TUTORIAL: BAP 71 AIS DISCUSSION QUESTIONS

Lecture Week: 9 Chapter 11: Expenditure Cycle

DISCUSSION QUESTIONS:

11.1 Martin Ltd has always had a strategy of product differentiation; that is, providing
high quality products and extracting a price premium from the market. During
the recent economic downturn Martin Ltd has seen its customer base diminish,
and decided to move strategically to a cost leadership strategy, that is, to try to
sell more products at a lower price.
(a) What are the implications of this strategy change for the expenditure
cycle?
(b) What changes would you expect to see in the expenditure cycle?
(c) What are the implications of this strategy change in terms of the
usefulness of historic sales data for decision making related to demand
predictions?

(a) This strategy change will have big implications for the expenditure cycle, which is
fundamentally driven by the level of demand for products and services. All existing policies
and procedures will be geared around volume, pricing and quality targets flowing from the
product differentiation (high price / high quality) strategy. To move to a cost leadership (high
volume / low price) strategy requires revisiting and realigning existing policies and procedures.

(b) Assessing changes in the order of the processes in the expenditure cycle:

1.0 To accurately determine demand for goods will require careful reassessment of all policies
and operational procedures relating to raising a purchase requisition. As an example, current
purchasing policies may encourage creating a purchase requisition on immediate receipt of a
request for a product, whereas under a cost leadership strategy this policy may need to be
updated to include the ability to achieve cost efficiencies. The effect of the strategy change
may well be to slow down this stage of the process, as requests which were previously
processed on receipt may be stored and accumulated to achieve efficient ordering quantities.
Depending on the degree of automation of existing demand calculations it may be necessary
to check and adjust any heuristics used to calculate future demand for systems dealing with
inventory management

2.0 Supplier choice will be impacted by the strategy change; high cost high quality high service
providers deemed appropriate under a differentiation strategy may no longer be the best
choice under cost leadership. All existing suppliers would need to be reassessed for suitability
using metrics suited to the new strategy (for example product cost would tend to be weighted
more highly, and quality and service dimension may be ranked as slightly less important). New
suppliers may need to be located and assessed to meet the differing demands of the cost
leadership strategy, for example an existing high quality low volume supplier may be unable
to meet predicted demands under the new strategy so a larger supplier may need to be located
for any affected products. Creation of purchase orders may be affected by the need to
consolidate multiple purchase requisition in order to achieve volume related cost efficiencies.

3.0 The activities around receiving and recording goods would be affected by volume and
speed considerations. Handling higher volumes of goods may require changes to be made to
physical working spaces and the related logistics considerations. It may be effective to
introduce technology to automate some previously manual functions, such as use of bar codes
and scanners to verify delivery quantities. Policies would need to be reviewed to check for the
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presence of internal controls designed to promote ultra-high quality outcomes as it may be
possible to relax some of these controls, (assuming that expected increases in error rates will
be acceptable) in order to receive goods more efficiently during this phase of the expenditure
process. Operational procedures relating to quality checking of goods received may need to
be revised to allow for slightly lower quality controls over receiving products, where
appropriate.

4.0 Volume considerations would also be a consideration when making payments to suppliers.
Depending on how automated the payment cycle currently is at Martin Ltd they may need to
consider introducing a higher degree of data integration and automation to ensure payment
efficiencies are achieved. Martin Ltd may also need to consider a complete revamp of their
payments system to allow payment on receipt of goods rather than on receipt of a supplier
invoice (i.e. adopt invoice-less trading). This would reduce costs in relation to these activities
as three way reconciliation (purchase order, goods received, and invoice) reconciliation would
no longer be required. If Martin Ltd elected to introduce this option they would need to ensure
that controls are tightened around the activities related to generation of purchase orders and
recording goods receipt.

(c) Careful modelling and analysis would be required before historic sales data would be
suitable for use in any decision making task. Sales data is used in most decisions relating to
calculation of demand for products and services, so the implications of the strategy change
are immense. Martin Ltd may need to adopt a heuristic to deal with this issue, for example
they may assume that volumes under a cost leadership strategy are likely to be historic
volumes multiplied by a factor of x and adjust all analysis to allow for this. Martin Ltd would
need to be very careful whatever approach they take, as even a slightly incorrect assumption
could have a large effect on variances to the actual demand encountered.

11.2 Johnson Ltd has decided to use online banking electronic payment facilities to
pay suppliers for goods.
(a) What controls would you expect to see introduced to ensure the safety
of the online banking data?
(b) Which activities in the accounts payable process would be affected?
(c) What changes would you expect to see in these activities?
(d) What metrics could you use to measure the success of this initiative
post implementation?

(a) Johnson Ltd should ensure that accounts payable data is regularly reconciled to supplier
statements by an independent person, and that bank reconciliation is conducted regularly.
They also need to limit access to online banking to those staff who genuinely need this access
to perform their regular duties. Johnson Ltd should configure their online banking payments
or funds transfer facilities so two electronic authorisations are required before any transaction
can proceed.

