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 firms inventory cycle. The study only covers the purchase system and inventory management of the firms 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 firms 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 firms supplies inventory.

C. Constraints

time.

Time management in accomplishing different requirements at the same

The size of the business. The limited hands-on training on the existing systems 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 firms 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 proponents 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 Ateneans 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 firms operations.

IV. COMPANY PROFILE

The business firms 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 Clinics Mission and Vision Statement:

MISSION Earthlife Wellness Spa Clinics 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 Clinics 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 Companys 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 firms 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

LEGEND:
Operations Manager

Entity Name Flow of Data

Monitor Inventory Inventor ylevel level

Process Triggered by Data File Storage

Approval of Order

Order from Supplier (Via Text)

Direct Purchase (Paid in Cash)

Supplier

Receive Inventory

1st Delivery

Record Purchase

Record Book

2nd Delivery Issue Check

Storage

Release Inventory

Therapist

D. Problem Analysis of the Existing System

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 Managers 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

Inventory Record / Inventory Subsidiary Ledger Supplier Inventory Levels

Purchase Order

Purchase Requisition

Monitor Inventory Level

General Ledger

Prepare Purchase Order Sales Receipt Purchase Order (2 copies) Blind Copy

Set up Accounts Payable

Post to General Ledger

1 Receiving Report Copy 1

Issue Check

Receive Goods

Receiving Report Copy 2 Update Inventory Quantity Received Inventory Subsidiary Ledger

Receiving Report Copy 3

Storage

Receiving Report File

Figure 4. Data Flow Diagram for the Recommended Inventory Management

LEGEND:
Therapist Entity Name Flow of Data Process Triggered by Data
Prepare Materials and Supplies Requisition Slip

File Storage

(2 copies)

Approval of Materials and Supplies Requisition Slip

Verification of Laundry Personnel

Materials and Supplies Requisition Slip (copy 1)

Verification Operations Manager

Materials and Supplies Requisition Slip (copy 2)

Operations Manager File

Laundry Personnel File

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 spas 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

EARTHLIFE WELLNES SPA CLINIC Purchase Requisition Date: ________ ,___

ITEM(S)

QUANTITY

TOTAL

Requested by: _________________ Requested via: _________________ Approved by: _________________

EARTHLIFE WELLNES SPA CLINIC Purchase Order Date: ________ ,___

ITEM(S)

QUANTITY

PRICE

TOTAL

Ordered by: _________________ Ordered via: _________________ Approved by: ________________

Inventory Logbook format

(Item Name)

DATE

QTY. RECEIVED

QTY. USED