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18 Cards in this Set

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Expenditure Cycle
The primary external exchange of information is with suppliers (vendors).

The primary objective of the expenditure cycle is to minimize the total cost of acquiring and maintaining inventory, supplies, and services.
The three basic activities performed in the expenditure cycle are
Ordering goods, supplies, and services.
Receiving and storing these items.
Paying for these items.
Ordering goods, supplies, and services
Key decisions in this process involve identifying what, when, and how much to purchase and from whom.
Inventory control methods
Economic Order Quantity (EOQ)
Just in Time Inventory (JIT)
Materials Requirements Planning (MRP)
Economic Order Quantity (EOQ)
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.
Materials Requirements Planning (MRP)
MRP seeks to reduce inventory levels by improving the accuracy of forecasting techniques and carefully scheduling production and purchasing around that forecast.
Just in Time Inventory (JIT)
JIT systems attempt to minimize or eliminate inventory by purchasing or producing only in response to actual (as opposed to forecasted) sales.
These systems have frequent, small deliveries of materials, parts, and supplies directly to the location where production will occur.
A factory with a JIT system will have multiple receiving docks for their various work centers.
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.
Similarities and differences between MRP and JIT:
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).
Order Processing 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.
Purchase Requisition
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.

The purchase requisition is received by a purchasing agent (aka, buyer) in the purchasing department, who typically performs the purchasing activity.
In manufacturing companies, this function usually reports to the VP of Manufacturing.
purchase order
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
blanket order
A blanket order is a commitment to buy specified items at specified prices from a particular supplier for a set time period.
Reduces buyer’s uncertainty about reliable material sources
Helps supplier plan capacity and operations
vendor-managed inventory (VMI) program
In a vendor-managed inventory (VMI) program:
Inventory control and purchasing are outsourced to a supplier.
The supplier has access to POS and inventory data and automatically replenishes inventory.
This approach:
Reduces amount of inventory carried.
Eliminates costs of generating purchase orders.
Requires good controls to ensure accuracy of inventory records.
Receiving and storing these items
The receiving department accepts deliveries from suppliers.
Normally, reports to warehouse manager, who reports to VP of Manufacturing.
Inventory stores typically stores the goods.
Also reports to warehouse manager.
The receipt of goods must be communicated to the inventory control function to update inventory records.
receiving report
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 these items
There are two basic sub-processes involved in the payment process:
Approval of vendor invoices
Actual payment of the invoices
Approval of vendor invoices
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.