BASIC INFORMATION

SYSTEMS

Development of information systems and management

of information systems serve substantially to improve the
quality of life in different walks of life, especially in developing
countries like India. Owing to the emergence of the service
sector as the fastest growing sector, which contributes nearly
90 per cent of the job market, the market is influenced by
information service to the maximum extent. Developing
countries have recently begun to recognize the significance
of information and its strategic importance, and to make it
the priority area. These information services can be used in
the management of land records resulting in less litigation,
in natural resource planning leading to the optimum use of
water, oil, electricity, coal, etc. in banking and financial services
for better money management, in improving the legal delivery
system and in networked educational institutions to facilitate
better resource sharing.
The information requirements of managers and
organisations will vary according to the nature of the function
that they are expected to perform. Information is a catalyst
and an ingredient of management that coalesces the functions
of management, such as planning, operating and controlling.
An organisation can achieve its overall objectives, only if it
possesses the means for the acquisition, use, retention and
transmission of information. Thus, besides management
information system, various other functional information
Basic Information Systems 225

systems are also to be developed, to ensure the easy

performance of managerial functions and organisational tasks,
and to support the MIS.
The basic information systems in a manufacturing
company are those which contribute to the planning, operating
and controlling functions in the organization and include
Engineering Information Systems (design information
systems), Manufacturing Information Systems (operations
systems), Marketing Information Systems, Financial
Information Systems (administrative information systems),
Project Planning or Controlling Information Systems, and
Support Systems. All these information systems are
interrelated. They interact with each other by providing a
mechanism to tie up the various subsystems in the
organizational system, and help to integrate the functions of
planning, operating and controlling. These information
systems serve anyone or more of these basic managerial
functions.
1. Financial Information System
The most popular information system in the modern
business world is financial information system. It assumes
greater significance in business organizations, since finance
is the life-blood of every business, and contributes to the
overall growth of the organization. The system is designed to
enure the proper flow of finance throughout the organization.
Financial information systems faCilitate the profitability and
responsibility accounting systems and ensure that they follow
the organization structure. The system utilizes various internal
and historical data regarding the financial planning, and is
forward-looking in nature. Even though computerized financial
information systems are developed, manual systems are still
widely used in organizations owing to the nature of their
operations. Financial information systems are generally
concerned with budget preparation and control. In financial
information system, master budgets are prepared by
combining various functional budgets and assigning
responsibilities for maintaining investments, income, costs,
etc. with in specified limits. The performance is compared
with the planned result, and corrective measures are initiated
in the case of deviations. Financial information system involves
determination of equitable standards for control,
determination of actions required to attain the standards,
226 Management Information System

and to obtain frequent and speedy information about

deviations. Computerization can be used only at the third
stage, whereas the first two stages require manual work. It
is the most important management information system. The
effectiveness of financial information system lies in the ability
of the system designer to use it as an inevitable tool for
operations and planning. Since the functioning of all other
information systems requires finance and financial information
this information system influences all other information
systems in the organizations. A typical computerized billing
system is an example of a financial information system.
Invoices can be prepared with the help of a computer, which
provides benefits like clerical savings, timely processing, and
so on. It increases the speed and accuracy of operation and
influences the cash flow.
2. Personnel Information System
It is an important information system that provides
information about the human resources and their flow, and
the future human resource requirements in an organization.
It normally deals with personnel functions such as recruitment,
selection, placement, training, compensation and
maintenance. Human resource functions have been
traditionally known as personnel functions, whose scope is
very narrow. However, human resource management
considers the total system and its interaction with other major
systems, such as marketing, production, finance, and even
the external environment. The human resource management
program helps these various information systems by predicting
and forecasting the personnel requirements of the
organization, keeping an adequate working staff, and
controlling and regulating the personnel policies and
programs.
In order to facilitate human resource planning and
forecasting, an information system is needed, called the
human resource management system, which in turn consists
of a number of subsystems that are integrated through
information flow. The human resource management system
considers and integrates the functions of the personnel
manager with the duties of the operating personnel. The
important personnel information subsystems are recruitment,
placement, training and development, compensation and
maintenance. The demands placed by the external
Basic Information Systems 227

environment on the human resource management system

are: equal employment opportunity, affirmative action,
Occupational Safety and Health Act, and Employee Retirement
Income Security Act. The human resource management
systems focus on designing skills inventory programs called
'skills banks' or 'manpower assessment programs', to identify
and locate the talented resources of the organization for
maximum utilization. The working of a skills inventory program
can be represented in the following diagram:

