CHAPTER: 4

PURCHASING
Definition, duties & functions of a store keeper, store records,
Stock management, orders & tenders, security deposit, earnest money
PURCHASING
Purchasing refers to a business or organization attempting to acquiring goods or services to
accomplish the goals of its enterprise. Though there are several organizations that attempt to
set standards in the purchasing process, processes can vary greatly between organizations.
Typically the word purchasing is not used interchangeably with the word procurement,
since procurement typically includes Epediting, !upplier "uality, and Traffic and #ogistics
$T%#& in addition to Purchasing.
DUTIES & RESPONSIBILITIES OF A STORE KEEPER
' store(eeper is more than )ust the face of the store. *hile a friendly, store(eeper maintains a
good clientele+ she must also be business savvy using math and critical,thin(ing s(ills to tally
sales, report ependitures and quic(ly tabulate a customer-s purchases with an applied
discount, for eample. The store(eeper must be (nowledgeable about the products she sells,
understand the business she-s in and appear approachable with employees and customers
ali(e.
Maintains Reco!s
.nowing what inventory the store has, when stoc( is running low and which items customers
request is the store(eeper-s responsibility. !he (eeps detailed inventory records when
products are purchased and returned+ notes customer-s opinions and arranges for store
transfers, compiles a customer mailing list with sale alerts and coupons, and files and updates
employee documents as necessary. These records must be tidy and organized for others to
understand.
Ceates an! Recei"es O!es
The store(eeper (eeps detailed records so she (nows when to reorder supplies or
merchandise. !he uses her math and computer s(ills to generate orders and communicates
with sales reps on sizes, fabrics and delivery times, for eample. *hen merchandise arrives,
it is her responsibility to unpac( shipments, assess the inventory, delegate employees to stoc(
the shelves and send bac( defective or wrong merchandise in a timely manner.
Kee#s A##eaances U#
The overall image of the store is the store(eeper-s responsibility. !he (eeps shelves dust,free,
spaces clothes and merchandise appropriately, styles and updates the mannequin-s when
necessary, and ensures merchandise labels all face the same way, for eample. /n addition, the
store(eeper is aware of lighting issues, such as bulbs that need replacing, or crac(ed tiles in
the bathroom needing repair. !he also ensures the store is hazard,free with ample wal(ing
room and that employees follow business and employee state laws.
Co$$%nicates &e''
0ecause the store(eeper )uggles the needs of customers, vendors, sales reps, employees and,
possibly, the store-s owners, she must have ecellent communication s(ills. !he is responsible
for problem,solving, eplaining products, answering questions about company policies, and
training and giving employee feedbac(. 1ood listening and interpersonal s(ills, an intuitive
nature and the ability to ma(e quic(, spot,on assessments are important for the successful
store(eeper.
COMPONENTS OF PURCHASE
Ac(%isition #ocess
The revised acquisition process for ma)or systems in industry and defense is shown in the
net figure. Then the purchase has to clear all the materials. The process is defined by a series
of phases during which technology is defined and matured into viable concepts, which are
subsequently developed and readied for production, after which the systems produced are
supported in the field.
The process allows for a given system to enter the process at any of the development phases.
2or eample, a system using unproven technology would enter at the beginning stages of the
process and would proceed through a lengthy period of technology maturation, while a
system based on mature and proven technologies might enter directly into engineering
development or, conceivably, even production. The process itself includes four phases of
development3
4oncept and Technology 5evelopment3 is intended to eplore alternative concepts
based on assessments of operational needs, technology readiness, ris(, and
affordability.
4oncept and Technology 5evelopment phase begins with concept eploration. 5uring
this stage, concept studies are underta(en to define alternative concepts and to provide
information about capability and ris( that would permit an ob)ective comparison of
competing concepts.
!ystem 5evelopment and 5emonstration phase. This phase could be entered directly
as a result of a technological opportunity and urgent user need, as well as having
come through concept and technology development.
The last, and longest, phase is the !ustainment and 5isposal phase of the program.
5uring this phase all necessary activities are accomplished to maintain and sustain the
system in the field in the most cost,effective manner possible.
Se'ection o) *i!!es
This is the process where the organization identifies potential suppliers for specified supplies,
services or equipment. These suppliers- credentials and history are analyzed, together with the
products or services they offer. The bidder selection process varies from organization to
organization, but can include running credit reports, interviewing management, testing
products, and touring facilities. This process is not always done in order of importance, but
rather in order of epense. 6ften purchasing managers research potential bidders obtaining
information on the organizations and products from media sources and their own industry
contacts. 'dditionally, purchasing might send 7equest for /nformation $72/& to potential
suppliers to help gather information. Engineering would also inspect sample products to
determine if the company or organization can produce products they need. /f the bidder
passes both of these stages engineering may decide to do some testing on the materials to
further verify quality standards. These tests can be epensive and involve significant time of
multiple technicians and engineers. Engineering management must ma(e this decision based
on the cost of the products they are li(ely to procure, the importance of the bidders8 product
