sample system evaluation on inventory cycle
TRANSCRIPT
Ateneo de Zamboanga University
School of Management and Accountancy
Accountancy Department
In partial fulfilment of the
Requirement in Accounting 236 – A
“A System Evaluation Report
on the Purchase System and Inventory Management
of Supplies Inventory of the Earthlife Wellness Spa Clinic”
Submitted by:
Ban, Floyd I.
Fonollera, Alexis A.
Gerundio, Marie Angelie J.
Guevarra, Cris Abel M.
Palencia, Flordeliz May L.
Submitted to:
Brenda Luz A. Molina, CPA
Instructor
March 11, 2011
ACKNOWLEDGMENT
The proponents would like to thank all the individuals who contributed in the
completion of this systems evaluation report. Without them, the proponents would not be
able to make it through the different trials and hardships that they experienced while
working on this paper.
The proponents would like to extend their gratitude, to their beloved Accounting
236- A instructors, to Ms. Thelma Wee and Ms. Brenda Luz Molina for introducing this
splendid requirement to them, for giving advises, and importantly, for sharing their
expertise to make this paper a success.
Also to the management and staff of Earthlife Wellness Spa Clinic, especially to
M. Josephine Maria R. Eslava and Mr. Dexter Tabangan for accepting the proponents’
request to be their host company. For their cooperation, time, patience and understanding,
thank you!
Most of all to our Almighty God for His unending support and guidance,
“Without Him we are nothing,” and to the proponents’ loving parents, for their trust,
consideration and financial support.
I. EXECUTIVE SUMMARY
The study was conducted at the Earthlife Wellness Spa Clinic located at Door 1, J.
Azucena Bldg., Gov. Camins Avenue, Zamboanga City. It is a sole proprietorship owned
by Ms. Josephine Maria R. Eslava. The business started operating on January 18, 2006.
This study aims to conduct a system evaluation in order to improve the efficiency
and effectiveness of the firm’s inventory cycle. The study only covers the purchase
system and inventory management of the firm’s supplies inventory. In order to gather
data, the proponents conducted an observation of the actual purchase and management of
supplies inventory, and an interview with the manager and employees from January 6 –
February 8, 2011. After the data gathering it was discovered that the business have no
formal reorder point for mineral and essential oil, that the record of purchases and usage
were not regularly adjusted, Operations Managers assigned in the front desk have
overlapping functions, that there is a lack of supervision in the release of bedroom and
bathroom fabrics, and there is no formal authorization in releasing and returning of
oil/lotion/alcohol, beauty care products, and bedroom and bathroom fabrics.
The proposed alternative system includes controls such as: maintaining an
inventory logbook which will be reflecting the quantity of supplies consumed for the day,
the management should consider lessening its roles and duties to avoid overlapping
functions, the transfer of the furniture where bathroom and bedroom fabrics and other
supplies are located for tight supervision, and, lastly, the usage of a requisition slip
prepared by the masseurs and therapist to be approved by the storage or any authorized
personnel.
II. TERMS OF REFERENCE
A. Objectives
General Objective
This study aims to conduct a system evaluation in order to improve the efficiency
and effectiveness of the firm’s inventory cycle.
Specific Objective
To evaluate the purchase system and inventory management of supplies inventory
To observe and document the existing purchase system and inventory
management of supplies inventory
To develop activity controls to improve the existing purchase system and
inventory management of supplies inventory
B. Scope of the Study
The scope of the study covers the purchase system and inventory management of
the firm’s supplies inventory.
C. Constraints
Time management in accomplishing different requirements at the same time.
The size of the business.
The limited hands-on training on the existing system’s operational procedure (e.g.
record-keeping, and handling of supplies inventory).
D. Methodologies
The approaches used for data gathering are the following:
Observation of the actual purchase and management of supplies inventory
The proponents performed an on-site observation of the firm’s existing system
employed in the firm and noted these observations in index cards and processed among
the members of the team.
