CHAPTER - 4

a) Materials cost
 MATERIALS

Meaning : Commodities which are consumed in production process.

Definition : “Anything that can be stored, stocked or stockpiled.”

Classification : -Direct material

Indirect material
Finished parts

purchased parts
 M O V E M E N T O F M AT E R I A L →
S TA G E S

A) Procurement of materials.
B) Storing the material till it is required for consumption

C) Issue of the material for consumption.

P R O C U R E M E N T O R P U R C H A S I N G O F M AT E R I A L

Definition : Scientific purchasing

“ the procurement by purchase of the proper materials, machinery,

equipments and supplies of stores used in manufacture of product
adapted to marketing in the proper quantity and quality at the
proper time and the lowest price consistent with the quality
desired.”
 OBJECTIVES OF SCIENTIFIC
PURCHASING

Continues flow of material

No understocking
No overstocking

Proper type and quality of materials

Economy in purchasing
Proper advice to the management

Supply of information about materials

FUNCTIONS OF SCIENTIFIC PURCHASING

Quality material

Right quantity

Buying at right price

Timely supply of materials

Determination of purchasing budget

Issue purchase order to suppleirs

 CONT.…

Verification of quality and quantity of materials received

Approving invoices

Maintenance of proper record

Coordination with other department

METHODS OF PURCHASING

Centralized
Methods
Decentralize
d
 A D VA N TA G E S O F C E N T R A L I Z E D
PURCHASING
Better control over purchases

It avoids excessive reckless buying by several persons .

Regular supply and favourable treatment from the supplier

Reduced price of material on account of trade discount , cash discount

facilities
It eliminates possibility of overstocking

Expert purchasing staff

Uniformity in purchasing policies, practices and procedures

D I S A D VA N TA G E S O F C E N T R A L I Z E D
PURCHASING

Working capital gets locked up.

The buying procedures becomes rigid
Distribution to consumption centres involves
transportation cost
Delay in receiving
Misunderstanding among departments..
 DECENTRALIZED
P U RC H A S IN G

Advantages
More prompt and flexible

Personal contacts with suppliers are developed

Avoids delays in purchases

Convenient for purchasing items specific to units

 DISADVANTAGES

Losses can be more than savings

Small organization cannot afford

Duplication of work can take place

Administration cost increases

PURCHASE PROCEDURE
 PURCHASE PROCEDURE

1) Purchase Requisition: It is an indication given to the purchase

department to purchase a certain material. It is issued by either
store keeper or by production department.
Following particulars must appear in purchase requisition:
 Materials to be purchased
 When it is required
 How much to be purchased
2}SELECTION OF SOURCES OF
S U P P LY

The purchase department may call for quotations from the prospective
suppliers of a certain type of material.
 Single tender
 Limited tender
 Open tender

 Global tender
 Comparative statements
 3) PURCHASE ORDER
The contractual obligation between the supplier and purchaser starts from
purchase order.
It is drawn in favour in of the supplier by the purchase department.
It may include number of facts
Materials to be supplied

Quantity to be supplied
Price and other terms(e.g. excise duty, sales tax, octroi, insurance, packing,
and transportation etc.)
 CONT..
Cash and trade discount

Instructions in respect of delivery

Guarantee clause

Damages clause

Inspection clause

Method of settlement of disputes.

Purchase order should be serially numbered and 4 to 5 copies of it

should be made
 4}RECEIPT AND INSPECTION

After receiving the material from supplier the quantity received

actually is compared with quantity ordered and variations if any
are dealt with supplier.
Excess material can be dealt in following way..

--accept all the material received

--accept the material ordered and return the excess to the supplier.
 5)CHECKING INVOICES AND
ACCOUNTING FOR PURCHASES

For this purpose suppliers invoice is compared

with following documents
• Purchase order
• Goods received note
• Inspection report
 B ) S T O R I N G A N D I S S U E O F M AT E R I A L

Movement of material in stores can take place in following manner:

1) Receipt of material

Goods received note (GRN or GRR) is prepared to record the details of

material received.

Form of GRN:
 FEATURES OF GRN

It is prepared in quadruplicate.

It should be serially numbered.

The serially numbered GRN helps to locate discrepancies in material
receipts-
Quantity received in excess: Goods Returned Note

Quantity received in short

Quantity received of different quality.
 2) ISSUE OF MATERIAL
Materials should be issued by store department along with a proper
authority and this authority is in the form “Material Requisition Note”
Contents of this Note

Number and date

Deartment demanding the material

Discription and code of material demanded

Quantity of material demanded

Signature of authority issuing and receiving material

 3 } R E T U R N O F M AT E R I A L

Material issued to production department is returned back to

stores.
Reasons ?

Form of Material Return Note

 4 } T R A N S F E R O F M AT E R I A L

Tranfer of material from one production department to another .

Accompanied by material tranfer note.

 P E R P E T U A L I N V E N TO RY
SYSTEM

Proper conduct of storage function

Aim or objective

Recording receipts and issues efficiently. This aim is achieved by

preparing “Bin card” and “stores ledger”.
Continues verification of physical stock at regular intervals.
 BIN CARD

Quantitative record of receipts, issues and closing balances of an item

of material.
Separate bin card is maintained for each item of material.
Enties in receipt column are made on the basis of GRN
Entries issued coumn is made on the basis of MRN.

After every entry balance is found out.

Ideally bin card should be placed with material.
 FORM OF BIN CARD
Bin card

Description Maximum Level :

Code no. Minimum Level :
Location Reorder level :

Date Docume Receipt Issues Balance Remarks

nt no.
 S TO R E S L E D G E R

It is maintained to record all receipts and transactions like bin card
but with the exception that it records financial expressions also.
 FORM OF STORES LEDGER
Stores ledger

Description Maximum Level :

Code no. Minimum Level :
Location Reorder level :

Date Document Receipts Issues Balance Remarks

no.

Qty Rate Rs Qty Rate Rs Qty Rate Rs.

. .
 VA L U AT I O N / P R I C I N G O F
ISSUES

FIFO (First in First out)

LIFO (Last in First out )

Simple Average Method

Weighted Average Method

 FIFO
Under this method price of the earliest available lot is considered first
and if that lot is exhausted the price of the next possible lot is considered.
E.g. A - 1st lot

B - 2nd lot
C - 3rd lot
Price consideration of A will be 1st
then price of B will be considered.
 LIFO

Under this method price of the latest available lot is considered first
and if that lot is exhausted price of the lot prior to that is considered.
For e.g. A - 1st lot

B - 2nd lot
C - 3rd lot

Price consideration of C will be 1st

then price of B will be considered.
THANK YOU