Concept explainers
(Prepared by Will Richens and Michael Catchpole, Lehigh University)
CUSTOM FABRICATIONS Inc., is a bicycle manufacturing firm founded in 2000 that currently employs 126 people. The company produces custom bicycles in its factory located near Los Angeles, California. Each bicycle is tailored to a rider based on a number of different measurements, including height, weight, inseam, and arm length. These measurements are taken at 30 professional bicycle shops around Southern California, which are certified to size CUSTOM FABRICATIONS cycles. By accepting orders only through licensed dealers, CUSTOM FABRICATIONS ensures that each bike matches its rider precisely. CUSTOM FABRICATIONS’s custom bikes are considered extremely high quality, and the company takes pride in using only the best components sourced from around the world. Accordingly, CUSTOM FABRICATIONS purchases from a cast of hundreds of suppliers, chosen for its commitment to quality and reliability.
Demand for CUSTOM FABRICATIONS’s cycles has grown exponentially in recent years. The surge in demand was somewhat unexpected and the company’s factory has been operating at capacity for over a year. As a result, current orders face a production backlog of approximately five to six weeks. The company’s operations have been further hampered by severe inefficiencies and control weaknesses attributed to its legacy accounting system. Your firm has been hired as an outside consultant to suggest improvements in the company’s accounting procedures. The following paragraphs describe the company’s revenue cycle.
Revenue Cycle
SALES ORDER SYSTEM. The sales order process begins when a licensed CUSTOM FABRICATIONS dealer faxes a completed customer order and measurement form to the sales department. When the fax is received, a sales representative calls the dealer to confirm the order details and generates a quote based on the complexity of the order. The sales clerk then enters the measurements and quoted price into his PC terminal, which automatically generates a sales order form. The clerk prints three hard copies of the sales order form. The first copy is sent to the billing department and the second is sent to the factory. The clerk files the third copy, along with the customer order in the sales department’s open customer order file.
The billing department clerk uses the first copy of the sales order to compute the final sales price and manually prepares two copies of the customer invoice. One copy of this invoice is sent to the customer, while the second is used by the billing clerk to update the sales order journal and
When the second copy of the sales order is received in the factory, it is forwarded to the production planning clerk for scheduling. The clerk sets a production date and manually prepares one copy of the materials requisition form and two copies of the production order. The first copy of the production order is sent to the sales department and filed in the open customer order file to inform the customer of the intended date of production. The second copy of the production order form and the materials-requisition form are temporarily filed in the factory.
At the beginning of each day, the factory production line manager accesses the temporary production file and pulls the production orders to be completed for the day. He then forwards the materials-requisition form to the warehouse to obtain the raw material and components needed for production. Once the materials have been forwarded to the production department, the warehouse clerk updates the digital inventory subsidiary account from his terminal. At the end of every day, the clerk prints a hardcopy journal voucher and sends it to the general ledger department.
When production of a cycle is completed, the bike and the second copy of the production order form are sent to the warehouse to await shipping. The warehouse clerk receives a bike and its accompanying production order, and he or she packs the bike for shipping. The clerk then manually prepares a stock release document from the production order document. Finally, the warehouse clerk forwards the packaged bike, along with the stock release document, to the shipping department.
On the date the bike is due to be shipped, the shipping clerk uses the stock release document to prepare three copies of the bill of lading and one copy of the packing slip from the department PC. From this PC, he updates the company’s shipping log. Two copies of the bill of lading and the packing slip are forwarded along with the packaged bike to the carrier. The third copy of the bill of lading is sent the sales department to close the open customer order file.
At the close of business each day when the general ledger department clerk receives journal vouchers and the AR summary, he updates the GL accounts from the PC in the department. The AR summary and vouchers are filed in the department.
CASH RECEIPTS SYSTEM. Customer payments are processed in CUSTOM FABRICATIONS’s mail room along with all other mail received by the organization. A mail room clerk selects and opens customer remittances envelopes and reviews the checks and remittance advice. Next, the clerk manually prepares three copies of a remittance list.
The first copy of the remittance list is sent, along with the checks, to the cash receipts department. Once the clerk there receives the remittance list, he or she reconciles the checks and remittance list and updates the cash receipts journal from his PC. He then prints two copies of the deposit slip, which are sent along with the checks to the bank.
The second copy of the remittance list, along with the remittance advice, is sent to the billing department. The clerk reconciles these documents and updates the accounts receivable subsidiary account to reflect the payment received.
The third remittance list is sent to the general ledger department, which uses it to update the accounts receivable control and cash accounts.
Required
- a. Create a data flow diagram of the current system.
- b. Create a system flowchart of the existing system.
- c. Analyze the physical internal control weaknesses in the system.
- d. Describe the risks associated with these control weaknesses
- e. (Optional) Prepare a system flowchart of a redesigned computer-based system that resolves the control weaknesses that you identified. Explain your solution.
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Accounting Information Systems
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