Materials Procurement and Use

1. Determine materials requirements per

product per process (Bill of materials)
2. Determine production quantity for the
period (Production budget)
3. Request purchase of quantity and kind of
materials (Purchase requisition)
4. Order materials from suppliers (purchase
order)
 Materials Procurement and Use

5. Receive and inspect deliveries from

suppliers (Receiving report)
6. Request materials for production (Materials
requisition)
7. Record issuance and receipt of materials
(Materials record cards)

Refer to Figure 9-1 of Carter for flowchart of

materials transactions
 Purchase of materials
In large companies, purchases of
materials are usually made by the
Purchasing Department.
In smaller companies. Department
heads/supervisors have authority to
purchase materials as needed.
 Purchase of materials
Purchasing procedures should be in
writing, to fix responsibility and to provide
information regarding the ultimate use of
materials ordered.
 Functions of the Purchasing Dept.

1. Receives purchase requisitions for materials,

supplies, and equipment;
2. Keeps informed concerning sources of supply,
prices, and shipping and delivery schedules;
3. Prepares and places purchase orders
4. Arranges for reporting among the purchasing,
receiving, and accounting departments
 Purchasing forms
Purchase requisition
issued by the storeroom or requesting
department to purchasing department
Purchase order
issued by purchasing department to the
selected supplier and serves as a confirmation
of purchase commitments
 Electronic Data Interchange (EDI)

Exchange of transaction information

between computers of two companies
Paperless business environment
Purchase orders, invoices, cash transfers
and updates on status of order or location
of a shipment
 Receiving Materials
The Receiving Department:
Unloads and unpacks incoming materials
Compares quantities received with the
shippers packing list
Matches materials received with descriptions
on the purchase orders
Prepares receiving reports
 Receiving Materials
Notifies the Purchasing Department of
discovered discrepancies/damage in transit
Arranges for inspection when necessary
Routes accepted materials to the appropriate
location
 Invoice Approval
Invoice clerk receives vendor invoice and compares with
PO and receiving report to check for discrepancies
After approval of invoice, a voucher is prepared and sent
to the treasurer for payment of the purchase
Treasurer prepares the check

Electronic Data Processing (EDP)- matching and recording

is done electronically

See exhibit 9-1 (Carter) for the accounts charged/used for

purchase transactions
 Cost of Acquiring Materials

Cost of materials purchased include:

Vendor invoice price net of trade and quantity
discounts
Transportation charges (Freight-In)
allocated based on material cost or weight
Charged to a Freight-in account

Include total freight-in cost in computing the

factory overhead rate for the period

 Storage and Use of Materials
After receipt, materials are forwarded to
storeroom until issuance
Documents used in the issuance of
materials
Materials requisition (see Fig. 9-2)
Bill of materials
 Materials Requisition
Issued by the production department
Authorizes the storekeeper to issue
materials
Source document for entries
 Bill of Materials
List of all materials needed for a typical
job or production run
All the materials may be issued at one
time, and the bill of materials serves as a
requisition.
 Inventory Costing Methods
Common:
First In, First Out (FIFO)
Average
Weighted average (used for periodic inventory system)
Moving average (used for perpetual inventory system)
Last In, First Out (LIFO)
Others:
Market price
Last purchase price
Standard cost
 FIFO, Average, LIFO

FIFO AVERAGE LIFO

Cost Flow Issuances to Issuance to Issuances to
Assumption production would be production would production would
coming from the be the mix/ be coming from
oldest stock average cost of all the newest stock
units at that time
Best Used Purchases have Numerous small
same prices/ items with low unit
Infrequent cost and frequent
purchases change in prices
Effect Inventory balance Minimize effect of Inventory balance
reflects the recent temporary high reflects the oldest
purchase price and low purchases purchase price
(Stable cost)
 FIFO, Average, LIFO

FIFO AVERAGE LIFO

Rising Prices Issued at lowest Issued at higher Issued at highest
cost than FIFO but cost
Inventory balance lower than LIFO Inventory balance
at highest Inventory balance at lowest
is between the two

Falling Assigns highest cost Assigns a cost as Assigns lowest

Prices Inventory balance well as inventory cost
at lowest balance between Inventory balance
FIFO and LIFO at highest
costs/ balances
 Other Costing Systems
Market Last Standard
Price Purchase
Price
Assumption Issuances to Issuances to Issuances are
production =the production = charged at
price quoted at price at date of predetermined
date of issue last purchase or estimated
cost
Best Used Traded, low cost Low-cost High turnover
and insignificant insignificant of materials
materials materials
Also called Replacement Replacement
costing costing
 Perpetual vs. Periodic
Perpetual
Maintain up-to-date material
records by entering quantity
and price for each material
received, issued and on-
hand
More accurate but
inconvenient. Best used
when materials are
frequently issued
Periodic
Purchases are added to
beginning inventory, the
ending inventorys count and
cost are subtracted, and the
difference is considered cost
of materials issued
Convenient and best used
when materials are issued in
bulk lot