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Cost Accounting: The Ordering Process

There’s a process to ordering in cost accounting. Here’s a typical example. Say you own a clothing store. You need to order scarves for the upcoming fall season. A supervisor fills out a purchase order (PO). The form lists the amount, style, size, and unit cost of the items requested.

A manager must approve the order. He or she reviews it and verifies that the order is in the budget. The manager initials the order (by hand or electronically), which confirms approval.

The purchase order goes to the vendor (the scarf manufacturer or distributor). The vendor fills the order and ships the merchandise. When the shipping/receiving clerk opens the box, he or she finds two documents: a packing receipt and an invoice. (Note: Sometimes the invoice arrives by mail.)

The packing receipt confirms what’s in the box — the items that were actually shipped. The manager needs to agree that the items on the packing receipt match the purchase order. This step verifies that the vendor sent what you ordered. If not, it may mean that some items are back-ordered. Perhaps the vendor can’t fill the full order, and you have to wait.

Generally, this is not a good thing. If the items on the receipt don’t match the purchase order, it also may simply be a mistake. Call the vendor, and ask about the discrepancy.

The invoice is the bill. The store manager should verify that the invoice matches the purchase order and the shipping receipt. The manager should initial each document to confirm that they all agree.

Unless you, the owner, are also the manager (as is likely in smaller stores), all three documents (purchase order, shipping receipt, and invoice) now go to you. If you’re the manager, you’ve already seen them.

You review the documents to authorize payment, so you initial the documents and send them to the accounting department. An accounts payable clerk (AP clerk) generates a check, which comes back to you for signature. Finally, the check and a copy of the invoice are sent to the vendor.

If you’re placing a lot of orders with a vendor every month, expect to see a statement, a summary of individual invoices. The process is the same; the owner authorizes payments only if all the invoices shown on the statement match individual invoices.

Your company incurs costs for all of the people involved with the order. The owner, manager, supervisor, and accounting clerk all spend time on orders. The cost of that time (salary, benefits, and so forth) amounts to ordering costs.

Carrying costs include your cost to store your inventory. You might store some inventory on the shelves at your clothing store, but what about the rest? You need a stockroom or a warehouse, and that costs money.

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