Different forms used Purchase
requisition form Quotations from (at
least) three suppliers
 Purchase order
 Receiving report Material
requisition report (from
production to storeroom)
 Material stock card
(storeroom)
 Bill of materials (shows the
actuals materials used in the
production)
 Returns materials report
(unused materials are
returned to storeroom)
 Debit or credit
memorandum
Steps (Modified) in Purchase
Transactions (Ballada)
When certain materials are needed, the
user department fills a purchase
requisition, then have it authorized, and
sends the purchase requisition to the
purchasing department. The purchasing
department ask for price lists,
quotations or catalogues from three
different suppliers and selects the
item(s) that meet the specification in the
purchase requisition. The purchasing
department then prepares purchase
order after checking the price list,
quotations or catalogues of approved
vendors. The purchase order,
addressed to the selected vendor(s),
indicates the quantity, description, and
price of the material(s) ordered. It also
indicates the expected payment terms
and trransportation arrangements.
Steps (Modified) in Purchase
Transactions (Ballada)
After receiving the purchase order, the
seller forwards an invoice to the
purchaser upon shipment of the
materials. The sales invoice and a
purchase order from the buyer, defines
the terms of the transaction.
5. Upon receiving the shipment of
material(s), the purchaser’s receiving
department sees to it that the terms in
the purchase order are complied with,
and prepares a receiving report. (Note:
Aside from physical analysis, some
materials may require chemical analysis
before final acceptance is made.)
6. Before approving the invoice for
payment, the accounts payable
department compares the copies of the
purchase requisition, purchase order,
receiving report and sales invoice to
ensure that quantities, descriptions and
prices agree.
Steps in Purchase Transactions (De
Jesus)
5. Once the materials are delivered by
the vendor, a receiving report will be
prepared by the receiving department
(materials storeroom or warehouse)
which inspect the materials if there are
damages or defects and eventually
certifies the materials received if there
are no defects.
6. A materials requisition form is issued
to the material storekeeper to issue the
materials to a given person or
department requesting it at a specified
time.
7. Material stock cards are maintained
to record the receipt and issuance of
each kind of materials
Objectives of Materials Control (De
Jesus)
To allow uninterrupted production. To
have the required quality of materials.
To minimize wastage, spoilage and
defective goods.
To assign responsibility.
To maintain the costs of materials at a
minimum and maximum level.
To purchase materials at the minimum
price. To provide information to the
company
Essentials of Materials Control System
(De Jesus)
Cooperation and coordination of
different departments. Good storage
facility to avoid losses from damage,
fire, obsolescence, pilferage, theft,
deterioration of materials.
Proper checking and accounting
materials using the standard forms (for
requisition, purchase, receiving,
inspection, returns and usage of
materials). Proper records of different
materials (description, classification,
quantity, unit cost and available
balance.)
Essentials of Materials Control System
(De Jesus)
purchasing department for orderly
acquisition, eliminate excessive and
unauthorized acquisition of materials.
Proper inspection of materials when
they are received.
Proper segregation of duties and
responsibilities of workers and
employees. 8. Quantity of materials to
be ordered should be planned to
minimize the costs of handling and
ordering
Control Procedures (De Jesus)
Order cycling method
ABC Analysis (a. Very large and
expensive materials; b. Somewhat
larger and more costly; and c. small and
less costly materials)
Two-bin system
Minimum-Maximum system
Automatic order system
Basic Aspect of Materials Control (De
Jesus)
Physical and operational aspect
a. Limit the access to materials
b. Proper segregation of duties and
responsibilities
c. Accuracy in recording Control of
investment in materials
a. The order point (formula order point
= Usage x lead time + safety stock)
Safety stock = (Maximum daily usage -
Average daily usage) x Lead time
Illustration (De Leon)
Assume that the expected daily usage
of an item of material is 100 units, the
anticipated lead time is 4 days, and it is
estimated that a safety stock of 800
units is needed, the order point is
calculated as follows:
100 units (average daily usage) x 4
days (lead time) = 400 units