to production, and other factors. 4redit chec(s, interviewing management, touring plants as
well as other steps could all be utilized if engineering, manufacturing, and supply chain
managers decide they could help their decision and the cost is )ustifiable.
6ther organizations might have minority procurement goals to consider in selection of
bidders. 6rganizations identify goals in the use of companies owned and operated by certain
ethnicities or women owned business enterprises. !ignificant utilizing of minority suppliers
may qualify the firm as a potential bidder for a contract with a company or governmental
entity loo(ing to increase their minority supplier programs.
This selection process can include or eclude international suppliers depending on
organizational goals and criteria. 4ompanies loo(ing to increase their pacific rim supplier
base may eclude suppliers from the 'mericas, Europe, and 'ustralia. 6ther organizations
may be loo(ing to purchase domestically to ensure a quic(er response to orders as well as
easier collaboration on design and production.
6rganizational goals will dictate the criteria for the selection process of bidders. /t is also
possible that the product or service being procured is so specialized that the number of
bidders are limited and the criteria must be very wide to permit competition. /f only one firm
can meet the specifications for the product then the purchasing managers must consider
utilizing a !ole !ource option or wor( with engineering to broaden the specifications if the
pro)ect will permit alteration in the specifications. The sole source option is the part of the
selection of bidders that ac(nowledges there is sometimes only one reasonable supplier for
some services or products. This can be because of the limited applications for the product
cannot support more than one manufacturer, proimity of the service provided, or the
products are newly designed or invented and competition is not yet available.
Bi!!in+ #ocess
This is the process an organization utilizes to procure goods, services or equipment. Processes
vary significantly from the stringent to the very informal. #arge corporations and
governmental entities are most li(ely to have stringent and formal processes. These processes
can utilize specialized bid forms that require specific procedures and detail. The very
stringent procedures require bids to be open by several staff from various departments to
ensure fairness and impartiality. 7esponses are usually very detailed. 0idders not responding
eactly as specified and following the published procedures can be disqualified. !maller
private businesses are more li(ely to have less formal procedures. 0ids can be in the form of
an email to all of the bidders specifying products or services. 7esponses by bidders can be
detailed or )ust the proposed dollar amount.
9ost bid processes are multi,tiered. 'cquisitions under a specified dollar amount can be
user discretion permitting the request or to choose who ever they want. This level can be as
low as :;<< or as high as :;<,<<< depending on the organization. The rationale is the savings
realized by processing these request the same as epensive items is minimal and does not
)ustify the time and epense. Purchasing departments watch for abuses of the user discretion
privilege. 'cquisitions in a mid range can be processed with a slightly more formal process.
This process may involve the user providing quotes from three separate suppliers. Purchasing
may be as(ed or required to obtain the quotes. The formal bid process starts as low as
:;<,<<< or as high as :;<<,<<< depending on the organization. The bid usually involves a
specific form the bidder fills out and must be returned by a specified deadline. 5epending of
the commodity being purchased and the organization the bid may specify a weighted
evaluation criterion. 6ther bids would be evaluated at the discretion of purchasing or the end
users. !ome bids could be evaluated by a cross,functional committee. 6ther bids may be
evaluated by the end user or the buyer in Purchasing. Especially in small, private firms the
bidders could be evaluated on criteria or factors that have little if anything to do with the
actual bid. Eamples of these factors are history of the bidder with the company, history of
the bidder with the company8s senior management at other firms, and bidder8s breadth of
products.
Tec,nica' e"a'%ation
Technical evaluations, evaluations of the technical suitability of the quoted goods or services,
if required, are normally performed prior to the commercial evaluation. 5uring this phase of
the procurement process, a technical representative of the company $usually an engineer& will
review the proposal and designate each bidder as either technically acceptable or technically
unacceptable.
Co$$ecia' e"a'%ation
4ost of 9oney is calculated by multiplying the applicable currency interest rate by the
amount of money paid prior to the receipt of the 1oods. /f the money was to have remained
in the buyer-s account, interest would be drawn. That interest is essentially an additional cost
associated with such Progress or 9ilestone payments.
The manufacturing location is ta(en into consideration during the evaluation stage primarily
to calculate for freight costs and regional issues. 2or instance, it is common in Europe for
factories to close during the month of 'ugust for a summer holiday. #abor agreements may
also be ta(en into consideration and may be drawn into the evaluation if the particular region
is (nown to frequent labor unions.
The manufacturing lead,time is the time from the placement of the order $or time final
drawings are submitted by the 0uyer to the !eller& until the goods are manufactured and
prepared for delivery. #ead,times vary by commodity and can range from several days to
years.
Transportation time is evaluated while comparing the delivery of goods to the 0uyer-s
required use,date. /f 1oods are shipped from a remote port, with infrequent vessel
transportation, the transportation time could eceed the schedule and ad)ustments would need
to be made.
5elivery 4harges , the charge for the 1oods to be delivered to a stated point.
