Gather and record operating and cost data

Costing Systems

Costing is the proper allocation of expenditure and involves the collection of costs for every order, job, process, service or unit. These systems are made up of principles and rules that are commonly used to determine the cost of manufacturing goods or providing services. There are various costing systems used by organisations.

Absorption Method

Absorption costing is a traditional method of costing where all manufacturing costs (direct materials, direct labour, and overhead) are charged to the inventory and turned into assets. However, selling and administrative expenses are charged to expenses. Manufacturing costs are classified as expenses until the inventory is sold. 

The absorption method is typically used for the internal reporting of the business.

Income statement for Old Oaks Furniture

Inventory	Expenses
direct materials direct labour overhead	selling expenses administrative expenses

Absorption Method Example:

Simply Furnished produced 35 pieces of kitchen cabinets in October. Suppose that the following is the cost structure for the kitchen cabinets:

Direct materials	$3,005
Add: Direct labour	$2,500
Add: Variable overhead	$2,000
Add: Fixed overhead	$3,000
Total Production Cost	$10,505

Using the absorption costing method, the product cost per unit will be calculated as:

Production cost per unit = Total production cost / Total units produced

$10,505 / 35 = $300

The company sold 30 pieces at the end of the month, with each unit sold at $375. Using the production cost per unit, an absorption income statement can be produced. This will determine the sales, cost of goods sold, and any other variable period costs.

Simply Furnished Income Statement for Month Ended 31 October
Sales (a)	$11,250
Less: Cost of goods sold (b)	$9,000
Gross profit (c)		$2,250
Operating expenses
Selling expenses (d)	$5,007
Add: General and admin. expenses	$3,000
Total operating expenses		$2,007
Net operating income (e)		$243

Sales = Number of units sold x Selling price per unit

Cost of goods sold (COGS) = Number of units sold x Production cost per unit

Gross profit = Sales – COGS

1. Selling expenses = Fixed selling expenses + Variable selling expenses x Number of units sold. For this example, the value of the operating expenses is as follows:
   1. Fixed selling expenses: $5,000
   2. Variable selling expenses: $0.25 per unit
   3. General and admin. expenses: $3,000
2. Net operating income = Gross profit – Total operating expenses. Note that income statements using the absorption method will only show the net operating income based on the number of products sold.⁴

Direct (Variable) Costing

Direct costing is an alternative form of costing for fixed manufacturing overhead. In direct costing, the fixed manufacturing overhead is not debited to the work-in-process account but is written off as an expense in the period within which it is incurred. In the absorption costing method, both fixed and variable manufacturing overhead are debited to the work-in-process account, e.g. the product absorbs all manufacturing costs, including fixed manufacturing overhead.

With direct costing, fixed manufacturing overhead is not treated as product cost but is treated as a period cost. Retailers and wholesalers use direct costing and do not include fixed overhead costs as part of acquiring goods; only the direct purchasing cost and inwards charges are recorded. Many service industries include all overhead, including non-product fixed costs, when costing a service. This is referred to as “full costing”.

Where fixed manufacturing overhead is excluded from the cost of a product using direct costing, inventory values at the end of the accounting period will be lower than values reported using the absorption method, and there will also be a difference in the reported profits for the periods.

Example: Calculating manufacturing costs

Calculate the manufacturing cost per unit for the following product using both the absorption and direct costing methods. The number of units produced is 10,000.

Absorption method

Direct material costs	$25,000
Direct labour costs	$35,000
Variable factory overhead	$20,000
Fixed factory overhead	$20,000
	$100,000

Cost per unit = Total production cost / Total units produced = $100,000 / 10,000 = $10

Direct material costs	$25,000
Direct labour costs	$35,000
Variable factory overhead	$20,000
	$80,000

Cost per unit = Total production cost / Total units produced = $80,000 / 10,000 = $8

The value of inventory at the end of the accounting period if 2,000 units are in stock is as follows:

Absorption method: 2,000 x $10 = $20,000

Direct costing method: 2,000 x $8 = 16,000

Example: Direct costing method

Let us create an income statement for Simply Furnished for the month of November using the direct costing method. The values are as follows:

