MATERIALS:

 PURCHASING
 STORING AND
ISSUING
 CONTROLLING
AND COSTING
By : Daguio, Michaela F.
BSAIS 2A
 PURCHASING MATERIALS
(Chapter 2)
 Must be available when
01
needed
Correct quantities and
02 types must be on hand at
right time
Purchased at the most
MATERIALS CONTROL 03
favourable price
Rigid controls over raw Protected from loss or
04
materials. thef

05 Risks must be minimized

Minimize cost of handling

06
and storage
01 Physical Safeguards

MODERN SYSTEM OF
02 Formal Procedures INVENTORY
CONTROL

03 Perpetual Inventory System

ORGANIZATION FOR CONTROL
1. Purchasing Department
2. Receiving Department
3. Storeroom / Stockroom
4. Accounting Department
5. Cash Department
MATERIALS ACQUISITION
PURCHASE RECEIVING COMPARING
04 DOCUMENTS
REQUISITION REPORT

01 03
06

PURCHASE 02 PAYING
ORDER 05
THE
VOUCHER
RECORDING
VOUCHER
 00
REORDER POINT
FACTORS:
 Frequency used
 Lead time
 Safety stock Daily usage x Lead time XX
Add: Safety Stock XX
Reorder point XX
Example:
Jenjen Printers wants to have at least 100 cans on
hand at all times. Since 20 cans are used in
production each day and it takes five days to
receive an order, compute for the reorder point.
Solution:
20 cans x 5 days 100
Add: Safety Stock 100
Reorder point 200
ECONOMIC ORDER QUANTITY (EOQ)
Reflect the quantity necessary to get the best price
while keeping inventory at an appropriate level to
ensure uninterrupted production.
Formula:
•
2 ������������������� � ������ �� �����
���=
√ ���� ������� � ����������
• 2 � ������ �������� ����� � ���� ��� �����
���=
√
���� ��� ������������ � ������������ ����������
• Number of orders placed annually =

• Annual ordering cost =

• Average number of units in inventory at any point in time =

• Annual carrying cost =

• Annual carrying cost =

Example:
If Jenjen printer’s cost to order is P108, the cost to carry
an item in inventory is P75; and if the company requires
5,000 cans of ink during the year, compute for the EOQ.

1,080,000
¿
√ 75
¿ √ 14,400
Determination of the total cost to order and carry
materials at various order sizes
Order Size Number of Total Cost to Average Total Cost to Total Cost to
Orders Order Inventory Carry Order and
(5,000 / Order (P108 x No. Of (Order Size / 2) (Average Total Cost to
Size) (Rounded) Orders) Inventory x P75)
Carry

80 62 6,696 40 3,000 9,696

100 50 5,400 50 3,750 9,150
120 42 4,536 60 4,500 9,036
140 36 3,888 70 5,250 9,138
160 31 3,348 80 6,000 9,348
01
PURCHASE REQUISITION
Purchase Requisition
Jenjen Printers, Inc. No. _______________________
27 Ayala Ave. Date ______________________
Makati City, Philippines Date Required _____________

Quantity Material No. Description

Requisitioned by_____________________ Charge:

Acct. ____________
Approved by_________________________ Job ______________
Dept. ____________
PURCHASE REQUISITION
Requesting the materials to be ordered
Storeroom Supervisor
Original Copy – Purchasing Department
Duplicate Copy – Storeroom Files
02
PURCHASE ORDER
Jenjen Printers, Inc. Purchase Order
27 Ayala Ave. No. _______________________
Makati City, Philippines Date ______________________

To: SHIPPING INSTRUCTIONS

Date Wanted ______________
Ships Via __________________

Quantity Description Unit Price Amount

By Charge:Acct. ______________
Purchasing Agent Job _______________
Dept. ______________
PURCHASE ORDER
Authorization to the supplier to ship the specified
material
Five copies are distributed as follows:
Suppliers – authority to deliver materials
Storeroom – notification that the materials requested
are on order
Receiving Department – authorization to accept
shipment
Purchasing Department – (2 copies) for file
03.1
RECEIVING REPORT
Jenjen Printers, Inc. Receiving Report
27 Ayala Ave. No. _______________________
Makati City, Philippines

Received From: Date Received_____________________

Purchase Order No.________________
Invoice No. ______________________
Ship Via: _________________________Freight Bill No. ________ Received by _________________