Personal
Report
Salary administration,
Benefits analysis,
Company Data Placement education,
Bank Training appraisal,
etc.
L..-_ _ _ _..... ---7) Computer

~kills Inventor~
(
Report
Programs
Employee
Profile
Employment
History Simulater
Education & Model
Achievement

Skills Evaluation of
alternative manpower
ISimulati~ J plans ( hiring,
transferring etc.)

Fig. 14.1: Manpower Assesment Program

3. Operational Information System (Production
Information System)
It provides information about the flow of goods and
services in physical terms, and is concerned with production
planning and control, inventory planning and control,
management of purchases, distribution, and transportation.
Automation can be easily adopted in information systems of
228 Management Information System

this kind, because of huge volume of data, and timing of

information so essential, these systems can provide huge
benefits such as critical and costly problem solving. The
important features of production information system that
make it suitable for automation are: speed, length, quantity,
repetitiveness of tasks involved, complexity of problems, exact
inputs, and accurate outputs.
Timeliness in handling large volume of data provides
economy in production or operations. Proper information is
needed for the effective management of production in
organizations. In any manufacturing company, production
information system plays a crucial role since it has an influence
on various subsystems throughout the organization. It offers
opportunity for development, cost savings, and management
improvement. The input for operational information system
is the customer order. The areas of production information
systems are: purchasing, materials planning, operations,
scheduling, etc. The objectives of purchasing activity in
production information systems are: determination of EOQ
(Economic Order Quantity- the optimum quantity for which
order should be placed for purchase every time when materials
ar-e to be purchased.), reduction of clerical cost, monitoring
the buyer performance, identification of high volume vendors
to get high discount, and determination of supplier
performance. Materials planning aims at planning and
controlling parts from a predetermined production schedule,
reducing the time and cost of ordering, allowing non
descriptive change in production schedule, forecasting future
needs and changes in materials requirements, as a result of
changes in the production schedule.
Operations scheduling activity helps to identify the future
loads of work center, to check whether they are overloaded
or under loaded to evaluate alternatives to meet delivery
dates, to identify orders to be rescheduled, to forecast the
time and location of equipment and tooli'l~ needs, to forecast
skills and trades required to compute starting data, and to
forecast order release dates. A typical production information
system integrates various subsystems, such as: sales analysiS,
engineering, inventory control and production scheduling,
production facilities, purchasing, financial and sales and
distribution, and reflects the information flow in the entire
organizational production system. .
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Fig. 14.2: Information Flow in Production Information System N
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230 Management Information System

4. Marketing Information System

It involves activities such as forecasting (sales planning)
market -research, advertising, and operating and control
information required to manage the marketing function.
Generally, marketing is performed on the basis of certain
assumptions and intuitions, and only few executives use
marketing information systems to get such activities
performed. A majority of the organizations keep information
only about sales and orders of shipment. Marketing
information system helps organizations to make decisions
regarding pricing, advertising, product promotion poliCY, sales
force effort, etc. and considers all internal and external
information relating to the marketing efforts of the company.
Such information systems are developed on the basis of
feedbacks available from markets, which are used to judge
and analyse the performance of the system in the past as
well as to apprise the new activity. The important applications
in marketing information system are: marketing planning
(forecasting), purchasing, credit management, market
research, prizing policy, advertising strategy, advertising
expenditure, marketing control, marketing costs, sales
performance, control of sales, distribution and costs. These
marketing information systems can be divided into three
categories, such as control systems, planning systems, and
market research systems. Marketing information system can
be designed in four formats, such as: sales recap, record
summaries, transaction analysis and exception inquiries.
Perodic
automated
reports
Company
Database

