in a transport company.

Organizations with disposition of specific electronic capacity

These type of organizations have electronic capability, such as a telephone operator.

Telephone operators generate revenue through phone calls and subscriptions. The capacity is not available in paper form, but only in electronic form. It is almost impossible to calculate the vacancy of the telephone network.

Captured time of telephone calls per call rate * = revenue from phone calls

Number of subscriptions (t0) + new - finished = number of subscriptions (t1)

Number of subscriptions (t1) * Subscription price = subscription revenues

We can find a risk in the investment process: the overload or ‘not using’ the telephone network. To prevent this risk, there should be a market analysis. It must contain the seasonal effects, average occupancy and spikes. In the sales process, the interruption of an automatic system is a risk. There must be, therefore, back-up procedures.

A few functions need to be separated

  • Making investment calculations

  • Investment transponders and other IT devices

  • Network management

  • Information system management

  • Customer services

  • Technical customer support

  • Revenue assurance

To prepare budgets, a manager should first predict the sales. This results in a sales budget. On the basis of a sales budget there must be made a capacity and staff plan. A capacity plan includes planned investments and divestments and other assets, given the current capacity and the expected demand. A staffing plan includes the necessary personnel taking account of the current staff. Then the cost budget is compiled. Phone operators use a detailed budget system that has budget cycles and pre-budgeting cycles. Also an investment and liquidity budget is drawn up. For this company various guidelines are drawn up.

Organizations with disposition of nonspecific space

The availability of a non-specific space, for example, a museum.

Vacancy control is not possible with this type of organization, because a visitor is not a piece of space in the museum book. Therefore, there are quasi goods. These quasi goods give the purchaser the right to a service by the organization that puts into circulation such items, such as entrance tickets.

Beginning stock + admissions growth stock - final stock of admissions = soll position of the number of admission tickets sold * ticket price = soll position of revenues from entrance tickets.

Cash end of the day - early in the day cash + cash = cash payment receipt

A risk in the investment process is a significant investment in art works, because this can have considerable impact on working capital. To prevent this risk, the management must always decide on investments and investments that fit within the budget.

In the sales process, there are also risks like access of visitors that pay to little or do not pay at all. To mitigate this risk, an adequate system of quasi goods is required. The paper must, where the quasi goods are printed, be stored in a secure vault.

There are a few functions that need to be separated into a museum.

  • The purchase of works of art

  • Securing the artworks and access to the museum

  • Cashier

  • Authorization of payments

  • Record of payments

  • Checking transactions

Based on the number of visitors expected a sales budget is drawn up, followed by a staff plan and cost budgets. Also different directives need to be prepared for working in a museum.

Service Organizations that put Knowledge and Skills at their Customers Disposal - Chapter 17

Service Organizations & Knowledge and Skills at their Customers' Disposal

We distinguish three forms of service organizations that put Knowledge and Skills at their customers’ disposal.

  • Organizations that sell man hours

  • Organizations that deploy electronic intellectual property

  • Organizations that sell financial products. The main sources of income are intangible property.

Organizations that sell man hours

Accountants, lawyers and office cleaners are examples of organizations that sell man hours. The number of hours worked is the basis of the documentation of income:

Shop time - indirect hours = time job Job time * rate = soll position of income

We distinguish two processes in these organizations: human resource management process (purchasing process) and the sales process.

The main risk in the human resource management process is that the capacity does not match with the demand in the qualitative (under or over qualified personnel) and / or quantitative terms (too many / few accountants). To mitigate this risk, assessing the future order portfolio is needed. Or an active human resource policy to bring supply and demand together and create flexibility by having annual contracts and outsourcing.

The main risk in the sales process is non-compliance with applicable laws by auditors. To manage this risk, procedures must be introduced so that colleagues can test each other and appropriate for the hiring, selection and training of auditors. Another risk is the incorrect reporting of time, therefore partners must monitor each other's times and regulators oversee the reporting of unproductive time.

There are a few functions that need to be separated:

  • Recruiting

  • Selecting and hiring personnel

  • Maintaining personnel files

  • Canvassing and contract with clients

  • Offering insurance services

Budgets are prepared on the basis of the sales forecasts. This can be done by different contracts: fixed-fee contract (fixed amount is agreed in advance) and cost reimbursement contract (an agreed hourly rate by type of service and the number of paid hours is billed). Based on established sales is a staffing plan, then the cost budget is determined. Several guidelines will be established for people who work at an accounting firm.

Organizations that deploy electronic intellectual property

An example of an organization that deploys electronic intellectual property is a software company.

This type of organization generally has three functions:

  1. The production process is costly and on a project basis

  2. The development of the product is low

  3. The use of intellectual property is entirely dependent on the use of information systems

We have a production and sales process. Software companies have relatively high software production costs while direct costs (e.g. the cost of a CD-ROM) are relatively low.

The soll position is the number of copied CDs that were brought to the warehouse * selling price.

A risk in the production process is that cost and time software development projects can exceed. To manage this risk, a detailed project administration, a detailed audit time and frequent progress reports are needed.

A risk in the sales process is the circulation of illegal software copies. To mitigate this risk, organization should carry copy protection applications and use a licensing system. The entrance and exit of workers should be protected to prevent the inclusion of the software.

A licensing system has the following functions:

  • The company has a license database that contains all the license numbers.

  • Each license number is printed on a certificate, and that is in the package with the CD of the application.

  • The software cannot be installed without a license key. The database then sends an activation code back.

  • If the license code is used, the procedure checks whether the code can be used multiple times for a second time. If not, then no activation code will be sent there.

There are a few functions that need to be separated

  • Developing the software

  • Application and data management

  • Replication software, monitoring software

  • License management

  • Sales and project management

We first look at the software development costs before we draw up budgets. The sales forecasts refer to the number of software packages that are sold, divided into one or more users.

In addition, there should be an investment, maintenance and staff plan to be made. Also for working in a software company guidelines should be formulated.

Organizations that sell financial products

The main sources of income are intangible property. This type of organization, such as a bank or insurance company, sells ​​financial products. Banks offer different services.

The risks can be divided into three categories:

  • Operational risks

  • Credit risks

  • Market risks

An operational risk is the risk that the bank will cause damage through fraud and error. Credit risk is the risk that customers cannot repay their loans, interest or other obligations. The market risk is the risk of losses by banks exchange transactions. Banks should separate the functions that have to do with the 'back office' and 'front-office'. The employees of the 'back office' process the transactions and keep cash and other valuables from the bank. The employees of the "front-office" have direct contact with employees.

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