The procurement process for Omni Wholesale Company includes a series of activiti
ID: 452457 • Letter: T
Question
The procurement process for Omni Wholesale Company includes a series of activities that transforms a materials requisition into a vendor check. The process begins with a request for materials. The requesting department prepares and sends a materials request form to the Purchasing Department. The Purchasing Department then places a request for a quote to vendors. Vendors prepare bids in response to the request for a quote. A vendor is selected based on the lowest bid. A purchase order to the low-bid vendor is prepared. The vendor delivers the materials to the company, whereupon a receiving ticket is prepared. Payment to the vendor is authorized if the materials request form, receiving ticket, and vendor invoice are in agreement. These three documents fail to agree 40% of the time, initiating effort to reconcile the differences. Once the three documents agree, a check is issued. The process can be diagrammed as follows:
An activity analysis indicated the following activity costs with this process:
1
Preparing materials request
$36,000.00
2
Requesting, receiving, and selecting vendor bids
100,000.00
3
Preparing purchase order
20,000.00
4
Preparing receiving ticket
24,000.00
5
Matching M/R, R/T, and invoice
48,000.00
6
Correcting reconciliation differences
140,000.00
7
Preparing and delivering vendor payment
32,000.00
8
Total process activity cost
$400,000.00
On average, the process handles 20,000 individual requests for materials that result in 20,000 individual payments to vendors.
Management proposes to improve this process in two ways. First, the Purchasing Department will develop a preapproved vendor list for which orders can be placed without a request for quote. It is expected that this will reduce the cost of requesting and receiving vendor bids by 75%. Second, additional training and standardization will be provided to reduce errors introduced into the materials requisition form and receiving tickets. It is expected that this will reduce the number of reconciliation differences from 40% to 10%, over an average of 20,000 payments.
evelop a table showing the percent of individual activity cost to the total process cost.
Omni Wholesale Company
Individual Activity Cost as a Percentage of Total Process Cost
1
Activity
Cost
Percent of Total Process
2
Preparing materials request
$36,000.00
3
Requesting, receiving, and selecting vendor bids
100,000.00
4
Preparing purchase order
20,000.00
5
Preparing receiving ticket
24,000.00
6
Matching M/R, R/T, and invoice
48,000.00
7
Correcting reconciliation differences
140,000.00
8
Preparing and delivering vendor payment
32,000.00
9
Total process activity cost
$400,000.00
B. Determine the average total process cost per vendor payment, assuming 20,000 payments.
per payment
C. Prepare a table showing the improvements in the activity costs as a result of the changes proposed by management. If an amount is zero, enter "0".
Omni Wholesale Company
Changes in Activity Costs
1
Activity
Activity Cost Prior to Improvement
Activity Cost After Improvement
Activity Cost Savings
2
Preparing materials request
$36,000.00
3
Requesting, receiving, and selecting vendor bids
100,000.00
4
Preparing purchase order
20,000.00
5
Preparing receiving ticket
24,000.00
6
Matching M/R, R/T, and invoice
48,000.00
7
Correcting reconciliation differences
140,000.00
8
Preparing and delivering vendor payment
32,000.00
9
Total process activity cost
$400,000.00
D. Estimate the average cost per vendor payment, assuming that the changes proposed by management are enacted for 20,000 total payments. If required, round your answers to the nearest cent.
per payment
1
Preparing materials request
$36,000.00
2
Requesting, receiving, and selecting vendor bids
100,000.00
3
Preparing purchase order
20,000.00
4
Preparing receiving ticket
24,000.00
5
Matching M/R, R/T, and invoice
48,000.00
6
Correcting reconciliation differences
140,000.00
7
Preparing and delivering vendor payment
32,000.00
8
Total process activity cost
$400,000.00
Explanation / Answer
A)
B)
Average total process cost per vendor payment = Total process activity cost/Total Payments
=$400,000/20,000
= $20 Per Payment
C)
D)
Average total process cost per vendor payment = Total process activity cost/Total Payments
=$220,000/20,000
= $11 Per Payment
1 Activity Cost Percent of Total Process 2 Preparing materials request $36,000.00 9.00% 3 Requesting, receiving, and selecting vendor bids 1,00,000.00 25.00% 4 Preparing purchase order 20,000.00 5.00% 5 Preparing receiving ticket 24,000.00 6.00% 6 Matching M/R, R/T, and invoice 48,000.00 12.00% 7 Correcting reconciliation differences 1,40,000.00 35.00% 8 Preparing and delivering vendor payment 32,000.00 8.00% 9 Total process activity cost $400,000.00 100.00%Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.