0id =alidity
Pac(ing
0id 'd)ustments
Terms and 4onditions
!eller-s !ervices
!tandards 6rganizations
2inancial 7eview
Payment 4urrency
7is( 'nalysis , mar(et volatility, financial stress within the bidders
Testing
Ne+otiatin+
>egotiating is a (ey s(illset in the Purchasing field. 6ne of the goals of Purchasing 'gents is
to acquire goods per the most advantageous terms of the buying entity $or simply, the
?0uyer?&. Purchasing 'gents typically attempt to decrease costs while meeting the 0uyer-s
other requirements such as an on,time delivery, compliance to the commercial terms and
conditions $including the warranty, the transfer of ris(, assignment, auditing rights,
confidentiality, remedies, etc.&.
1ood negotiators, those with high levels of documented ?cost savings?, receive a premium
within the industry relative to their compensation. 5epending on the employment agreement
between the Purchasing 'gent $0uyer& and the employer, 0uyer-s cost savings can result in
the creation of value to the business, and may result in a flat,rate bonus, or a percentage
payout to the Purchasing 'gent of the documented cost savings.
Purchasing 5epartments, while they can be considered as a support function of the (ey
business, are actually revenue generating departments. 2or eample, if the company needs to
buy :@< million A!5 of widgets and the Purchasing 5epartment secures the widgets for
:BC9 A!5, the Purchasing 5epartment would have saved the company :C9 A!5. That
savings could eceed the annual budget of the department, which in effect would pay the
department-s overhead , the employee-s salaries, computers, office space, etc.
Post-a.a! a!$inistation
Post,award administration typically consists of ma(ing minor changes, additions or
subtractions, that in some way change the terms of the agreement or the !eller-s !cope of
!upply. !uch changes are often minor, but for auditing purposes must be documented into the
eisting agreement. Eamples include increasing the quantity of a #ine /tem or changing the
metallurgy of a particular component.
O!e c'oseo%t
/s the closing of order.
STORE RECORDS
The following documents or records are used ?on recording the store items3
0in 4ard
!tores #edger
!tores /ssue 7equisition
0ill of 9aterial
9aterial Transfer >ote.
A/ Bin Ca!
'fter inspection of materials, the approved materials are received by the (eeper. These
materials are stored in bins, rac(s, almirahs and other equipments provided for the purpose.
2or systematic storing, each type of mate (ept in different bins, rac(s, almirahs, etc.
/t may be noted that a bin is a place, i.e, a rac(, a shelf, an admiral or an op place where
goods are stored. 2or each bin a card is maintained containing the of materials only and
updated by the store,(eeper. 0in card is prepared in dup-DE 6ne card is attached to each bin
and the other remains with the store,(eeper.
' bin card is a quantitative record of receipts, issues, and balances of m
3
-
F
in stores. The bin
card is attached to the bin or rac( in which materials are sty.
/t enables to (now the quantity of materials in hand at a glance . 0in card maintained by the
store,(eeper. This card is used not only for recording receipts issues of stores but also assists
the store,(eeper to cGntrol the stoc(. ' bin card the store,(eeper to prepare purchase
requisition to replenish the ehausted material. /t also helps in locating the discrepancy when
physical stoc( verification+ underta(en and the balance compared with bin card.
/t contains particulars such as number, description of material, code number of material,
maimum, minimum, order and danger levels.
Bene)its o) a Bin Ca!
0in card has the following benefits or utilities3
$i& 's the most important store record it gives up,to,date record of receipt, sits and closing
balances of items of stores.
$ii& /t is helpful in placing requisitions for replenishment as when necessary. 7e,ordering
quantity is also available in this card.
$iii& /t ma(es Perpetual /nventory system meaningful by reconciling physical stoc( with
balance shown in the bin card.
$iv& /t helps to control material cost with minimum investment as the store(eeper (eeps the
stoc(s within the prescribed limit.
$v& /t discloses at a glance to any one in the stores about the quantity balance of stoc(. /t helps
in a system of internal chec( as many information relating to store (eeping is available from
bin card.
B/ Stoes Le!+e
' stores ledger is a record of materials showings receipts, issues, and balances / of materials
in quantities and value. /t is maintained by the 4osting 5epartment and is outside the control
of store,(eeper. This ledger is maintained in order to ensure correct ; stores accounting.
This ledger is usually of loose leaf or card type and each account represents an item of
materials. The sheets are numbered serially and initiated by a responsible official so as to
avoid the ris( of removal or loss. /n some concern, the stores ledger is maintained in bound
volumes so as to rule out the possibility of loss of folios.The specimen of stores ledger is
given below3
Bene)its o) Stoes Le!+e
The benefits of stores ledger are given below3
$i& /t is an account record which provides information about receipt, issue nod balances both
in quantity and value.
$ii& /t is maintained centrally in cost office from where consolidated.3 information may be
made available.
$iii& /t constitutes a. chec( on the quantity recorded in bin card.
$iv& 2requent overall review of stores balances may be conveniently made with the help of
stores ledger.
5ifference between a 0in 4ard and a !tores #edger
' stores ledger differs from a bin card in the following respects3
Bin Ca!
$;& 0in card records particulars of materials only in quantities.
$B& /t is maintained in the stores by the store,(eeper.
$@& /t is normally (ept inside the stores and it is used for controlling materials.
$H& Entries are posted before the transactions ta(e place.
$C& Entries are posted individually.
$G& Entries are made on the basis of quantity received or issue.
Stoes Le!+e
!tores #edger records particulars of materials both in terms of quantity and value.
