Chapter 3-Purchasing Materials

REVIEW QUESTIONS

Q 1: List three factors in determining techniques for

controlling materials.
Specific procedures and methods for controlling materials vary from
company. The factors that determine the techniques for controlling
materials are
♠ Size of the company
♠ Types of goods produced
♠ Organisation of its production activities

Q 2: How does a purchase requisition differ from a purchase

order?
A purchase requisition is an authorised written request for materials. A
purchase order form, on the other hand, represents written
authorization to the supplier to ship the specified material.

Q 3: What is a receiving report?

A receiving report intends to show all details of the shipment, including
comments on the condition of materials received. All description must
agree with the purchase order descriptions to avoid confusions and
errors.

Q 4: Why is the copy of the purchase order sent to the

receiving department a blind copy?
A copy of the purchase order sent to the receiving department does
not specify the quantity ordered, hence called blind copy. A blind copy
ensures an independent check of quantities by the receiving
department.

Q 5: What type of information is shown on a materials ledger

card?
A materials ledger card shows receipts, issues, and balance on hand,
along with identification, control data, and even cost figures.

Q 6: What procedures should be followed before an entry is

made in the voucher register to record the purchase of new
materials?
When the disbursement voucher, invoice and attached papers reach
the accounting unit, the voucher clerk compares the quantities, verifies
extensions and footings, computes discounts and checks all other
computations. The voucher clerk also checks all supporting documents
are included in the file and that they are properly approved and
signed. After verifying the account distribution against the purchase
order, the voucher clerk enters the purchase in the voucher register.

Q 7: Define bills of materials.

A bill of materials lists all materials required on a job and the date they
will be needed. This record enables the storeroom supervisor to check
the quantity of materials on hand to make sure that enough is
available.

Q 8: What document is prepared to inform the supplier of a

deduction from an invoice for the cost of goods returned to the
supplier?

A debit memorandum is prepared, which serves a notice to the vendor

of a deduction from the invoice for the cost of goods (materials)
returned to the supplier.

Q 9: Which departments are responsible for each of the

following procedures?

a. Issuing purchase Storeroom/Warehouse

requisitions
b. Issuing purchase orders Purchase agent/manager
c. Recording approved Voucher clerk/Accounts
vouchers department
d. Preparing checks to pay Treasurer/Accounts
vouchers department
e. Counting goods Receiving department
received

MANAGERIAL DISCUSSION QUESTION

Q 1: What are some of the advantages of maintaining a

materials ledger?
A materials ledger is used to record the units purchased, units issued
and the balance on hand. For those manufacturing processes where
numerous raw materials are required a separate subsidiary materials
ledger card is kept for every type of materials. The card, along with
identification of the material, also provides control data (reorder point
and reorder quantity) and even cost figures.
Q 2: Under what circumstances would a ‘bill of materials’ be
prepared?
There are instances, when several jobs requiring the same materials
are started at about the same time. The usual quantities on hand of
standard stores items may not be sufficient. To avoid this problem a
production manager may prepare a bill of materials when a new sales
order is received. A bill of materials lists all materials required on the
job and the date they will be needed.

Q 3: Before a disbursement order is recorded and approved for

payment, copies of the purchase requisition, purchase order,
receiving report, and purchase invoices should be compared
and double-checked for accuracy. Why?