Direct materials	$3,500
Direct labour	$2,500
Variable overhead	$2,000
Fixed overhead	$1,500
Fixed selling expenses	$2,000
Variable selling expenses	$0.25 per unit
General and administrative expenses	$1,500
Units produced	50
Units sold	40 (10 left in ending finished goods inventory)
Selling price per unit	$375

Calculate first for the production cost per unit:

Direct materials	$3,500
Add: Direct labour	$2,500
Add: Variable overhead	2,000
Total Production Cost	$8,000

Using the direct costing method, the product cost per unit will be calculated as:

Production cost per unit = Total production cost / Total units produced

$8,000 / 50 = $160

Next, calculate the contribution margin income statement under direct costing:

Simply Furnished Income Statement for Month Ended 30 November
Sales (a)			$15,000
Variable Costs:
COGS (b)		$6,400
Add: Selling expenses (c)		$10
Total variable costs			$6,410
Contribution margin (d)			$8,590
Fixed Cost:
Fixed overhead		$1,500
Add: Fixed selling expenses		$2,000
Add: General and admin. expenses	$1,500
Total fixed expenses			$5,000
Net operating income (e)			$3,590

1. Sales = Number of units sold x Selling price per unit
2. Cost of goods sold (COGS) = Number of units sold x Production cost per unit
3. Selling expenses = Variable selling expenses x Number of units sold
4. Contribution margin = Sales – Total variable costs
5. Net operating income = Contribution margin – Total fixed expenses⁵

Management accounting information is for internal purposes and does not need to comply with this external reporting standard Accounting Standard AASB 102 Inventories.

Read the refer to Accounting Standard AASB 102 Inventories for information.

Read the following short article for information on journals that will directly assist you with your assessments.

Activity-based Costing (ABC)

Watch the following short video for information that will directly assist you with your assessments: (2:50):

The advantage of using ABC is that it focuses on processes that incur costs and enables management to view costs from the perspective of what causes the cost. ABC can also be used in service organisations. The three (3) approaches to ABC are as follows:

• Manufacturing overheads are allocated to products
• Product-related costs are allocated to products
• All costs are allocated to products

Allocating manufacturing overheads to products is the most common approach.

ABC is a two-stage process of assigning costs to products. The first stage requires the establishment of activity cost pools. The second stage identifies cost drivers for each activity cost pool. Activity cost pools collect costs that are driven by homogeneous activities. The costs for each pool are assigned to individual products in proportion to the amount of cost driver used for each product. ABC allocates overhead based on the amount of overhead activity actually used by each product.

Activity cost pools can be identified at the following levels:

• Unit level: Activities required by each unit produced, e.g. machine-related costs where each unit requires machining.
• Batch level: Activities performed for each batch of products, e.g. setting up for each production run.
• Product level: Activities that support particular products, e.g. product development and product testing.
• Facility level: Activities that are necessary to sustain a department’s or firm’s general processes, e.g. administration, depreciation, insurance, and rates.

Activity areas and cost drivers will vary between manufacturing organisations as follows:

Activity Cost Pool	Cost Driver
Materials handling	No. of requisitions for materials
Quality testing	No. of items tested
Machine maintenance	Machine hours
Product development	Square metres
Factory administration	Supervision, maintenance, cleaning, electricity, power, and lighting

Table: Activity cost drivers

The example below sets out the differences between the conventional method of cost accounting and the ABC method.

Example: Allocation of factory overheads

A manufacturer produces two (2) types of cleaning products. Using conventional costing and allocating costs between two (2) products, factory overheads are allocated as follows:

	Product A	Total	Product B
Sales	145,000	250,000	105,000
Less: COGS
Direct materials	30,000	55,000	25,000
Direct labour	28,000	48,000	20,000
Factory overhead	42,000	72,000	30,000
Gross profit	45,000	75,000	30,000

In the example above, overhead is allocated at 150% of direct labour.

Using the ABC method, the cost pools for the allocation of factory overheads are handling of materials, machine costs, quality testing, and factory administration.