/t is maintained by the cost accounting department by the 'ccounts 4ler(.
/t is normally (ept outside the stores and it is used to determine the value of materials, i.e.,
pricing of materials issues.
Entries are posted after the transactions ta(e place.
Entries are posted periodically.
Entries are supported by material received note and material requisition note.
T.o-Bin S0ste$
'ccording to this system, a certain quantity of materials termed as reserve stoc( is set apart
which is not used for daily use. Ander this system two bins are used. The first bin is (nown as
?running bin? which serves the purpose of day,to,day issues. The (ey second bin which is
(nown as ?reserve bin? is set aside with certain quantity of materials.
The reserve stoc( is set apart by ta(ing into account the time ta(en by the o supplier to
deliver the materials. *hen the materials in the running bin ehausts, the materials in the
reserve bin is used for issuing them. This serves as a caution for the store,(eeper to place a
purchase requisition.
Reconci'iation o) Bin Ca! an! Stoes Le!+e
'fter ma(ing necessary entries in the bin card, the receipt and issue document are valued and
handed over to the stores ledger cler( for posting in the ledge >ormally, there should be no
difference between the balances disclosed in the twos of records. 0ut in practice difference
arises due to the following reasons3
$i& There may be some arithmetical error in wor(ing out the balances.
$ii& There may be posting in the wrong bin card or in the wrong sheet of stores ledger.
$iii& There may be posting of receipt documents in issue column or vice v..
$iv& There may be complete omission of posting a document either in a card or in a stores
ledger.
$v& There may be some temporary entry only in bin card or stores ledger. 4. !tores
7equisition
The store,(eeper is required not to issue any material unless he is d+ authorized by the
competent authority. ?!tores or 9aterial 7equisition is authorization to a store,(eeper to issue
materials or other stores.? This is use. prepared by the foreman of the production department.
The contents of !tores 7equisition are3
$i& >umber and date of requisition.
$ii& >ame of the section requiring the materials.
$iii& Particulars and code number of materials.
$iv& The quantity of material demanded and its unit of measurement.
$v& The rate at which issue is to be made.
$vi& The total value of materials.
$vii& 'uthority for requisition.
The specimen of stores requisition is given below3
'04 4ompany #td. !tores 7equisition >ote
D/ Bi'' o) Mateia'
' 0ill of 9aterial may be defined as, ?a document containing a complete list of materials and
components required for manufacturing a particular product or for a particular )ob, process or
wor(,order?. /t is also (nown as -!pecification of materials-,
0ill of material often serves the purpose of 9aterial 7equisition as it contains the complete
list of materials required for a particular )ob. 0ut a !tores 7equisition cannot replaces a 0ill
of 9aterial.
'. bill of material is a schedule of materials required for each )ob, process or operation. /t
gives the details, of materials necessary li(e material specification, weigh and the quantity of
each item. The bill of material is prepared by production or planning department as soon as
the order is received. /t is a requisition to the stores department for supplying the desired
materials in proper time.
A!"anta+es o) Bi'' o) Mateia'
$i& /t serves the purpose of an advance intimation to all concerned of the order to be eecuted.
$ii& /t acts as an authorization for issue of materials from store.
$iii& /t serves the production department as an authority to place material requisition.
$iv& /t may be used as a guide for controlling consumption of materials as it provides detailed
list of materials required. I-
$v& /t is possible to calculate material cost of all articles before their production.
$vi& /t may be used as a basis for passing accounting entries in the stores ledger and cost
ledger.
E/ Mateia' Tans)e Note
9aterial Transfer >ote is prepared when materials or equipments are transferred from one
sub,store to another sub,store or from one production section to another or from one )ob to
another in the factory. >ormally inter department transfer is not allowed. Jowever, it may be
encouraged in the following situations3
$a& *here the surplus materials ar( of very heavy weight and involves more handling
epenses.
*here production is not to be stopped due to want of materials.
STOCK MANAGEMENT
!toc( management largely refers to when a company wor(s to obtain and preserve a suitable
assortment of goods while also (eeping trac( of all orders, shipping and handling, and other
related costs.
Primarily, stoc( management is about specifying the size and placement of the goods that a
company has in stoc(. !toc( management is often important for numerous departments
within a facility in order to protect the planned course of production against the possibility of
running out of critical materials or goods.
Co$#etin+ stoc1 e(%ie$ents
!toc( management also encompasses the important connections between replenishment lead
time, asset management, carrying costs of stoc(, future stoc( price forecasting, physical
stoc(, available stoc( space, demand forecasting and much more.
0y balancing these competing requirements, a company will discover their optimal stoc(
levels. This is a never,ending process, as the company will need to shift and react to its
environment as it changes and grows.
P%s, an! #%''
To put it simply, stoc( management is ruled by first the customers, who pull goods out of
stoc(, and second by the company that pushes the goods out of stoc( based on orders and
demand.
T,e e-cono$ic &a0
*ith the e,conomic !toc( management add,on module, your stoc( list goes above and
beyond a general product directory. /t enables you to3
7eceive a clear and structured overview of your stoc(
6ptimize and improve your performance and business.
!ee which products are in stoc(, find out when to reorder, learn which products are
selling as epected and which ones are not, and much more.
7eceive an accurate overall picture of your stoc(D
STOCK MANAGEMENT

