Cost Accounting and Control

MODULE 2

PURCHASE OF MATERIALS

Control of Materials

Effective internal control system requires the following:

(1) Desired quality and quantity are available when needed;
(2) Correct quantities and types of materials are available at the right time to proceed at the scheduled
production;
(3) Materials must be purchased at the most favorable and reasonable prices;
(4) Materials must be kept from loss or theft;
(5) Spoilage and obsolescence must be minimized;
(6) Cost of handling and storage must be kept to a minimum
(7) Physical safeguards for receiving, storing, and issuing
(8) Formal procedures for ordering and paying for materials
(9) Use of perpetual inventory method

Organization for Control

Different departments which functions are related to materials acquisition and use:
(1) Purchasing Department. Responsible for placing orders for materials with the reliable supplier at the
right time and the right price.
(2) Receiving Department. Charged with inspection and verification of the quantities of shipment as per
order.
(3) Storeroom/Stockroom. Responsible for physical protection of materials against theft and/or
deterioration and ensures that stocks are properly issued.
(4) Accounting Department. Records all transactions pertaining to materials based on the documents
received from other departments.
(5) Cash Department. Pays all invoices after approval by the accounting department.

Procedures In the Purchasing Department

The Purchasing Agent is responsible for purchase of materials at the right time and at the lowest prices.
The purchase staff keeps a record of various sources of supplies, negotiates purchase contracts, prepares
purchase orders, and follow up deliveries.

Reorder Point. The following factors are considered to determine if the item should be reordered:

(1) frequency at which the materials are used

(2) lead time. The length of time it takes the supplier to deliver the goods after the order has been
placed
(3) safety stock. The minimum level of materials to ensure that the company does not run out of
materials.

Formula: reorder point = (frequency x lead time) + safety stock

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Economic Order Quantity (EOQ). The standard quantity to reflect the quantity necessary to get the best
price while keeping the inventory at an appropriate level to ensure an uninterrupted production.

Formula: EOQ = sq. root (2 x annual requirements x cost of an order)

Cost to carry a single item

Exercises:
1. ABC Co. requires 500 kilos of materials each day, and it takes the supplier 5 days to deliver the orders
and that the company wants to have 300 kilos of materials on hand at all times.
Required: Compute the reorder point.
2. DEF Co. uses 12,000 kilos of materials each year, the cost to carry a kilo of material in inventory is
Php40, and the cost to place an order is Php125.
Required: Calculate the EOQ.

Purchase Requisition. It is a properly approved written request for materials prepared in duplicate and
prenumbered for reference. This is prepared by the storeroom supervisor once the reorder point for
materials is reached. A copy is then sent to the purchasing department and the other copy is retained in
the storeroom.

Purchase Order. It is a prenumbered written authorization to the supplier to ship the specified materials.
It is prepared once the purchasing department receives the purchase requisition. Sources of supplies are
selected from among the several suppliers who quote prices or make bids. In choosing the supplier, the
purchasing agent considers factors such as dependability, quality of materials, prices, number of days to
deliver. Purchase order is prepared in five copies, distributed as follows:
(a) Suppliers – as an authority to deliver the materials
(b) Storeroom – as a notification that the materials requested are in order
(c) Receiving Department – as an authorization to accept the incoming shipment
(d) Purchasing Department – 2 copies for file

In the Receiving Department

Materials are received by the receiving clerk. The receiving clerk unpacks, checks the quantities and
compares them with the copy of purchase order. After counting and inspecting, the receiving clerk then
prepares the receiving report. A receiving report shows the details of the shipment, including the
condition of the materials received. It is prepared in quadruplicate:
(a) original and one copy to the Purchasing Department where it is compared with the purchase order;
(b) one copy is sent to the storeroom together with the materials transferred
(c) final copy is signed by the storeroom supervisor and is kept by the receiving clerk in his file.
The receiving clerk is also responsible in the transfer of materials to the storeroom.

In the Storeroom
The storeroom clerk records the receipt of materials in a subsidiary ledger, the material or store ledger, by
making an entry on the appropriate materials ledger card or bin tag.

Comparing Documents
The purchasing department compares the purchase invoice with the purchase order and the receiving
report to make sure that:
1. Materials ordered have been received in good condition and these are listed only on the invoice

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2. Terms, unit prices, shipping charges, and other details are in accordance with the specifications
3. Computations are correct

If all documents are in order, purchase order, purchase invoice, receiving report are stapled and filed in a
completed purchases folder arranged alphabetically. Then a check voucher or disbursement voucher is
prepared with attached documents. Once approved, the voucher is sent to the accounting department for
recording.

In the Accounting Department

The voucher clerk checks all the documents if they are properly approved and signed. The double-checking
is a way for another effective internal control system. Then the voucher clerk enters the purchase in the
voucher register. After the entry is made in the voucher register, the voucher is sent to the cash
department for filing in the unpaid voucher file.

In the Cash Department

Before the due date, the voucher is removed from the unpaid voucher file. A check in the amount of the
voucher will then be prepared by a staff. The check is recorded in the check register and the voucher is
marked “paid”. 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 the
supporting documents is then filed in the paid vouchers file.

The disbursement voucher is the basis for the preparation of journal entries to record the purchase and
the payment of the invoice.

Computerized Purchase of Material

It allows an up-to-date information and improves the organization’s purchasing processes such that an
order is automatically placed when the inventory reaches the minimum level.

Internal Control Principles

All purchasing procedures must reflect the following internal control procedures:
(1) Request for purchases must be made only by authorized persons.
(2) Purchase orders must be properly approved.
(3) All materials received must be carefully counted, inspected, and compared with purchase orders.
(4) All payments must be properly approved.
(5) There should be different persons responsible in handling purchase of materials processes to avoid
fraud or error.