The overheads are allocated as follows:

	Total	Product A	Product B
Sales	250,000	145,000	105,000
Less: COGS
Direct materials	55,000	30,000	25,000
Direct labour	48,000	28,000	20,000
Factory overhead	72,000
Handling materials		15,000	10,000
Machine costs		7,000	5,000
Quality testing		5,000	3,000
Factory administration		15,000	12,000
	175,000	100,000	75,000
Gross profit	75,000	45,000	30,000

The application rates for manufacturing industries and service-related activities can be calculated in the same manner, although the cost pool's cost drivers will be different.

Example: Recovery rates for a restaurant

A restaurant has prepared the annual budget as follows:

Activity Cost Pool	Budgeted Cost Driver	Cost Driver	Budgeted Level
Purchasing material	$6,000	No. of orders	2,000
Preparing materials	$15,000	Hours of preparation	3,000
Serving customers	$21,000	No. of customers	10,500
Cleaning	$6,000	No. of items	20,000
Keeping records	$6,405	No. of customers	10,500

The recovery rates are as follows: ¹

Purchasing material:    6,000 / 2,000    3,000

Preparing materials:    15,000 / 3,000    5,000

Serving customers:    21,000 / 10,500    2

Cleaning:    6,000 / 24,000    0.25

ABC costing what is it and how to calculate costs using it:

Read the following short article for information on ABC costing and how to calculate costs using it. The reading will directly assist you with your assessments.

Process Costing

Organisations that produce large numbers of the same or similar products using mass production techniques do not track costs to specific batches or jobs. Costs are accumulated by each department or process through which the product passes. These costs are then allocated to inventories according to the number of units completed by each department. The method of cost accumulation and allocation is known as process costing. Industries that use process costing include oil, brewing, food, and chemicals.

Materials being the process and direct labour, factory overhead, and new materials are added at different stages during the process. A process will operate at all times during working hours apart from breakdowns. New units are started, move through the process and are output as the finished product.

Here is a video that explains how to prepare a Production Cost Report.

Watch the following short video for information that will directly assist you with your assessments: (10:24):

Example: Process costing

A company commences work on 4,000 units at the beginning of the month, and at the end of the month, 500 are incomplete. Costs for the month are as follows:

Direct materials	$220,000
Direct labour	$171,000
Factory overhead	$266,000

To allocate costs to the completed units, a five (5) step process is followed:

• Identify the physical units. Units completed during the month were 3,500: (4,000-500).
• Calculate equivalent completed units. To calculate the equivalent completed units, it is necessary to convert the ending work-in-process to completed units. For example, if 500 units are 60% complete, this would be equivalent to 300 completed units (500×60%). As materials are added at the beginning of the process, the 500 units are complete with regard to materials.

The schedule for physical and equivalent completed units is shown below:

Equivalent Completed Units
	Physical Units	Direct Materials	Direct Labour	Factory Overhead
Completed	3,500	3,500	3,500	3,500
Work in process	500	500	300	300
Units accounted for	4,000
Work done to date		4,000	3,800	3,800

• Identify total costs: $657,000 = ($220,000 + $171,000 + $266,000)
• Calculate equivalent unit costs. To allocate costs, it is necessary to calculate costs per equivalent unit as follows:

Costs	Total	Direct materials	Direct labour	Factory overhead
Costs to be allocated	$657,000	$220,000	$171,000	$266,000
Divide by equivalent units		4,000	3,800	3,800
Cost per equivalent unit	$170	$55	$45	$70

• Allocate total costs.

