Expenditure Cycle - Purchasing Process Notes

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Expenditure Cycle

Introduction
Definition: recurring set of business activities & related info-processing operations, associated with procuring goods & services from suppliers (primary external info exchange) & cash disbursements Objectives: minimise total cost of acquiring/maintaining inventory, supplies & services

Goals of Expenditure Cycle
• Purchase from reliable vendors (service-focused)
• Purchase high quality items (quality-focused)
• Obtain best possible prices for items (price-focused) • Purchase only items that are properly authorised
• Have resources available at hand when needed
• Receive only items that are ordered
• Pay for the items in a timely manner

Goal Conflicts & Ambiguities
• Individual managers’ goals may not be in congruence with organisational objectives o Purchasing department may buy large quantities of inventory (bulk ordering) to take advantage of quantity discounts & reduce ordering costs/pay in cash to take advantage of cash discounts o But this drives up costs of receiving, inspecting & holding inventory costs (may not have enough storage space, may want to preserve cash to improve cash flows)

• Ambiguities in defining goals & success in meeting them o Purchasing goal = select vendor providing best quality at lowest price by promised delivery date o But realistically, 1 vendor will not be able to satisfy all 3 (timely, quality & price)

• Prioritisation of goals is necessary for choosing best solution given various constraints o Trade-offs while prioritising amongst conflicting goals o Depending on market characteristics as well (eg. if market sensitive to satisfying customer needs -> may pay higher price to ensure best quality & timely delivery)

Performance Reports
• Supplier performance
• Employee (those related to expenditure cycle process) performance • Quantity of POs processed by purchasing clerk
• Quantity of invoices processed by A/P clerk
• Quantity of deliveries handled by receiving clerk
• Quantity of inventory moves by warehouse worker
• Inventory turnover
• Classification of inventory based on contribution to profitability

Purchasing Process
Data Stores Involved
• Inventory Master Data: record of each item stocked/regularly ordered • Vendor Master Data: stores info about approved vendors (including vendor performance) • Purchase Requisition Data: data on all purchase requisitions (by user departments) • Purchase Order Master Data: open PO info (purchasing department) • Purchase Receipts Data: lists items received (receiving department)

1.0 – Determine Purchase Requirements
Departments: Unit, purchasing
Key Activities:
• Determine What & How Much to Order
o Data stores involved: inventory, purchase requisition master data o Ordering more frequently = lower average inventory -> lower holding costs, but higher ordering costs (preferred due to presently decreasing ordering costs) o Ordering less frequently = high average inventory -> higher holding costs, but lower ordering costs • Determine When to Order

o Data stores involved: inventory master data
o Conduct ROP analysis based on pre-determined order levels

Key Risks & Internal Control Plans:
• Prevent Stock-Outs
o Periodic physical counts of inventory
o Maintain accurate inventory records (input & update accuracy is important) • Ordering Unnecessary Items
o Approval of purchase requisitions

2.0 – Order Goods & Services
Departments: purchasing department
Key Activities:
• Select Vendor
o Data store involved: vendor master data
o Consider quality/price of goods, reliability of delivery, payment terms • Prepare Purchase Order
o Data store involved: purchase order, inventory master data o Purchaser...
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