Interview with the owner, managers and employees
The proponents also conducted series of interviews in the execution of the system
evaluation. It has been a verification point of the gathered data. Through this method, the
proponents have clearly grasped the nature of the business as well its existing system.
III. BACKGROUND OF THE STUDY
The rationale of this study is to widen the knowledge of Management Accounting
students by exposing them with actual business processes.
It serves as a means for them to apply their acquired Accounting Information
System insights. It also serves as a tool to measure the proponent’s understanding of the
said subject matter.
This study also contributes in the community service involvement of the
university. Its significance is for the students to learn and gain knowledge from the
experience and at the same time to be able to serve the community, as always an
Atenean’s advocacy.
Furthermore, the conduct of this study is an avenue for Management Accounting
students to apply all the concepts of its curriculum to their respective host company. This
study does not only benefit the proponents but also their host company especially in the
application of the recommended system which visions to minimize cost and improve
efficiency in the firm’s operations.
IV. COMPANY PROFILE
The business firm’s name is Earthlife Wellness Spa Clinic. It is a sole
proprietorship owned by Ms. Josephine Maria R. Eslava. It is located at Door 1, J.
Azucena Bldg., Gov. Camins Avenue, Zamboanga City.
The business believes that the company is “The Heart for curing people from
stressful way of Life.” The firm started its operations on January 18, 2006. It offers the
following services:
Aromatherapy Massage
Bentosa (Cup Suction)
Hand and Foot Reflex
Facial Spa
Facial Spa with Clay Mask
Body Scrub
Foot Spa
Foot Scrub with Foot Reflex
Foot scrub with Foot Massage
Sauna Bath
Body Massage with Sauna Bath
Body Massage with Body Scrub
Hand and Foot Scrub
The service/s ranges from P150-P400 and usually is on hourly basis. The spa
clinic operates from Monday to Sunday, 1pm to 2am. One distinctive feature of the spa
clinic is that the customers in massage services enjoys full discretion on what amount of
oil/lotion they wanted to be use in the service, they can ask for more or ask for a minimal
amount only. Below are Earthlife Wellness Spa Clinic’s Mission and Vision Statement:
MISSION
Earthlife Wellness Spa Clinic’s mission is to combine the finest elements of spa in
achieving lifelong beauty, health and wellness through the application of unparalleled
therapeutic massage and aesthetician services in a caring, upscale, and professional
environment.
VISION
Earthlife Wellness Spa Clinic’s vision is to create a relaxing environment filled with
beauty and love through its attentive and professional staff. We see ourselves providing
the best beauty and wellness services at all times, with a focus on internal matters,
treating each client as our most cherished loved ones will foster and elicit loyalty,
referrals and good faith from clients.
The organizational structure is presented in Figure 1 of the next page. The owner
is concerned in major decision making in the business. She also takes active participation
in setting up and implementing strategies and policies in the business. The general
manager of the spa is Mr. Dexter Tabangan. He is the person who manages the day-to-
day operations of the spa, he regularly goes to the spa to check the employees and also
how business operations runs in the spa. Mr. Dexter Tabangan is also the person who
directly relays information to the proprietor about all the relevant activities in the firm
(i.e. purchase of supplies, employee compensation, payment of operating expenses and
including problems identified.) The operations managers of Earthlife Wellness Spa Clinic
are Mr. Ralph Lagoy and Ms. Marie May Escopete. They are responsible for the
operations of the business and also handle its customer service functions. They are
considered the trustees in the business and assigned to bill customers. They are assigned
in the front desk. The operations manager assistants are Mr. Felix Poblacion and Ms.
Sheyr Tabangan. They are tasked to assists Mr. Ralph Lagoy and Ms. Marie May
Escopete with the business operations. If the operations manager is checking on the
operations of the spa clinic, he/she will be in-charge in the front desk. The
staff/employees of Earthlife Spa Wellness Clinic are its masseurs, therapists, kitchen
personnel and laundry personnel. The business maintains 26 employees, majority are full-
time workers and some are just part-time workers.