Costs	Total	Direct materials	Direct labour	Fancy overhead
Cost per equivalent unit	$170	$55	$45	$70
Allocation of costs
Direct materials	27,500	(500 x $55)
Direct labour	13,500		(300 x $45)
Factory overhead	21,000			(300 x $70)
	62,000
Completed units	595,000	(3,500 x $170)
Total costs allocated	$657,000

The five (5) step procedure for process costing can be summarised in a cost of production report. The cost of production report for the above example is set out below:

Cost of Production Report for the Month of XXXX:¹

Equivalent Completed Unites
	Physical Units	Direct Materials	Direct Labour	Factory Overhead
Completed	3,500	3,500	3,500	3,500
Work in process	500	500	300	300
Units accounted for	4,000
Work done to date		4,000	3,800	3,800

Equivalent Completed Units
	Physical Units	Direct Materials	Direct Labour	Factory Overhead
Costs
Costs to be allocated	657,000	220,000	171,000	266,000
Divide by equivalent unit		4,000	3,800	3,800
Cost per equivalent unit	170	55	45	70
Allocation of costs
Direct materials	27,500	(500 x $55)
Direct labour	13,500		(300 x $45)
Factory overhead	21,000			(300 x $70)
	62,000
Completed units	595,000
Total costs allocated	$657,000

Job Costing  

Job costing, also referred to as project-based accounting, is the process of tracking costs and revenue for each individual project.

Job costing looks at each project in detail, breaking down the costs of labour costs, materials and overhead. It's preferable to other methods of costing and is used in the construction business since it accounts for a wide range of costs.

Job costing is also used in a variety of fields, including manufacturers, creative agencies, law firms, and more, and is calculated by accumulating the cost of labour, assets and overhead on a specific job.

How to Calculate Job Costing

Read the following short article for information that will directly assist you with your assessments.

Operation Costing

Operation costing is a hybrid cost accounting system and is suitable for organisations that manufacture batches of similar products. Direct materials are accounted for in the same manner as job costing. Conversion costs and equivalent completed units are accounted for in the same manner as process costing.

Example: Operation costing

A manufacturer has the following costs for the month of April:

Direct materials
Batch 1 – Standard (400 items)	$12,000
Batch 2 – Varnished (600 items)
Cutting	24,000
Varnish	9,000	$45,000
Direct labour
Cutting	15,200
Assembly	14,500
Varnish	6,300	36,000
Factory overhead
Cutting	18,000
Assembly	10,000
Varnish	4,800	32,800
Total costs		$113,800

To allocate the costs, it is necessary to calculate the cost per unit per department for each element of costs:

Direct materials per unit
Batch 1 (Cutting)	$12,000 / 400	$30
Batch 2	$24,000 / 600	40
Cutting
Varnished	$9,000 / 600	15
Direct labour per unit
Cutting	$15,200 / 1,000	15.20
Assembly	$14,500 / 1,000	14.50
Varnished	$6,300 / 600	10.50
Factory overhead per unit
Cutting	$18,000 / 1,000	18
Assembly	$10,000 / 1,000	10
Varnished	$4,800 / 600	8

TABLE STARTS HERE

	Batch 1		Batch 2
	400 units		600 units
Cutting department
Direct materials
Batch 1	30.00
Batch 2			40.00
Direct labour	15.20		15.20
Factory overhead	18.00	63.20	18.00	73.20
Assembly department
Direct labour	14.50		14.50
Factory overhead	10.00	24.50	10.00	24.50
Varnish department
Direct materials Batch 2			15.00
Direct labour			10.50
Factory overhead			8.00	33.50
Cost per unit		87.70		131.20
Total cost per batch		35,080		78,720

Policies and Procedures

There are different features of organisational policies and procedures relevant to costing systems:

• How the organisation’s procurement process ensures all purchasing expenses are accounted for: Policies and procedures likewise dictate the parameters of the procurement process according to inventory management (the kind or type of supplier, the order size, reorder point, economic order quantity) to control costs (ordering and carrying costs). This applies to the screening and selection of suppliers, purchasing or procurement.
• How the organisation’s costing policies help ensure that all overhead, including non-product fixed costs, are included when costing a service: On the other side of the spectrum is the costing for the products offered. The policies and procedures aim to capture all the costs, whether direct or indirect, in the costing process. This ensures that the business appropriately allocates its production costs to each of its products and that customers are paying for their money’s worth. 
• How the organisations’ documentation policies help ensure that expenses are recorded accurately: Policies and procedures typically include the documentation process to help ensure that expenses are recorded accurately. This goes for every business regardless of the costing system employed. It is noteworthy to say that documentation is vital for reporting, review and audit processes.

