The Expenditure Cycle: The expenditure cycle is a recurring set of business activities and related data processing operations

associated with the purchase of and payment for goods and services. Primary objective of the expenditure cycle is to minimize the total cost of acquiring and maintaining inventories, supplies and the various services the organization needs to function Expenditure Cycle Business Activities Three basic business activities performed 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 These activities mirror activities in the revenue cycle. The following figure provides a level 0 data flow diagram for the expenditure cycle.

1) Ordering goods, supplies and services: The first major business activity in the expenditure cycle is ordering inventory or supplies. Key decisions in this process involve identifying what, when, and how much to purchase and from whom. Alternative Inventory Control Methods One of the key factors affecting the ordering process is the inventory control method to be used. We will consider three alternate approaches to inventory control: economic order quantity (EOQ); just in time inventory (JIT); and materials requirements planning (MRP). Economic Order Quantity (EOQ) is the traditional inventory control method to maintain sufficient inventory levels so production can continue without interruption. Just-in-Time (JIT) is another inventory management technique that minimizes carrying and stock out costs by having deliveries made in quantities and at the time needed for production based on customer demand. Materials Requirement Planning (MRP) is an inventory management technique that seeks to reduce required inventory by better scheduling production. MRP basically estimates the sales demand for a product. Purchase Requests The purchase order is a document that formally requests a vendor (supplier) to sell and deliver specified products at specified prices. Generating Purchase Orders A crucial decision is the selection of supplier for inventory items. Several factors should be considered in making this decision: Price Quality of materials Dependability in making deliveries 2) Receiving and Storing Goods The second major business activity involves the receipt and storage of ordered items.

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 receiving department has two major responsibilities: Deciding whether to accept a delivery Verifying quantity and quality The receiving report is the primary document used in this process. It includes the date received, shipper, supplier, and purchase order number. In this process contains three possible exceptions; they are: (1) receiving a quantity of goods different from the amount ordered, (2) receiving damaged goods, or (3) receiving goods of lower quality that fail inspection.

3) Paying For Goods and Services The third main activity in the expenditure cycle is paying vendors. There are two basic sub-processes involved in the payment process: approval of vendor invoices and actual payment of the invoices. Approving 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. There are two basic approaches to processing vendor invoices: Voucher system Non-voucher system Paying for goods purchased

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.