MATERIALS

The term Kmaterials8 covers a wide range of items. 5epending on the nature of the activities
carried on by an organization, materials can ta(e the following forms3
7aw materials, which are needed to produce a finished product. 2or eample, flour
and sugar for biscuit, or wood for furniture+
*or(,in,process, which refers to semi,produced raw materials at a particular point in
time+
4omponents or Kpiece parts8, for assembly into a finished product+
2inished products for use or sale. 2or eample, pac(aged food or bag of cement+ and
/ndirect materials for use by one or more cost centres of an organization, such as
stationery, fuel and lubricants, and cleaning materials.

*hatever the nature of the business of an organization, materials are required, obtained,
stored and used to achieve its ob)ectives. The cost or management accountant must, therefore,
provide management with information that would guide their decision in respect of materials
acquisition, planning and control, and pricing.

MATERIALS AC2UISITION
The various steps to be observed by a cost,conscious organization in respect of purchase and
receipt of materials are as follows3
/nitiation of the purchase procedure by means of a purchase requisition+
Preparation of the purchase order and its dispatch to the supplier+
7eceipt of the materials+
/nspection or testing of the materials+
5ebit note to the supplier in respect of defects, re)ects, etc.+
Passing of the transaction to accounts department for payment+ and
Entry in the relevant accounting boo(s.
P%c,ase Re(%isition
This is the formal instruction or request to the procurement department to purchase
goodsLmaterials. /t is initiated by the person or department requiring the goods, who must
state the quantity of each type of material required, give a description of the goods $including
quality, specification, etc&, the account to be charged, a suggested name of the supplier and
the point of delivery. Asually, two copies of the Purchase 7equisition 2orm $P72& is to be
prepared, one for the procurement 5epartment and the second for retention in the originating
cost centre8s file.

A SPECIMEN PURCHASE RE2UISITION FORM

The specimen purchase 7equirement form $P72& above can be modified to suit the need of
an organization. /n order to ensure accountability, it is advisable to put the form into use.

T,e Poc%e$ent De#at$ent
Purchasing is a specialist activity frequently carried out by a separate department under the
control of a procurement officer or manager. /t is a specialist activity in the sense that the
purchaser must have bargaining s(ills and power to purchase at the lowest possible cost. This
will have a positive effect in the overall profit the organization. /t is to be noted that
economical procurement should always be the aim of the business+ the manager must not
allow quality to suffer. Je should buy the quality, at the right time, at the price and always
from dependable sources of supply.

T,e P%c,ase O!e Fo$ 3POF4
This form is used for ordering supplies. The form is prepared based on the specification
included in the purchase requisition form as signed by the procurement manager. /t contains
name and address of the purchasing organization, name of the supplier, date of order, terms of
payment, prices, delivery instructions and delivery date.

The procurement manager should ma(e his organizations requirement absolutely clear and
refer to the standard specification published by the >igerian !tandards 6rganization $>!6&,
if need be.

The P62 is usually raised in five $C& copies and distributed as follows3
!upplier,
1oods 7eceiving 5epartment,
'ccounts 5epartment,
/nitiating 5epartment, and
Procurement 5epartment, for reference purpose.

A SPECIMEN PURCHASE ORDER FORM

The specimen Purchase 6rder 2orm above can be ad)usted to suit the specific needs of an
organization.

T,e Goo!s Recei"in+ De#at$ent
/n any organization which is well organized, all incoming materials should be received by
goods receiving department. This department chec(s quantity, quality and condition of items
against the copy of purchase order form sent to it as well as the supplier8s advice note. 'fter a
satisfactory chec(, a goods receiving >ote $17>& is raised. The 17> shows the date,
supplier8s name, purchase order number, quantity and description of the goods, condition on
arrival and details of returnable pac(ing material. The 17> is to be signed by the head of the
department or any other person authorized to do so.

The number of copies of 17> to be raised depends on the organization concerned. /n a large
organization, five copies are to be raised and distributed as follows3
Purchasing department,
6riginating department,
!tores
'ccounts department, and
The goods receiving department for reference purpose.
*here the receiving approving and storing of goods are responsibilities of the store(eeper,
four copies of the 17> are to be raised.
!ometimes, technical or laboratory inspection is necessary and, therefore, the goods have to
be passed to a separate inspection section or laboratory department, which will provide a
quality report either on the 17> or on a separate sheet of paper. /n either case, the report is to
be forwarded to the procurement department.

A SPECIMEN GOODS RECEI5ED NOTE

The specimen 17> above can be modified to suit the needs of an organization.

De*it an! Ce!it Note
*hen the material received from the supplier are either3
>ot of the type ordered,
>ot in accordance with the specification in the purchase order form
're damaged while in transit, or
/ncorrect in quantity
/t is usual to forward a debit note to the supplier, informing him that his account has been
debited with the value of the materials concerned.

The 5ebit note is to be prepared by the procurement department in three copies and
distributed as fellows3
the supplier,
the 'ccounts 5epartment,
7etained.
The unsatisfactory materials may be returned to the supplier immediately, or they may be
held pending his instructions. /f the supplier accepts the claim$s& of the buyer, he signifies his
acceptance through the issue of a credit note. The credit note indicates a credit to the
company $debtorLbuyer& with the value of the materials on which claim for allowance is
made.

T,e Acco%nts De#at$ent
*hen an invoice is received from a supplier, the invoice must be receipted and numbered.
The Procurement 5epartment will chec( the description of the goods and prices against the
Purchase order 2orm. The quantities will also be verified from the 1oods 7eceived >ote and
reference will be made to inspection or laboratory test report. 't each stage, the appropriate
officers must append their names and signatures. The Procurement 5epartment staff will state
the quantity, quality and price and an appropriate ledger code number will be entered.

'fter this processing, the invoice is passed to the 'ccounts 5epartment for payment. /n this
department an accounts cler( will chec( will chec( the calculations in the invoice and, if
found correct, the invoice value will be entered in the Purchase boo(. 2rom there, the
supplier8s account will be credited in the Purchase #edger with the amount payable to him on
the goods purchased. The total of the Purchase boo( is to be debited to Purchase 'ccount in
the 1eneral #edger. *hen payment is made to the supplier, his account will be debited and
cash boo( $cash or ban( account& will be credited.

