CASE STUDY: AN EVALUATION ON PURCHASE SYSTEMS OF TRAVEL BEE

BUSINESS INN

A Research Paper
Presented to the
Faculty of the Department of Accountancy
School of Business and Economics
University of San Carlos
Cebu City, Philippines

In Partial Fulfillment
of the Requirements for the course
AC527 Accounting Synthesis
( 9:00 - 10:30 am MWF)

By
Krysstine Pearl P.Bacaling
Julius Christian L. Boncales
Steven B. Hortizano
Enna Joyce Bates Jorge
Neil Jude N. Mondigo
Kristian Romeo L.Napinas
Katia Ysabel E. Yparraguirre
 Chapter 1

RATIONALE OF STUDY

Having the most efficient purchases in businesses is the key strategy in achieving

efficient development goals. The amount of purchases outflow will determine the survival and

progress of a business. Any kind of business whether small or large needs a purchase system that

is efficient, reliable, effective, and secure.

Successful businesses’ purchase systems are usually complicated yet efficient for these

businesses to continue its business despite having millions of transactions from customers,

suppliers, and employees per day. Dependents on such purchases systems are the reason why

these businesses became giants. However, different purchase system is necessary for different

businesses and simply following a system which is used by successful businesses may not be as

effective and may even lead to problems and complications in the flow of purchases of the

business.

Studies regarding how to determine the appropriate purchase system were relatively done

by many businesses in countries around the globe. These businesses wanted to examine through

research and testing in order for them to improve further their purchase system and determine

and fix their systems current flaws and problems. Their willingness to pay millions for these

researches testifies on how much importance a purchase system can affect a business. The

researchers wanted to determine how much cash a business can disburse before it can result in

shortages of cash and how much cash a business should reserve before it becomes an opportunity

cost. The current economies of their respective target country were considered.
THE PROBLEM

STATEMENT OF THE PROBLEM

The study aims to evaluate the internal control practices of the purchase system of Travel

Bee Business Inn using the framework of the Committee of Sponsoring Organizations of the

Treadway Commission (COSO) in order to suggest improvements.

Specifically, it will seek to answer the following objectives:

1.1 To describe the profile of the business in terms of:

1.1.1 Nature of operation

1.1.2 Company background

1.1.3 Mission and vision

1.1.4 Years of existence

1.1.5 Organizational structure of the Purchasing Department

1.1.6 Number of personnel involved in the Purchasing Department

1.2 To document the purchase system of the company thru:

1.2.1 Narrative

1.2.2 Data flow diagram

1.2.3 Process flowchart

1.3 The policy and procedure of purchasing activities of the companies

1.4 To evaluate the Internal control activities based on COSO as to:

1.4.1 Transaction authorization

1.4.2 Segregation of duties

1.4.3 Supervision
 1.4.4 Accounting Records

1.4.5 Access Controls

1.4.6 Independent Verification

1.5 Based on the above findings, to make recommendation for the betterment of the

organization’s purchasing system.

SIGNIFICANCE OF THE STUDY

The purpose of the study is to assess and analyse if the current purchase system of the

business is efficient, reliable, effective, and secure and to make suggestions to improve the

business.

SCOPE AND LIMITATIONS

The research will focus on only one of the three branches of Travel Bee Hotels which is its

Business in Branch. With the many different departments and systems of the business the study

will focus primarily on the people handling purchases specifically the Purchasing Department

and only on that single branch.

DEFINITION OF KEY TERMS

Purchase System - A purchasing system manages the entire acquisition process, from

requisition, to purchase order, to product receipt, to payment.

COSO Framework - The COSO framework defines internal control as a process, affected by an

entity's board of directors, management and other personnel, designed to provide reasonable

assurance regarding the achievement of objectives of the business.

Control Activities - are the policies, procedures, techniques, and mechanisms that help ensure

that management's response to reduce risks identified during the risk assessment process is

carried out.

Purchasing Department - the group of staff within an organization that

is responsible for buying goods or products

Internal Control - is the process designed to ensure reliable financial reporting, effective and

efficient operations, and compliance with applicable laws and regulations.

Segregation of Duties -is the concept of having more than one person required to complete a

task. In business the separation by sharing of more than one individual in one single task is an

internal control intended to prevent fraud and err.

Requisition - is the document used to communicate needs internally between users/specifiers

and supply management according to establish internal controls.

