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C HAPTER 1 
Accounting Information 
Systems: 
An Overview 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 1 of 43
INTRODUCTION 
• Questions to be addressed in this chapter 
include: 
– What is the meaning of system, data, and 
information? 
– What is an accounting information system (AIS)? 
– Why is the AIS an important topic to study? 
– What is the role of the AIS in the value chain? 
– How does the AIS provide information for decision 
making? 
– What are the basic strategies and strategic positions 
an organization can pursue? 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 2 of 43
SYSTEMS, DATA, AND INFORMATION 
• A system is: 
– A set of interrelated components 
– That interact 
– To achieve a goal 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 3 of 43
SYSTEMS, DATA, AND INFORMATION 
• Most systems are composed of smaller 
subsystems . . . 
• . . . And vice versa! 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 4 of 43
SYSTEMS, DATA, AND INFORMATION 
• Every organization has goals. 
– The susbsystems should be designed to 
maximize achievement of the organization’s 
goals 
– Even to the detriment of the subsystem itself 
– EXAMPLE: The production department (a 
subsystem) of a company might have to 
forego its goal of staying within its budget in 
order to meet the organization’s goal of 
delivering product on time. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 5 of 43
SYSTEMS, DATA, AND INFORMATION 
• Goal conflict occurs when the activity of a 
subsystem is not consistent with another 
subsystem or with the larger system. 
• Goal congruence occurs when the 
subsystem’s goals are in line with the 
organization’s goals. 
• The larger and more complicated a 
system, the more difficult it is to achieve 
goal congruence. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 6 of 43
SYSTEMS, DATA, AND INFORMATION 
• The systems concept encourages integration 
(i.e., minimizing the duplication of recording, 
storing, reporting and processing). 
• Data are facts that are collected, recorded, 
stored, and processed by an information system. 
• Organizations collect data about: 
– Events that occur 
– Resources that are affected by those events 
– Agents who participate in the events 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 7 of 43
SYSTEMS, DATA, AND INFORMATION 
• Information is different from data. 
• Information is data that have been 
organized and processed to provide 
meaning to a user. 
• Usually, more information and better 
information translates into better 
decisions. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 8 of 43
SYSTEMS, DATA, AND INFORMATION 
• However, when you get more information 
than you can effectively assimilate, you 
suffer from information overload. 
– Example: Final exams week! 
• When you’ve reached the overload point, 
the quality of decisions declines while the 
costs of producing the information 
increases. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 9 of 43
SYSTEMS, DATA, AND INFORMATION 
Benefits of information 
- Cost of producing information 
Value of information 
Benefits of information may include: 
• Reduction of uncertainty 
• Improved decisions 
• Improved ability to plan and schedule activities 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 10 of 43
SYSTEMS, DATA, AND INFORMATION 
Benefits of information 
- Cost of producing information 
Value of information 
Costs may include time and resources spent: 
• Collecting data 
• Processing data 
• Storing data 
• Distributing information to users 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 11 of 43
SYSTEMS, DATA, AND INFORMATION 
Benefits of information 
- Cost of producing information 
Value of information 
Costs and benefits of information are often 
difficult to quantify, but you need to try when 
you’re making decisions about whether to 
provide information. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 12 of 43
SYSTEMS, DATA, AND INFORMATION 
• Characteristics that make information 
useful: 
– Relevance 
It reduces uncertainty by helping you predict 
what will happen or confirm what already has 
happened. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 13 of 43
SYSTEMS, DATA, AND INFORMATION 
• Characteristics that make information 
useful: 
– Relevance 
– Reliability 
It’s dependable, i.e., free from error or bias 
and faithfully portrays events and activities. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 14 of 43
SYSTEMS, DATA, AND INFORMATION 
• Characteristics that make information 
useful: 
– Relevance 
– Reliability 
– Completeness 
It doesn’t leave out anything that’s important. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 15 of 43
SYSTEMS, DATA, AND INFORMATION 
• Characteristics that make information 
useful: 
– Relevance 
– Reliability 
– Completeness 
– Timeliness 
You get it in time to make your decision. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 16 of 43
SYSTEMS, DATA, AND INFORMATION 
• Characteristics that make information 
useful: 
– Relevance 
– Reliability 
– Completeness 
– Timeliness 
– Understandability 
It’s presented in a manner you can 
comprehend and use. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 17 of 43
SYSTEMS, DATA, AND INFORMATION 
• Characteristics that make information 
useful: 
– Relevance 
– Reliability 
– Completeness 
– Timeliness 
A consensus notion—the nature of the 
information is such that different people 
– Understandability 
would tend to produce the same result. 
– Verifiability 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 18 of 43
SYSTEMS, DATA, AND INFORMATION 
• Characteristics that make information 
useful: 
– Relevance 
– Reliability 
– Completeness 
– Timeliness 
– Understandability 
You can get to it when you need it and in a 
– Verifiability 
format you can use. 
– Accessibility 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 19 of 43
SYSTEMS, DATA, AND INFORMATION 
• Information is provided to both: 
– External users 
– Internal Users 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 20 of 43
SYSTEMS, DATA, AND INFORMATION 
• Information is provided to both: 
– External users 
– Internal Users 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 21 of 43
SYSTEMS, DATA, AND INFORMATION 
• External users primarily use information 
that is either: 
– MANDATORY INFORMATION—Required by 
a governmental entity, such as Form 10-K’s 
required by the SEC; or 
– ESSENTIAL INFORMATION—Required to 
conduct business with external parties, such 
as purchase orders. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 22 of 43
SYSTEMS, DATA, AND INFORMATION 
• In providing mandatory or essential 
information, the focus should be on: 
– Minimizing costs 
– Meeting regulatory requirements 
– Meeting minimum standards of reliability and 
usefulness 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 23 of 43
SYSTEMS, DATA, AND INFORMATION 
• Information is provided to both: 
– External users 
– Internal Users 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 24 of 43
SYSTEMS, DATA, AND INFORMATION 
• Internal users primarily use discretionary 
information. 
