CHAPTER 11 : CHAPTER 11 The Expenditure Cycle:
Purchasing to Cash Disbursements
INTRODUCTION : INTRODUCTION The primary objective of the expenditure cycle is to minimize the total cost of acquiring and maintaining inventory, supplies, and services.
INTRODUCTION : INTRODUCTION Key Decisions :
What level of inventory and supplies should we carry?
What vendors provide the best price and quality?
Where should we store the goods?
Can we consolidate purchases across units?
How can IT improve inbound logistics?
Is there enough cash to take advantage of early payment discounts?
How can we manage payments to maximize cash flow?
EXPENDITURE CYCLE BUSINESS ACTIVITIES : EXPENDITURE CYCLE BUSINESS ACTIVITIES The three basic activities performed in the expenditure cycle are:
Ordering goods, supplies, and services.
Receiving and storing these items.
Paying for these items.
These activities mirror the activities in the revenue cycle.
ORDERING GOODS, SUPPLIES, AND SERVICES : ORDERING GOODS, SUPPLIES, AND SERVICES Key decisions in this process involve identifying what, when, and how much to purchase and from whom.
Weaknesses in inventory control can create significant problems with this process:
Inaccurate records cause shortages.
One of the key factors affecting this process is the inventory control method to be used.
ORDERING GOODS, SUPPLIES, AND SERVICES : ORDERING GOODS, SUPPLIES, AND SERVICES Alternate inventory control methods
We will consider three alternate approaches to inventory control:
Economic Order Quantity (EOQ)
Just in Time Inventory (JIT)
Materials Requirements Planning (MRP)
ORDERING GOODS, SUPPLIES, AND SERVICES : ORDERING GOODS, SUPPLIES, AND SERVICES EOQ is the traditional approach to managing inventory.
Goal: Maintain enough stock so that production doesn’t get interrupted.
Under this approach, an optimal order size is calculated by minimizing the sum of several costs:
Ordering costs
Carrying costs
Stockout costs
The EOQ formula is also used to calculate reorder point, i.e., the inventory level at which a new order should be placed.
Other, more recent approaches try to minimize or eliminate the amount of inventory carried.
ORDERING GOODS, SUPPLIES, AND SERVICES : ORDERING GOODS, SUPPLIES, AND SERVICES Similarities and differences between MRP and JIT:
Scheduling production and inventory accumulation. MRP schedules production to meet estimated sales and creates a stock of finished goods inventory to be available for those sales.
JIT schedules production in response to actual sales and virtually eliminates finished goods inventory, because goods are sold before they’re made.
ORDERING GOODS, SUPPLIES, AND SERVICES : ORDERING GOODS, SUPPLIES, AND SERVICES Similarities and differences between MRP and JIT:
Scheduling production and inventory accumulation
Nature of products MRP systems are better suited for products that have predictable demand, such as consumer staples.
JIT systems are particularly suited for products with relatively short life cycles (e.g., fashion items) and for which demand is difficult to predict (e.g., toys associated with movies).
ORDERING GOODS, SUPPLIES, AND SERVICES : ORDERING GOODS, SUPPLIES, AND SERVICES Similarities and differences between MRP and JIT:
Scheduling production and inventory accumulation
Nature of products
Costs and efficiency Both can reduce costs and improve efficiency over traditional EOQ approaches.
ORDERING GOODS, SUPPLIES, AND SERVICES : ORDERING GOODS, SUPPLIES, AND SERVICES Similarities and differences between MRP and JIT:
Scheduling production and inventory accumulation
Nature of products
Costs and efficiency
Too much or too little In either case, you must be able to:
Quickly accelerate production if there is unanticipated demand.
Quickly stop production if too much inventory is accumulating.
ORDERING GOODS, SUPPLIES, AND SERVICES : ORDERING GOODS, SUPPLIES, AND SERVICES Whatever the inventory control system, the order processing typically begins with a purchase request followed by the generation of a purchase order.
A request to purchase goods or supplies is triggered by either:
The inventory control function; or
An employee noticing a shortage.
Advanced inventory control systems automatically initiate purchase requests when quantity falls below the reorder point.
ORDERING GOODS, SUPPLIES, AND SERVICES : ORDERING GOODS, SUPPLIES, AND SERVICES The need to purchase goods typically results in the creation of a purchase requisition. The purchase requisition is a paper document or electronic form that identifies:
Who is requesting the goods
Where they should be delivered
When they’re needed
Item numbers, descriptions, quantities, and prices
Possibly a suggested supplier
Department number and account number to be charged
Most of the detail on the suppliers and the items purchased can be pulled from the supplier and inventory master files.
