Complex Spend Categories for PurchasingBuyers' Training
November 29, 2012 — 1,128 views
Complex Spend Categories for Purchasing
Many reasons or requirements may necessitate the creation of complex spending categories for the purpose of purchasing. A large company or government agency may have many smaller divisions such as bureaus that are divided into departments, departments that are divided into agencies, agencies that are divided into offices, etc. Large businesses may be divided into national, regional and local administrative centers. Job costs and project funding are also reasons individual items purchased must be assigned to one particular area of activity.
Each organization has its own requirements for the designation of spending categories. These are nearly always based on financial responsibility or to whom or to what department the expense will be charged. Hospitals, for example, have divisions, levels, floors, wards and stations to which purchases are charged. The financial staff must know who will have ultimate responsibility for the expense.
For this reason, those responsible for the purchasing activities must have a clear understanding of the final location of the item being purchased together with knowledge of the source of funding for the purchase. The easiest and most efficient way to accomplish this is through establishing source code numbers. These code numbers will become an identifier and be added to the basic Chart of Accounts codes.
As an example, if the code representing “office supply expenses” is 4321 and the office supply purchase is generated by and appropriated for the Data Processing Center of the Human Relations Division of the Bureau of Labor Statistics, the extended account code could appear as 4321-01-02-03. In this case the #01 would represent the Bureau, #02 would represent the Division and #03 would represent the Center. Similar code combinations can be established for any type of spending category.
It also may be necessary to separate the items to be purchased into types or groups in order to fulfill purchasing or expense requirements. This type of complexity can be accomplished by breaking down the Chart of Accounts code into smaller segments. An example of this action could be “office supplies – pens and pencils” which could be represented by the number 4321; then “office supplies – copy paper” could be 4322. “Office supplies – desk top machines” could be 4323 and so on. The total changes or divisions that can be made are limited only by the possible number combinations.
The categories for spending will become complex when the items that are being purchased, the job to be charged or the source of funding must be described with numbers or codes. However, if each step in the scoring process is assigned a number or code, a step by step review will refer back to the ultimate point of reference.