The purchasing unit compares the supplier’s invoice with the purchase
order and receiving report to make sure
♠ Goods ordered must have been received in good condition and be
those covered by the invoice.
♠ Terms, unit prices, shipping charges, and other details must agree
with the order specifications.
♠ Computations must be correct.
Q 4: List at least three procedures for purchasing materials
that should be followed in order to achieve good internal
control. Explain how each helps in achieving internal control.
Three of the procedures that can help in achieving good internal
control are as under
♠ Preparing of a purchaser order
♠ Preparation of a receiving report
♠ Comparing documents
Preparing of a purchase order
A purchasing order represents written authorization to the supplier to
ship the specified material. The order contains all the necessary
details, such as delivery date, method of shipment, unit price, and
account number to be charged. The internal control system requires
that all the purchase order form be pre-numbered. At the end of each
month the cost accountant verifies that all numbered forms have
either been sent to the supplier, or are on hand. This ensures that
purchase orders are used only for authorised purposes.
Preparation of a receiving report
When the materials are received from the supplier, they go to the
receiving department. This department is responsible for unpacking
the goods, checking quantities and physical condition, and delivering
them to the storeroom. The receiving department holds a copy of the
purchase order which is a blind copy, which means that it does not
specify the quantities ordered. A blind copy ensures an independent
check of quantities by the receiving department. After counting and
inspecting the materials, the department prepares a receiving report.
The report shows all details of the shipment, including comments on
the raw materials received.
Comparing documents
When the invoice is received from the supplier, it is sent to the
purchasing unit. The purchasing unit compares the supplier’s invoice
with the purchase order and receiving report to make sure of the
following points
♠ Goods ordered must have been received in good condition and be
those covered by the invoice.
♠ Terms, unit prices, shipping charges, and other details must agree
with the order specifications.
♠ Computations must be correct.

Q 5: Why is it important for management to have complete and

correct data on the cost of materials?

The cost of materials in most of the manufacturing concerns is a major

part of the total manufacturing cost of each product. The management
needs to have a complete and accurate data on cost of materials to
avoid following problems
♠ Quality and cost of materials may not meet the specifications on
which sales price are based.
♠ Production schedule may be disturbed because of shortage of
materials
♠ Materials may be lost or stolen
♠ Funds may be tied up an inventory when they may be used more
profitably elsewhere.
♠ Materials are subject to risks of spoilage and obsolescence .
♠ Cost of material handling and storage may not be optimised.
EXERCISES

Q 1. Disbursement Vouchers. Voucher No 10-16 was prepared from a

purchase invoice for $25,480 and a debit memorandum for $1,100 (for
damaged goods returned). What is the gross amount of the voucher?

The gross amount of the voucher can be obtained by adding back the
damaged goods return figure. Adding $1,100 to $25,840 would provide
us with the gross amount of voucher which is $26,940.

Q 2: Materials ledger card. Calculate the ending balance of Material No

K-374 (folding-leg sections) based on the following information from
the materials ledger card.

Units Amount per

unit
Beginning 183 $12.50
balance
Issued 159 12.50
Received 225 12.50

Materials Ledger
Card
Materia Folding leg
Reorder Point
l section
Reorder
Number K-374 Quantity

Referen Received Issued Balance

Date ce Units Price Amount Units Price Amount Units Price Amount
XXX Balance 183 12.5 2287.5
XXX MR 159 12.5 1987.5 24 12.5 300.0
XXX PO 225 12.5 2812.5 249 12.5 3112.5
Q 3: Net amount of disbursement vouchers. Calculate the net amount
of the following disbursement vouchers.
a. Gross amount of invoice: $25,730; terms 3/10, n/30; debit
memorandum $1,380
b. Gross amount of invoice: $125,703; terms 4/20, n/60; debit
memorandum $5,460
 a.

Disbursement
Voucher

Payee Voucher No
Issued date
Discount date
Due date

Invoice date Terms Invoice No Amount

3/10, n/30 25,370
Less damaged items returned 1,380
(as shown in the debit
memorandum)

23,990

Distribution Price OK
Account
Number Amount Material Received
23,990 Extensions O.K.
Gross amount 23,990
Discount 719.7
Net paid 23,270
Approved for payment
Check No Date

Form No
 b.

