Question

Describe the expenditure and production cycles and explain why these are so important in business. Include two examples of typical documents you would use in each cycle in your explanation. [7 Marks]

Answer 1

Expenditure cycle

Expenditure cycle of a business shows the set of activities concerning the purchase and repayment towards good and services. The set of activities comprises of identification of purchase requirement, purchase of goods, receipt of goods and finally the payment back to suppliers. The expenditure cycle more relays on the sales cycle since the last sales gives the most nearest consumer demands.

The expenditure cycle includes requisition of goods and services, supplier selection, ordering, receipt and payments. The purchasing is an internal function and it always linked to all the activities of the business. The goals of effective purchasing include buying quality products at reasonable rate. Usually all the companies are having continuous flow of purchasing activities.

Expenditure cycle is a set of repetitive process of purchase of good and services and its payments. The cycle of expenditure includes process of ordering of good and services, Receiving of the same and approval of invoices and at last Disbursing Cash.

Ordering of Goods and Services: This is the first step of expenditure cycle. Here the business firm makes order to buy materials, supplies, and services. The purchase requisition is made by the employees. Then purchase department will approve the requisition and thay will find a supplier and creates a purchase order. This will be after considering the quality and price of the products.

Receipt of Goods and Services: Once the order is placed, the supplier will deliver the products. So the ordering firm needs to receive and check the product quality, quantity etc… after receiving. There is always a chance of theft. So the physical presence should be identified.

Approval of Invoices. The accounts payable section will approve the vendor invoices after it receives the goods and they will match it with the requisition.

Disbursal of cash: The Authentic and timely payment by the company is also an important activity by the business.

Production Cycle

The production cycle comprised of activities from procurement of raw materials to the conversion of it to the finished goods. This include design of goods, production schedule, manufacturing of goods into finished product and its cost allocation etc…These are handled by different departments like Engineering, Material Management, Production planning and procurement, accounts department etc…

The engineering departments makes the product designs based on the inputs they received from other departments like marketing, accounts etc…After product design is made, the Bill of Materials is created by the engineering dept. Then the production plan is made based on the sales forecast. Then the purchase requisition is made. Based on the raw materials they purchased.

Once the materials are ready materials management department releases job orders in accordance with production plan. Then the production process begins and the materials are converted to fished goods. The cost accounting department assesses the cost summaries for the completed processes and the variances from the expectation are identified. Then the corrective actions are taken accordingly.

The production cycle in short include the following steps: Sales Forecasting, Preparation of budget, production planning activity, dispatching, progressing, inspection, evaluation and stock.

DOCUMENTS:

in Expenditure Cycle: Purchase Requisition and Purchase Order

in Production Cycle:  Bill of Materials, Operation List, Purchase Requisition and Purchase Order, Production Schedule etc...