Figure 1. The Company’s Organizational Structure
PROPRIETOR
General Manager
Operations Managers
Operations Manager Assistants
Employee/Staffs
Masseurs Therapists Lounge Personnel Laundry Personnel
V. THE EXISTING SYSTEM
A. Objectives
General Objective
The existing system desires to efficiently manage supplies inventory transactions.
Specific Objective
The specific objective of the existing system is to safeguard and properly manage
its supplies inventory
B. Scope of the Study
The scope of the study covers the firm’s supplies inventory specifically in
safeguarding and proper usage of supplies inventory.
C. Concept of the Operation
The existing Purchase System of the Earthlife Wellness Spa Clinic starts with
determining whether there is a need to purchase additional supplies as based on the
inventory level. This is done by checking the quantity of supplies in the cabinet that are
still available for use. The quantity of supplies (for bedroom and bathroom fabrics) is
being monitored after services have been rendered to a client. The masseur or therapist
who rendered the service checks the supplies used, changes the bed sheet and pillow case,
and cleans the room. For the oils and other consumable supplies, it is usually being
estimated when an order is to be made for such supplies. The estimation is done by the
operations manager. After recognizing the need to order certain supplies, the operations
manager informs the manager/owner of the necessity through a phone call or text. The
manager/owner then now does the purchase of the supplies through order to a supplier or
through a direct purchase from a department store.
Order to a supplier
This is for the ordinary massage mineral oil used in the operations
The manager texts/calls the supplier for the order
The quantity of supplies ordered is fixed every time an order is made
Direct Purchase from a department store
This is for the towels, shorts, bed sheets, etc. and for the essential oils which are
purchased in Manila
The manager does the purchase of the supplies with specific quantity from a
department store or thru malls
The quantity of the supplies varies every time a purchase is made
Paid in cash
When the ordered supplies are delivered, the operations manager receives the
supplies and issues a check for payment. The issuance of a check includes payments for
the supplies delivered and may include a payment for the purchase made previously. In
other words, a check issued is equivalent for two payments which means half of the
amount stated in the check is for the obligation incurred for prior delivery and the other
half is for the supplies delivered at the time the check is issued. On the other hand, the
supplies that are purchased directly from a department store are also received by the
operations manager or if it is not directly forwarded to the Spa, it is kept by the
manager/owner himself in his house.
The purchase is now then recorded in a record book listing the supplies purchased
and their quantity and the amount paid. For accounting purposes, such information is
supplied to the bookkeeper.
Whenever there is a client/customer, the therapist in charge will directly get the
supplies needed for the session from their respective cabinets/shelves. Then after the
session, one of the staffs does the changing of beddings and at the same time checking
the supplies used.
Figure 2. Data Flow Diagram for the Existing Purchase System
D. Problem Analysis of the Existing System
Approval of Order
Operations ManagerOperations
Manager
Issue Check
Order from
Supplier (Via Text)
SupplierSupplier
2ndDelivery
Record Book
Direct Purchase (Paid in Cash)
Receive Inventory
Record Purchase
1stDelivery
StorageStorage Release Inventory
TherapistTherapist
Monitor Inventory level
Monitor Inventory
level
LEGEND:
Entity Name
Flow of Data
Process Triggered by Data
File Storage
1.) No formal reorder point for mineral and essential oil.
There is no formal reorder point established for mineral and essential oil
especially that these are used in most of the services offered by the business. The
operations manager forwards the general manager or owner the items which needed to be
reordered. But the method for identifying the reorder point of the supplies stated needs to
be formalized and improved. The operations manager only uses estimates in judging
whether the items already need reordering. When the volume of mineral and essential oil
left can only last for a day or two, it is when the operations manager sends the notice to
the general manager or even the owner itself to make the necessary placement of order.
2.) Record of purchases and usage were not regularly adjusted.
The business records the purchases when they arrive. They record the items
received, the quantity and the price. But during the normal operations of the business,
they do not monitor the amount of the supplies being used and adjust the records as it is
being consumed or used. With this, they cannot really quantify the volume or quantity of
supplies left and already needed reordering.