• The primary focus in producing this 
information is ensuring that benefits 
exceed costs, i.e., the information has 
positive value. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 25 of 43
WHAT IS AN AIS? 
• An AIS is a system that collects, records, 
stores, and processes data to produce 
information for decision makers. 
• It can: 
– Use advanced technology; or 
– Be a simple paper-and-pencil system; or 
– Be something in between. 
• Technology is simply a tool to create, 
maintain, or improve a system. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 26 of 43
WHAT IS AN AIS? 
• The functions of an AIS are to: 
– Collect and store data about events, 
resources, and agents. 
– Transform that data into information that 
management can use to make decisions 
about events, resources, and agents. 
– Provide adequate controls to ensure that the 
entity’s resources (including data) are: 
• Available when needed 
• Accurate and reliable 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 27 of 43
WHY STUDY ACCOUNTING 
INFORMATION SYSTEMS? 
• It’s fundamental to accounting. 
• Accounting is an information-providing 
activity, so accountants need to 
understand: 
– How the system that provides that 
information is designed, implemented 
and used. 
– How financial information is reported 
– How information is used to make 
decisions 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 28 of 43
WHY STUDY ACCOUNTING 
INFORMATION SYSTEMS? 
• It’s fundamental to accounting. 
• Other accounting courses focus on how 
the information is provided and used. 
• An AIS course places greater emphasis 
on: 
– How the data is collected and 
transformed 
– How the availability, reliability, and 
accuracy of the data is ensured 
• AIS courses are not number-crunching 
courses 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 29 of 43
WHY STUDY ACCOUNTING 
INFORMATION SYSTEMS? 
• It’s fundamental to accounting. 
• The skills are critical to career success. 
• Auditors need to evaluate the accuracy 
and reliability of information produced by 
the AIS. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 30 of 43
WHY STUDY ACCOUNTING 
INFORMATION SYSTEMS? 
• It’s fundamental to accounting. 
• The skills are critical to career success. 
• Tax accountants must understand the 
client’s AIS adequately to be confident that 
it is providing complete and accurate 
information for tax planning and 
compliance work. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 31 of 43
WHY STUDY ACCOUNTING 
INFORMATION SYSTEMS? 
• It’s fundamental to accounting. 
• The skills are critical to career success. 
• In private industry and not-for-profits, 
systems work is considered the most 
important activity performed by 
accountants. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 32 of 43
WHY STUDY ACCOUNTING 
INFORMATION SYSTEMS? 
• It’s fundamental to accounting. 
• The skills are critical to career success. 
• In management consulting, the design, 
selection, and implementation of 
accounting systems is a rapid growth area. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 33 of 43
WHY STUDY ACCOUNTING 
INFORMATION SYSTEMS? 
• It’s fundamental to accounting. 
• The skills are critical to career success. 
• The AIS course complements other 
systems courses. 
• Other systems courses focus on design and 
implementation of information systems, 
databases, expert systems, and 
telecommunications. 
• AIS courses focus on accountability and 
control. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 34 of 43
WHY STUDY ACCOUNTING 
INFORMATION SYSTEMS? 
• It’s fundamental to accounting. 
• The skills are critical to career success. 
• The AIS course complements other 
systems courses. 
• AIS topics are tested on the new CPA 
exam. 
• Makes up about 25% of the Business 
Environment & Concepts section of the CPA 
exam. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 35 of 43
WHY STUDY ACCOUNTING 
INFORMATION SYSTEMS? 
• It’s fundamental to accounting. 
• The skills are critical to career success. 
• The AIS course complements other 
systems courses. 
• AIS topics are tested on the new CPA 
exam. 
• AIS topics impact corporate strategy 
and culture. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 36 of 43
WHY STUDY ACCOUNTING 
INFORMATION SYSTEMS? 
Occupational 
Culture Strategy 
AIS 
Information 
Technology 
AIS design is 
affected by 
information 
technology, the 
organization’s 
strategy, and the 
organization’s 
culture. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 37 of 43
WHY STUDY ACCOUNTING 
INFORMATION SYSTEMS? 
Occupational 
Culture Strategy 
AIS 
Information 
Technology 
Information technology 
affects the company’s 
choice of business 
strategy. To perform 
cost-benefit analyses on 
IT changes, you need to 
understand business 
strategy. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 38 of 43
WHY STUDY ACCOUNTING 
INFORMATION SYSTEMS? 
Occupational 
Culture Strategy 
AIS 
Information 
Technology 
While culture affects 
the design of the AIS, 
it’s also true that the 
AIS affects culture by 
altering the 
dispersion and 
availability of 
information. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 39 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• The objective of most organizations is to 
provide value to their customers. 
• What does it mean to deliver value? 
