Source Documents

1 Introduction

This chapter looks at how purchases, sales, labour and materials are recorded and controlled.

2 The material control cycle

The material cycle can be depicted as:

At each stage there should be documents or other procedures that allow control to be exercised.

Purchase requisition: there will normally be a purchase requisition note showing:

• Sequential document number
  

• Date of requisition
  

• Inventory code
  

• Quantity needed
  

• Supplier
  

• Supplier’s product code
  

• Signatures authorising the requisition
  

The purchase requisition notes are passed to the purchasing department where they will be examined and approved or queried. Sometimes, despite the supplier being entered on the purchase requisition, the purchasing department might ask several suppliers for quotations.

A purchase order is then raised (created). This will typically show:

• Our name, address and contact details
  

• Purchase order number
  

• Date
  

• Supplier’s name and address
  

• Details of goods required: product codes, description, unit price and total price.
  

• Authorisation
  

The order will have at least two copies: one for the supplier and one for the stores to inform them that a delivery is expected.

When goods are received, they will usually be accompanied by a delivery note. This will show the information that is on the purchase order, except for the value of the goods. Goods should not be accepted before checking to a copy of the order that they have, in fact, been ordered. One copy of the delivery note is signed and kept by the supplier. Usually the receiving company will create a standard goods received note from the delivery note. The goods will be stored in the warehouse and inventory records on bin cards (see below) will be updated from the goods received note.

A purchase invoice showing the payment due will be received from the supplier, and before this is approved for crediting to the suppliers account and subsequent payment, it should be matched to the order and goods received note to ensure that the correct goods have been received.

When materials are needed for production a materials requisition note should be created requesting the release of material from the stores: part/material code, quantity, job number and so on. This should be signed by the person requesting the goods. Inventory records will be updated as goods are issued.

There might be a production order setting out goods and labour needed for the production of the goods ordered by customers.

As goods are produced they will be transferred from the production line to the finished goods store. Inventory records there should be updated with goods description, quantities and costs.

Customer orders will initiate sales. From those, despatch (or delivery notes) will be produced. These can be used as the basis for taking goods from stores, updating the bin card (see below) packing the goods and despatching them. There will usually be three copies of the delivery note: two go with the goods and of those one stays with the customer and one is signed by the customer and returned as proof of delivery receipt. One copy will stay in the despatch department in case of later queries.

Central to the material control cycle is the recording of the amount of inventory as this will determine when goods need to be ordered and will also record the receipt and issue of goods.

In manual accounting systems bin cards are used (a bin is where a specific item of inventory is stored). The equivalent records are now usually held in computer systems. A typical bin card would look as follows:

This allows a continuous recording of inventory quantities.

A particularly important figure to calculate is free inventory. This is

Free inventory = Quantity on hand plus units ordered less units allocated for use

The calculation of free inventory has the advantage of anticipating inventory movements so that receipts and issues that are known about are taken into account when assessing the need to order.

To ensure that the inventory as recorded on the bin cards is accurate, companies should carry out periodic inventory counts (sometimes called cycle counts) and correct the amounts on the bin cards. Some companies carry out one only inventory count per year.

3 The procedures and documentation to ensure the correct authorisation, analysis and recording of direct and indirect material costs

Direct materials are those which can be specifically traced to a unit of production.

Indirect materials cannot be specifically traced to a unit of production. For example, paint being used in the construction of a product will not be identified as going to a specific product.

Direct materials will be subject to formal requisition requests. Indirect material might simply be made available. For example, it is hardly likely to be cost-beneficial to account for individual screws or the use of drops of adhesive.

The costs of materials can be traced to production: the cost of direct material can be linked to specific items but the cost of indirect materials is likely to be allocated on an average basis.

4 The procedures and documentation needed to ensure the correct authorisation, coding, analysis and recording of direct and indirect labour and expenses.

Direct labour is labour that can be directly identified with a unit of production. A mechanic repairing a car would be an example of direct labour.

Indirect labour cannot be identified with specific units of production. For example a supervisor’s time is spread amongst all workers.

Labour time can be recorded using clock cards, time sheets, or by an assumption that everyone works a standard day. The clock card system is where the employee swipes a card through a reader when getting to work and again when leaving (“clocking-in and clocking-out”). The time working (or at least the time at work) can be calculated and wages calculated from that. The clocking-in and clocking-out processes should be supervised to ensure that employees do not clock in/out for friends.

Time sheets should be reviewed to ensure that time is recorded accurately against the jobs involved. For example, when an audit assistant spends time on a specific audit, an account code (or job code) will be placed against that time on the time sheet. This code will enable the total time spent on each job by each employee to be accumulated.

Any overtime worked should be authorised by supervisors.

Employee wage rates should have been approved by the human resources department.

4.1 Expenses

Expenses are the costs that are neither material nor labour: power, rent, telephone, insurance, subcontractors' invoices, travel claims and so on.

Direct expenses can be traced to one cost unit — hiring a particular machine for one job, or paying a royalty on each unit sold. Indirect expenses cannot: the factory's electricity bill benefits everything made in it.

The controls over expenses follow the same pattern as materials:

• Authorisation. A supplier's invoice is approved by the manager whose budget carries the cost, and for anything large, against a purchase order raised beforehand. An employee expense claim is approved by that employee's manager, never by the employee, and is supported by receipts.

• Coding. Every approved invoice or claim is given the code of the expense type and the code of the cost centre that benefited, so that the cost reaches the right place in the management accounts.

• Analysis. The purchase day book is analysed into columns by expense type, so that the total for each type and each cost centre can be taken out at the period end.

• Recording. The invoice is posted to the payables ledger and to the coded expense account; petty-cash payments are recorded on a signed voucher and posted from the petty cash book.

Direct expenses are charged to the job or unit. Indirect expenses are collected in the cost centre they relate to and are then absorbed into cost units with the rest of the overhead (see chapter 9).

5 The procedures and documentation to ensure the correct analysis and recording of sales.

Sales transactions will normally be initiated by receiving an order from a customer. It is important that orders are recorded as soon as possible, for example by entering them in a register (book).

The customer’s account will be checked to ensure that the customer is paying for previous orders satisfactorily and will remain within any credit limit if the new order is approved.

As outlined above, from the order a multi-set delivery note or despatch notes will be raised so that the goods can be packed and despatched to customers. It is, of course vital that all despatched goods are invoiced otherwise the company will effectively be giving goods away. One way of doing this is to enter invoice numbers against the original register of orders. This should mean that all orders received have been despatched and invoiced.

In a manual system, the invoices will be listed in the sales day book. Sometimes, the sales day book can have several columns for the sales of different categories of goods. The sum of these lists will be the total of sales made in each category.