Question

In: Accounting

Lecimore Company has a centralized purchasing department that is managed by Meg Shen. Shen has established...

Lecimore Company has a centralized purchasing department that

is managed by Meg Shen. Shen has established policies and procedures to guide the clerical

staff and purchasing agents in the day-to-day operation of the department. She is satisfied

that these policies and procedures are in conformity with company objectives and believes

there are no major problems in the regular operations of the purchasing department.

Lecimore’s internal audit department was assigned to perform an operational audit of

the purchasing function. Their first task was to review the specific policies and procedures

established by Shen. The policies and procedures are as follows:

• All significant purchases are made on a competitive bid basis. The probability of

timely delivery, reliability of vendor, and so forth, are taken into consideration on a

subjective basis.

• Detailed specifications of the minimum acceptable quality for all goods purchased

are provided to vendors.

• Vendors’ adherence to the quality specifications is the responsibility of the materials

manager of the inventory control department and not the purchasing department.

The materials manager inspects the goods as they arrive to be sure that the quality

meets the minimum standards and then sees that the goods are transferred from the

receiving dock to the storeroom.

• All purchase requests are prepared by the materials manager based on the production

schedule for a four-month period.

The internal audit staff then observed the operations of the purchasing function and

gathered the following findings:

• One vendor provides 90% of a critical raw material. This vendor has a good delivery

record and is reliable. Furthermore, this vendor has been the low bidder over the

past few years.

• As production plans change, rush and expedite orders are made by production directly

to the purchasing department. Materials ordered for cancelled production

runs are stored for future use. The costs of these special requests are borne by the

purchasing department. Shen considers the additional costs associated with these

special requests as “costs of being a good member of the corporate team.”

Materials to accomplish engineering changes are ordered by the purchasing department

as soon as the changes are made by the engineering department. Shen is proud

of the quick response by the purchasing staff to product changes. Materials on hand

are not reviewed before any orders are placed.

• Partial shipments and advance shipments (that is, those received before the requested

date of delivery) are accepted by the materials manager, who notifies the purchasing

department of the receipt. The purchasing department is responsible for follow-up on

partial shipments. No action is taken to discourage advance shipments.

Based on the purchasing department’s policies and procedures and the findings of

Lecimore’s internal audit staff:

a. Identify deficiencies and/or inefficiencies in Lecimore Company’s purchasing

function.

b. Make recommendations for those deficiencies/inefficiencies that you identify.*

Solutions

Expert Solution

a. b.
WEAKNESSES/ INEFFICIENCIES RECOMMENDATIONS
·1. Quantities of materials received are not verified by the materials manager. Besides inspecting all incoming goods to ensure that quality standards are met, the materials manager should verify quantities received by actualphysical
count. All material receipts do not have to be counted
for a verification program to be effective.Systematically verifying one or severalreceipts from each vendor during a given time period can identify those receipts which are the most troublesome. Once identified, efforts can be directed to correcting the problem. The verification processis performed by comparing receiving document quantities to actual physical counts to ensure invoice totals are correct.
2. The materials manager prepares purchasing requests based on production schedules and not on requisitions received from operating departments. Purchasing requests prepared by the materials manager are to be based on requisitions received from operating departments and not production schedules for a four-month period. Production schedules could be outdated and not reftect current sales trends. Operating departments are constantly adjusting production levels to account for changes. To improve budgetary control over expenditures, the controller's office also should review the requests in conjunction with forward planning to ensure expenditures are consistent with company sales projections. Once an analysis of inventory flows is
complete the economic order quantity can be applied to determine the reorder point and to minimize inventories.
3. The majority of Lecimore's requirement for a critical raw material is supplied It is best to develop alternate sources of supply for critical materials. The obvious benefits are reduced reliance on a single vendor, and the reduced
by a single vendor. possibility of lost production because of material
shortages and/or other interruptions in the operation due to a single vendor. Encouragement of competition by t11e effective allocation of material requirements between vendors is also another benefit tllat can be expected to materializeif an effective program is implemented. Other benefits such as improved vendor services and technical assistance may also result as vendors attempt to gainincreased s11ares of the goods provided the user company.
4 . Rush and expedite orders are made by production directly to the purchasing department without consulting the materials managers. Rush and expedite orders should be reviewed by the materials manager to determine if any of the orders can be filled using existinginventories.
5. The purchasing department is held The direct association of special order costs with responsible departments is necessary in order to exercise proper control. Responsibility accounting obligates departments to exercise judgment and
responsible for the cost of special orders, which can be clearly identified by requesting departments. prudence over those costs they are held accountable for. Through responsibility reporting, excessive costs are highlighted so that corrective actions can be
implemented.
6. Engineering c11anges are not discussed with other departments before the materials needed to implement the change are ordered. A general policy outlining the authority and responsibility for implementing engineering changes must be established. The proposed changes should be reviewed thOroughly by various company departments before an orderis placed. The controller's officewould review the proposalin light ofincremental costs or cost savings that are expected to result The manufacturing departments would review the change from an adaptability point of view. Before placing an order, purchasing would 11ave to receive approvalfrom the reviewing departments. Once approvalis obtained,t11e vendor selection process can begin.
7. Accounting is not notified by the materials manager of t11e receipt of partial shipments. Besides notifying the purchasing department of the receipt of partial shipments,the materials manager should alsoinform the accounting department so t11at vendor invoices can be processed correctly.
Receiving reports clearly identifying the receipt as a partialshipment is the most effective means of communicating this information. By appropriately annotating the receiving report, vendors will not be paid for materials the company has not received.

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