Purchasing of Materials |Cost Accounting

After reading this article you will learn about: 1. Introduction on Purchasing of Materials 2. Centralised and Decentralised Purchase 3. Purchase Routine 4. Purchase Requisition 5. Specification of Materials or Bill of Material 6. Time of Purchase 7. Purchase Quantity 8. Purchase Order 9. Purchase Procedures and Others.

Introduction on Purchasing of Materials:

In a manufacturing concern there is a separate purchase department under the control of purchasing officer. The main functions of purchase department are to purchase required quantity of materials in time so that the store can feed the production departments with the continuous supply of materials, to purchase better quality of materials at reasonable price.

The purchase officer has to play an important role since much money can be saved or lost by him. He requires a good technical knowledge of the industry and a large measure of administrative ability. He should also be aware of the policy of the management and the financial resources of the concern.

He should also be aware of the market conditions and must have the knowledge of the sources of supply, reliable suppliers, price and purchasing formalities.

He must keep himself abreast of the government policies regarding import and export restrictions and various duties and taxes on commodities. He must have a working knowledge of laws relating to contracts and sale of goods, so that he can negotiate and enter into contract on behalf of his employer.

Centralised and Decentralised Purchase:

Centralised Purchase:

Centralised buying means purchase of materials by one specialised department. The purchase department is manned by personnel having specialised knowledge in respect of all aspects of materials. The purchase department has the authority to make purchases for the whole organisation.

Under this system the requirements of the whole organisation are ascertained through the preparation of Purchase Budget and the purchase department makes the purchases following the accepted principles and distributes the materials to the respective production departments according to their requirements.

In most of the cases the purchase department purchases material on the basis of Requisition Slip issued by the Store. The suppliers deliver the materials to the Materials Receiving Section. Where centralised purchase is followed, no individual department is allowed to purchase its own materials.

Decentralised Purchase:

Decentralisation of purchases means each department is allowed to purchase materials according to its own needs. So, the authority to make purchases lies with the individual departments.

Advantages:

(a) Benefits of local purchase:

If the production unit is situated far away from the main unit, it is beneficial to allow the unit to make local purchases. Benefits of basic low price, seasonal prices can be enjoyed which will cut out cost.

(b) Reduction in Transportation Cost:

On account of local supply of materials, transport cost will be reduced substantially.

(c) Quick settlement of issues:

Disputes arising out of rejections, shortages, returns can be settled easily and quickly.

Advantages of Centralized Purchase:

The following advantages can be derived from the Centralised buying:

(a) Advantages of bulk purchase:

Since materials are purchased in bulk, materials can be bought at a much cheaper rate because of higher rate of trade discount, better credit facilities and increased bargaining power, quantity, discount.

(b) Maintenance of quality:

Since all the purchases are made by the Purchase Department manned with persons having specialised knowledge in the quality of goods, quality of materials can be maintained which will ultimately lead to production of better quality of finished goods. Better quality of goods surely enhances the goodwill of the business which, in turn, results in increased turnover leading to a greater profit.

(c) Reduction in transport cost:

Under this system materials are purchased in bulk as a result of which transportation cost is reduced substantially. This has a positive impact on the total cost or per unit cost of material. This will enable the organisation to be more competitive.

(d) Advantage of specialization:

As the Buying Department is manned with expert purchasing personnel, right purchases from the right type of suppliers is possible. This guarantees both quality and price.

(e) Duplication can be avoided:

As one person is held responsible for all the purchases, duplication of purchasing work can be avoided.

(f) Planned purchase:

Due to planned purchase holding of excess stores can be dispensed with, better space management becomes possible and unnecessary blocking of working capital can easily be avoided.

Limitations:

The following are the limitations of Centralised Buying:

(a) Expensive

The administrative cost of the purchasing department is likely to be very expensive as a result of which the total cost is sure to increase and the very purpose of costing to reduce cost is defeated.

(b) Acts as a hindrance to smooth functioning:

In case the materials which are required by one production department are not available, it has to wait till purchases are made by the purchasing-department. This delay will lead to stoppage of production which will again lead to increased cost.

