Question

. Donald Toys manufactures custom made dolls and the company purchases its raw materials from various suppliers. When production supervisors require raw materials, they complete a requisition form and this is submitted to the purchase ordering department. Requisition forms do not require authorisation and no reference is made to the current inventory levels of the materials being requested. Staff in the purchasing department uses the requisitions to raise sequentially numbered purchase orders based on the approved suppliers list, which was last updated 24 months ago. The purchasing director authorises the orders prior to these being sent to the suppliers. When the goods are received, the warehouse department verifies the quantity to the suppliers despatch note and checks that the quality of the goods received are satisfactory. They complete a sequentially numbered goods received note (GRN) and send a copy of the GRN to the finance department. Purchase invoices are sent directly to the purchase ledger clerk, who stores them in a manual file until the end of each week. He then inputs them into the purchase ledger using batch controls and gives each invoice a unique number based on the supplier code. The invoices are reviewed and authorised for payment by the finance director, but the actual payment is only made 60 days after the invoice is input into the system.

Required:

(a) Explain three (3) deficiencies of the purchasing system of Donald Toys [15 marks]

(b) Recommend a control to address each of these deficiencies that you have identified above. [15 marks]

Answer 1

Part a)

The three deficiencies of the purchasing system of Donald Toys are given as follows:

1) Material Requisition Forms not Authorized

The requsition forms are forwarded by the production supervisors to the purchase department without getting them authorized by the head/manager of the production department. This can result in unnecessary purchases as the stock of current inventory is not taken before raising a requisition which in turn can increase the cost of carrying and maintaining the inventory. Further, the absence of proper authorization may also encourage fraudulent purchases.

2) List of Authorized Suppliers not Updated from a Long Time

The list of authorized suppliers has not been updated since last 24 months. This may result in procurement of raw materials at higher prices as the price list was last negotiated and finalized 2 years ago. The company may become too much dependant on these limited suppliers which may affect the delivery times. Further, the suppliers may not provide the same level of quality as they used to offer initally.

3) Raw Materials Received not Compared and Checked with Purchase Orders

The raw materials received are not compared and checked by the warehouse department with the purchase orders issued by the purchase department and sent to the suppliers. The stock received is compared only against the despatch note issued by the supplier. This can result in receipt of items completely different from what was ordered and payment for stock which was not required by the company.

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Part b)

The control to address each of the deficiencies identified in Part a is given as below:

1) Authorization of Material Requisition Forms by Appropriate Personnel

Each material requisition form should be signed by the production manager/head. Production manager/head should check the current inventory available with the company before authorizing the requisition. The requisition form should be designed in such a way that the production supervisor is required to mention the current inventory of the raw material (s) that is required to be replenished. Till the time, the requisition has been authorized by the concerned employee, the purchasing department should not accept the requisition and place order for raw materials.

2) Update List of Suppliers

The company should review and update the list of suppliers on a regular basis (such as 6 or 12 months). Fresh suppliers can also be added (to the list) after a thorough verification of their business processes and operations. This can help the company in ensuring regular supply of raw materials and in negotiating better terms and conditions (including prices) with both existing and new suppliers.

3) Match Raw Materials Received with Purchase Orders

The purchasing department should forward a copy of the authorized purchase order to the warehouse department. The warehouse department should match the items received with the relevant purchase order and perform the quantity and quality check accordingly. Relying solely on the desptach note of the supplier for quantity and items verification is not advisable as it can result in huge discrepancies between the items ordered and items actually received.