Procurement - The act of obtaining or buying goods and services. The process includes

preparation and processing of a demand as well as the end receipt and approval of payment.
 Chapter 2

REVIEW OF RELATED LITERATURE

According to W.C Benton, Jr., et al (2014), Purchasing refers to an act of buying materials,

equipment, and services that conform to the correct quality, in the correct quantity, and at the

market price, and are delivered in accordance with the promised delivery date. All kinds of

businesses use purchasing as one of its basic functions. Examples of purchasing are the

following: Merchandise Inventory, supplies, furniture and fixtures and many more items that

businesses need.

Purchasing refers to a function in business whereby the enterprise obtains the inputs for what

it produces, as well as other goods and services it requires. Purchasing is one of the basic

functions common to all types of business enterprise. These functions are basic, because no

business can operate without, them (Dobler, 1984).

Purchasing is the responsibility of buying the kinds and quantities of materials authorized by

the requisitions issued by production scheduling, inventory control, engineering, maintenance

and other department of function requiring materials (Leenders, 1989).

According to P. Fraser Johnson, et al (2015), Purchases can represent 50-70 percent of costs

for manufacturing organizations and 30-40 percent for service firms. While this indicates the

importance of supply in procuring a significant portion of organizational resources, it also

suggests the challenges of designing an efficient and effective process for a diverse spend. A

purchase originates when a person or a system identifies a definite need in the organization what,

how much, and when it is needed. The purchaser must know exactly what the internal costumers

want. And internal requirements should be driven by a clear understanding of the external

costumer’s needs. It is essential to have an accurate description of the need, whether it is a

tangible good, a service, or goods and services bundled together. Unclear or ambiguous

descriptions, or over specified materials, services, or quality levels will lead to unnecessary

costs.

According to Anna E. Flynn, et al (2015) a requisition is the document used to communicate

needs internally between users/specifiers and supply management according to establish internal

controls. There are several types of purchase requisition, including standard requisitions,

travelling requisitions, a bill of materials, and stores/ inventory requisition.

It also talks about the preparation and placement of the purchase order. Purchase orders are

used unless the supplier’s sales agreement or a release against a blanket order is used instead.

Failure to use the proper contract form may result in serious legal complications or improper

documentation. Even where an order is placed by telephone, a confirming written order should

follow. The purchase order format and routing varies. The essential requirements are the serial

number, date of issue, name and address of the supplier, the quantity and description, date of

delivery, shipping directions, price, terms of payment, and conditions governing the order.

Invoices according to Anna E. Flynn, et al(2015) is a claim against the buying organization.

Typically it shows order number and itemized price. Invoice Clearance procedures are not

uniform. Checks and audits of invoices are established based on cost-benefit analysis. The cost

of a person’s time to resolve minor variances may exceed the value of the variance.

Purchasing Departments are created to help companies to help manage and control

purchases. A typical department is responsible for the acquisition of a broad range of materials

and supplies. Depending on the sales volume, the number of employees, and the functional

sophistication, the purchasing activities can be either complex or simple. In most cases, large

multidivisional firms like IBM, Ford, and Toyota usually establish a set of systematic policies
based on the overall corporate missions. Purchase materials at lowest possible cost while

maintaining quality. Maintain good relationship with the supplies. Take advantage of economies

of scale. Maintain records efficiently. Develop highly competent personnel. Coordinate with all

the departments of the organization.

Major types of purchasing activities carried by a typical Purchasing Department of a given

organization include: Coordination with user department to identify purchase needs , doing

traditional buying, discussion with sales representatives, identification of potential suppliers,

conduct market studies for important materials, negotiation with potential suppliers analysis of

proposals, selection of suppliers, issuance of purchase orders, administration of purchase

contracts and resolution of related problems, maintenance of a variety of purchase records

(Leenders, 1989).

The purchasing department is also in charge of the following responsibilities: Provide an

uninterrupted flow of materials, supplies, and services required to operate the organization, keep

inventory investment and loss at a minimum, maintain adequate quality standards, find or

develop competent vendors, standardize where possible, the items bought, purchases required

items and service at lowest ultimate price, improve the organizations competitive position,

achieve harmonious, productive working relationships with other departments within the

organization, and accomplish the purchasing objectives at the lowest possible level of

administrative costs.(Leenders, 1989).

 Purchasing system is a method used by businesses to buy products and/or services. A

purchasing system manages the entire acquisition process, from requisition, to purchase order, to

product receipt, to payment. Purchasing systems are a key component to effective inventory

management in that they monitor existing stock and help companies determine what to buy, how

much to buy and when to buy it. Types of purchasing system are imports, capital equipment

purchase, method petty cash system, E-procurement Subcontracting rate contract, Blanket order

E-Purchasing, Tender System and Stockless Purchase System.

In Tender System the entity invites their supplier to give their quotations. The supplier with

the lowest quotation wins the contract. It is a contract mostly followed by large organizations and

governments when purchases are of large value.

