Expenditure Cycle Overview

Chapter 15: Expenditure Cycle

Expenditure Cycle Overview

  • Expenditure Cycle: Set of recurring activities related to acquiring inventory and supplies.
    • Involves 3 main activities:
    1. Ordering Supplies, Inventory, Services
    2. Receiving Supplies, Inventory, Services
    3. Paying for Supplies, Inventory, Services

Ordering Inventory

  • Inventory Control Methods:

    • 1. Economic Order Quantity (EOQ)

    • Traditional approach to manage inventory.

    • Objective: Ensure there is always enough inventory so that production is never interrupted.

    • Goal: Minimize the sum of three costs:

      1. Ordering Costs: Costs associated with creating a purchase order.
      2. Carrying Costs: Costs of holding inventory.
      3. Stockout Costs: Costs associated with running out of inventory (shortages).

    • 2. Materials Requirements Planning (MRP)

    • Focuses on forecasting demand to create inventory orders based on forecasts.

    • Works well for consistent consumer staple products (e.g., food).

    • Improves techniques for placing orders based on expected demand.

    • 3. Just-in-Time (JIT)

    • A method that aims to eliminate all inventories by placing orders in response to actual sales.

    • Works best for products with limited life spans and predictable demand (e.g., fashion items).

    • Bases ordering inventory on actual sales.

Receiving Supplies and Services

  • Responsibilities of Receiving Department:
    1. Determine if the order should be accepted.
    2. Verify the quantity and quality of goods received based on whether a valid purchase order exists.
  • This process achieves the following:
    1. Ensures the company pays only for what is received.
    2. Maintains accurate inventory records.
    3. Identifies defective goods received.
  • Receiving Process:
    • When goods arrive, the receiving department verifies and processes them:
    1. Count quantities received.
    2. Inspect goods for damage and send undamaged goods to the warehouse.
    3. Prepare a receiving report that includes:
      • List of items and quantities received.
      • Identification of vendor and purchase order number.
      • Date goods were received.
    • Receiving Report is then sent to Accounts Payable.

Ordering Process for Goods and Services

  • When a department needs to purchase supplies or goods:
    • Complete a requisition, clearly identifying the goods requested for purchase and the quantities needed.
    • This requisition is sent to the purchasing department.
Purchasing Department Actions
  • Upon receiving the purchase requisition:
    • Negotiate terms with vendors.
    • Identify proper vendors.
    • Generate five copies of the Purchase Order (PO), which serves as a formal request for a vendor to sell and deliver specified quantities of goods at specified prices.
  • The Purchase Order should include:
    1. Goods ordered.
    2. Quantities.
    3. Shipping terms.
    4. Name of vendor.
Distribution of Purchase Order Copies
  • Five copies of the Purchase Order are distributed as follows:
    1. Sent back to the requisitioning department.
    2. Sent to the vendor.
    3. Kept in the purchasing department.
    4. Sent to Accounts Payable for recording in the A/P ledger.
    5. Sent to the Receiving Department for quantity confirmation against the purchase order.

Conclusion on Receiving Goods and Services

  • When a vendor delivers goods, they should be received by the Receiving Department, ensuring all processes above are correctly followed.