Computer

Marketing
Information
) System
Marketing Programs
subsystem
files

Fig. 14.3: Manpower Information System

Basic Information Systems 231

An example of a marketing information system is the

system of inventory management prevailing in organizations.
The reports prepared by inventory management systems,
after an evaluation of the entire system and various other
subsystems, are: distribution by value report, and
distribution-by-value with item movement.
5. Other Information Systems
The other important information systems are:
(a) Purchasing information system: where the computer
automatically prepares requests, updating the
orders, handling routine follow-ups, processing
requisitions. Order writing, Vendor rating,
Computation of EOQ, accounts payable cheques,
etc., are other applications of this system.
(b) PERT (Program Evaluation and Review Technique):
used for effecting control over the time, cost and
work involved in a project or program.
(c) Research and development: an information system
exchanging information on the results of research
findings, provisions for examination, storage and
retrieval of research information.
(d) Simulation that permits simulating decisions to act
as a vital tool for planning.
(e) Strategic Planning, which involves projections of the
future and provides data for other uses in the
system, such data being generated internally or
externa lIy.
The typical management information systems in an
organization can be classified on the basis of the functional
areas they deal with, and include production information
system, finance information system, personnal information
system, and Marketing information system. The tasks assigned
to these information systems will vary according to the level
of management. The production information system at the
strategic level performs tasks relating to new plant location,
at the strategic level, it deals with the bottlenecks in production
process, at the operational level, it calls for daily work
scheduling. The financial information system at the strategic
level aims at findings out strategic and alternative financing
sources, at the tactical level it provides for variance analysis,
232 Management Information System

and the operational level managers in the finance information

system deal primarily with the payroll preparation.
The personnal information system concentrates on
welfare policy at the strategic level, performance appraisal at
the tactical level, and leave records of employees at the
operational level. In the marketing information system, the
strategic management level gives emphasis to competitor
survey, at the tactical level the focus is on advertising, the
operational level managers give importance to sales analysis.
Even though the implementation of MIS and various other
information systems provides for organizational advancement
and growth, where and how these systems do fit into the
organization is not at all clear to the executives. As a result,
the implementation of these systems are very difficult in such
a way as to contribute to the overall organizational objectives.
The spectacular development in the field of information
technology, and communication facilities leading to the
changing role of information systems from passive data
support to providing new business/opportunities, are viewed
as powerful weapons in the world of competition. A mastery
of these information systems helps to exploit the potential of
various technologies used in these functional areas in an
optimal manner. The system deSigner must ensure that in
every functional area in an organization, mapping of
informational pyramid is carefully worked out, since these
information systems significantly influence the functional
areas.
Accounting Information System
The New Economic Policy launched by the Government
of India and subsequent changes in the economy owing to
globalisation, liberalization and privatization, have pushed the
industrial sector to new areas of competition. The industrial
and business houses have started to adopt measures for
improving their overall performance. The most inevitable
requirement for strengthening financial soundness of the
enterprises is the arrangement for appropriate decision
making. Availability of accurate and reliable information at
the right time to the right person is the vital ingredient in
decision making process.
The major reason for most of the weaknesses of the
existing information set up of many industrial organizations
Basic Information Systems 233