Blanket Order System is most popular method for companies that purchase many small items

on day to day basis which becomes difficult to have inventory for all. There are two methods:

Agreement is made to supply Fixed Quantity of the product at a Fixed Price for a specific period.

Agreement is made to supply for a Specific Period but the Quantity is unknown.

According to P. Fraser Johnson et al(2015) Blanket or open-end purchase orders reduce costs

by reducing the number of purchase orders issued. A blanket order usually covers a variety of

items. Blanket orders are used to buy maintenance, repair, and operations items and production-

line requirements used in volume and purchased repetitively over a period of months.

Subcontracting refers to the process of entering a contractual agreement with an outside

person or company to perform a certain amount of work. The outside person or company in this

arrangement is known as a subcontractor. Many small businesses hire subcontractors to assist

with a wide variety of functions. Example: A small business may use an outside firm to prepare
its payroll. Subcontracting is also known as outsourcing, Outsource means to send part of a

company’s work to outside providers to simplify or reduce cost.

Capital Equipment Purchase is a purchasing system which requires high capital. It is used to

purchase large value assets such as Machinery and Equipment's.

In Petty Cash System a small fund of cash is kept in hand for purchases or reimbursements

which are too small to be worth submitting to the more rigorous purchase and reimbursement

procedures of a company or institution. Petty cash funds must be safeguarded and documented to

ensure that thefts do not occur. The most common way of accounting for petty cash expenditures

is to use the impress system.

E-procurement is the business-to-business or business-to-consumer or business-to-

government purchase and sale of supplies, work, and services through the Internet. E-

procurement helps to achieve benefits such as increased efficiency and cost reduction. E-

procurement is an application software package that allows the requisitioning, authorizing,

ordering, receiving, invoicing and paying for goods and services through the internet and is

frequently a module in the company’s ERP system. A survey of chief purchasing officers about

their use of e-procurement technology found the benefits were: (1) better visibility of what they

are spending globally by supplier, region and commodity, (2) faster, better product development

by tapping suppliers as an innovative source, and (3) tighter risk reduction and mitigation.

Stockless purchase system can be defined as Arrangement in which a supplier holds the items

ordered by the customer in its own warehouseand releases them as and when required by the

customer. It is also known as just-in-time purchasing. In this system the vendor has a clear idea

of the requirements of the buyer and holds the stock in convenient location. The seller has the
financial responsibility of holding the stock. Examples: Tyre warehouse near automobile

manufacturing units. Petrol pumps in transport undertaking. Aviation fuel pumps at airport.

A policy is a statement that describes in very general terms may intend course of action. If

policies are to function effectively, it is imperative that they be placed in written form. A

purchasing policy manual typically has two distinct sections, one containing company policies

which spells out in unmistakable terms the responsibility and authority at all departments, and

the other containing department policies which inform personnel of the expected patterns of

conduct for major buying activities and for relations with suppliers. The purchasing policies

should be clearly communicated to the staff and other stakeholders. Medias for communicating

this information to the company employee can be published regulation, Company informational

booklet and departmental manuals (Alijan, 1973).

ARTICLES FOR COSO

Beacon (2014) is a purchasing partner whom Then Hospitality; a hotel management company

entrusted to manage their hotel purchases. Beacon is an experienced procurement partner that

was able to effectively manage the purchases of Then Hospitality; sourcing a wide range of

products or items for the hotel company. Beacon was able to source Current suppliers and

reduced prices of hotel items such as laundry, biscuits and coffee and was able to reduce the cost

of the hotels complementary items such as biscuits by 25% each which saved the hotel more than

£2,000 per year.

Tanvi Kothari, Clark Hu and Wesley S. Roehi (2006) conducted a case study about e-

Procurement technology in a chain hotel. The aim of the study was to grasp the challenges faced
by the decision makers of the chain hotel in implementing and adopting e- Procurement. Their

conclusion was that the chain hotel lacks purchasing standardization across properties and that

not all e- Procurement vendors are well experienced enough to partner with hotel companies.

Phuong Phan (2016) conducted a case study about the purchasing practices of PAUL

Bakery UK, a Café and Restaurant business. The purpose of the study is to investigate the

business’ purchasing processes to discover areas that needed to be improved. The case study

concluded that the business must improve specifically on supplier relationship management,

Internal communication, Economic Order quantity, discount options, portfolio models and

applications of sourcing strategies.

Christine Mercieca (2011) conducted a case study of Maltese hotel group specifically on

its internal control procedures of the purchasing cycle. The study evaluated the stages of the

purchasing cycle and other elements with regards to stock control. They conducted interviews

with the hotel’s personnel such as their Financial Controller, the Purchasing Officer, Food and

Beverage Manager and Store-keeper. The study’s conclusion was that both hotels that were used

in the study; were able to properly implement their purchasing cycle and segregated the duties of

their personnel that enabled errors to be kept under control.