• Let’s peek in on a conversation at Joe’s 
pharmacy . . . 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 40 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
Well, Mr. Pharmaceutical 
Salesman, your proposal looks 
good, but your prices are about 
5% higher than your competitors. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 41 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
That’s true, but we’re 
comfortable with that 
because of the value-added 
that we bring to 
this arrangement. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 42 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
What is that “value-added,” 
and how do you convert it 
into dollars? 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 43 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
Blah—blah—blah– 
customer service– 
blah—blah--blah 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 44 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• While “adding value” is a commonly used 
buzzword, in its genuine sense, it means making 
the value of the finished component greater than 
the sum of its parts. 
• It may mean: 
– Making it faster 
– Making it more reliable 
– Providing better service or advice 
– Providing something in limited supply (like O-negative 
blood or rare gems) 
– Providing enhanced features 
– Customizing it 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 45 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• Value is provided by performing a series 
of activities referred to as the value chain. 
These include: 
– Primary activities 
– Support activities 
• These activities are sometimes referred to 
as “line” and “staff” activities respectively. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 46 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• Value is provided by performing a series 
of activities referred to as the value chain. 
These include: 
– Primary activities 
– Support activities 
• These activities are sometimes referred to 
as “line” and “staff” activities respectively. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 47 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• Primary activities include: 
– Inbound logistics 
Receiving, storing, and distributing the 
materials that are inputs to the 
organization’s product or service. 
For a pharmaceutical company, this activity 
might involve handling incoming chemicals 
and elements that will be used to make their 
drugs. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 48 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• Primary activities include: 
– Inbound logistics 
– Operations 
Transforming those inputs into products or 
services. 
For the pharmaceutical company, this step 
involves combining the raw chemicals and 
elements with the work of people and equipment to 
produce the finished drug product that will be sold 
to customers. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 49 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• Primary activities include: 
– Inbound logistics 
– Operations 
– Outbound logistics 
Distributing products or services to customers. 
For the pharmaceutical company, this step involves 
packaging and shipping the goods to drug stores, 
doctors, and hospitals. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 50 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• Primary activities include: 
– Inbound logistics 
– Operations 
– Outbound logistics 
– Marketing and sales 
Helping customers to 
buy the organization’s 
products or services. 
A pharmacy rep may 
visit with drug stores, 
doctors, etc. to inform 
them about their 
products and take 
orders. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 51 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• Primary activities include: 
– Inbound logistics 
– Operations 
– Outbound logistics 
– Marketing and sales 
– Service 
Post-sale support provided to 
customers such as repair and 
maintenance function. 
A pharmaceutical firm will 
typically not be repairing it’s 
product (though the product may 
be periodically reformulated). 
The pharmaceutical company is 
more likely to be providing 
advisory services to pharmacists, 
etc. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 52 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• Value is provided by performing a series 
of activities referred to as the value chain. 
These include: 
– Primary activities 
– Support activities 
• These activities are sometimes referred to 
as “line” and “staff” activities respectively. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 53 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• Support activities include: 
– Firm infrastructure 
Accountants, lawyers, and administration. 
Includes the company’s accounting 
information system. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 54 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• Support activities include: 
– Firm infrastructure 
– Human resources 
Involves recruiting and hiring new 
employees, training employees, paying 
employees, and handling employee benefits. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 55 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• Support activities include: 
– Firm infrastructure 
– Human resources 
– Technology 
Activities to improve the products or services 
(e.g., R&D, website development). 
For the pharmaceutical company, these activities 
would include research and development to 
create new drugs and modify existing ones. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 56 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• Support activities include: 
– Firm infrastructure 
– Human resources 
– Technology 
– Purchasing 
Buying the resources (e.g., 
materials, inventory, fixed 
assets) needed to carry out the 
entity’s primary activities. 
In the pharmaceutical company, 
the purchasing folks are trying 
to get the best combination of 
cost and quality in buying 
chemicals, supplies, and other 
assets the company needs to 
run its operations. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 57 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• Information technology can significantly 
impact the efficiency and effectiveness 
with which the preceding activities are 
carried out. 
• An organization’s value chain can be 
connected with the value chains of its 
customers, suppliers, and distributors. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 58 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
For example, the inbound logistics of 
Pharmaceuticals, Inc., links to the 
outbound logistics of its suppliers. 
Pharmaceuticals, Inc. 
Inbound Logistics 
Operations 
Outbound Logistics 
Marketing & Sales 
Service 
Smith Supply Co. 
Inbound Logistics 
Operations 
Outbound Logistics 
Marketing & Sales 
Service 
Customer Pharmacy 
Inbound Logistics 
Operations 
Outbound Logistics 
Marketing & Sales 
Service 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 59 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
And the outbound logistics of 
Pharmaceuticals, Inc., links to the inbound 
logistics of its customers. 
Pharmaceuticals, Inc. 
Inbound Logistics 
Operations 
Outbound Logistics 
Marketing & Sales 
Service 
Smith Supply Co. 
Inbound Logistics 
Operations 
Outbound Logistics 
Marketing & Sales 
Service 
Customer Pharmacy 
Inbound Logistics 
Operations 
Outbound Logistics 
Marketing & Sales 
Service 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 60 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
The linking of these separate value chains 
creates a larger system known as a supply 
chain. 
Pharmaceuticals, Inc. 
Inbound Logistics 
Operations 
Outbound Logistics 
Marketing & Sales 
Service 
Smith Supply Co. 
Inbound Logistics 
Operations 
Outbound Logistics 
Marketing & Sales 
Service 
Customer Pharmacy 
Inbound Logistics 
Operations 
Outbound Logistics 
Marketing & Sales 
Service 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 61 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
The linking of these separate value chains 
creates a larger system known as a supply 
chain. 