in India is lack of a system approach. To provide information

in the right form and at the right time, a systems approach is
essential. Such a system will help to collect, discriminate,
select, relate, classify and interpret the information according
to the needs of the user. If the set up is based on the
information needs of the user and is sCientifically developed
so that all inter-related aspects of information such as
analysis, storage, retrieval and flow are adequately covered,
then it fulfills the requirements of an Information System.
The system would connect the mass of data available in the
organization into meaningfL:1 and required information. Let
us see how the accounting can be an aid to the information
system in business and industrial enterprises in our economy.
Changes in Accounting
The systematic march of industrial and business
activities towards progress is seen throughout the world. In
the course of this process, accounting has also been
undergoing significant changes. The modern accountant is
not like the old bookkeeper. The nature and scope of the
accounting functions have become multidimensional. The area
of operation of accounting now covers such fields as costing,
productivity, taxation and integrated information system.
Informative accounts facilitate an atmosphere of confidence
for the growth of capital investment. The increased area of
accounting for management purposes and the related
development of accounting techniques and methods have
offered the accountant a crucial role in the working of the
organization. The accounting system is now regarded the
central holder of information needs throughout. The
accountant gives equal importance for internal reporting and
external reporting and thereby meets the information needs
of insiders and outsiders. He develops a system for the flow
of informations both horizontally and vertically in internal
reporting. The system requires perfection since the
information supplied by the accountant is taken for granted
by the management in formulating policies and programme.
Insiders in the organization ask for accounting information in
terms of money, time and other valid units of measurement.
Fair, adequate and understandable disclosure of facts in the
form of financial statements remains with due prominence
as the main responsibility of the accountant towards external
reporting.
234 Management Information System

Specia lisation
The functions of accounting have not only deepened,
but widened. More specialization and differentiation has also
taken place. In addition to general financial accountants highly
specialized ones like cost accountants and management
accountants have emerged. The primary responsibility of
each category of accountant is to serve the information needs
of various groups and the difference exists only in their
respective roles. The financial accountant is entrusted with
the task of recording financial transactions and preparing
accounts and statements containing the working results (Le.,
trading and profit and loss account or income and expenditure
account as the case may be) and the financial position (i.e.,
Balance Sheet). The cost accountant provides information
related to costs at different intervals enabling the management
to effectively control the operations. He able to point out the
areas of losses and wastes and this helps the management
to initiate steps for corrective action. The management
accountant is largely responsible for advising the top
management to come to a proper decision. His job is to collect,
analyze, interpret and present all accounting information
useful to the management, applying his skill in accounting,
statistics and other techniques in financial management.
User Groups
Accounting information is inevitable for every activity.
Since accounting information covers the entire activities of
the organization the necessity of it is felt by various user
groups such as:
• Equity investors and holders of convertible
debentures;
• Employees and trade unions;
• Loan creditors;
• Government authorities like income tax, excise and
sales tax departments and Reserve Bank of India;
• Business contact groups like customers, trade
creditors, investors and business rivals;
• Public including consumers, tax payers, political
parties and environmental protection societies; and
• Special groups like financial analysts, journalists,
economists, statisticians, researchers and brokers.
Basic Information Systems 235

Common Needs of Users

Common needs of the various user groups are:
• to decide when to buy, hold or sell an equity
investment;
• to assess the stewardship or accountability of
management;
• to determine the ability of enterprise to pay and
provide the benefits to its employees;
• to ascertain the security for amounts lent to the
enterprise;
• to analyze taxation policies and benefits;
• to estimate distributable profits;
• to prepare and use income statistics; and
• to regulate activities of the enterprise.
Qualities of Accounting Information
Information is power, competitive edge and opportunity.
An accounting language is a set of specific definitions, policies
and procedures and the information generated through the
application of accounting language should be really useful to
the user groups. This necessitates some qualitative
characteristics for accounting information as stated below:
• An essential quality of accounting information is that
it must be readily understandable to the concerned
user groups.
• To be useful information must be relevant to the
decision-making needs of the user.
• Materiality of the information is very crucial.
• Information must have the quality of reliability, that
is it should be free from material errors.
• Information must represent faithfully the transaction
and other events. For example, the Balance Sheet
should represent faithfully the transactions and other
events that result in asset, liability or equity of the
enterprise at the reporting date.
• It is necessary that information is represented in
accordance with the substance and economic
ratability and not merely the legal form.
236 Management Information System

