Question

Process Activity Analysis

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 50% 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:

Requesting, Receiving, and Preparing and Delivering Vendor Matching M/R, R/T, and Vendor Preparing Materials Preparing Purchase Order Preparing Receiving Ticket (R/T) Selecting Vendor Request (M/R) Invoice Check Bids Correcting Reconciliation Differences

An activity analysis indicated the following activity costs with this process:

Preparing materials request	$21,000
Requesting, receiving, and selecting vendor bids	75,000
Preparing purchase order	12,000
Preparing receiving ticket	18,000
Matching M/R, R/T, and invoice	27,000
Correcting reconciliation differences	117,000
Preparing and delivering vendor payment	30,000
Total process activity cost	$300,000

On average, the process handles 60,000 individual requests for materials that result in 60,000 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 65%. 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 50% to 15%, over an average of 60,000 payments.

a. Develop a table showing the percent of individual activity cost to the total process cost. Round percentages to the nearest whole number, if required.

Omni Wholesale Company
Individual activity cost to the total process cost
Procurement Activities	Activity Cost	Percent of Total Process Cost
Preparing materials request	$	%
Requesting, receiving, and selecting vendor bids		%
Preparing purchase order		%
Preparing receiving ticket		%
Matching M/R, R/T, and invoice		%
Correcting reconciliation differences		%
Preparing and delivering vendor payment		%
Total process activity cost	$	%

b. Determine the average total process cost per vendor payment, assuming 60,000 payments. Round to the nearest cent, if required.
$ per vendor 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 a "0".

Omni Wholesale Company
Changes activity costs
Procurement Activities	Activity Cost Prior to Improvement	Activity Cost After Improvement	Activity Cost Savings
Preparing materials request	$	$	$
Requesting, receiving, and selecting vendor bids
Preparing purchase order
Preparing receiving ticket
Matching M/R, R/T, and invoice
Correcting reconciliation differences
Preparing and delivering vendor payment
Total process activity cost	$	$	$

d. Estimate the average cost per vendor payment, assuming that the changes proposed by management are enacted for 60,000 total payments. Round to the nearest cent.
$ per vendor payment

Answer 1

Below answer is mainly allocation of cost and determined Avg rate per unit ( before improvement and after improvement of cost )  

		Amount ($)	% 0f total Process cost
Preparing Material Request		21,000	7.00%
Requesting , receiving & Selecting Vendor		75,000	25.00%
Preparing Purchase order		12,000	4.00%
Preparing Receiving Ticket		18,000	6.00%
Matching M/R, R/T		27,000	9.00%
Correcting Reconciliation Difference		1,17,000	39.00%
Preparing & delivering vendor payment		30,000	10.00%
Total process activity Cost(a)		3,00,000	100%
On Average , process handle Unit (b)		60,000
Average rate/ Unit(a/b)		5

Procurement Activity		Activity cost prior to Improvement$	Activity cost After Improvement$	Change/Savings $
Preparing Material Request		21,000	21,000	-
Requesting , receiving & Selecting Vendor		75,000	26,250	48,750	( as per Quesiton - 65% savings) 75000*65%=48750
Preparing Purchase order		12,000	12,000	-
Preparing Receiving Ticket		18,000	18,000	-
Matching M/R, R/T		27,000	27,000	-
Correcting Reconciliation Difference		1,17,000	35,100	81,900	( below Workings)
Preparing & delivering vendor payment		30,000	30,000	-
Total process activity Cost(a)		3,00,000	1,69,350	1,30,650
On Average , process handle Unit (b)			60,000
Average rate/ Unit(a/b)			3

		Amount ($)
Correcting Reconciliation Difference(a)		1,17,000
Number of Unit to reconcile before improvement(b)
('60000*50%)		30,000
Cost per reconciliation(a/b)=c		4
Numner of unit ( after savings )-d
('60000*15%)		9,000
Cost of reconciliation after savings (c*d)		35,100