Pharmaceuticals, Inc. 
Inbound Logistics 
Operations 
Outbound Logistics 
Marketing & Sales 
Service 
Smith Supply Co. 
Inbound Logistics 
Operations 
Outbound Logistics 
Marketing & Sales 
Service 
Customer Pharmacy 
Inbound Logistics 
Operations 
Outbound Logistics 
Marketing & Sales 
Service 
Information 
technology can 
facilitate synergistic 
linkages that improve 
the performance of 
each company’s value 
chain. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 62 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• There is variation in the degree of 
structure used to make decisions: 
– Structured decisions 
• Repetitive and routine 
• Can be delegated to lower-level employees 
• EXAMPLE: Deciding whether to write an 
auto insurance policy for a customer with a 
clean driving history. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 63 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• There is variation in the degree of 
structure used to make decisions: 
– Structured decisions 
– Semistructured decisions 
• Incomplete rules 
• Require subjective assessments 
• EXAMPLE: Deciding whether to sell auto 
insurance to a customer with a tainted 
driving history. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 64 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• There is variation in the degree of 
structure used to make decisions: 
– Structured decisions 
– Semistructured decisions 
– Structured decisions 
• Non-recurring and non-routine 
• Require a great deal of subjective 
assessment 
• EXAMPLE: Deciding whether to begin 
selling a new type of insurance policy 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 65 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• There is also variation in the scope of a 
decision’s effect: 
– Occupational control decisions 
• Relate to performance of specific tasks 
• Often of a day-to-day nature 
• EXAMPLE: Deciding whether to order 
inventory 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 66 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• There is also variation in the scope of a 
decision’s effect: 
– Occupational control decisions 
– Management control decisions 
• Relate to utilizing resources to accomplish 
organizational objectives 
• EXAMPLE: Budgeting 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 67 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• There is also variation in the scope of a 
decision’s effect: 
– Occupational control decisions 
– Management control decisions 
– Strategic planning decisions 
• The “what do we want to be when we grow 
up” types of questions 
• Involves establishing 
– Organizational objectives 
– Policies to achieve those objectives 
• EXAMPLE: Deciding whether to diversify the 
company into other product lines 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 68 of 43
ROLE OF THE AIS IN THE VALUE CHAIN 
• In general, the higher a manager is in the 
organization, the more likely he/she is to 
be engaging in: 
– Less structured decisions 
– Broader scope (i.e., strategic planning) 
decisions 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 69 of 43
THE AIS AND CORPORATE STRATEGY 
• Corporations have: 
– Unlimited opportunities to invest in technology 
– Limited resources to invest in technology 
• Consequently, they must identify the 
improvements likely to yield the highest 
return. 
• This decision requires an understanding of 
the entity’s overall business strategy. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 70 of 43
THE AIS AND CORPORATE STRATEGY 
• Michael Porter suggests that there are two 
basic business strategies companies can 
follow: 
– Product-differentiation strategy 
– Low-cost strategy 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 71 of 43
THE AIS AND CORPORATE STRATEGY 
• Michael Porter suggests that there are two 
basic business strategies companies can 
follow: 
– Product-differentiation strategy 
– Low-cost strategy 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 72 of 43
THE AIS AND CORPORATE STRATEGY 
• A product differentiation strategy involves 
setting your product apart from those of 
your competitors, i.e., building a “better” 
mousetrap by offering one that’s faster, 
has enhanced features, etc. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 73 of 43
THE AIS AND CORPORATE STRATEGY 
• Michael Porter suggests that there are two 
basic business strategies companies can 
follow: 
– Product-differentiation strategy 
– Low-cost strategy 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 74 of 43
THE AIS AND CORPORATE STRATEGY 
• A low-cost strategy involves offering a 
cheaper mousetrap than your competitors. 
The low cost is made possible by 
operating more efficiently. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 75 of 43
THE AIS AND CORPORATE STRATEGY 
• Sometimes a company can do both, but 
they normally have to choose. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 76 of 43
THE AIS AND CORPORATE STRATEGY 
• Porter also argues that companies must 
choose a strategic position among three 
choices: 
– Variety-based strategic position 
• Offer a subset of the industry’s 
products or services. 
• EXAMPLE: An insurance company 
that only offers life insurance as 
opposed to life, health, property-casualty, 
etc. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 77 of 43
THE AIS AND CORPORATE STRATEGY 
• Porter also argues that companies must 
choose a strategic position among three 
choices: 
– Variety-based strategic position 
– Needs-based strategic position 
• Serve most or all of the needs of a particular 
group of customers in a target market. 
• EXAMPLE: The original Farm Bureau-based 
insurance companies provided a portfolio of 
insurance and financial services tailored to the 
specific needs of farmers. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 78 of 43
THE AIS AND CORPORATE STRATEGY 
• Porter also argues that companies must 
choose a strategic position among three 
choices: 
– Variety-based strategic position 
– Needs-based strategic position 
– Access-based strategic position 
• Serve a subset of customers who differ from 
others in terms of factors such as geographic 
location or size.. 
• EXAMPLE: Satellite Internet services are 
intended primarily for customers in rural areas 
who cannot get DSL or cable services. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 79 of 43
THE AIS AND CORPORATE STRATEGY 
• Porter also argues that companies must 
choose a strategic position among three 
choices: 
– Variety-based strategic position 
– Needs-based strategic position 
– Access-based strategic position 
• These strategic positions are not 
mutually exclusive and can overlap. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 80 of 43
THE AIS AND CORPORATE STRATEGY 
• Choosing a strategic position is important 
because it helps a company focus its efforts as 
opposed to trying to be everything to everybody. 