ORDERING GOODS, SUPPLIES, AND SERVICES : ORDERING GOODS, SUPPLIES, AND SERVICES A crucial decision is the selection of supplier.
Key considerations are:
Price
Quality
Dependability
Especially important in JIT systems because late or defective deliveries can bring the whole system to a halt.
Consequently, certification that suppliers meet ISO 9000 quality standards is important. This certification recognizes that the supplier has adequate quality control processes.
ORDERING GOODS, SUPPLIES, AND SERVICES : ORDERING GOODS, SUPPLIES, AND SERVICES A purchase order is a document or electronic form that formally requests a supplier to sell and deliver specified products at specified prices.
The PO is both a contract and a promise to pay. It includes:
Names of supplier and purchasing agent
Order and requested delivery dates
Delivery location
Shipping method
Details of the items ordered
RECEIVING AND STORING GOODS : RECEIVING AND STORING GOODS The two major responsibilities of the receiving department are:
Deciding whether to accept delivery.
Verifying the quantity and quality of delivered goods.
The first decision is based on whether there is a valid purchase order.
Accepting un-ordered goods wastes time, handling and storage.
RECEIVING AND STORING GOODS : RECEIVING AND STORING GOODS Verifying the quantity of delivered goods is important so:
The company only pays for goods received.
Inventory records are updated accurately.
The receiving report is the primary document used in this process:
It documents the date goods received, shipper, supplier, and PO number.
Shows item number, description, unit of measure, and quantity for each item.
Provides space for signature and comments by the person who received and inspected.
Receipt of services is typically documented by supervisory approval of the supplier’s invoice.
PAYING FOR GOODS AND SERVICES : PAYING FOR GOODS AND SERVICES There are two basic sub-processes involved in the payment process:
Approval of vendor invoices
Actual payment of the invoices
PAYING FOR GOODS AND SERVICES : PAYING FOR GOODS AND SERVICES Approval of vendor invoices is done by the accounts payable department, which reports to the controller.
The legal obligation to pay arises when goods are received.
But most companies pay only after receiving and approving the invoice.
This timing difference may necessitate adjusting entries at the end of a fiscal period.
PAYING FOR GOODS AND SERVICES : PAYING FOR GOODS AND SERVICES Objective of accounts payable:
Authorize payment only for goods and services that were ordered and actually received.
Requires information from:
Purchasing—about existence of valid purchase order.
Receiving—for receiving report indicating goods were received.
PAYING FOR GOODS AND SERVICES : PAYING FOR GOODS AND SERVICES Two basic approaches to processing vendor invoices:
Non-voucher system
Voucher system A disbursement voucher is prepared which lists:
Outstanding invoices for the supplier.
Net amount to be paid after discounts and allowances.
The disbursement voucher effectively shows which accounts will be debited and credited, along with the account numbers. Each invoice is stored in an open invoice file.
When a check is written, the invoice is marked “paid” and then stored in a paid invoice file.
PAYING FOR GOODS AND SERVICES : PAYING FOR GOODS AND SERVICES Two basic sub-processes involved in the payment process:
Approval of vendor invoices
Actual payment of the invoices
PAYING FOR GOODS AND SERVICES : PAYING FOR GOODS AND SERVICES Payment of the invoices is done by the cashier, who reports to the treasurer.
The cashier receives a voucher package, which consists of the vendor invoice and supporting documentation, such as purchase order and receiving report.
This voucher package authorizes issuance of a check or EFT to the supplier.
Slide 24 : PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN EXPENDITURE CYCLE Selects suitable suppliers
Issues purchase orders
Slide 25 : PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN EXPENDITURE CYCLE Decides whether to accept deliveries
Counts and inspects deliveries
Slide 26 : PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN EXPENDITURE CYCLE Stores goods that have been delivered and accepted
Slide 27 : PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN EXPENDITURE CYCLE Approves invoices for payment
Slide 28 : PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN EXPENDITURE CYCLE Issues payment to vendors
CRIME TIME : CRIME TIME The vendor’s representative may try to induce the purchasing agent to buy goods that:
Are over-priced
Are of inferior quality
Aren’t even needed
Aren’t even delivered
In exchange, the vendor’s rep typically offers the purchasing agent something of value. That “something” might be money, payment of a debt, a job offer, an expensive vacation, or anything the purchasing agent might value.