Quantity Received Quantity Accepted Quantity Rejected Description

INSPECTION RECORD
Quantity Accepted Quantity Returned Reason For Rejection

Date Inspected by
RECEIVING REPORT
Receiving clerk compares purchase order with
the shipment
Four copies are distributed as follows:
Purchasing Department – Original and
Duplicate
Storeroom – one for comparison and another
for supervisor’s sign
 03.2
COMPARING DOCUMENTS
MATERIALS LEDGER CARD

Material ____________________________ Reorder Point _______________________

Number ____________________________ Reorder Quantity ____________________

Received Issued Balance

Date Reference
Units Price Amount Units Price Amount Units Price Amount
04
COMPARING DOCUMENTS
Purchasing Department compares:
Purchase Invoice
Purchase Order
Receiving Report
05
RECORDING THE VOUCHER
DISBURSEMENT VOUCHER
Jenjen Printers, Inc. Voucher No. _________________________
27 Ayala Ave. Issued Date __________________________
Makati City, Philippines Due Date ____________________________

Payee

Invoice Date Invoice No. Description Amount

Distribution
Account Debited Amount Check No. ______________________
Approved by ____________________
RECORDING THE VOUCHER
Voucher Clerk:
Double-check
Enters the purchase in the voucher register
Send voucher to the Cash Department
 06
PAYING THE VOUCHER
VOUCHER REGISTER For the Month of _____________ 2008
Paid
Voucher
Payable DR Materials CR
Date Voucher No. Payable to Date Check No. 201 121
PAYING THE VOUCHER
Cash Department’s Staf
Prepares a check
Voucher is returned to the Voucher Clerk
afer marked as “paid”
COMPUTERIZED MATERIALS PURCHASING SYSTEM
On-line purchasing system for materials allows
companies to have up-to-date information and
improves the organization’s purchasing process.
SPECIAL PURCHASING PROCEDURES
Used for handling damage, lost, or defective
materials and for shortage and overages in
shipment.
Meet the following special cases:
Bill of Materials
Debit and Credit Memorandum
 01
BILL OF MATERIALS
Bill of Materials
JGG Manifacturing Corp.
Fairview Avenue
Quezon City, Philippines

Job ____________________________ Date_______________________

To be Started on _________________ For _______________________

Will Require the following Materials

Materials Issued
Units Materials No. Description Unit Cost Total Cost

Materials received by ______________

Date ____________________________ Department Head
 02
DEBIT AND CREDIT MEMORANDUMS
Jenjen Printers, Inc. Debit Memorandum No. _____
27 Ayala Ave.
Makati City, Philippines

To: _______________________ Date _____________________

Invoice No. ________________
Invoice Date _______________

Purchase Order
Quantity No. Stock No. Description Unit Price Amount

Explanation ______________________________________________________________________________________
Return Via _______________________________ _________________________________________
Purchasing Agent
CONTROL PROCEDURES
Order Cycling
Min-max Method
Two-bin Method
ABC Plan
Automatic Order System
SUMMARY
 STORING AND ISSUING MATERIALS
(Chapter 3)
 Admittance to the storage area should
01
be restricted
Materials ledger card should be
MATERIALS 02
maintained
INTERNAL
Should be clearly identified, stored and
CONTROL 03
carefully protected
FACTORS / 04
Should be issued only upon proper
written authorization
PRINCIPLES
Accounting system should permit check
05 of the materials ledger against
materials account
Diferent persons should be involved in
06
storage and issuance operation
00
BIN TAG
MATERIALS ACQUISITION
MATERIALS
MATERIALS JOB COST SHEET
REQUISITION 04
REQUISITION JOURNAL

01 03

MATERIALS 02
LEDGER 05

DEPARTMENT
OVERHEAD ANALYSIS
SHEET
01
MATERIALS REQUISITION
MATERIALS REQUISITION

By Dep’t Head / Job Supervisor

Receipt – one copy
Storeroom Clerk – second copy
02
MATERIALS LEDGER
MATERIAL LEDGER CARD

