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 firm’s inventory cycle. The study only covers the purchase

system and inventory management of the firm’s 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 firm’s 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 firm’s supplies inventory.

C. Constraints

Time management in accomplishing different requirements at the same time.

The size of the business.

The limited hands-on training on the existing system’s 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 firm’s 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 proponent’s 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

Atenean’s 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 firm’s operations.

IV. COMPANY PROFILE

The business firm’s 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 Clinic’s Mission and Vision Statement:

MISSION

Earthlife Wellness Spa Clinic’s 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 Clinic’s 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 Company’s 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 firm’s 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

D. Problem Analysis of the Existing System

Approval of Order

Operations ManagerOperations

Manager

Issue Check

Order from

Supplier (Via Text)

SupplierSupplier

2ndDelivery

Record Book

Direct Purchase (Paid in Cash)

Receive Inventory

Record Purchase

1stDelivery

StorageStorage Release Inventory

TherapistTherapist

Monitor Inventory level

Monitor Inventory

level

LEGEND:

Entity Name

Flow of Data

Process Triggered by Data

File Storage

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 Manager’s 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

Figure 4. Data Flow Diagram for the Recommended Inventory Management

Receiving Report Copy 2

Post to General Ledger

Storage

Inventory Levels

Purchase Requisition

Supplier

Purchase Order

Sales Receipt

Receiving Report Copy 3 Quantity

Received

Purchase Order (2 copies) 1 Blind Copy

Issue Check

Set up Accounts Payable

Receive Goods

Update Inventory

Inventory Subsidiary Ledger

Monitor Inventory

Level

Prepare Purchase

Order

Inventory Record /Inventory Subsidiary Ledger

General Ledger

Receiving Report Copy 1

Receiving Report File

Therapist

Prepare Materials

and Supplies Requisition

Slip

Approval of Materials

and Supplies Requisition

Slip

Verification of Laundry Personnel

Verification Operations Manager

Operations Manager File

Laundry Personnel File

(2 copies)

Materials and Supplies Requisition Slip (copy 1)

Materials and Supplies Requisition Slip (copy 2)

LEGEND:

Entity Name

Flow of Data

Process Triggered by Data

File Storage

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 spa’s

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

Inventory Logbook format

EARTHLIFE WELLNES SPA CLINICPurchase RequisitionDate: ________ ,___

ITEM(S) QUANTITY                                 TOTAL  

Requested by: _________________Requested via: _________________Approved by: _________________

EARTHLIFE WELLNES SPA CLINICPurchase Order

Date: ________ ,___

ITEM(S) QUANTITY PRICE                                   

(Item Name)

DATE QTY. RECEIVED QTY. USED                                                                                                    

EARTHLIFE WELLNES SPA CLINICPurchase Order

Date: ________ ,___

ITEM(S) QUANTITY PRICE