Chapter 2-PURCHASING

MATERIALS
Prepared by: Prof. Harris R. Egliane
 MATERIALS CONTROL
Certain requirements are essential to an effective internal
control system for materials , as follows:
- Materials of the desired quality must be available when
needed.
- Correct quantities and types of materials must be on
hand at the right time for production to proceed on
schedule.
- Materials must be purchased at the most favorable prices
- Materials must be protected from loss or theft.
- Risks of spoilage and obsolescence must be minimized.
- Cost of materials handling and storage must be kept to a
minimum.
 Organization for Control
The functions related to materials acquisition and use
are usually subdivided into the following
departments:
1. Purchasing Department. - placing orders for
materials
2. Receiving Department. –inspection of incoming
shipments
3. Storeroom (stockroom).- protecting materials
4. Accounting Department.- records all transactions
5. Cash Department.- pays all invoices after approval
by the accounting department.
Note: checks and balances ( that is, effective internal control) are
provided by making each dept. independent from the others.
 MATERIALS PURCHASING PROCEDURE
“ Responsibility for purchasing materials is given
to the purchasing agent. This person must buy
materials in correct quantities at the proper
time, and at the lowest price.”
1. Routine work of the purchasing staff begins
with the receipt of a purchase requisition.
2. Purchasing staff keeps informed of various
sources of supply, negotiates purchase
contracts.
3. Prepare purchase orders
4. Follows up deliveries
 Reorder point:
Factors should be considered:
 The frequency at which the materials is used.
 The length of time it takes for the material to be
delivered from the supplier after an order has
been placed. This is known as the lead time.
 The minimum level of materials that should be
maintained to ensure that the company does
not run out of materials. This is known as the
safety stock
Example:
For example, the reorder point is 200 cans of ink. JenJen Printers wants to have at
least 100 cans on hand at all times. Since 20 cans are used in production each day
and it takes five days to receive an order, the reorder point is computed as follows:

20 cans (daily usage) x 5 100

days (lead time)
Add: safety stock 100

Reorder point 200

 Economic Order Quantity (EOQ)
• The standard quantity to be ordered varies
from item to item. It should reflect the
quantity necessary to get the best price while
keeping inventory at an appropriate level to
ensure uninterrupted production.
• To determine the most advantageous number
of units to order, a formula called the
economic order quantity has been developed
 Economic Order Quantity (EOQ)
• It is computed as follows:

EOQ = 2 x annual requirements x cost of an order

Cost to carry a single item
 Economic Order Quantity (EOQ)
Example: if Jenjen printer’s cost to order is P108, the
cost to carry an item in inventory is P75; and if the
company requires 5,000 cans of ink during the year,
the EOQ is computed as follows:
EOQ = 2 x annual requirements x cost of an
order
Cost to carry a single item

