Three basic business activities in the expenditure cycle:
1. Ordering goods, supplies, and services
2. Receiving and storing goods, supplies, and services
3. Paying for goods, supplies, and services
Order Goods
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 as demonstrated in the introductory
Purchase Requests
Whatever the inventory control system, the order processing typically begins
with a purchase request followed by the generation of a purchase order. The
purchase requisition is triggered by 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.
Generating Purchase Orders
A crucial decision is the selection of supplier for inventory items. Several
factors should be considered in making this decision:
1. Price
2. Quality of materials
3. Dependability in making deliveries
Once a supplier has been selected for a product, their identity should become
part of the product inventory master file. It’s important to track and
periodically evaluate supplier performance. The purchasing function should be
evaluated and rewarded based on how well it minimizes total costs, not just
the costs of purchasing the goods.
A purchase order (PO 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. Multiple purchase orders may be
completed for one purchase requisition if multiple vendors will fill the
request. A blanket purchase order is a commitment to buy specified items at
specified prices from a particular supplier for a set time period.
Improving Efficiency and Effectiveness
The major cost driver is the number of purchase orders processed.
Using EDI is one way to improve the purchasing process. EDI reduces costs by
eliminating the clerical work associated with printing and mailing paper
documents.
The time between recognizing the need to reorder an item and subsequently
receiving it also is reduced.
Vendor-managed inventory programs provide another means of reducing purchase
and inventory costs.
Vendor-managed inventory essentially outsources much of the inventory
control and purchasing.
Suppliers are given access to point-of-sales and inventory data and are
authorized to automatically replenish inventory.
Reverse auctions provide another technique to reduce purchasing-related
expenses. In reverse auctions, suppliers compete with one another to need
demand at the lowest price.
One other way to reduce purchasing-related costs is to conduct a pre-award
audit, normally involving large purchases that involve bids.
The internal auditor verifies the accuracy of the bids.
Receiving and Storing Goods
The Receiving Department accepts deliveries from suppliers. The Receiving
Department normally reports to the Warehouse Manager, who reports to Vice
President of Manufacturing. The Inventory Stores Department, which also
reports to the Warehouse Manager, is responsible for the storage of the
goods.
The two major responsibilities of the receiving department are deciding
whether to accept delivery (based on whether there is a valid purchase order)
and verifying the quantity and quality of delivered goods.
When goods arrive, a receiving clerk compares the PO number on the packing
slip with the open PO file to verify the goods were ordered. The receiving
clerk counts the goods and examines them for damage before routing to the
warehouse or factory.
Three possible exceptions to this process are
1. Receiving a quantity of goods different from the amount
ordered
2. Receiving damaged goods
3. Receiving goods of inferior quality that fail inspection
In all three cases, the purchasing department must resolve the situation with
the supplier.
Improve Efficiency and Effectiveness
One way to improve the efficiency of the receiving process is to require
suppliers to bar-code their products.
Bar-coding enables receiving clerks to scan in the product number,
description, and quantity of all items received, eliminating data errors.
Radio frequency identification (RFID) tags are attached to each crate of
goods and emit a signal that a receiving unit embedded in the gates near a
company’s warehouse unit can read.
EDI and satellite technology provide another way to improve the efficiency of
inbound logistics. EDI advance shipping notices inform companies when
products have been shipped.
Finally, audits may identify opportunities to cut freight costs. For example,
many companies have negotiated significant savings with specific carriers.
Paying for Goods and Services
There are two basic sub-processes involved in the payment process:
1. Approval of vendor invoices
2. Actual payment of the invoices
Approve Vendor Invoices for Payment
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.
There are two basic approaches to processing vendor invoices:
1. Non-Voucher system—Each approved invoice is posted in the
supplier’s records in accounts payable, filed, and is then
stored in an open invoice file.
When a check is written, the invoice is removed from the open
invoice file, marked “paid” and then stored in a paid invoice
file.
2. Voucher system—A disbursement voucher is also prepared which
identifies the supplier, lists outstanding invoices, and 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.
There are three advantages for using disbursement vouchers:
1. Several invoices may be paid at once (reducing number of checks).
2. Vouchers can be pre-numbered, which simplifies tracking all
payables.
3. The voucher provides a record that a vendor invoice has been
approved for payment and facilitates invoice approval separate from
invoice payment. This makes it easier to schedule both activities to
maximize efficiency.
Accounting approves the invoice for payment by comparing the invoice to
the purchase order and receiving report. A voucher package, which contains
the approved invoice, and supporting purchase order and receiving report,
is sent to the cashier. This voucher package authorizes issuance of a
check or EFT to the supplier.
Pay Approved Invoices
The final activity in the expenditure cycle is the payment of approved
invoices.
The cashier reviews the voucher package, approves the payment, prepares
the check for payment, and signs the check.
Improving Efficiency and Effectiveness
The accounts payable process, which matches vendor invoices to purchase
orders and receiving reports, is a prime candidate for automation.
Processing efficiency can be improved by: requiring suppliers to submit
invoices by EDI and having the system automatically match invoices to
purchase orders and receiving reports.
Another option is to eliminate vendor invoices. This “invoiceless”
approach is called evaluated receipt settlement (ERS). ERS replaces the
traditional three-way matching process with a two-way match of the
purchase order and receiving report.
Procurement cards provide one way to eliminate the need for accounts
payable to process many small noninventory invoices. A procurement card is
a corporation credit card that employees can use only at designated
suppliers to purchase specific kinds of items.
Using corporate credit cards for travel expenses further reduces the
number of invoices that need to be processed.
Preparing careful short-term cash budgets is useful in taking advantage of
early-payment discounts.
For example, if the corporation purchased an item for $100,000 with the
terms 2/10, n/30; the amount of the discount that could be realized by
paying within ten days is $2,000. Even more important, if the
corporation did not pay within the ten days, the 2 percent discount
represents an annual interest rate of 18 percent (2% X 360/20).
Finally, financial data electronic interchange (FEDI) can cut the costs
associated with paying suppliers by eliminating the need to prepare and
mail checks.