Mateia's P'annin+ an! conto'
9aterials control is the system that ensures the provision of the required quantity of material,
of the required quality, at the required time and at the least possible cost. /f a cost accounting
system is to be fully effective, there must be an adequate system for the control of materials
from the time an order is placed with a supplier until the material is issued to production or
for other use.

9aterial represents and important asset and is the largest single item of cost in every
manufacturing business and in almost every organization. Asually, more than H<M of the total
manufacturing cost represents material cost. 'ccordingly, the success or failure of a business
concern may depend largely on efficient material procurement, storage utilization and
accounting.

Efficient materials control eliminates losses and other forms of waste that usually pass
unnoticed. Theft, brea(age, deterioration and the use of ecessive floor space can be reduced
to the barest minimum through proper materials control.

Re(%ie$ents )o a Goo! S0ste$ o) Mateia's P'annin+ an! Conto'
The ma)or requirements of a satisfactory system of materials control are3
Efficient co,ordination between the departments involved in the buying,
receiving, inspection and storage of materials and in accounting for them+
4entralization of purchasing under the authority of the procurement department or
officer+
The materials must be well planned and programmed+
Proper classification and, where applicable, coding of materials+
The use of standard forms for orders requisitions, chec(ing, reporting, etc., upon
which written and signed instructions are given+
7egular budget and budgetary control on materials and equipment to be purchased+
/nternal chec( and audit must be introduced and effected in order to ensure that all
transactions involving materials and equipment are chec(ed by reliable and
independent officials+
9aterials must be stored in well planned and properly designed stores, sub)ect to
adequate safeguards and supervision+
*or(,in,process materials too must be adequately recorded and controlled, li(ewise
the manufactured stoc(+
7egular reports to management on purchases of materials, suppliers, spoilage or
wastage.
Doc%$ents )o Mateia' P'annin+ an! Conto'
The store department must (eep records of all goods received into store and of the physical
issues of materials from the store. 2our main documents that are used for materials control
are3
9aterials 7equisition 2orm
9aterial 7eturn >ote
0in 4ard
!tore #edger 4ard $'ccount&.
Mateia' Re(%isition Fo$ 3MF4
This form is used by a department, section, or unit or request for materials in the store. This is
an important document for both storage control and cost ascertainment in virtually all cost
accounting systems. This document is usually raised in three copies. 6ne copy will be
retained by the originator and the other two copies are sent to store department to allow
authorize withdrawal of goods from the store. 6f these two copies, the store department will
retain one to up,date their own records, and, having completed the quantity issue section,
send the other copy to the !tore #edger section. Jere, the material will be priced and the
copy will be used to update the relevant store card before being forwarded to the 4ost
'ccount section. /t is this section that will charge the relevant department, unit, product, )ob
or process with the value of materials issued, using the stoc( valuation system of the
organization. The same document will also be used to update the balances in other relevant
ledger accounts.
A S#eci$en Mateia' Re(%isition Fo$

KA6AL&A CEMENT PLC

MATERIAL RE2UISITION


The specimen 972 above can be modified to suit the specific needs of an organization. /t is
normally the store(eeper8s responsibility to ensure that the requisition is properly authorized
and accurately completed, after which the materials are issued and the stores ledger card
updated. The stoc( ledger account is to be credited, that is, transaction entered in the issues
column to arrive at a reduced balance and the account of the appropriate )ob or cost centre is
to be debited.

Mateia's Ret%n Note 3MRN4
This is a document which records the return to store department of surplus materials no
longer required by the cost centre. 97> can be of virtually identical design to the 972 but
coloured differently. The various materials records and cost accounts are to be ad)usted to
ensure that the cost centre concerned receives credit for the materials returned while the store
account is debited for the returned materials.

T,e Bin Ca! 3BC4
This is a document on which is recorded every transaction in respect of each item of
materials, after the physical receipt or issue. ' bin card is normally attached to the bin,
drawer or shelf in or on which each individual materials is stored. /t provides a running
record of receipts and issues in the simplest possible form. 'n entry will be made at the time
of each receipt or issue and a new balance will be determined. The bin card records the unit
or quantity issued or received into store and not the 4ost =alue. 2or each item, on the bin
card, the maimum, minimum and re,order levels as well as the order quantity should be
reflected.

A SPECIMEN BIN CARD

At t,e en! o) t,is .ee1 t,e st%!ents s,o%'! *e a*'e to %n!estan!

Purchasing Procedures
/nventory control procedures


The specimen bin card above can be ad)usted to sit the specific needs of an organization.

IN5ENTR6 CONTROL
The stoc( levels in the bin card are meant to ensure effective control of materials in the store
and to avoid ecessive stoc(, wastages, wor( stoppages, etc. The levels could be defined as
follows3

Ma7i$%$ Stoc1 Level3 This is the upper level of the inventory and the quantity that
must not be eceeded without specific authority from the management of the
organization. The level is given by the formula3 re,order level N 7e,order "uantity O
$9inimum Asage 9inimum 7e,order period&
Mini$%$ Stoc1 Le"e'3 This is the lowest level to which the inventory should be
allowed to fall. /t is given by3
7e,order level O $'verage Asage 'verage 7e,order period&.
A"ea+e Stoc1 Le"e'3 9aimum !toc( level Plus 9inimum !toc( level divided by B.
Re-o!e Le"e' o O!e Le"e'3 This is the level to which the materials stoc( level is
to be allowed to fall before an order for further supplies is placed. /t is given by3
9aimum Asage 9aimum 7e,order Period.
Re-o!e Peio! o Lea! Ti$e3 This is the time ta(en between the placing of an
order and the receipt of the materials.
Re-o!e 2%antit03 This is the economic order quantity $E6"& or simply the normal
order. /t is the quantity that minimizes the total cost of order and holding of stoc(.