– EXAMPLE: A radio station that tries to play all types 
of music will probably fail. 
• It’s critical to design the organization’s activities 
so they reinforce one another in achieving the 
selected strategic position. The result is 
synergy, which is difficult for competitors to 
imitate. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 81 of 43
THE AIS AND CORPORATE STRATEGY 
• The growth of the Internet has profoundly 
affected the way value chain activities are 
performed: 
– Inbound and outbound logistics can be streamlined 
for products that can be digitized, like books and 
music. 
– The Internet allows companies to cut costs, which 
impacts strategy and strategic position. 
– Because the Internet is available to everyone, intense 
price competition can result. The outcome may be 
that many companies shift from low-cost to product-differentiation 
strategies. 
– The Internet may impede access-based strategic 
positions. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 82 of 43
THE AIS AND CORPORATE STRATEGY 
• The AIS should help a company adopt 
and maintain its strategic position. 
– Requires that data be collected about each 
activity. 
– Requires the collection and integration of both 
financial and nonfinancial data. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 83 of 43
THE AIS AND CORPORATE STRATEGY 
• The authors believe: 
– Accounting and information systems should 
be closely integrated. 
– The AIS should be the primary information 
system to provide users with information they 
need to perform their jobs. 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 84 of 43
SUMMARY 
• What we’ve learned so far: 
– The meaning of system, data, and 
information 
– What an AIS is 
• Why it’s an important topic to stody 
• What its role is in the value chain 
• How it provides information for decision making 
– What are the basic strategies and strategic 
positions an organization can pursue 
• How these interact with the AIS 
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 85 of 43

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Accounting information system

  • 1. C HAPTER 1 Accounting Information Systems: An Overview © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 1 of 43
  • 2. INTRODUCTION • Questions to be addressed in this chapter include: – What is the meaning of system, data, and information? – What is an accounting information system (AIS)? – Why is the AIS an important topic to study? – What is the role of the AIS in the value chain? – How does the AIS provide information for decision making? – What are the basic strategies and strategic positions an organization can pursue? © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 2 of 43
  • 3. SYSTEMS, DATA, AND INFORMATION • A system is: – A set of interrelated components – That interact – To achieve a goal © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 3 of 43
  • 4. SYSTEMS, DATA, AND INFORMATION • Most systems are composed of smaller subsystems . . . • . . . And vice versa! © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 4 of 43
  • 5. SYSTEMS, DATA, AND INFORMATION • Every organization has goals. – The susbsystems should be designed to maximize achievement of the organization’s goals – Even to the detriment of the subsystem itself – EXAMPLE: The production department (a subsystem) of a company might have to forego its goal of staying within its budget in order to meet the organization’s goal of delivering product on time. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 5 of 43
  • 6. SYSTEMS, DATA, AND INFORMATION • Goal conflict occurs when the activity of a subsystem is not consistent with another subsystem or with the larger system. • Goal congruence occurs when the subsystem’s goals are in line with the organization’s goals. • The larger and more complicated a system, the more difficult it is to achieve goal congruence. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 6 of 43
  • 7. SYSTEMS, DATA, AND INFORMATION • The systems concept encourages integration (i.e., minimizing the duplication of recording, storing, reporting and processing). • Data are facts that are collected, recorded, stored, and processed by an information system. • Organizations collect data about: – Events that occur – Resources that are affected by those events – Agents who participate in the events © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 7 of 43
  • 8. SYSTEMS, DATA, AND INFORMATION • Information is different from data. • Information is data that have been organized and processed to provide meaning to a user. • Usually, more information and better information translates into better decisions. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 8 of 43
  • 9. SYSTEMS, DATA, AND INFORMATION • However, when you get more information than you can effectively assimilate, you suffer from information overload. – Example: Final exams week! • When you’ve reached the overload point, the quality of decisions declines while the costs of producing the information increases. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 9 of 43
  • 10. SYSTEMS, DATA, AND INFORMATION Benefits of information - Cost of producing information Value of information Benefits of information may include: • Reduction of uncertainty • Improved decisions • Improved ability to plan and schedule activities © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 10 of 43
  • 11. SYSTEMS, DATA, AND INFORMATION Benefits of information - Cost of producing information Value of information Costs may include time and resources spent: • Collecting data • Processing data • Storing data • Distributing information to users © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 11 of 43
  • 12. SYSTEMS, DATA, AND INFORMATION Benefits of information - Cost of producing information Value of information Costs and benefits of information are often difficult to quantify, but you need to try when you’re making decisions about whether to provide information. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 12 of 43
  • 13. SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance It reduces uncertainty by helping you predict what will happen or confirm what already has happened. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 13 of 43
  • 14. SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance – Reliability It’s dependable, i.e., free from error or bias and faithfully portrays events and activities. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 14 of 43
  • 15. SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance – Reliability – Completeness It doesn’t leave out anything that’s important. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 15 of 43
  • 16. SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance – Reliability – Completeness – Timeliness You get it in time to make your decision. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 16 of 43
  • 17. SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance – Reliability – Completeness – Timeliness – Understandability It’s presented in a manner you can comprehend and use. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 17 of 43
  • 18. SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance – Reliability – Completeness – Timeliness A consensus notion—the nature of the information is such that different people – Understandability would tend to produce the same result. – Verifiability © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 18 of 43