Data processing in a costing system goes through several stages, including data collection, input, processing, output and storage. Policies and procedures should be implemented which ensure that the risks inherent in each of these stages are adequately addressed by the application of various internal control activities.

Effective policies and procedures should address the following:

1. How data is entered into the system: Controls need to be implemented, which must help assure that the data entered into the system is accurate, valid and complete (input controls).
2. How the data is processed once it is in the system: Controls need to be implemented which ensure data is processed accurately and correctly (processing controls).
3. How the outputs of the system are protected: The focus should be on controlling who can request outputs (user access privileges), how outputs are prepared, the format and content of outputs, and making sure all outputs are accounted for.

Policies and procedures implemented should also allow for the operation of key general controls across the organisation. These controls relate to the overall environment in which the costing system operates. Examples include:

1. Physical controls: Concerned with protecting/restricting access to physical resources, e.g. keeping servers in a secure room and using locks to keep laptops secure.
2. Segregation of duties: Involves the separation of employee duties and responsibilities so that an individual employee cannot engage in fraudulent activities without being detected. Ideally, key functions must be divided among different employees to ensure that there are checks and balances in place.
3. User access to the system: This relates to the access of users to the costing system. Users need to have an appropriate, secure password.
4. User risk awareness: Organisations need to ensure that the users of the costing system are aware of security threats & risks and that the organisation’s policies are followed.
5. Data storage (backup) procedures and policies: Data is one of an organisation’s most valuable resources. Policies relating to access (restrict access), duplication, sending, and storage (offsite backup critical) of data should be implemented.

Management of Finance Operations

The major objective of responsibility accounting is to ensure targets and budgets are achieved, and managers are accountable for those items over which they have control. The staff involved with the management of finance need support to perform their roles competently. This support can be provided through the following:

• Documentation procedures
• Intranet-based information
• Briefings and training sessions;
• Helpdesk and access to expert advice

Examples of tasks and operations that require documented procedures include the following:

• Purchasing and procurement
• Wages and salary payments, and record-keeping
• Maintaining journals, ledgers, and other record-keeping systems
• Banking
• Debt collection
• Invoicing clients and customers
• Maintaining a petty cash system
• Ensuring security, accuracy, and currency of financial operations

To perform their duties effectively, all employees must follow the same procedures. These procedures need to be documented to ensure uniformity and to guide employees. The procedures may be provided to employees both electronically and manually. The resources of an organisation are as follows:

• Human resources: The people who are involved in activities from repetitive tasks to strategic planning.
• Material resources: Resources such as inventory and associated resources that are required for the manufacturing industry.
• Financial resources: The combination of debt and equity financing which finances the activities of the organisation.
• Miscellaneous resources: Includes operating expenses such as rent, electricity, licences, and telephones.
• Capital asset resources: Noncurrent assets.⁶

Non-Financial Objectives

Qualitative as well as quantitative factors play an important part in the planning process of an organisation. Non-financial objectives also include maintaining control over information, assets, and the computer network. Organisations are required to comply with legislation, accounting standards, corporate governance principles and recommendations and ethical requirements.

Corporate governance may be summarised as a set of principles to ensure corporate direction, responsibility, and accountability. The ASX Corporate Governance Council has developed a framework of principles and recommendations as a practical guide for corporate governance procedures that should be adopted by corporate organisations.⁷

Accounting Professional and Ethical Standards Board (APESB) standards contain professional and ethical requirements relating to the conduct and performance of professional services and are mandatory for members of professional accounting bodies.⁸

The AASB is committed to developing, in the public interest, high-quality, understandable accounting standards that require the disclosure of transparent and comparable information in general-purpose financial statements. The purpose of accounting standards is to prescribe concepts that guide the selection, application, and disclosure of accounting policies and to require specific disclosure to be made in relation to accounting policies adopted in preparing and presenting financial reports.