3.) Operations Managers assigned in the front desk have overlapping functions.
The operations managers are assigned with many duties. They receive payment
from customers from time to time. They are also the ones who receives the delivery of
orders from the supplier and the ones who records such items. Sometimes, they hand-
over checks for payment to the supplier which is issued by the owner. They are also the
ones who schedule masseurs and therapists whenever a specific service is needed to be
catered. In addition, they are also tasked to monitor the volume of the mineral oil and
other supplies inventory if they already needed reordering. They are the people in the
business who have the access to cash and other cash related transactions and authorized
in releasing of supplies inventories.
4.) Lacking of supervision in the release of bedroom and bathroom fabrics.
Towels, shawls, shorts, bed sheets, and pillow cases are placed on a cabinet or
chest of shelves not visible to the operations manager. It is located at about six to eight
meters away from the front desk and behind a wall near the lounge room for employees.
Anyone could take any supplies without the notice of the operations manager and which
may result in the misuse of these bedroom and bathroom fabrics may likely to occur.
5.) No formal authorization in releasing and returning of oil/lotion/alcohol, beauty care
products, and bedroom and bathroom fabrics
When a service is needed, the masseurs or therapists are given free-hand in
getting bedroom and bathroom fabrics that are needed without any formal approval of
release. The releases of oil, lotion, alcohol, and beauty care products do not have any
formal authorization as to whom to get the approval and also recording such items
released. In the returning process, no authorized person is assigned to collect and check if
correct items were really returned and released for laundry. Used towels, shawls, shorts,
bed sheets, and pillow cases are deposited to the wash room where it is piled up before
these are brought outside for laundry.
VI. THE ALTERNATIVE SOLUTIONS
A. Title and Brief Description of the Proposed Alternative System
IMPROVED PURCHASE AND INVENTORY MANAGEMENT
OF SUPPLIES INVENTORY SYSTEM
This improved purchase and inventory management of supplies inventory system
aims to reduce the risks and problems identified in the existing system concerning the
reorder point of mineral and essential oil, the adjusting of supplies inventory in its
Accounting records, the multi tasking function, supervisory role of the Operations
Manager, and the transaction authorization process of the release of bedroom and
bathroom fabrics.
B. Scope of the Alternative System
This improved purchase and inventory management of supplies inventory system
covers the formalization of the reorder point of mineral and essential oil and the
adjustment of used supplies inventory in the Accounting records, the segregation of
duties, the on-eye supervision on the releasing of supplies inventory and the
implementation of a procedural transaction authorization.
C. Concept of Operation
The recommended purchase system DFD in Figure 3 shows that when the
supplies inventory drop to a predetermined reorder point, a purchase requisition is
prepared and sent to the prepare purchase order function to initiate the purchase process.
The Operations Manager (OM) will be assigned the duty of preparing the purchase
requisition which will be forwarded to the General Manager/Owner who will then
prepare 2 copies of purchase order (PO) and 1 blind copy. A copy of the purchase order
will be kept by the General Manager who does the accounts payable function and the
posting to the General Ledger, and the other copy of the PO will be sent to the supplier.
The blind copy is given to the Operations Manager (OM) who will receive the supplies
upon delivery.
When the supplies inventory are delivered it will be received by the Assistant
Operations Manager and be reconciled with the blind copy of the PO. The Assistant OM
will now prepare a receiving report stating the quantity and condition of the delivered
supplies. A copy of it is given to the General Manager to recognize the liability. Another
is given to the Operations Manager to update the inventory logbook. A last copy is placed
in the receiving report file.
A check is issued in the payment for Cash on Delivery (C.O.D.) and the liability
incurred in previous purchases.
For purchases made directly from department stores (this is for other supplies
used in the operation), it follows the same process except in the recognition of the
liability. Instead of recognizing the liability incurred to the supplier, it is recorded as
liability to the General Manager. A Payable to General Manager Account is created to
record the purchases made by the GM from department stores, which is paid in cash
using the General Manager’s own funds.
