Cost Management Systems

1
Overview

• Procurement is the business process of selecting
  a source, ordering, and acquiring goods or
  services.
• The goods or services might be obtained
  internally or purchased.

2
Control Objectives

• All transactions are properly Authorized
• All recorded transactions are valid
• All valid,authorized transaction are recorded
• All transactions are recorded accurately
• Assets are safeguarded from Loss of theft
• Business activities are performed efficiently and
  effectively.

3
The Procurement Business Process

• Procurement business process generally includes
  the following activities.
• purchase requisition
• request for quotation
• quotation
• purchase order
• Receiving
• Payment

4
The Procurement Business Process
Requirement Determination
Issue Purchase Order
Receipt of the Goods
Selection of Source
Invoice Verification
Request for Quotation
Vendor Payment
Selection of a Vendor
5
Requisitioning
Prepare Requisition
Receiving Report
Verify Goods
Purchase Database
Delivery
Requisition Processing
Goods Receipt Processing
Receiving
Accounts Payable
Purchase Requisition
Receiving Report
Purchasing
6
Purchasing
Vendor
Competitive Bidding
Invoice
Select Vendor
Purchase Requisition
Purchase Database
Prepare Order
Invoice Verification
Order Processing
Invoice
Purchase Order
Accounts Payable
Vendor
7
Receiving
Purchase Database
Vendor
Match to Purchase Order
Delivery
Enter Receipt
Order Processing
Blind Count
Receiving Report
Delivery
Stores
Stores
8
Edit Checks When Entering Data

• Validity Check
• Vendor account Inventory Item
• Field checks
• Numeric text fields
• Reasonableness test
• Quantity amount
• Range checks
• Expected delivery date
• Completeness Check
• All appropriate data items

9
Accounts Payable
On Due Date
Accounts Payable
Purchase Requisition
Prepare Voucher
Purchase Order
Voucher Register
Voucher Processing
Receiving Report
Invoice
Journal Voucher
Voucher
Voucher Check
Retrieve Documents
Purchase Database
General Ledger
Cash Disbursements
10
Accounts Payable

• Accounts payable is responsible for initiating
  payments to vendors.
• What documents are available to document a
  purchase transaction?
• purchase requisition
• purchase order
• receiving report
• invoice

11
Accounts Payable

• The use of a voucher system to support payments
  is a major transaction cycle control over
  procurement.
• What is a voucher system?
• It is essentially a review technique to ensure
  that all appropriate documentation is
  assembled, verified, and reviewed prior to actual
  payment of invoice.

12
Accounts Payable

• What are additional control features?
• Purchasing does not control the actual goods.
• Receiving is separate from final custody of the
  delivery.
• Accounts payable handles only documents.
• Purchase requisitions should be independently
  reviewed.

13
Accounts Payable

• Invoices should be routed to purchasing for
  review and approval prior to being sent to
  accounts payable.
• Purchase terms should be reviewed.
• Inventory records should be updated to reflect
  the receipt of goods.

14
Integrity of the Procurement Business Process

• Purchase documentation simply ensures that
  individual orders are received as expected.
• Purchase orders and receiving reports control
  individual purchases.
• They do not directly exercise control over the
  procurement business process.
• Control centers on the integrity of the
  buyer-vendor relationship.

15
The Attribute-Rating Approach to Vendor Selection

• The attribute-rating approach to vendor selection
  is appropriate whenever an objective evaluation
  of the opinions of several independent evaluators
  is desired.
• What are the steps involved?
• Identify and list the attributes to be included
  in the evaluation.

16
The Attribute-Rating Approach to Vendor Selection

• Assign a weight to each attribute, based on
  relative importance and objectivity.
• Have individual evaluators rank each vendor on
  each attribute.
• Total the individual evaluations.

17
Cash Disbursements Business Process

• The cash disbursement business process controls
  check disbursements as well as actual cash
  disbursement.
• Checks are used for the majority of
  disbursements.
• Currency disbursements are restricted to small
  amounts drawn from and accountable to a petty
  cash imprest fund.

18
Cash Disbursements Business Process

• What is an imprest fund?
• It is a fund maintained at a specified,
  predetermined amount.
• The imprest fund concept is not restricted to
  petty cash control.
• Imprest payroll funds and imprest charge or
  expense funds are common in systems design.

19
Cash Disbursements
Sign Checks
Voucher Check
Cancel Voucher after Signing Check
Voucher
Accounts Payable
Voucher
Voucher Check
Check Register
Post
General Ledger
Forward Direct to Payee
Control Total
Voucher Check
20
Internal Audit
Independent of Cash Disbursements
Cancelled Checks
Bank Reconciliation
Bank
Bank Statement
Check Register
Bank Reconciliation
21
Voucher Systems

• The real control over disbursements is a final
  review of documents evidencing the entire
  transaction prior to the authorization for
  payment.
• Authorization may take different forms.
• What are these forms?

22
Voucher Systems

• physically signing off on a voucher package
• preparing a document to authorize an entry in the
  voucher register
• entering data into a computer device
• It is the review process, not the actual signing
  of checks, that is the control.

23
Voucher Systems

• Accounts payable generally refers to trade
  accounts.
• A vouchers payable system encompasses all
  expenditures.
• Vouchers can take several forms, ranging from a
  simple form or envelope to a voucher-check
  combination.

24
Voucher Systems

• A basic question in the design of a voucher
  system concerns when invoices are to be posted to
  vouchers payable.
• After invoices have been approved for payment,
  they may be held until the due date and formally
  posted at that time.
• Alternatively, they may be booked at the time of
  approval.

25
Voucher Systems

• What are built-up voucher systems?
• These systems accumulate several invoices from
  the same vendor and pay them with a single check.
• Three files are necessary to maintain useful
  information.
• What are these files?

26
Voucher Systems

• A file of approved but unpaid invoices
• A file of paid invoices
• A vendor file showing both paid and unpaid
  amounts, ordered by vendor ID

27
Information Needs

• Basic Operational information needs
• Determine when how much inventory to order
• Select the appropriate vendors from whom to
  order.
• Verify the accuracy of vendor invoices
• Decide whether purchase discounts should be
  taken.
• Monitor cash flow needs to pay outstanding
  obligations.

28
Information Needs

• Information for Strategic Performance
  evaluation
• Efficiency and effectiveness of purchasing
  department
• Analyze vendor performance such as ontime
  delivery, quality and so on.
• Time taken to move the goods from receiving dock
  to production
• Percentage of purchase discount taken.

29
Summary

• The efficiency and effectiveness of procurement
  cycle activities can significantly affect a
  companys overall performance
• Deficiencies in requesting and ordering necessary
  inventory and supplies can lead to production
  bottle necks that can lead to lost sales and
  customer dissatisfaction.
• Expenditure cycle database should provide
  information to make sound operational decisions
  along with transaction information.