= 2 x 5,000 x 108
75
= 14,400

= 120
The determination of the total cost to order and carry
materials at various order sizes is shown below:
 Purchase Requisition
Once the materials reach the reorder point, the
storeroom supervisor completes a purchase
requisition requesting that materials be ordered. A
purchase requisition (Document 1) is a properly
approved, written request for materials and is
prepared in duplicate. The original copy is sent to
the purchasing department as a request for the
materials. The duplicate copy is retained in the
storeroom files. Purchase requisitions must be
numbered for easy reference.
Purchase Requisition (document 1)
 Purchase Order
“When the purchasing department receives the
purchase requisition, source of supply must be
selected. Several suppliers may be asked to
quote prices or make bids.”
“ After choosing the supplier, the purchasing
agent prepares a purchase order (document
2) as shown in the next slide. “
Purchase Order (document 2)
 Purchase Order
• Purchase order is a written authorization to the supplier to
ship the specified material. The purchase order is prepared
in five copies to be distributed as follows:
1. Suppliers – as authority to deliver
2. Storeroom- as a notification that materials
requested are on order
3. Receiving Dept.- as an authorization to accept
an incoming shipment.
4. Purchasing Dept.- ( 2 copies) for file in unfilled
order.
 RECEIVING REPORT
“The materials are received by the receiving clerk
from the supplier. The receiving clerk is
responsible for unpacking them, checking
quantities, and transferring them to the
storeroom. The receiving clerk, upon receipt of
the materials, takes out his copy of the purchase
order and compares its contents with the
shipment. After counting and inspecting the
materials, the clerk prepares a receiving report.”
 RECEIVING REPORT
• Receiving Report as shown below shows all details of
the shipment, including comments on the condition
of the materials received
 RECEIVING REPORT
“ Receiving report is usually prepared in quadruplicate.
The original and one copy are sent to the
purchasing department, where they are compared
with the purchase order and the supplier’s invoice.
One copy accompanies the materials to the
storeroom for comparison with the purchase order
and entry in the storeroom records. The storeroom
supervisor signs the final copy to confirm that the
materials have reached the storeroom. This copy is
then kept in the receiving clerk’s permanent file.”
 MATERIALS LEDGER CARD
The storeroom clerk records the receipt of
materials in a subsidiary ledger, the materials
ledger, by making an entry on the appropriate
materials ledger card (Document 4). Materials
are also called stores; hence, the materials
ledger is sometimes called stores ledger. A
separate card, like one shown on the next
page, is kept for each type of material.
MATERIALS LEDGER CARD (doc. 4)
 Comparing Document
“ When the invoice is received from the supplier, it is sent to
the purchasing dept. Normally the invoice will arrive before
the shipment to allow verification of the purchase order
before the shipment is accepted. The purchasing dept. then
compares the supplier’s invoice (purchase invoice) w/ the
purchase order and the receiving report to make sure that:
- Materials ordered have been received in good condition
and those listed only on the invoice
- Terms , unit prices, shipping charges, and other details are
in accordance with order specifications
- Computations are correct.”
“ If all documents are in order, the purchase
invoice, receiving report, and the purchase
order are stapled and file them in a completed
purchases folder arranged alphabetically by
supplier. Next, a check voucher also called
disbursement voucher like the one shown in
Document 5 is prepared with supporting
documents attached to it. Once approved, the
voucher is sent to the accounting department
for recording.”
Disbursement Voucher (Doc. 5)
 Recording the Voucher
“When the voucher and supporting
documents reach the accounting
department, the voucher clerk
checks all the documents if they are
properly approved and signed”
 Recording the Voucher
In verifying the account distribution against the
purchase order, the voucher clerk enters the
purchase in the voucher register, as shown in
Document 6. ( Vouchers are prenumbered for
control purposes). The purchase of direct
materials or indirect materials is entered as debit
in the Raw materials column and as a credit in the
Vouchers Payable column. The total for the month
is the source of entry A in Chapter 1, debiting
Materials account.
 Recording the Voucher

After the entry is made in the voucher register, the

voucher is sent to the cash department for filing
in the unpaid vouchers file
 Paying the Voucher
“ Before the due date, the voucher is removed from the
unpaid vouchers file. A staff in the Cash Department
prepares a check for the amount in the voucher. The
check is then recorded in the check register. The
voucher is marked “Paid” by using a rubber stamp and
enters the check number and date paid on the
voucher. The check is sent to the supplier, and the
voucher is returned to the voucher clerk. The voucher
clerk records the check number and date of payment
in the voucher. The voucher, with invoice and other
supporting documents, is then filed in the paid
vouchers file.
Computerized Materials Purchasing System

“ On- line purchasing system for materials

allows companies to have up-to-date
information and improves the
organization’s purchasing process.”
Computerized Materials Purchasing System

Remember: a computerized purchases system

has an inventory file, a supplier file, and an
open purchase order file in its memory. Upon
receipt of a purchases requisition, the
purchasing agents scans the supplier file and
chooses a supplier. The computer prepares a
purchase order, and the data in the purchase
order is added to the open purchase order file.
Computerized Materials Purchasing System