Furthermore, the recommended system for inventory management in Figure 4
represents the therapist will prepare two copies of materials and supplies requisition slip
for supplies needed in the service to be rendered upon arrival of the customer. The
operations manager will check the supplies and signs for the approval of the slip. After
rendering the service, the said therapist will bring the used bedroom and bathroom fabrics
with the said slip to the laundry personnel and have it verified. Then the therapist will
proceed to the operations manager with the same slip for final verification of the
consumable materials. If there are extra supplies that can be returned, it will be brought
back to the operations manager. One copy will remain in the operations manager file and
the other copy will be brought to the laundry personnel file.
Figure 3. Data Flow Diagram for the Recommended Purchase System
Figure 4. Data Flow Diagram for the Recommended Inventory Management
Receiving Report Copy 2
Post to General Ledger
Storage
Inventory Levels
Purchase Requisition
Supplier
Purchase Order
Sales Receipt
Receiving Report Copy 3 Quantity
Received
Purchase Order (2 copies) 1 Blind Copy
Issue Check
Set up Accounts Payable
Receive Goods
Update Inventory
Inventory Subsidiary Ledger
Monitor Inventory
Level
Prepare Purchase
Order
Inventory Record /Inventory Subsidiary Ledger
General Ledger
Receiving Report Copy 1
Receiving Report File
Therapist
Prepare Materials
and Supplies Requisition
Slip
Approval of Materials
and Supplies Requisition
Slip
Verification of Laundry Personnel
Verification Operations Manager
Operations Manager File
Laundry Personnel File
(2 copies)
Materials and Supplies Requisition Slip (copy 1)
Materials and Supplies Requisition Slip (copy 2)
LEGEND:
Entity Name
Flow of Data
Process Triggered by Data
File Storage
D. Advantages of the Alternative System
The implementation of the alternative system will provide the firm activity
controls for the purchasing, management and usage of supplies inventory. These controls
will help the firm keep track of the transactions being made by the employees. Records of
purchases, received goods, and the usage and return of the supplies inventory can be
made available for future references. The inventory logbook serving as a record for the
used supplies in the rendering of the services daily will be of benefit in the future
decision making of the business. This inventory logbook will be able to show the trend of
the business operations. The trend includes the peak and lean seasons of the business.
With this, the business will be able to tell the difference in the quantity of supplies being
used each month. Thus, giving the management knowledge on what period the supplies
inventory needed to be reordered in higher quantity.
Usage of supplies inventory will be properly monitored resulting to minimum
possibility of loss or mismanagement. Also, close monitoring of the movement of
supplies will minimize unnecessary expenses due to purchase of lost items. The
employees will be more responsible of their tasks and proper handling of supplies
inventory.
E. Disadvantages of the Alternative System
The proper monitoring of the supplies inventory will require the employees to
perform more tasks compared to what they have used to. The preparation of materials and
supplies requisition slip by masseurs and therapists will be an additional task to them.
Also, this activity will consume time, and thus causing a delay before service is rendered.
The operations managers and their assistants will also have an additional task with
regards to the preparation of purchase order, receiving report and the approval and
verification of the materials and supplies requisition slips. The purchase order, receiving
report and the materials and supplies requisition slip will be an additional cost to the firm
since these forms will be used regularly.
F. Technical Feasibility
The alternative system involves transferring the shelves where bathroom and
bedroom fabrics are placed. This should be situated in a spot where it is visible to the
operations manager and to the assistant operations manager and if possible, it will be
located near the front desk. The transfer will not bear any expenses since the same
furniture will be utilized and it is just a matter of maximizing space in the spa. All the
employees and staffs with the management can have a sit down talk to discuss this
transfer and will take part in implementing the said transfer to their agreed spot.
G. Operational Feasibility
The new system is up for the approval of the management; if and when this is
approved and implemented, the new system will be able to minimize or eliminate the
risks and problems identified in the existing system. The implementation of the suggested
system will facilitate operational efficiency and effectiveness thus assuring that supplies
inventories are properly accounted for (formal reorder point and an adjusted record of
supplies inventory) and tight supervision will be executed. In addition, the new system
will also assign specific roles for operations managers and its assistants so as to ease
overlapping functions and will instigate transaction authorization within the management
level.