• The information contained in financial reports should

be neutral i.e., free from bias.
• The Accountants should exercise prudence in the
preparation of financial reports. For example, a
degree of caution in the exercise of the judgment is
needed to ensure that assets or incomes are not
overstated and liabilities and expenses are not
understand.
• Information in financial statements must be complete
with the bounds of materiality and costs. For
example, an omission can cause information to be
false or misleading and thus unreliable and deficient
in terms of its relevance.
• Users must be able to compare financial statements
of an enterprise through time in order to identify
trends in its financial position and performance. Like
this information must be useful for inter-firm
comparison.
Limitations
Being essentially monetary, accounting information
excludes non-monetary or qualitative elements like employee
morale, social and environmental issues. Flexibility of using
alternatives is also wide and this often misleads comparisons.
In the global scene accounting information further suffers
from varied monetary units, commercial traditions,
government regulations, tax systems, professional standards
and reporting practices. It requires special mention in this
context that new measures have been attempted to overcome
these limitations.
Recent Trends
Dependence on accounting information of varied nature
by different user groups has put new responsibilities on
accountants. He has been improving tools and assuming new
burdens so as to ensure greater alternative and respect for
his products, as detailed below:
With the urge to perform with great speed and accuracy
integrated information system has started gaining ground.
This system handles accounting data, engineering: data,
research data etc. by using mechanical and electronic devices.
The accountan~ has acquired skHlsin systems analYSiS, data
processing and computer programming.
Basic Information Systems 237

Besides accounting, services of the accountants are

now used in other areas also. Recently professional
accountants are actively involved in policy decision and
strategic planning. Even in the administrative set up of the
Government the accounting profession has been given due
recognition with the creation of Indian Audit and Accounts
Service, Indian Railway Accounts Service, Indian Revenue
Accounts Service etc.
The need for following uniform accounting policies and
practices was felt all over the world immediately after Second
World War. However, serious efforts in this direction were
attempted by the formation of Accountants International
Study Group in 1967. International Accounting Standards
Committee (IASC) was constituted in 1973 with the objective
of formulating and publishing international standards to be
observed in the presentation of financial statements. It was
also intended to promote world wide acceptance and
observance of such standards. So far, IASC has published
several statements of standards, known as International
Accounting Standards (lAS). Another international body titled
International Federation of Accountants was established in
1977 to issue guidelines on auditing.
The Institute of Chartered Accountants of India and
the Institute of Cost and Works Accountants of India are
member of the IASC. Accounting Standards Board (ASB) was
formed in India in 1977, to formulate accounting policies and
practices keeping in view of the international development.
ASB issues accounting standards, more or less, on the Jines
of lAS with suitable modifications required in our economy.
From the above discussion, it is clear that the
accountants are tend to be regarded as information
technologists. The opportunities and challenges for
accountants in the present society have enormously increased.
In view of the changes, accountants have to acquire
knowledge of other disciplines like mathematics, statistics,
economics, and acturial sciences, coupled with IT skills if
they are really serious of playing a vital role at the enterprise
level working. The ever-changing technical and professional
environment also demands constant updating of knowledge
and competence.
238 Management Information System

Conclusion
Every functional area in ian organization must have its
own set of information processing systems, such as: finance
information system; purchase information system, production
information system, marketing and personnel information
system. They facilitate the easy operation of the functions
and ensure local control. These systems integrated into a
common data source called DataBase Management System
(DBMS). Support system is also developed to help the
functional managers in decision-making. They include
Decision-Support-System (DSS) Executive Support Systems
(ESS) etc. By generating summary information like trend,
pattern, exceptions, etc., these support systems help the
functional mangers and facilitate non- programmed decision-
making.
Exercise
Short Answer Questions
1. Write a short note on financial information system.
2. What do you mean by personnel Information system?
3. Explain the significance of human resource information system
in an organization.
4. Discuss operational information system in an organization.
5. Explain the functioning of marketing information system.
6. Describe accounting information system and its significance.
Essay Questions
1. Discuss in detail the basic information system in an organization.
2. Explain the components of organizational information system.