I''%station 8-9
The following data were etracted from the records of .abuga 9anufacturing
#imited, .ano for a period3
'verage usage ;<< units per day
9inimum usage G<< units per day
9aimum usage ;@<< units per day
Economic order quantity $E6"& C<, <<< units
7e,order period BC to @< days

Re(%ie!
5etermine the following for the company
$a& 9aimum stoc( level
$b& 9inimum stoc( level
$c& 7e,order level
$d& 'verage stoc( level

S%++este! so'%tion 8-9
7e,order level must be determined first before any of the first two stoc( levels.
$a& 9aimum !toc( #evel P @Q,<<< N C<,<<< , $G<< BC& P RH,<<< units
$b& 9inimum !toc( #evel P @Q,<<< O $;<<< BR.C& P ;;,C<< units
$c& 7e,order level P ;@<< @< P @Q,<<< units
$d& 'verage !toc( #evel P 9a. N 9in.LBP RH,<<< N ;;,C<<LB P HB,RC< units

9aimum, minimum and re,order levels are not static. They must be varied to suit changing
circumstances. 'lterations will ta(e place if the usage of certain materials is increased or
decreased. /f the re,order period changes or decreased.

STORES LEDGER CARD3
This is the (ey to an effective materials control system as it provides the details necessary to
ascertain material values and for the chec(ing of physical stoc( of materials. 2or materials
control to be efficient and effective. There must be minimum delay between the physical
movement of materials and their recording in the card. 2or the re,ordering routine to operate
efficiently, it is necessary to ta(e account of the amount of materials on order and the eisting
physical materials held.

Probability of disappointment3 'lternative quic( supply arrangement may be made where
necessary.
$c& 9aimum level O is the level that warns management about slow moving stoc(, low
demand of production, low material utilization etc.
'ny of these problem, can give rise to overstoc(ing.

ECONOMIC ORDER 2UANTIT6 3EO24
Economic 6rder "uantity can be seen as the 7e,order "uantity which minimizes the
differences between inventory holdings cost and re,order cost. *e have eplained that
inventory must be well planned and should not be left to chance. Though past eperience has
a lot to do with fiing Economic 6rder "uantity $E6"&. The figure could be computed with
the following assumption3

!toc(,holding cost is (nown
6rdering cost is (nown and constant
The rate of demand for materials is (nown
Price per units is (nown and constant
The re,order quantity is supplied in bul(.

*here these variables are (nown with certainly, the formular for the computation is3

E6" P "A6TE

*here3 5 P 5emandLuse of stoc( per annum
4o P 4ost of 6rdering per order
P P Price of material per unit
4s P 4ost of !torage $stoc( holding costs per annum&
I''%station 5:
The data for material 9B.G shows that RB<< units were used annually. The cost of ordering
the materials was >B< per order3 the price of material was >;< each and the cost of storage
was BCM of material cost.
2rom this data the E6" can calculated as follows3

E6" P "A6TE P "A6TE
P "A6TE

E6" P @@Q units
I''%station 5I
The demand for a particular material per annum has been established as @<<< units. The
ordering cost was traced to be relatively constant at >C<< per order. Each unit of the material
costs >;< and the carrying cost was B<M of material cost per annum.
7equire3 To calculate the Economic order quantity for the material.

So'%tion:
E6" P "A6TE P "A6TE

E6" P "A6TE P ;BBC units

I''%station 5II
The data below related to material 9P4@
5emand , @<<< units per month
Anit 4ost , >C per unit
6rdering 4ost , >HS< per order
4arrying 4ost , @<M of cost per annum
Tou are required to calculate the E6" for the material 9P4@

So'%tion:
!tep /3 !ince the demand for the material is given on monthly basis, and the storage cost is
given on annual basis, we will find the total demand per annum i.e. @<<< units ;B months P
@G, <<< units per annum.

!tep //3 'pply the formula
E6" P "A6TE
E6" P HS<< units

NEED FOR ECONOMIC ORDER 2UANTIT6 3EO24
The formula is used to arrive at the amount of inventory to be ordered at any given time so as
minimize annual cost of stoc(. *here large quantity is purchased at a time, the holding cost
will be high because few orders will be made. 6n the other hand, where small orders are
made at a time, the holding cost will be low because small amount of capital is tied up but the
frequent ordering of the stoc( will increase the cost of ordering. The E6" formula is very
commonly used by organization to good inventory control. Jowever it is necessary to note
that E6" may be determined using Tabular 2ormat or 1raphic 2ormat.

The graphic 2ormat illustrated below shows that the lowest point of the total holding cost and
ordering cost is about >B<<.The Economic 6rder quantity $E6"& is about ;<<< units. The
E6" is usually read off at the point of intersection between 'nnual Jolding 4ost line and
'nnual 6rdering 4ost line.

2or further information on Tabular and 1raphic determination of E6", consult literatures on
"uantitative Techniques.