H. Economic Feasibility
The formalization of its accounting processes will require additional work
specifically in the recording to different accounting documents but will ensure cost
minimization consequently generating an accurate income for the business. Meanwhile,
the transfer of the shelves where bathroom and bedroom fabrics are placed might require
an amount for renovation although practically, the furniture can be kept and maintained.
The challenge falls only on strategically locating it, so to subsequently maximize space
with minimal cost.
Moreover, the designation of specific roles and implementing tight supervision
will not incur cost but will, on the long run, improve operational performance and
minimize costs, giving an increase on income.
The suggested new system assures that expected costs will not exceed the benefits
and savings that are expected from the new system. Therefore, advantageous for the
business
VII. RECOMMENDATIONS
In order to achieve operational efficiency and effectiveness, the company should
consider implementing the alternative systems that the proponents have suggested. It is
clearly shown and described in Figures 2 and 3 of this paper.
Maintenance of an inventory logbook. The business should maintain an
inventory logbook which will be reflecting the quantity of supplies consumed and on
hand. This way, the supplies inventory can be adjusted regularly. This record will show
the actual daily consumption of mineral and essential oils which will be reduced from the
record of the total volume purchased of the said supplies. When the volume left reaches
the target amount that should be left before reordering, that is when the Operations
Manager sends a notice to the manager to reorder.
Segregation of duties between the Operations Manager and Operations
Manager Assistant. Concerning the overlapping or multi-tasking function of the
Operations Manager, the management should consider lessening its roles and duties in
the business. Inventory management can be specifically assigned to the Operations
Manager Assistant. By then, the assistant is delegated in receiving and releasing of
inventories. He will also act as the storage personnel in the business. This will give the
assistant, authority in managing inventories especially those frequently used in the spa’s
day-to-day operations.
Tight supervision in the release of supplies inventory. Stressing the
importance of supervision in the business shows the vitality in maximizing the success
potential of the business. To keep tight supervision in the release of supplies inventory
such as oil/lotion/alcohol, beauty care products, bathroom and bedroom fabrics, and other
supplies inventory, it is important that these are placed visible to the storage personnel or
the supervisory team. The proponents suggest transferring the furniture where bathroom
and bedroom fabrics and other supplies are located to a spot that is near or with direct
access to its operations manager and its assistant. This will help in the monitoring of its
releases.
Usage of materials and supplies requisition slip. For a formal authorization
of the release and return of oil/lotion/alcohol, beauty care products, bathroom and
bedroom fabrics, the business should maintain the usage of a materials and supplies
requisition slip prepared by the masseurs and therapist, and approved by the storage or
any authorized personnel. The slip is consisting of items that a masseur or therapist
needed in rendering a service. The storage personnel approves items released and verifies
items returned. The used bedroom and bathroom fabrics used and deposited to the lounge
room will be verified by the laundry personnel and also signs on the slip. Each of the
storage and laundry personnel will be keeping a copy of the verified requisition slip for
filing. This way, the person responsible for any losses or unreturned items can be traced
and be charged.
The listed recommendations above will facilitate learning to each and every
individual involved in the process. Not only it improves quality in service but also paving
the way for the business to continuously grow and expand.
VIII. APPENDICES
Inventory Logbook format
EARTHLIFE WELLNES SPA CLINICPurchase RequisitionDate: ________ ,___
ITEM(S) QUANTITY TOTAL
Requested by: _________________Requested via: _________________Approved by: _________________
EARTHLIFE WELLNES SPA CLINICPurchase Order
Date: ________ ,___
ITEM(S) QUANTITY PRICE
(Item Name)
DATE QTY. RECEIVED QTY. USED
EARTHLIFE WELLNES SPA CLINICPurchase Order
Date: ________ ,___
ITEM(S) QUANTITY PRICE