By Storeroom Clerk
03
MATERIALS REQUISITION JOURNAL
MATERIALS REQUISITION JOURNAL

By Cost Clerk – journalizes the transaction to a

special journal
04
JOB COST SHEET
JOB COST SHEET

By Cost Clerk – only direct materials are posted

05
DEPARTMENT OVERHEAD ANALYSIS SHEET
DEPARTMENT OVERHEAD ANALYSIS SHEET

All indirect manufacturing expenses

SUMMARY
SPECIAL ISSUING PROCEDURES

Should include the following procedures for

special cases:
Materials Returned to Storeroom
Materials Returned to Supplier
01
MATERIALS RETURNED TO STOREROOM
MATERIALS RETURNED TO STOREROOM

Duplicate (original requisition) accompanied by

returned materials report
Storeroom Clerk
Enters unit and total cost figures
Makes entry in the issued section of the
materials ledger card.
RETURNED MATERIALS REPORT
Sends materials report to the cost clerk:
Entry in the indirect material column of the departmental
overhead analysis sheet or in materials section of the
appropriate job cost sheet
Totals of materials requisition journal and the returned
materials journal are posted in summary from the
appropriate general ledger accounts at the end of the
month
02
MATERIALS RETURNED TO SUPPLIER
MATERIALS RETURNED TO SUPPLIER

By Purchasing Agent
Triplicate accompanied by debit memorandum
Purchasing Agent – 1 copy of return shipping
order and debit memorandum
Shipping Dep’t – 1 return shipping order for
authorization to return
MATERIALS RETURNED TO SUPPLIER
Accounting Dep’t – 1 copy of return shipping
order and debit memorandum
Storeroom Clerk – Debit memorandum to
record the return in the materials ledger
under the received column
COMPUTERIZED SYSTEM FOR ISSUANCE OF MATERIALS

Facilitates to update inventory records, simplifies

processing purchase orders, and provides efective
internal control system for material issuance.
 PROBLEMS
P9-1 Applied Acquisition Costs. Frankton Company records incoming materials at invoice price
less cash discounts plus applied receiving and handling cost. For product Gamma, the following
data are available:
Budgeted for the Actual Cost for
Month the Month
Freight-in and cartage-in……………………………… 2,500 2,580
Purchasing Department cost ……………………… 4,800 4,500
Receiving Department cost ………………………… 3,900 4,200
Storage and handling …………………………………… 4,200 3,800
Testing, spoilage, and rejects ……………………… 2,600 3,120
Total …………………………………………………………… 18,000 18,200

The purchasing budget shown estimated net purchases of $144,000 for the month. Actual
invoices net of discounts total $148,500 for the month.
Required:
1. Determine the applied acquisition costing rate for the, month.
Budgeted acquisition cost 18,000
= = 12.50%
Budgeted purchases 144,000
2. Determine the amount of applied cost added to materials purchased during the
month.
148,500 x 12.5% = 18,562.50
3. State the accounting treatment of the diference between actual and applied
acquisition costs for the period.
18,562.50
-18,200
362.5

The over-applied acquisition cost should be credited to Cost of Goods Sold or

prorated to Cost of Goods Sold and Inventories
P9-2 EOQ; Safety Stock. Settler Company sells a number of products to many restaurants in
the area. One product is a special meat cutter with a disposable blade. Blades are sold in a
package of 12 at $20 per package. It has been determined that the demand for the replacement
blades is at a constant rate of 2,000 packages per month. The packages cost the company $10
each from the manufacturer and require a three-day lead time from date of order to date of
delivery. The ordering cost is $1.20 per order, and the carrying cost is 10% per year. The company
uses the economic order quantity formula.
Required:
1. Compute the economic order quantity.

2 �24,000 �1.20
���=
√
10 �10 %
=240 units
2. Compute the number of orders needed per year.
Annual requirements 24,000
= = 100
EOQ 240
3. Compute the cost of ordering and of carrying blades for the year.
EOQ Annual requirements
(Carrying cost (Ordering cost per
+
2 per unit) EOQ order)

240 24,000
= (10 x 10%) + (1.20)
2 240
= 240
4. Determine the number of days until the next order should be placed, assuming that there is
no safety stock and that the present inventory level is 400 packages. (360 days = I year.)