Purchase Routine:

Generally the following routine is followed for the purchase of materials:

(i) Request for purchase. The request is made by the Store Officer.

(ii) Inviting tenders and quotations for the supply of requisite quantity of materials.

(iii) Placing of order with suppliers after considering the tenders and quotations submitted by different suppliers.

(iv) Receiving of materials after proper inspection.

(v) Verifying and passing suppliers bill for payment.

Purchase Requisition:

The decision for purchase of materials is taken by the purchase department after receiving requisition for such purchase from any authorised department. Requests for purchases are made by the authorised department to the purchase department on a prescribed form known as Purchase Requisition.

A Purchase Requisition supplies three basic information which help the purchase officer to carry on the function of purchasing efficiently.

The information are:

(i) What materials are to be purchased (purchase of right quality).

(ii) When they are to be purchased (right time).

(iii) How much is to be purchased (right quantity).

Purchase Requisition

Purchase requisition is received by the Purchase Officer from:

(i) The store-keeper for all standard materials;

(ii) The production control department for non-standard materials required for production.

(iii) The plant and maintenance engineer for special maintenance and capital expenditure.

(iv) Head of the departments for special items, like office sundries.

The Purchase Requisition is prepared in triplicate—two copies are sent to the purchase department where one copy is retained as an evidence of authorisation and the other copy is returned to the inventor after quoting therein the details of the order placed which indicates the action taken by the purchase department. The third copy is retained by the Store for office record and for future reference.

Specification of Materials or Bill of Material:

Purchase Requisition contains the particulars and specification of the materials to be purchased. Specification of materials is known as Bill of Material. It is initiated in the Production Control department or in the department of plant and maintenance engineer. BUI of Material is a complete schedule of materials or parts required by a particular job or work order prepared by the drawing office.

Bill of Material is prepared for all production orders and a copy thereof is sent to the store-keeper.

Advantages of Bill of Materials:

The following advantages can be obtained by various departments from Bill of Materials:

(i) On receipt of Bill of Materials the purchase department can place order with the selected supplier. So, Bill of Materials serves the purpose of Purchase Requisition.

(ii) A Bill of Materials authorizes the Store to issue materials.

(iii) The foreman is not required to prepare detailed materials requisitions because the Bill of Materials contains the details of materials to be used by a job or work order. So it saves time and facilitates easy drawal of materials.

Time of Purchase:

The Purchase Requisition indicates the date by which the materials are required for use. The Store-keeper places requisition to the purchase officer as soon as the materials reach the re-ordering level. The purchase officer on receipt of the Purchase Requisition places order to the supplier mentioning the date of delivery.

The date of delivery is fixed keeping in view the rate of consumption of the material and the minimum level fixed for it.

Purchase is also made when the market condition is favourable in spite of the fact that there is no immediate requirement of material for production. In an inflationary economy, materials are purchased in bulk with the expectation that the price will rise further.

In case of raw materials like jute, cotton, sugarcane, bulk purchases are made in the season to take advantage of quantity, quality and price. Sometimes long-term contracts are entered into with the suppliers for the purchase of materials for a specified period at a specified rate to safeguard against the possible rise in price in future.

But, in doing so, the purchase officer should take into account the following factors:

(i) Storage facilities to preserve quantity;

(ii) Financial resources of the concern; and

(iii) Cost of transport, cost of capital and cost of storage etc.

Purchase Quantity:

Before placing an order with the supplier the purchase officer is to ensure that only the right quantity of stores is purchased.

The following factors are to be kept in view in deciding the quantity to be purchased:

(i) The stock level of materials is to be maintained in such a way that production department’s requirement can be satisfied;

(ii) Production is not hampered for want of raw materials;

(iii) There should be no over-stocking to block working capital unnecessarily nor under-stocking of materials; and

(iv) Availability of funds.

Purchase Order:

Definition:

Purchase order is an agreement between the buyer and supplier of materials. It is a request made by the purchaser to the supplier to supply a specific quantity and quality of goods in accordance with the terms and conditions laid down in the agreement. It also signifies the commitment on the part of the buyer to take delivery of the goods and make payment as per the terms and conditions stated in the purchase order.