  • 19. SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance – Reliability – Completeness – Timeliness – Understandability You can get to it when you need it and in a – Verifiability format you can use. – Accessibility © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 19 of 43
  • 20. SYSTEMS, DATA, AND INFORMATION • Information is provided to both: – External users – Internal Users © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 20 of 43
  • 21. SYSTEMS, DATA, AND INFORMATION • Information is provided to both: – External users – Internal Users © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 21 of 43
  • 22. SYSTEMS, DATA, AND INFORMATION • External users primarily use information that is either: – MANDATORY INFORMATION—Required by a governmental entity, such as Form 10-K’s required by the SEC; or – ESSENTIAL INFORMATION—Required to conduct business with external parties, such as purchase orders. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 22 of 43
  • 23. SYSTEMS, DATA, AND INFORMATION • In providing mandatory or essential information, the focus should be on: – Minimizing costs – Meeting regulatory requirements – Meeting minimum standards of reliability and usefulness © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 23 of 43
  • 24. SYSTEMS, DATA, AND INFORMATION • Information is provided to both: – External users – Internal Users © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 24 of 43
  • 25. SYSTEMS, DATA, AND INFORMATION • Internal users primarily use discretionary information. • The primary focus in producing this information is ensuring that benefits exceed costs, i.e., the information has positive value. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 25 of 43
  • 26. WHAT IS AN AIS? • An AIS is a system that collects, records, stores, and processes data to produce information for decision makers. • It can: – Use advanced technology; or – Be a simple paper-and-pencil system; or – Be something in between. • Technology is simply a tool to create, maintain, or improve a system. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 26 of 43
  • 27. WHAT IS AN AIS? • The functions of an AIS are to: – Collect and store data about events, resources, and agents. – Transform that data into information that management can use to make decisions about events, resources, and agents. – Provide adequate controls to ensure that the entity’s resources (including data) are: • Available when needed • Accurate and reliable © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 27 of 43
  • 28. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • Accounting is an information-providing activity, so accountants need to understand: – How the system that provides that information is designed, implemented and used. – How financial information is reported – How information is used to make decisions © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 28 of 43
  • 29. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • Other accounting courses focus on how the information is provided and used. • An AIS course places greater emphasis on: – How the data is collected and transformed – How the availability, reliability, and accuracy of the data is ensured • AIS courses are not number-crunching courses © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 29 of 43
  • 30. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. • Auditors need to evaluate the accuracy and reliability of information produced by the AIS. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 30 of 43
  • 31. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. • Tax accountants must understand the client’s AIS adequately to be confident that it is providing complete and accurate information for tax planning and compliance work. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 31 of 43
  • 32. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. • In private industry and not-for-profits, systems work is considered the most important activity performed by accountants. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 32 of 43
  • 33. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. • In management consulting, the design, selection, and implementation of accounting systems is a rapid growth area. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 33 of 43
  • 34. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. • The AIS course complements other systems courses. • Other systems courses focus on design and implementation of information systems, databases, expert systems, and telecommunications. • AIS courses focus on accountability and control. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 34 of 43
  • 35. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. • The AIS course complements other systems courses. • AIS topics are tested on the new CPA exam. • Makes up about 25% of the Business Environment & Concepts section of the CPA exam. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 35 of 43
  • 36. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. • The AIS course complements other systems courses. • AIS topics are tested on the new CPA exam. • AIS topics impact corporate strategy and culture. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 36 of 43
  • 37. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? Occupational Culture Strategy AIS Information Technology AIS design is affected by information technology, the organization’s strategy, and the organization’s culture. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 37 of 43
  • 38. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? Occupational Culture Strategy AIS Information Technology Information technology affects the company’s choice of business strategy. To perform cost-benefit analyses on IT changes, you need to understand business strategy. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 38 of 43
  • 39. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? Occupational Culture Strategy AIS Information Technology While culture affects the design of the AIS, it’s also true that the AIS affects culture by altering the dispersion and availability of information. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 39 of 43
  • 40. ROLE OF THE AIS IN THE VALUE CHAIN • The objective of most organizations is to provide value to their customers. • What does it mean to deliver value? • Let’s peek in on a conversation at Joe’s pharmacy . . . © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 40 of 43
  • 41. ROLE OF THE AIS IN THE VALUE CHAIN Well, Mr. Pharmaceutical Salesman, your proposal looks good, but your prices are about 5% higher than your competitors. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 41 of 43
  • 42. ROLE OF THE AIS IN THE VALUE CHAIN That’s true, but we’re comfortable with that because of the value-added that we bring to this arrangement. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 42 of 43
  • 43. ROLE OF THE AIS IN THE VALUE CHAIN What is that “value-added,” and how do you convert it into dollars? © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 43 of 43
  • 44. ROLE OF THE AIS IN THE VALUE CHAIN Blah—blah—blah– customer service– blah—blah--blah © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 44 of 43