(b) 4.1 approve the payment and 4.2 make the payment.

(c) Activity 4.1 will not fundamentally change as it will still be necessary to assess and approve
the payment as due. What may alter is there may be a need to record this approval in two
systems, once on the in-house accounts payable system, and then again on the banks online
system to create the payable transaction. Activity 4.2 would differ in that instead of generating
a print run of cheques or an electronic notification to the bank emanating from an internal
accounts payable system, the payment instead would be processed and performed entirely

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by the banks computer system on the payment due date. Depending on the degree of
integrating between online banking and accounts payable, payment notifications and their
related data may be shared electronically between these two systems, alternatively it may
need to be re-keyed into the in-house systems at Johnson Ltd.

(d) Amount or volume of unauthorised payment made, average payment times, numbers of
suppler complaints, volume or value of supplier overpayments detected.

11.3 Nguyen Ltd has just realised that it has a problem with its expenditure data, as
its goods received records do not easily identify whether a supplier has delivered the
ordered goods on the due date.
(a) What decisions made during the expenditure cycle would be affected by
this data problem?
(b) How would those decisions be affected? How would this data problem
affect the performance of the expenditure cycle?
(c) How would this data problem affect other processes at Nguyen Ltd?

(a) Decisions relating to choosing a supplier & approving supplier payment would be affected.

(b) The choice of supplier would be affected as there is no history related to supplier
performance in terms of their on-time delivery results. This may result in a supplier continuing
to be approved and selected even though their delivery performance is substandard. A
payment may be approved for a supplier in full when a partial payment may in fact be more
appropriate, depending on whether any performance penalty clauses are contained in the
supplier contract.

(c) In a situation where the goods purchased are raw materials for use in the production
process then the production cycle will be impacted by the data failure, as purchasing staff may
continue to select unreliable suppliers and any late or non-delivery will affect ability to meet
proposed production scheduling.

11.4 Wilson Ltd has a reconciliation problem. The amount of new goods booked
into inventory records by the warehouse staff does not always seem to match with the
amount of goods recorded as received by the goods receiving staff. Wilson Ltd seems
to have good controls, it has separated the receiving and warehousing of goods, and
it regularly conducts ad hoc duplicate counts of inventory items received.
(a) Which internal controls might be missing?
(b) What could you do in order to investigate this problem?

(a) Wilson Ltd should look at internal controls around the receipt of goods from when goods
arrive through to when they are transferred and booked into the warehouse. They should
assess the existence of control related to counting goods received, in particular double
checking of the count or use of blind purchase orders as appropriate. They should also check
whether physical access controls are effective and if periodic inventory stock checks are taking
place.

(b) You should review the controls in place, and if necessary recommend additional controls.
Compliance with existing controls should also be considered. Techniques here could include
observation and/or checking of audit trails and documentation related to historic transactions.
If theft of goods is suspected job rotations could be considered as a tactic to determine whether
theft is related to an individual or systemic in nature.
11.5 Anderson Ltd has a new CEO who is keen on improving process cycle times.
She has reviewed the process documentation for the expenditure cycle and is asking
you to stop accumulating purchase requests before determining the demand for
goods as it appears to be slowing the process down.
(a) Should you agree to stop accumulating the purchase requests? Why or
why not?
(b) If you would not agree to stop accumulating purchase requests, how
would you explain this decision to the CEO?
(c) If you would agree to stop accumulating purchase requests how would
you justify this change to the purchasing manager?
(d) If you stop accumulating purchase requests would you need to measure
the cycle performance differently?

(a) This really depends on the strategy of the organisation in terms of their desired cycle time
for procurement, and their policies and procedures related to acceptable inventory stock
levels. The issue here is that if you remove the accumulation of purchase requests you may
end up with inaccurate demand forecasts and as a result generate multiple inefficient or
incorrect purchase requisitions. If the reason you are currently accumulating the requests is
to obtain transaction cost efficiencies related to order size, and this efficiency is important to
Anderson Ltd, then you probably should not agree to stop accumulating the purchase
requests.

(b) The CEO needs to understand that this control is in place specifically to obtain cost
efficiencies related to procurement, and that to remove it risks incurring additional costs.

(c) The justification for the change to the purchasing manager would need to be framed around
an explanation of how overall cycle times are more important to the organisation than costs,
in terms of the purchasing process. From the perspective of this manager, their efficiency will
actually decrease as they will be required to generate more purchase requisitions and/or
purchase orders. The purchasing manager would need to understand/accept that the cost
savings achieved by accumulating requests outweigh the potential efficiencies inherent in a
reduction of purchasing cycle times.

(d) Performance expectations for the manager and section would need to be changed to reflect
the reality that previous targets did not consider high volumes of purchase requisition and
orders. The most appropriate KPI to measure the effect of this change would be a comparison
of the actual cycle time achieved compared to previous cycle times experienced, however
KPIs such as volume of complaints received from product requesters should also be
considered.