Plus Safety stock (as given)
800 units
Orderpoint 1200
Illustration (De Jesus) Assume the
following: Normal use per day 5,000
units Maximum use per day 6,000 units
Minimum use per day 2,000 units Lead
time 5 days Order quantity 5.000 units
Illustration (De Jesus) - solution
Maximum daily usage 6,000 units
Less average daily usage 5,000 units
Difference 1,000 units
X Lead time 5 days
Safety stock 5,000 units
Solution
Average daily usage 5,000 units
X Lead time 5 days
Total 25,000 units
Add Safety stock 5,000 units
Order point 30,000 unit
Illustration (De Jesus) - solution
Order point 30,000 units
Less average daily x lead time 25,000
units (5,000 x 5 days)
Difference 5,000 units
Add order quantity 5,000 units
Normal maximum inventory 10,000 units
Illustration (De Jesus) - solution Order
point 30,000 units
Less minimum daily usage x lead time
10,000 units (2,000 x 5 days)
Difference 20,000 units
Add order quantity 5,000 units
Absolute maximum inventory 25,000
units
Economic Order Quantity
It is an equation which determines the
optimum purchase order of inventory at
a minimized total cost. The two most
important factors of having an inventory
are the ordering costs and carrying
costs. At EOQ, the total ordering cost
and total carrying cost are equal. It
addresses the problem on inventory
planning with regards to the quantity of
materials to purchase.
Ordering cost - incurred in having an
additional inventory including freight
costs, salary of the staff in the
purchasing, receiving, inspection and
recording department; cost of paper
forms, communication cost to place an
order to suppliers, receiving report,
inspection costs, cost of accounting and
payment to the vendor.
Economic Order Quantity Carrying
costs - incurred in maintaining the
inventory including handling or storage
costs, interest, insurance, property
taxes, loss due to spoilage, theft,
deterioration, recording the inventory
and opportunity cost of capital tied up
in inventory.
Formula: EOQ = √(2CN/K) or Sqrt
(2CN/K)
Where C - cost of placing an order
N - number of units required annually
K - carrying cost per unit of inventory
Economic Order Quantity Illustration.
Assume that an entity is engaged in the
sale of toys. The cost per order is
P1,000 and its carrying cost per unit is
P25. The entity has a demand of 50,000
units per year.
EOQ = √(2CN/K)
EOQ = √(2)(1,000)(50,000)/25)
EOQ = 2,000 units
Number of orders per year = 50,000
units / 2,000 units = 25 orders
Total ordering costs (per year) = 25
orders x P1,000 = P25,000
Average Inventory = EOQ / 2 = 2,000
units / 2 = 1,000 units
Total carrying costs = Average inventory
x Carrying cost per unit = 1,000 units x
P25 = P25,000
Illustration Alma has developed the
following data to assist in controlling of
its inventory:
EOQ 100,000 units
Average daily usage 10,000
Minimum daily usage 8,000
Maximum daily usage 12,000
Working days per year 250
Safety stock? ?
Cost of carrying per unit per year P1.00
Lead time 6 day
Solution Maximum daily usage 12,000
units
Less average daily usage 10,000 units
Difference 2,000 units X
Lead time 6 days
Safety stock 12,000 units
Solution
Average daily usage 10,000 units
X Lead time 6 days
Total 60,000 units
Add Safety stock 12,000 units
Order point 72,000 units
Solution Annual inventory 100,000 units
Divided by 2
Average inventory 50,000 units
Add safety stock 12,000 units
Total average inventory 62,000 units
Solution Order point 72,000 units
Less average daily usage x lead time
60,000 units (10,000 x 6 days)
Difference 12,000 units
Add order quantity 100,000 units
Normal maximum inventory 112,000
units
Solution Order point 72,000 units
Less minimum daily usage x lead time
48,000 units (8,000 x 6 days
Inventory 10,000
AP 10,000
Paid freight (FOB shipping point, freight
collect) Freight In 500 Cash 500
Inventory 500 Cash 500 Return of
inventory, P1,200 AP 1,200 Purch.
Returns 1,200 AP 1,200 Inventory 1,200
Paid inventories purchased, less 1%
discount AP 8,800

Difference 24,000 units

Add order quantity 100,000 units

Absolute maximum inventory 124,000

units

Solution EOQ = √(2CN/K)

100,000 = √[2C(10,000*250 days)(/P1)

C (Cost of placing an order) = P2,000

Annual volume = 10,000 units x 250

days = 2,500,000

No. of orders = 2,500,000 / 100,000 =

25 orders

Total ordering cost = 25 orders x

P2,000 per order = P50,000

Accounting for inventories

Inventory systems

a. Periodic inventory system

b. Perpetual inventory system Inventory

costing method (inventory flow)

a. FIFO

b. Weighted average

c. LIFO

d. Specific Identification

Accounting for inventories Transaction

Periodic

Perpetual

Purchase of inventory

Purchases 10,000

AP 10,000