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CHAPTER - 4
a) Materials cost
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MATERIALS
Meaning: Commodities which areconsumed in production process.
Definition : Anythingthatcan bestored, stocked orstockpiled.
Classification : -Direct material
Indirect material
Finished parts
purchased parts
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M OVE M E N T O F M A T E R I A L S T A G E S
A) Procurement of materials.
B) Storingthe materialtillitisrequired forconsumption
C) Issue ofthe materialforconsumption.
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PRO CU R E M EN T O R PURCHASINGO F M ATERIAL
Definition : Scientific purchasing
the procurement bypurchase ofthe proper materials, machinery,
equipments and supplies ofstoresused in manufacture of product
adapted to marketinginthe properquantityand qualityatthe proper
timeand thelowest priceconsistent with thequalitydesired.
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O B J ECTI VES O F S CI EN TI F ICPURCHASING
Continuesflow of material
No understocking
No overstocking
Propertypeand qualityof materials
Economyin purchasing
Properadviceto the management
Supplyofinformationabout materials
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F U N C T I O N S O F S C I E N T I F I CP U R C H A S I N G
Qualitymaterial
Rightquantity
Buyingatright price
Timelysupplyof materials
Determination of purchasingbudget
Issue purchase orderto suppleirs
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CONT.
Verification ofqualityand quantityof materialsreceived
Approvinginvoices
Maintenance of properrecord
Coordination with other department
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METHODS OF PURCHASING
Methods
Centralized
Decentralized
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A D VANTAGES O F CEN TR ALI ZE D PURCHASING
Bettercontrol over purchases
Itavoidsexcessivereckless buying byseveral persons.
Regularsupplyand favourable treatmentfrom thesupplier
Reduced price of material onaccount oftrade discount , cash discount
facilities
Iteliminates possibilityof overstocking
Expert purchasingstaff
Uniformityin purchasingpolicies, practicesand procedures
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D I SA D VANTAGES O F CEN TR ALI ZE D PURCHASING
Workingcapitalgetslocked up.
The buyingprocedures becomesrigid
Distributionto consumptioncentresinvolvestransportation
cost
Delayinreceiving
Misunderstandingamongdepartments..
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DECENTRALIZED PURCHASING
Advantages
More promptand flexible
Personalcontacts with suppliersare developed
Avoids delaysin purchases
Convenientfor purchasingitemsspecificto units
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DISADVANTAGES
Lossescan be morethansavings
Small organizationcannotafford
Duplication of workcantake place
Administrationcostincreases
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PURCHASE PROCEDURE
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PURCHASE PROCEDURE
1) Purchase Requisition: Itisanindicationgivento the purchase
departmentto purchaseacertain material. Itisissued byeitherstorekeeper or byproduction department.
Followingparticulars mustappearin purchaserequisition:
Materialsto be purchased
Whenitisrequired
How much to be purchased
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2}SELECTI ON O F SOURCES O F SUPPLY
The purchase department maycallforquotationsfrom the prospective
suppliers ofacertaintype of material.
Single tender
Limited tender
Open tender
Global tender
Comparativestatements
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3) PURCHASE ORDER
Thecontractual obligation betweenthesupplierand purchaserstarts
from purchase order.
Itis drawninfavour in ofthesupplier bythe purchase department.
It mayincludenumber offacts
Materialsto besupplied
Quantityto besupplied
Priceand otherterms(e.g.excise duty, salestax, octroi, insurance,
packing, and transportationetc.)
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CONT. .
Cash and trade discount
Instructionsinrespect of delivery
Guaranteeclause
Damagesclause
Inspectionclause
Method ofsettlement of disputes.
Purchase ordershould beseriallynumbered and 4 to 5 copies ofit
should be made
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4}RECEIPT AND INSPECTI ON
Afterreceivingthe materialfrom supplierthequantityreceived
actuallyiscompared with quantityordered and variationsifanyare
dealt with supplier.
Excess materialcan be dealtinfollowingway..
--acceptallthe materialreceived
--acceptthe material ordered and returntheexcessto thesupplier.
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5)CHECKING INVOICES AND ACCOUNTING F OR PURCHASES
Forthis purposesuppliersinvoiceiscompared
with followingdocuments
Purchase order
Goodsreceived note
Inspectionreport
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B ) STORING AND ISSUE O F MATERIAL
Movement of materialinstorescantake placeinfollowingmanner:
1) Receipt of material
Goodsreceived note (GRN or GRR) is prepared to record the details of
materialreceived.
Form of GRN:
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FEATURES OF GRN
Itis prepared inquadruplicate.
Itshould beseriallynumbered.
Theseriallynumbered GRN helpsto locate discrepanciesin material
receipts-
Quantityreceived inexcess: Goods Returned Note
Quantityreceived inshort
Quantityreceived of differentquality.
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2) ISSUE OF MATERIAL
Materialsshould beissued by store department alongwith a proper
authorityand thisauthorityisintheform Material Requisition Note
Contents ofthis Note
Numberand date
Deartment demandingthe material
Discription and code of material demanded
Quantityof material demanded
Signature ofauthorityissuingand receivingmaterial
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3}RETURN O F M ATERIAL
Materialissued to production departmentisreturned backto
stores.
Reasons ?
Form ofMaterial Return Note
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4} TRANSFER O F MATERIAL
Tranfer of materialfrom one production departmentto another.
Accompanied bymaterialtranfer note.
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PERP ETUAL INVENT ORYSYSTEM
Properconduct ofstoragefunction
Aim or objective
Recordingreceiptsand issuesefficiently. Thisaim isachieved by
preparingBincardand storesledger.
Continues verification of physicalstockatregularintervals.
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BIN CARD
Quantitativerecord ofreceipts, issuesand closingbalances ofanitem
of material. Separate bincard is maintained foreach item of material.
Enties inreceiptcolumnare made onthe basis of GRN
Entriesissued coumn is made onthe basis ofMRN.
Aftereveryentrybalanceisfound out. Ideallybincard should be placed with material.
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FORM OF BIN CARD
Bin card
Description Maximum Level :Codeno. Minimum Level :
Location Reorderlevel :
Date Docume
nt no.
Receipt Issues Balance Remarks
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ST ORES LEDGER
Itis maintained to record allreceiptsand transactionslike bincard
but with theexceptionthatitrecordsfinancialexpressionsalso.
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F ORM OF STORES LEDGER
Stores ledger
Description Maximum Level :
Codeno. Minimum Level :Location Reorderlevel :
Date Document
no.
Receipts Issues Balance Remarks
Qty Rate Rs
.
Qty Rate Rs. Qty Rate Rs.
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VALUATI ON/PRICING O F ISSUES
FIFO(FirstinFirst out)
LIFO (LastinFirst out )
Simple AverageMethod
Weighted AverageMethod
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FIFO
Underthis method price oftheearliestavailablelotisconsidered first
and ifthatlotisexhausted the price ofthenext possiblelotisconsidered.
E.g. A - 1st lot
B - 2nd lot
C - 3rd lot
Priceconsideration of A will be 1st
then price ofB will beconsidered.
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LIFO
Underthis method price ofthelatestavailablelotisconsidered first
and ifthatlotisexhausted price ofthelot prior to that is considered. Fore.g. A - 1st lot
B - 2nd lot
C - 3rd lot
Priceconsideration of C will be 1st
then price ofB will beconsidered.
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