The next order should be placed in three days. This conclusion is arrived at as follows:
a. Number of days’ supply in each order:
Days in year 360
= = 3.6 days
Orders per year 100
b. Number of days’ supply lef in inventory:
Units in inventory 400
Days' supply in 6 days'
x = x 3.6 days =
EOQ each order 240 supply
c. Days before the next order should be placed:
(Days’ supply lef) – (Delivery lead time) = 6 days – 3 days = 3 days
5. Discuss the difficulties that most firms have in attempting to apply the EOQ formula to their
inventory problems.
Some of the difficulties most firms have in attempting to apply the EOQ formula to
inventory problems are:
a. Inventory is not always used at a constant rate; the constant usage assumption is
implicit in the EOQ formula.
b. The EOQ formula requires estimates of:
I. Annual requirements
II. Ordering cost
III. Purchase price per unit
IV. Cost of carrying inventories.
This estimates may be extremely difficult to obtain with accuracy.
P9-3 Order Point; Inventory Levels. Robertson Company has developed the following figures
to assist in controlling one of its inventory items:

Minimum daily use …………………………………………………............ 150 units

Normal daily use ……………………………………………………………….. 200 units
Maximum daily use ……………………………………………….............. 230 units
working days per year ……………………………………………………….. 250
Lead time in working days …………………………………………………. 10
Safety stock ……………………………………………………………………….. 300
Cost of placing an order …………………………………………………….. $ 80
Order quantity …………………………………………………………………… 4,000
Required:
1. Order point

Normal use per day (200) x Lead time (10) 2,000 units
Safety stock 300
Order point 2,300 units

2. Normal maximum inventory

Order point 2,300 units

Normal use during lead time (200 x 10) 2,000
On hand at time order received 300 units
Quantity ordered 4,000
Normal maximum inventory 4,300 units
3. Absolute maximum inventory
Order point 2,300 units
Minimum use during lead time (150 x 10) 1,500
On hand at time order received 800 units
Quantity ordered 4,000
Absolute maximum inventory 4,800 units

4. Assuming demand is uniform and the EOQ formula is applicable, determine the cost of storing
one unit for one year.
2 �(200 � 250)�80 8,000,000
4,000=
√ �
8,000,000
4,000=
�
8,000,000
√
4,000=
√ �
16,000,000=
�
8,000,000
�=
16,000,000
=.50
P9-4 Safety Stock. For Product 6E, ordered five times per year, stockout cost per occurrence is
$80 and safety stock carrying cost is $3 per unit. Available options are:
Units of
Probability of running
Safety
Out of safety Stock
Stock
10 50 %
20 40
30 30
40 20
50 10
55 3

Required: Compute the safety stock resulting in the lowest cost.

 Probability of Stockout
Units of Carrying Safety Stock
Safety x Cost per = Carrying + Orders x Running out Cost per = Stockout
x Occurrenc = Total Cost
Stock Unit Cost per Year of Safety Cost
Stock e
10 3 30 5 50 % 80 200 230
20 3 60 5 40 80 260 220
30 3 90 5 30 80 120 210
40 3 120 5 20 80 80 200
50 3 150 5 10 80 40 190
55 3 165 5 3 80 12 177
Lowest cost
Problem 3-3: Simulation Problems - Processing Documents
The Star Aluminum, Inc. manufactures aluminum doors and ladders. The procedures and issuing
materials used by the company are:
Receiving. A copy of the receiving report accompanies the materials to the storeroom, where it is
signed by the storeroom supervisor to show that materials were received. The storeroom clerk
records the receipt of the materials in the materials ledger cards. The receiving report and the
supplier's invoice are verified against the purchase order. A voucher is then prepared, approved
and entered in the voucher register. Materials returned to the supplier are covered by return
shipping order and a debit memorandum. The debit memorandum is posted to the materials
ledger cards and the voucher register.
Issuing. Materials are issued afer an approved materials requisition is received in the storeroom.
Unit costs are entered on the requisition. Issuance is posted to the materials ledger cards and
recorded in the materials requisition journal. The requisition is posted to the job cost sheet or
the departmental overhead analysis sheet. Materials returned to the storeroom are
accompanied by a returned materials report where it is posted to the materials ledger cards and.
recorded in the returned materials journal. The returned materials report is posted to the proper
job cost sheet or the departmental analysis sheet.
During December 2014 the following transactions occurred:

December 1: Materials are issued by the storeroom under Materials Requisition 084. The
materials are for use in the Welding Dept. on Job 72 for the Chico Supply Company.
Job 72 calls for 30 aluminum doors. The materials requisitioned are as follows:
300 units RA-6 side rails, 6'
150 units steps ST-12, 4" X 12"
300 units steps ST-15, 4t" X 15"
150 units tops TO-612, 6" X 12“

6: Receiving Report 065 (for Purchase Order 073) is completed by the receiving clerk.
The data to be posted to the materials ledger cards are taken from the
Disbursement Voucher 101, shown on the next page.