  • 45. ROLE OF THE AIS IN THE VALUE CHAIN • While “adding value” is a commonly used buzzword, in its genuine sense, it means making the value of the finished component greater than the sum of its parts. • It may mean: – Making it faster – Making it more reliable – Providing better service or advice – Providing something in limited supply (like O-negative blood or rare gems) – Providing enhanced features – Customizing it © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 45 of 43
  • 46. ROLE OF THE AIS IN THE VALUE CHAIN • Value is provided by performing a series of activities referred to as the value chain. These include: – Primary activities – Support activities • These activities are sometimes referred to as “line” and “staff” activities respectively. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 46 of 43
  • 47. ROLE OF THE AIS IN THE VALUE CHAIN • Value is provided by performing a series of activities referred to as the value chain. These include: – Primary activities – Support activities • These activities are sometimes referred to as “line” and “staff” activities respectively. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 47 of 43
  • 48. ROLE OF THE AIS IN THE VALUE CHAIN • Primary activities include: – Inbound logistics Receiving, storing, and distributing the materials that are inputs to the organization’s product or service. For a pharmaceutical company, this activity might involve handling incoming chemicals and elements that will be used to make their drugs. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 48 of 43
  • 49. ROLE OF THE AIS IN THE VALUE CHAIN • Primary activities include: – Inbound logistics – Operations Transforming those inputs into products or services. For the pharmaceutical company, this step involves combining the raw chemicals and elements with the work of people and equipment to produce the finished drug product that will be sold to customers. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 49 of 43
  • 50. ROLE OF THE AIS IN THE VALUE CHAIN • Primary activities include: – Inbound logistics – Operations – Outbound logistics Distributing products or services to customers. For the pharmaceutical company, this step involves packaging and shipping the goods to drug stores, doctors, and hospitals. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 50 of 43
  • 51. ROLE OF THE AIS IN THE VALUE CHAIN • Primary activities include: – Inbound logistics – Operations – Outbound logistics – Marketing and sales Helping customers to buy the organization’s products or services. A pharmacy rep may visit with drug stores, doctors, etc. to inform them about their products and take orders. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 51 of 43
  • 52. ROLE OF THE AIS IN THE VALUE CHAIN • Primary activities include: – Inbound logistics – Operations – Outbound logistics – Marketing and sales – Service Post-sale support provided to customers such as repair and maintenance function. A pharmaceutical firm will typically not be repairing it’s product (though the product may be periodically reformulated). The pharmaceutical company is more likely to be providing advisory services to pharmacists, etc. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 52 of 43
  • 53. ROLE OF THE AIS IN THE VALUE CHAIN • Value is provided by performing a series of activities referred to as the value chain. These include: – Primary activities – Support activities • These activities are sometimes referred to as “line” and “staff” activities respectively. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 53 of 43
  • 54. ROLE OF THE AIS IN THE VALUE CHAIN • Support activities include: – Firm infrastructure Accountants, lawyers, and administration. Includes the company’s accounting information system. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 54 of 43
  • 55. ROLE OF THE AIS IN THE VALUE CHAIN • Support activities include: – Firm infrastructure – Human resources Involves recruiting and hiring new employees, training employees, paying employees, and handling employee benefits. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 55 of 43
  • 56. ROLE OF THE AIS IN THE VALUE CHAIN • Support activities include: – Firm infrastructure – Human resources – Technology Activities to improve the products or services (e.g., R&D, website development). For the pharmaceutical company, these activities would include research and development to create new drugs and modify existing ones. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 56 of 43
  • 57. ROLE OF THE AIS IN THE VALUE CHAIN • Support activities include: – Firm infrastructure – Human resources – Technology – Purchasing Buying the resources (e.g., materials, inventory, fixed assets) needed to carry out the entity’s primary activities. In the pharmaceutical company, the purchasing folks are trying to get the best combination of cost and quality in buying chemicals, supplies, and other assets the company needs to run its operations. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 57 of 43
  • 58. ROLE OF THE AIS IN THE VALUE CHAIN • Information technology can significantly impact the efficiency and effectiveness with which the preceding activities are carried out. • An organization’s value chain can be connected with the value chains of its customers, suppliers, and distributors. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 58 of 43
  • 59. ROLE OF THE AIS IN THE VALUE CHAIN For example, the inbound logistics of Pharmaceuticals, Inc., links to the outbound logistics of its suppliers. Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 59 of 43
  • 60. ROLE OF THE AIS IN THE VALUE CHAIN And the outbound logistics of Pharmaceuticals, Inc., links to the inbound logistics of its customers. Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 60 of 43
  • 61. ROLE OF THE AIS IN THE VALUE CHAIN The linking of these separate value chains creates a larger system known as a supply chain. Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 61 of 43
  • 62. ROLE OF THE AIS IN THE VALUE CHAIN The linking of these separate value chains creates a larger system known as a supply chain. Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Information technology can facilitate synergistic linkages that improve the performance of each company’s value chain. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 62 of 43
  • 63. ROLE OF THE AIS IN THE VALUE CHAIN • There is variation in the degree of structure used to make decisions: – Structured decisions • Repetitive and routine • Can be delegated to lower-level employees • EXAMPLE: Deciding whether to write an auto insurance policy for a customer with a clean driving history. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 63 of 43
  • 64. ROLE OF THE AIS IN THE VALUE CHAIN • There is variation in the degree of structure used to make decisions: – Structured decisions – Semistructured decisions • Incomplete rules • Require subjective assessments • EXAMPLE: Deciding whether to sell auto insurance to a customer with a tainted driving history. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 64 of 43
  • 65. ROLE OF THE AIS IN THE VALUE CHAIN • There is variation in the degree of structure used to make decisions: – Structured decisions – Semistructured decisions – Structured decisions • Non-recurring and non-routine • Require a great deal of subjective assessment • EXAMPLE: Deciding whether to begin selling a new type of insurance policy © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 65 of 43