After carefully fixing up the quantity to be purchased, the purchasing department must place orders with the chosen suppliers. Those suppliers are to be chosen who can provide the necessary goods at competitive prices and at the right time. Quotations are invited from the suppliers.

Quotations received from different suppliers are compared and then the acceptable supplier is selected. After completing the above formalities the purchase order is issued to the supplier for the supply of requisite quantity of goods at specified time.

The purchase order i is issued in prescribed form and prepared in quadruplet (4 copies) and are sent to the following departments for reference and co-ordination:

(i) The first copy is sent to the supplier.

(ii) One copy is sent to the department originating the purchase requisition.

(iii) One copy is sent to the stores or goods inward department.

(iv) One copy is retained in the purchase department as a permanent record.

(v) A copy is sent to the Accounts department.

Purchase Procedures:

The Purchase Department has to follow certain procedures for efficient buying. The purchase procedures involve the following steps:

(1) Purchase requisition:

Receiving the purchase requisition, which may be received from the stores, production control department, Departmental Managers. The volume of materials to be bought should be determined judiciously.

(2) Search for supplier:

The Purchase Department has to search for prospective suppliers. Care should be taken in choosing the correct supplier. Once the suppliers are identified they should be asked to submit quotation or tender. The tenders are to be opened and supplier should be selected after considering the terms and conditions stated in the tenders.

(3) Placing order for purchase:

Once the supplier is selected the purchase order should be given to the selected supplier. Copy of purchase order should be sent to the originating department, Accounts Department and one copy to Costing Department.

(4) Receipt of Materials:

Materials received should be entered in the Goods Received Note and are to be sent to Inspection Department for inspection. After receiving inspection report, the materials are sent to the stores for despatch to the production departments.

For better understanding a chart in this respect is given below:

Purchasing Procedures:

Purchasing Procedures 

Receipt of Goods:

The following chart depicts the Reception and Inspection procedures of materials:

Reception and Inspection Procedures

A goods receiving department is usually set up at the entrance to the factory. All carriers of goods are supposed to report to this department. After receiving delivery note or an advice of despatch from the supplier, the receiving department should make arrangements for unloading the goods.

The receiving office should receive the goods after comparing the quantity, quality and other details incorporated in the Purchase Order which he should already possess. On receipt of goods they should be checked either by weighing or by counting or by inspecting.

If there is any damage or shortage, the fact should be noted on the carrier’s copy or challan. After being satisfied in all respects the receiver of the goods should sign the carrier’s copy of challan.Particulars of goods should then be entered in a Goods Received Note (given below). Goods Received Note is an important document and is necessary so that the supplier’s invoice can be verified and passed for payment.

Goods Received Note is prepared with additional copies to be distributed as follows:

(i) To the purchase department to update purchase record;

(ii) To the department originating the purchase requisition;

(iii) To the accounting and stock control department;

(iv) To the store-keeper; and

(v) Retained in the receiving department for record and future reference.

Goods Received Note (GRN):

It is a testimony to the goods received which are in accordance with the purchase order. Where this is not so the supplier is informed by a formal communication. If some adjustments are to be made on account of damaged or defective goods it is customary to send a debit note to the supplier for the value of the damaged or rejected items plus cost of carriage for returning them.

Checking of Purchase Invoices:

Along with the goods the supplier sends an invoice which contains the details of the materials supplied and the price to be paid for it.

On receipt of materials the purchase clerk checks the accuracy of the particulars with reference to the following documents:

(i) Purchase Order.

(ii) Goods Received Note.

(iii) Inspection Report.

(iv) Debit Note, if any.

If the invoices are found correct they are signed by the responsible authority of the purchase department with a rubber stamp and passed to the accounts department for payment. The invoices are now checked by the authorised person of accounts department to ensure that the calculations are correct.

The invoice is entered in the Purchase Day Book from which the supplier’s account is credited. Periodically the total of the Purchase Journal is debited to Purchase Account in the General Ledger.

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