TENDER
DEFINITION OF TENDER
6ne who tends+ one who ta(es care of any person or thing+ a nurse.
' vessel employed to attend other vessels, to supply them with provisions and other
stores, to convey intelligence, or the li(e.
' car attached to a locomotive, for carrying a supply of fuel and water.
To offer in payment or satisfaction of a demand, in order to save a penalty or
forfeiture+ as, to tender the amount of rent or debt.
To offer in words+ to present for acceptance.
'n offer, either of money to pay a debt, or of service to be performed, in order to save
a penalty or forfeiture, which would be incurred by nonpayment or nonperformance+
as, the tender of rent due, or of the amount of a note, with interest.
'ny offer or proposal made for acceptance+ as, a tender of a loan, of service, or of
friendship+ a tender of a bid for a contract.
The thing offered+ especially, money offered in payment of an obligation.
Easily impressed, bro(en, bruised, or in)ured+ not firm or hard+ delicate+ as, tender
plants+ tender flesh+ tender fruit.
!ensible to impression and pain+ easily pained.
Physically wea(+ not hardly or able to endure hardship+ immature+ effeminate.
!usceptible of the softer passions, as love, compassion, (indness+ compassionate+
pitiful+ anious for another-s good+ easily ecited to pity, forgiveness, or favor+
sympathetic.
Eciting (ind concern+ dear+ precious.
4areful to save inviolate, or not to in)ure+ ,, with of.
Anwilling to cause pain+ gentle+ mild.
'dapted to ecite feeling or sympathy+ epressive of the softer passions+ pathetic+ as,
tender epressions+ tender epostulations+ a tender strain.
'pt to give pain+ causing grief or pain+ delicate+ as, a tender sub)ect.
Jeeling over too easily when under sail+ ,, said of a vessel.
7egard+ care+ (ind concern.
To have a care of+ to be tender toward+ hence, to regard+ to esteem+ to value.
ORDER
DEFINITIONS
Co$$ece: ' confirmed request by one party to another to buy, sell, deliver, or
receive goods or services under specified terms and conditions. *hen accepted by the
receiving party, an order becomes a legally binding contract. !ee also purchase order.
Ban1in+: 'n instrument $such as a chec( or draft& through which its ma(er or issuer
$drawer& authorizes a ban( or other financial institution to pay the stated sum to a
named holder $drawee or payee&. !uch instruments are transferable by endorsement,
and thus are negotiable instruments.
La.: 'n authoritative mandate, command, or direction issued by a court under its
seal. ' final court order is called )udgment.
Finance: 'n investor-s instructions to a bro(er or dealer to buy or sell an item in a
specified manner. !uch orders are of four ma)or types3 $;& #imit order, $B& 9ar(et
order, $@& 6pen order, and $H& !top order.
EARNEST MONE6
De)inition o) :Eanest Mone0:
' deposit made to a seller showing the buyer-s good faith in a transaction. 6ften used in real
estate transactions, earnest money allows the buyer additional time when see(ing financing.
Earnest money is typically held )ointly by the seller and buyer in a trust or escrow account.
E7#'anation on ;Eanest Mone0:
'n earnest money deposit shows the seller that a buyer is serious about purchasing a
property. *hen the transaction is finalized, the funds are put toward the buyer-s down
payment. /f the deal falls through, the buyer may not be able to reclaim the deposit. Typically,
if the seller terminates the deal, the earnest money will be returned to the buyer. *hen the
buyer is responsible for retracting the offer, the seller will usually be awarded the money.
SUMMAR6 :
PURCHASING
9/ DUTIES & RESPONSIBILITIES OF A STORE KEEPER
9aintains 7ecords
4reates and 7eceives 6rders
.eeps 'ppearances Ap
4ommunicates *ell
8/ COMPONENTS OF PURCHASE
Ac(%isition #ocess
Se'ection o) *i!!es
Bi!!in+ #ocess
Tec,nica' e"a'%ation
Co$$ecia' e"a'%ation
Ne+otiatin+
Post-a.a! a!$inistation
O!e c'oseo%t
</ STORE RECORDS
0in 4ard
!tores #edger
!tores /ssue 7equisition
0ill of 9aterial
9aterial Transfer >ote.
4/ STOCK MANAGEMENT
4ompeting stoc( requirements
Push and pull
The e,conomic *ay
9'TE7/'#! '4"A/!/T/6>
Purchase 7equisition
The Procurement 5epartment
The Purchase 6rder 2orm $P62&
The 1oods 7eceiving 5epartment
5ebit and 4redit >ote
The 'ccounts 5epartment
9aterials Planning and control
9aterials control is the system that
7equirements for a 1ood !ystem of 9aterials Planning and 4ontrol
5ocuments for 9aterial Planning and 4ontrol
9aterial 7equisition 2orm $92&
9aterials 7eturn >ote $97>&
The 0in 4ard $04&
/>=E>T7T 46>T76#
9aimum !toc( #evel3
9inimum !toc( #evel
'verage !toc( #evel3
7e,order level
7e,order #evel or 6rder #evel3
7e,order Period or #ead Time3
7e,order "uantity3
!T67E! #E51E7 4'75
E46>69/4 675E7 "A'>T/TT $E6"&
>EE5 267 E46>69/4 675E7 "A'>T/TT $E6"&
=/ DEFINITION OF TENDER
>/ DEFINITIONS OF ORDER
?/ EARNEST MONE6
5efinition of -Earnest 9oney-
Eplanation on KEarnest 9oney-