Kostuch (2015) made an article about supplier relationships and how it leads to the

purchasing success of hotels. The article states that by building long- term relationships with

your suppliers, it enables trust and respect which in turn can benefit both sides. By having a

strong relationship with suppliers, they can go beyond merely business transactions and offer

value – added services that solve the needs and challenges of the business. One example given

by the article is how HD Supply’s Renovation, Brand Conversion, Current Build and Project

Management team; which is like a procurement company; helped hotels on their product prices,
ordering of goods and storing them to warehouses, delivering and brand conversion or Current

build

Theoretical Framework

The proposed purchase study on the business will result in the assessment of the purchase system

and determination of ways to improve the purchase system. The implementation of COSO to the

purchase system of the business will lead to the creation of a better and improved purchase

system. This may improve the business and result to significant increase in their overall

savings. Apart from cost savings, the implementation of COSO can cut down on lead

times that ensure delivery of quality goods on time. Furthermore, overview of COSO was

tackled to understand it more and to find out how it would positively impact the company’s

purchase system, since the aim of the company is to minimize its costs and maximize its profits.

IMPLEMENTATION OF
COSO

TRAVEL BEE
BUSINESS INN

INCREASE DECREASE
INCOME EXPENSES
 Figure 1: Pathway for the Theoretical Framework

Conceptual Framework

Figures 2 represent the pathway of the evaluation of the purchase system and open the

opportunity for improvements which will be evaluated in this thesis.

Review on the business’

purchase system

Assessment of the purchase

system

Implementation of COSO

Suggest recommendations
for the improvement of the
purchase system

Figure 2 Pathway for the assessment and determination of ways to

improve the purchase system
 Chapter 3

RESEARCH METHODOLOGY

RESEARCH PARTICIPANTS

The preliminary data gathering takes place from the Rank and file employees to

managers handling purchasing in the Purchasing Department of the business, which was a survey

regarding the pros and cons of the current purchasing system.

RESEARCH INSTRUMENTS

The preliminary instrument used is a letter of request in which we will ask consent to

study the enterprise. The main instrument used in data gathering for the study was a survey

questionnaire or form and after a follow up interview will be conducted. The kind of questions in

the survey questionnaire will be yes or no questions about the Transaction authorization,

Segregation of duties, Supervision, Accounting Records, Access Controls, and Independent

Verification. The study will also conduct interviews to relevant personnel especially those in

charge of purchasing about.

RESEARCH ENVIRONMENT
 This research aims to know the effects of the implementation of the current purchasing

system towards the business. The research focuses on one of the main three branches of Travel

Bee located in Jakosalem, Cebu City. Cebu is a highly urbanized city in Region 7: Central

Visayas, Philippines.

Figure 2 Pathway for the assessment and determination of ways to

improve the purchase system
RESEARCH PROCEDURES

The researchers acquired the necessary information for data gathering which includes the

latest record of the employees of the business and their use of the purchasing system. The

business managers advise were also taken to consideration regarding the employees who uses the

purchase system of the business. From the data collected, the required respondents and the total

number of participants were acquired.

Survey forms were formulated as planned and were distributed to the different employees

of the business in reference to the selected respondents that uses the purchasing system. The

distribution however was done randomly regardless of age, position, and gender. After the

survey forms are filled up, a follow up thorough interview about the topic to the participants

were conducted.

It was segregated by the dependability/involvement of the employees from 1(mostly

dependent) to 5(least dependent). The other data collected was also summarized from the results

and graphs were made to be the basis of the analysis. Analysis and conclusion was then drawn

from the results.

RESEARCH ASSUMPTIONS

In conducting this research, assumptions were created with regards to its inherent

limitations, to state theories that are supposedly true and to identify variables that are held

constant.

First, it is assumed that the business won’t know the difference between having a

purchase system compared to other purchase system and actually not having one. This is due to

the fact that they are not exposed to different purchase system but are only exposed to one.

Second, in the gathering of data through survey, the truthfulness and honesty of the

feedbacks of the participants are presumed. They are assumed to have sincere interest in

answering the questionnaire because they rely on the purchase system which helps them in their

work. However, the participants may find the questions confusing which may influence the

authenticity of their answers. Biases are inevitable and beyond the control of the researchers.

Lastly, the inclusion criteria of the sample if needed are assumed to be appropriate and

enough to represent the whole population of the employees of the business to be able to

adequately draw conclusions.

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