When the order arrives, the receiving clerk

counts the items and enter it in the receiving
room terminal ( also indicating which
materials must be returned, if any). The
computer compares the items ordered
( stored in the open purchase order file) with
the items received, prepares the receiving
report, and updates the open purchase order
file, the inventory file, and the supplier file.
 SPECIAL PURCHASING PROCEDURES

In addition to the usual purchasing procedures,

special procedures to meet the following
special cases:
 Bill of Materials
Case 1. To avoid the problem of insufficiency of
materials needed, the production manager
may prepare a bill of materials when a new
sales order is received. The bill of materials lists
all materials needed on the job and the date
they will be needed, as shown in Document 7.
This record enables the storeroom supervisor
to check the quantity of material on hand to
ensure that sufficient material is available.
 Bill of Materials

To avoid costly delays, the purchasing agent may be required to buy

more materials in advance. The bill of materials used by some
companies usually contains columns for unit costs and total costs.
Such a bill may later be used as a material requisition.
 Debit and Credit Memorandum
Case 2. Damaged or defective materials are
immediately returned to the supplier. A note
on the return is made on the receiving clerk’s
copy of the purchase order and on the
receiving report. The purchasing agent then
prepares a debit memorandum.
 Debit and Credit Memorandum

Debit memorandum is a notice to the vendor of a deduction from

the invoice for the cost of the returned materials
 Credit Memorandum
“ If the supplier ships more materials than were
ordered and the materials are not need, the
purchasing agent normally authorizes their return.
However, if they are retained for future use and
the materials have not been included in the
supplier’s invoice, the purchasing agent prepares a
credit memorandum for the additional costs. The
purchase order may be amended to include the
extra materials shipped instead of issuing a credit
memorandum.
 SUMMARY OF PROCEDURES AND
PRINCIPLES
1. Materials must be carefully controlled to
protect the company’s large investment in
materials and to maintain enough materials
on hand to meet production requirements
2. Materials should be purchased in correct
quantities, at the proper time, and at the
most economical cost to the company.
Purchasing procedures are performed by the
purchasing agent.
 SUMMARY OF PROCEDURES AND
PRINCIPLES
3. The purchasing cycle consists of the following steps:
- A purchase requisition is prepared by the
storeroom supervisor or the production manager.
- A purchase order is issued.
- When materials are received from the supplier,
payment of the bill should be authorized.
- The purchase is recorded in the voucher register.
- A check in payment of the invoice is issued and
recorded in the check voucher.
 SUMMARY OF PROCEDURES AND
PRINCIPLES
4. All purchasing procedures must reflect the following
principles of internal control:
a. Request for purchases must be made only by
authorized persons.
b. Purchase orders must be properly approved.
c. All materials received must be carefully counted and
inspected.
d. Payment should be made only upon proper approval.
e. Purchasing responsibilities should involve different
persons, so that the risk of fraud or error is reduced.
 SUMMARY OF PROCEDURES AND
PRINCIPLES
5. Special procedures can be used for handling
damaged, lost, or defective materials, and for
shortages and overages in shipment.
6. Many of the procedures in the purchasing
cycle can be handled electronically.
 Control Procedures
“Because inventory represent a major
investment to a firm, adequate control is
necessary. The level of raw materials inventory
is based on scheduled production, which is in
turn based on sales forecasts.
 Five control procedures:
1. Order Cycling- materials are reviewed on a regular cycle, and orders
are placed to maintain a desired inventory level.
2. Min-max method- minimum and maximum inventory levels are
determined. Reordering is done when the minimum level is reached.
3. Two-bin method. This is used for inexpensive items. When the first
bin is empty, an order is placed. The second bin provides coverage
until the order is received
4. ABC plan. This is used with a wide variety of items having different
values. The more expensive items receive more frequent review and
closer monitoring.
A items- most expensive items, usually few on hand
B items- moderately priced items and moderate quantity on hand.
C items- inexpensive items, generally kept Large quantities.
5. Automatic order system- order is
automatically placed when the inventory
reaches a predetermined level. This system
works best when used with a computer.
FLOW CHART FOR MATERIALS ACQUISITION
 Thank you
“Excellence is to do a common thing in an un
common way.”
-Booker T. Washington