The objective of Standard AASB108 - Accounting Policies, Changes in Accounting Estimates and Errors is to prescribe the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates, and corrections of errors. The standard is intended to enhance the relevance and reliability of an entity’s financial statements and the comparability of those financial statements over time and with the financial statements of other entities. Disclosure requirements for accounting policies, except those for changes in accounting policies, are set out in AASB 101 - Presentation of Financial Statements.⁹

Most organisational practices and procedures include a code of conduct. Employees are required to comply with the code of conduct, which includes observing ethical behaviour with respect to anti-bullying, harassment, and discrimination towards fellow employees. There are various laws, legislative requirements, and regulations that must be complied with in respect of discriminatory behaviour. The Commonwealth Government and the State and Territory governments have introduced an anti-discrimination law to help protect people from discrimination and harassment. The following laws operate at a federal level, and the Australian Human Rights Commission has statutory responsibilities under them:

• Age Discrimination Act 2004
• Australian Human Rights Commission Act 1986
• Disability Discrimination Act 1992
• Racial Discrimination Act 1975
• Sex Discrimination Act 1984 ¹⁰

It is also important to build and nurture effective working relationships within the organisation. With respect to human rights, everyone has a responsibility to do the following:

• Allow others to hold opinions different from their own
• Allow others to refuse requests
• Consider the needs and wishes of others as well as themselves
• Not cause others to feel in danger or uneasy
• Treat others with respect and dignity ¹⁰

Communication within the Organisation

Organisations need to develop a structure that suits their purpose and environment. The structure must include clear communication processes and reporting chains to link employees, so they can work together to achieve the organisation’s mission, goals, and objectives. An organisation’s structure impacts the way people interact and communicate with one another. The more sections, departments, or divisions in the organisation, the more complex it becomes because there is more differentiation between members’ jobs and more levels between staff members and senior management.¹¹

Effective communication techniques involve the following:

• Practising active listening skills by maintaining eye contact and letting the other person speak
• Using an appropriate tone of voice and displaying empathy and encouragement
• Communicating factual information objectively and avoiding the use of misleading information
• Operating in accordance with the organisation’s policies, procedures, and code of ethics
• Caring about how others will react to messages and not prejudging or stereotyping people
• Explaining complex ideas simply and directly
• Being aware of the nonverbal signals in communication and being sensitive to feedback, and varying the communication to match
• Giving proper personal space, especially when communicating with people from different cultures
• Being sensitive towards the religious views of other cultures
• Keeping the language simple and avoiding jargon
• Speaking clearly and at the right pace
• Pausing between sentences to allow time for comprehension
• Not completing the customer’s or client’s sentences
• Spelling out names and addresses if required
• Not raising your voice or being patronising or condescending.

Oral communication may include two (2) types of questioning techniques, e.g. open questions and closed questions. Open questions encourage the other person to talk and provide general information, e.g. “What problems are you experiencing here?” Closed questions invite a “yes” or “no” answer, e.g. “Did you reach your targets for the month?”¹²

Written communication may involve memos, which may be formal or informal, and reports. Formal memos and reports may need to be prepared using a template in accordance with organisational practices and procedures and may be used by internal staff members to provide or gather information with respect to performance or reporting information.¹³

Intranet and Document Control

An intranet is a private computer network that uses Internet protocols to securely share part of the organisation’s information or operations with its employees. It is a private version of the Internet. Appropriate access is provided through password control and may also be available to employees working offsite. Maintaining information and procedures in electronic format allows employees to search for information and also enables information to be easily modified and updated.

The intranet-based information is a valuable resource for employees and allows access to information regarding financial plans, budgets, and procedures. The intranet can also be used as effective training and communication tool to provide messages and make announcements to employees.

Where budget information is printed out and used on a regular basis by an employee, there is a risk the information currently in use may be outdated. Employees may be alerted to a warning that states that once information is printed, it becomes “uncontrolled”. In this respect, the employee is required to ensure the documentation utilised is the most current version. When saving files, documents can be “controlled” by using dates and numbers to record the most current version.⁶

Record-Keeping

Financial management involves managing resources efficiently and effectively to achieve the objectives of the organisation. An organisation should determine and access the required resources for its operations and employ appropriate systems to convert the resources into outcomes that will assist the organisation in meeting its objectives.