  • 66. ROLE OF THE AIS IN THE VALUE CHAIN • There is also variation in the scope of a decision’s effect: – Occupational control decisions • Relate to performance of specific tasks • Often of a day-to-day nature • EXAMPLE: Deciding whether to order inventory © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 66 of 43
  • 67. ROLE OF THE AIS IN THE VALUE CHAIN • There is also variation in the scope of a decision’s effect: – Occupational control decisions – Management control decisions • Relate to utilizing resources to accomplish organizational objectives • EXAMPLE: Budgeting © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 67 of 43
  • 68. ROLE OF THE AIS IN THE VALUE CHAIN • There is also variation in the scope of a decision’s effect: – Occupational control decisions – Management control decisions – Strategic planning decisions • The “what do we want to be when we grow up” types of questions • Involves establishing – Organizational objectives – Policies to achieve those objectives • EXAMPLE: Deciding whether to diversify the company into other product lines © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 68 of 43
  • 69. ROLE OF THE AIS IN THE VALUE CHAIN • In general, the higher a manager is in the organization, the more likely he/she is to be engaging in: – Less structured decisions – Broader scope (i.e., strategic planning) decisions © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 69 of 43
  • 70. THE AIS AND CORPORATE STRATEGY • Corporations have: – Unlimited opportunities to invest in technology – Limited resources to invest in technology • Consequently, they must identify the improvements likely to yield the highest return. • This decision requires an understanding of the entity’s overall business strategy. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 70 of 43
  • 71. THE AIS AND CORPORATE STRATEGY • Michael Porter suggests that there are two basic business strategies companies can follow: – Product-differentiation strategy – Low-cost strategy © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 71 of 43
  • 72. THE AIS AND CORPORATE STRATEGY • Michael Porter suggests that there are two basic business strategies companies can follow: – Product-differentiation strategy – Low-cost strategy © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 72 of 43
  • 73. THE AIS AND CORPORATE STRATEGY • A product differentiation strategy involves setting your product apart from those of your competitors, i.e., building a “better” mousetrap by offering one that’s faster, has enhanced features, etc. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 73 of 43
  • 74. THE AIS AND CORPORATE STRATEGY • Michael Porter suggests that there are two basic business strategies companies can follow: – Product-differentiation strategy – Low-cost strategy © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 74 of 43
  • 75. THE AIS AND CORPORATE STRATEGY • A low-cost strategy involves offering a cheaper mousetrap than your competitors. The low cost is made possible by operating more efficiently. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 75 of 43
  • 76. THE AIS AND CORPORATE STRATEGY • Sometimes a company can do both, but they normally have to choose. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 76 of 43
  • 77. THE AIS AND CORPORATE STRATEGY • Porter also argues that companies must choose a strategic position among three choices: – Variety-based strategic position • Offer a subset of the industry’s products or services. • EXAMPLE: An insurance company that only offers life insurance as opposed to life, health, property-casualty, etc. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 77 of 43
  • 78. THE AIS AND CORPORATE STRATEGY • Porter also argues that companies must choose a strategic position among three choices: – Variety-based strategic position – Needs-based strategic position • Serve most or all of the needs of a particular group of customers in a target market. • EXAMPLE: The original Farm Bureau-based insurance companies provided a portfolio of insurance and financial services tailored to the specific needs of farmers. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 78 of 43
  • 79. THE AIS AND CORPORATE STRATEGY • Porter also argues that companies must choose a strategic position among three choices: – Variety-based strategic position – Needs-based strategic position – Access-based strategic position • Serve a subset of customers who differ from others in terms of factors such as geographic location or size.. • EXAMPLE: Satellite Internet services are intended primarily for customers in rural areas who cannot get DSL or cable services. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 79 of 43
  • 80. THE AIS AND CORPORATE STRATEGY • Porter also argues that companies must choose a strategic position among three choices: – Variety-based strategic position – Needs-based strategic position – Access-based strategic position • These strategic positions are not mutually exclusive and can overlap. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 80 of 43
  • 81. THE AIS AND CORPORATE STRATEGY • Choosing a strategic position is important because it helps a company focus its efforts as opposed to trying to be everything to everybody. – EXAMPLE: A radio station that tries to play all types of music will probably fail. • It’s critical to design the organization’s activities so they reinforce one another in achieving the selected strategic position. The result is synergy, which is difficult for competitors to imitate. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 81 of 43
  • 82. THE AIS AND CORPORATE STRATEGY • The growth of the Internet has profoundly affected the way value chain activities are performed: – Inbound and outbound logistics can be streamlined for products that can be digitized, like books and music. – The Internet allows companies to cut costs, which impacts strategy and strategic position. – Because the Internet is available to everyone, intense price competition can result. The outcome may be that many companies shift from low-cost to product-differentiation strategies. – The Internet may impede access-based strategic positions. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 82 of 43
  • 83. THE AIS AND CORPORATE STRATEGY • The AIS should help a company adopt and maintain its strategic position. – Requires that data be collected about each activity. – Requires the collection and integration of both financial and nonfinancial data. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 83 of 43
  • 84. THE AIS AND CORPORATE STRATEGY • The authors believe: – Accounting and information systems should be closely integrated. – The AIS should be the primary information system to provide users with information they need to perform their jobs. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 84 of 43
  • 85. SUMMARY • What we’ve learned so far: – The meaning of system, data, and information – What an AIS is • Why it’s an important topic to stody • What its role is in the value chain • How it provides information for decision making – What are the basic strategies and strategic positions an organization can pursue • How these interact with the AIS © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 85 of 43