7: Disbursement Voucher 101 on the next page is received.

DISBURSEMENT VOUCHER
Star Aluminum,
Inc. Voucher No. 101
75 Ever Street Issued Date 12/07, 2013
Fairview, Quezon City Due Date 1/6/2014

Doors Distributors,
Payee Inc.
72 West Avenue
Quezon City

Invoice Date Invoice No. Description Amount

11/28/2010 84 6,000 Steps ST-12, 4"x12" @P4.50 27,000
4,600 Steps ST-15, 4"x15" @P6.00 27,600
Total 54,600
Distribution
Account No. Amount Check No. _____________
121 54,600 Approved by ___________
 10: Materials Requisition 085 is received by the storeroom supervisor, and the
materials are issued. The materials requisitioned are for use on Job 73 for the
Apple Construction Supplies Company. Job 73 calls for 25 eight-foot aluminum
ladders. The materials requisitioned are as follows:
250 units RA-8 side rails, 8'
125 units ST-12 steps, 4" X 12"
375 units ST-15 steps, 4" X 15"
125 units TO-612 tops, 6" X 12“
Required:
1. Open the materials ledger by recording the opening balances on the materials ledger cards.
The December balances are as follows:
Materials Reorder Point Reorder Units Balance Amount
Quantity Price
BR-10 braces 6,000 13,000 5,485 3.50 19,197.50
RA-6 side rails 6' 3,000 8,000 1,970 11.50 22,655.00
RA-8 side rails, 8' 1,900 3,850 2,025 14.00 28,350.00
ST-12 steps, 4"x12" 2,500 6,000 1,910 4.50 8,595.00
ST-15 steps; 4"x15" 2,500 4,600 1,700 6.00 10,200.00
TO612 tops, 6"x12" 2,400 5,000 1,440 7.50 10,800.00
W-125 washers,
1/4 flat (box of 100) 300 boxes 940 boxes 675 8.00 5,400.00
2. Prepare for materials requisition

Solution:
E9-5 EOQ and Quantity Discount. A material is purchased for $3 per unit. Monthly usage is 1,500
units, the ordering cost is $50 per order, and the annual carrying cost is 40%.

Required:

1. Compute the economic order quantity.

2. Determine the proper order size if the material can be purchased at a 5% discount in lots of
2,000 units.
Solution:

1. Compute the economic order quantity.

2. Determine the proper order size if the material can be purchased at a 5% discount in lots of 2,000
units.

QUANTITATIVE DATA
Order size ………………………………………………… 1225 units 2000 units
Number of orders per year ………………………. 14.7 9
Average Inventory …………………………………… 612.5 units 1000 units

COST DATA
Cost of placing orders at $50 …………………… $735 $450
Cost of carrying inventory:
612.5 x $3.00 x .40 …………………………… 735 1140
1000 x $2.85 x .40 …………………………….
Discount lost (12 x 1500 x $3 x .05) ………… 2700
Cost to order and carry …………………………… $4170 1590
E9-6 Ordering and Carrying Costs; Economic Order Quantity; Quantity Discount. Rediken
Company buys 500 boxes of Item X-100 every two months. Order costs are $380 per order;
carrying costs are $1 per unit and vary directly with inventory investment. Currently the company
purchases the item for $5 each.

Required:

1. Determine total ordering and carrying cost under current policy.

2. Determine the economic order quantity and the related ordering and carrying costs.

3. What is the optimal order size if the supplier ofers a 5% discount for orders of 3,000
units?
Solution:

1. Determine total ordering and carrying cost under current policy.

2. Determine the economic order quantity and the related ordering and carrying costs.
3. What is the optimal order size if the supplier ofers a 5% discount for orders of 3,000 units?
QUANTITATIVE DATA
Order size ………………………………………………… 1510 units 3000 units
Number of orders per year ………………………. 1.9868 1
Average Inventory …………………………………… 755 units 1500 units

COST DATA
Cost of placing orders at $380 …………………… $755 $380
Cost of carrying inventory:
$1 x 755 ……………………………………………… 755 1425
($1 - $.05) x 1500 …………………………….....
Discount lost (3000 x $5 x .05) …………..……… 750
Cost to order and carry …………………………… $2260 $1805
Thank You