Disbursement
Voucher
Payee Voucher No
Issued date
Discount
date
Due date

Invoice date Terms Invoice No Amount

4/20, n/60 125,703
Less damaged items returned 5,460
(as shown in the debit
memorandum)

120,243

Distribution Price OK
Account
Number Amount Material Received
120,243 Extensions O.K.
Gross amount 120,243
Discount 4,809.72
115,433.2
Net paid 8
Approved for pay
Check
No Date

Form No
 Problems

Problem 3-1

1) Purchase order

Lakeside
Manufacturer
Purchase
order
No: 644
This number must
appear
on all packages and papers
relating to this
order
140-
To Date Apr-05
Horizon Foundary Ship To
Lakeside Manufacturers, Rockford Illinois
Tampa, Florida 33600 61109

Ship to Date Wanted Shipped Via FOB Terms

Storeroom 28-Apr-05 Motor frieght Rockford 2/10, n/30

Quantity Description Unit Price Amount

5,930 603-4" angle irons black 0.12 711.60
6,210 622-6" angle irons black 0.18 1117.80
4,290 642-10" angle irons black 0.22 943.80

2773.2
Total 0

Account 121
Charge Job By Hussain Sajjad
Department Purchasing agent
 2) Receiving report

Receiving Report
Lakeside No: 644
Manufacturer

17-Apr-
Received from Date received 05
Purchase
Horizon Foudry order No 644
Tampa, Florida
33600 Invoice No 3-359

Sipped via Transportation charges Received by

Ame Freight Prepai

Co. d Collect Hussain Sajjad

Quantity Quantity
received Quantity accepted rejected Description Weight
5,930 5,930 603-4" angle irons black 593
6,210 6,210 622-6" angle irons black 1552.5
4,290 3,750 540 642-10" angle irons black 1875

INSPECTION RECORD

Quantity
accepted Quantity returned Reasons for Rejection
5,930
6,210
3,750 540 Brass instead of iron

Hussain
Date 14-Apr-05 Storeroom supervisor Sajjad
 c) Materials ledger card

Materials Ledger
Card
Materia 4” Angle iron
Reorder Point 4,780
l bars
Reorder
Number 603 Quantity 5,930

Referen Received Issued Balance

Date ce Units Price Amount Units Price Amount Units Price Amount
Apr 1 Balance 4,780 0.12 573.6
10,
XXX PO644 5,930 0.12 711.6 710 0.12 1,285

Materials Ledger
Card
Materia 6” Angle iron
Reorder Point 4,750
l bars
Reorder
Number 622 Quantity 6,210

Referen Received Issued Balance

Date ce Units Price Amount Units Price Amount Units Price Amount
Apr 1 Balance 2,560 0.18 460.8
XXX PO644 6,210 0.18 1,117.8 8,770 0.18 1,579

Materials Ledger
Card
Materia 10” Angle iron
Reorder Point 3,170
l bars
Reorder
Number 642 Quantity 4,290

Referen Received Issued Balance

Date ce Units Price Amount Units Price Amount Units Price Amount
Apr 1 Balance 1,850 0.22 460.8
XXX PO644 4,290 0.22 943.8 6,140 0.22 1,351
 4) Debit memorandum

Debit
Memorandum
Lakeside No: 385
manufacturer Date 19-Apr-05
Invoice # 3-539
To Invoice date 17-Apr-05
Purchase
order # 644
Stock # 642
We have debited your account as
follows
Quantity Description Unit price Amount

540 Brass angle Iron returned 0.22 118.8

Explanati Brass instead of

on black iron

Returne Hussain
d via Motor express Sajjad
Purchasing
agent

\
 Disbursement Voucher
Lakeside
Manufactuers
Payee Voucher No 4-740
Issued date 19-Apr-05
Discount date 28-Apr-05
Due date 28-Apr-05

Invoice date Terms Invoice No Amount

17-Apr-05 2/10, n/30 2,773.20

Less damaged items returned 118.80
(as shown in the debit memorandum) 2,654

Distribution
Account
Number Amount Price OK
2,654 Material Received
Extensions O.K.
Gross amount 2,654
Discount 53.09
Net paid 2,601.31
Approved for pay
Check No Date

Form No