A record-keeping system can be operated electronically or manually to record transactions. The data is analysed to provide information for control, decision-making, and planning. A paper-based system is where employees record data in books, registers, or cards.  In an electronic record-keeping system, computers and software are used to record data. The record-keeping process involves the input of raw data, human resources, and output which may include a report for financial management and planning.⁶

In brief, key management information requirements should include:

• Timely: Information should be communicated in time so that the recipient of the information is given ample time to make decisions based on the information received.
• Complete: Facts and figures should not be missing or concealed.
• Relevant: Information should be communicated to the right person, one who can utilise the information to make sound decisions.
• Accurate: Information should be fair and free from bias. It should not contain any arithmetical and grammatical errors.
• Reliable:  The data needs to be consistent across multiple records and does not contradict the information from other resources) according to best practice data quality research

Security Systems

Security over assets is an area an organisation should focus on, as the loss of physical assets and data will result in a loss of profits for the organisation. Any reports of loss of inventory should be reported, documented, and investigated. Security should also be set in place to safeguard computer equipment to prevent hacking or data from being lost or attacked by viruses. Such incidents may:

• Delay the supply of goods
• Negatively impact the provision of services
• Cause loss or corruption of data

Where an organisation is dependent on the use of computers, this may cause serious consequences and disruptions. Computer software should be protected to safeguard data and avoid deliberate corruption. All incidents should be recorded and reported for appropriate action.

An unprotected computer can be infected or hacked. Where a computer is connected to the Internet, information can flow freely, and a firewall and anti-virus software is required to prevent unauthorised access to computers and the network. Email is an essential communication tool, but it is also one of the most common ways for a virus to enter the computer system of an organisation and cause a breach of confidentiality and other serious problems. Many firms include a privacy statement in their e-mail messages, often in the signature text at the end of a message.

To ensure the safety of computer equipment and electronically stored information, you must consider the following:

• Access to servers: Protecting the server and other key telecommunications equipment starts with physical security. Intruders who have physical access to a server can also get direct access to files and data on the server’s hard drives, enabling them to extract the usernames and passwords of every user on the system, destroy data, and may allow access to the server remotely. Servers should be securely locked to protect against unauthorised access.
• Access to individual computers: Every computer should be configured to request a password before allowing access to the hard drive.
• Screensaver: Activating a password-protected screensaver is a simple and very effective way to prevent unauthorised access to the files on a computer that is logged on.
• Access to a network: Folders and files on the server must be configured to be shared. To control access to files or folders, sharing and access can be limited by either individual users or groups of users.
• Encryption of sensitive files: Many software products contain a feature that will allow password protection of documents for sensitive information.
• Backing up data: Data should be backed up regularly, e.g. daily, weekly, and monthly. It is critical to regularly back up the data files stored on the server and the hard drives of computers. The safest choice is to back up data to an external medium, e.g. CD, USB flash drive, or zip disk. The option chosen will depend on the amount of data that needs to be backed up.
• Offsite storage: Contracts with any third party who is in possession of confidential client information should cover relevant security issues, including specific provisions that require all information to be properly stored and secured to prevent inappropriate access. The third party should also indicate how the facility is prepared for a disaster, that adequate backup systems are in place, and what their contingency plans are if emergencies or disasters occur. These measures will ensure that the client's information is protected.¹⁴

Managing Inventory

The efficient management of resources should be a priority for organisations. Where the production of goods and the provision of services are efficient, it will increase profitability. Inventory represents the finished goods that are acquired for sale, and in a manufacturing business, this may include raw materials, work in process, and finished goods. It is necessary to accurately determine how much inventory is to be kept on hand to minimise costs, theft, and obsolescence. If an insufficient inventory is held, valuable business sales may be lost.

In a manufacturing business, a shortage of raw materials will restrict production. A technique generally practised to control expenditure on inventory is the just-in-time method, where materials are purchased just in time for production to avoid an unnecessary build-up of inventory.6