Materials: Purchasing, Reception and Storage

MATERIALS: PURCHASING, RECEIPTION AND STORAGE

Introduction

  • Objective of Cost Accounting: To determine the actual cost of a product or service, which encompasses material, labor, and expenses. Each cost element must be identified, analyzed, computed, and presented for management planning, controlling, and decision-making.
  • Importance of Inventory: Investment in inventory is crucial for businesses as it directly correlates with production and sales, ultimately affecting customer goodwill. An effective inventory control system is essential to prevent issues arising from inventory shortages (e.g., loss of sales).

Instructional Objectives

After studying this chapter, you should be able to:

  • Understand principles behind material acquisition.
  • Itemize various documents used for ordering, receiving, and issuing materials.
  • Describe the purchasing procedures of an organization.
  • Know principles involved in storekeeping and stocktaking.
  • List merits and demerits of centralized and decentralized stores.
  • Distinguish between store ledger deliveries of materials into stores and their cost recording. Include pricing those issues and putting a value on closing stock, along with control measures to prevent stock losses when materials are in store.

TYPES OF MATERIALS

Direct Materials
  • Definition: Raw materials needed to produce a finished product, which can further be classified into:
      - Raw Materials: Essentials for finished goods (e.g., flour and butter for bread, cement, and sand for blocks).
      - Work-In-Progress (WIP): Semi-processed materials at various production stages.
      - Components: Parts needed for assembly into a product.
      - Finished Products: Goods ready for use or sale (e.g., cork for beverages).
Indirect Materials
  • Definition: Consumables that support production processes but are not part of the final product (e.g., stationery, fuel, lubricants).

DELIVERY NOTE

  • Process of Receipt: Storekeeper signs a delivery note upon receipt of materials, checking against the purchase order to ensure accuracy. Discrepancies are addressed with the purchasing department.
  • Goods Received Note (GRN): Records details of materials received. Essential data includes the date, supplier’s name, purchase order number, and quantity. The GRN must be signed by the department head or authorized personnel.
      - Distribution of GRN copies: In larger organizations, five copies are required:
        - Purchasing Department.
        - Originating Department.
        - Stores Department.
        - Accounts Department.
        - Goods Receiving Department for reference.
Inspection
  • Goods received may require inspection and chemical analysis on a sampling basis against specifications outlined in the purchase order.
PURCHASE INVOICES
  • The invoice received from the supplier triggers the approval process, where copies of the GRN and purchase order accompany the invoice sent to the designated approver for payment.

STORAGE OF RAW MATERIALS

Objectives of Storing Materials
  • Quick and efficient receipt and issue of materials.
  • Accurate location tracking of all materials.
  • Identification of all materials.
  • Protection against damage and deterioration.
  • Efficient use of storage space.
  • Secure storage to minimize risks of theft, fire, etc.
  • Maintenance of accurate inventory levels.
  • Up-to-date records of receipts, issues, and inventory balances.

STOREKEEPING AND STORAGE

  • The storekeeper’s responsibilities include making materials accessible, safe from deterioration, and economically handled. Efficient store layout principles include:
      - Proximity of materials to regular use points.
      - Organized racks/shelves for easy access.
      - Optimized floor space using vertical height.
      - Standard packing quantities to facilitate movement.
      - Proper labeling of racks and bins for identification.
      - Issuing old stock first (FIFO).
      - Bulk materials stored for easy inventory assessment.

CENTRALIZED STORES vs. DECENTRALIZED STORES

  • Centralized Stores Advantages:
      - Facilitates stocktaking and enhances security against losses.
      - Reduces average stock levels and risk of duplication.
      - Closer control possible, resulting in less paperwork and higher quality staffing in specialized areas.
      - Easier access to advanced materials handling equipment.

  • Centralized Stores Disadvantages:
      - Risk of losing local knowledge.
      - Potential inconvenience for users.
      - Longer delays in material retrieval.
      - Increased transport costs.

  • Decentralized Stores Advantages:
      - Minimizes internal transport costs (bulk transport between stores).
      - Supports batching for manufacturing purposes.
      - Proximity to departments increases specialist knowledge availability.

  • Decentralized Stores Disadvantages:
      - Higher staff numbers leading to increased indirect labor costs.
      - Decreased supervisory control of storekeepers.
      - Complexity in conducting physical stock takes.
      - Larger buffer stocks resulting in higher storage space requirements and risks.

MATERIAL REQUISITION NOTE (MRN)

  • Initiated to authorize material issuance from stores; serves as a record for updating stores ledger.
MATERIAL TRANSFER NOTE
  • Used when materials are moved from one job/cost center to another without returning to stores.
MATERIALS RETURNED NOTE
  • Document to record the return of materials, typically formatted similarly to MRN but identifiable by color coding.

RECORDING INVENTORY LEVELS

Objectives: Maintain precise records of current inventory levels by accurately recording inventory movements.
BIN CARDS
  • Records consumption and inventory levels, typically located near the physical item.
  • Updated with receipts and issues to maintain balance.
STORES LEDGER
  • Records quantities received, issued, and current stock value, potentially in different formats (loose-leaf, card index, or computerized). Forms the basis for control procedures and inventory valuation.

IDENTIFICATION OF MATERIALS

  • Materials are coded for effective tracking and processing to avoid ambiguities, save time, and enhance efficiency.

THE INVENTORY COUNT (STOCK TAKE)

Procedures
  • Periodic Stock Taking: Counted at set times (e.g., end of accounting periods), necessitating careful coordination.
  • Continuous Stock Taking: Targets selected items regularly with a rotating schedule. Regular checks result in fewer errors and improved morale.

PERPETUAL INVENTORY

  • An inventory system that updates records with each receipt/issue, providing ongoing balance visibility for reporting.

INVENTORY CONTROL

Functionality
  • Ensures correct stock levels are maintained at all times, controlling cost tied in inventory while meeting demand.

INVENTORY COSTS

  • Ordering costs (Co): Costs associated with placing orders and receiving goods.
  • Carrying costs (Cc): Costs incurred during storage (insurance, damages, storage space costs).
  • Stockout costs (Cu): Costs from unmet demand due to insufficient stock.
  • Cost of inventory (Ci): The cost of items in stock, factoring in potential discounts.

OBJECTIVE OF INVENTORY CONTROL

Key Decisions
  • Determining optimal order quantity (EOQ) and reorder level (R) to minimize total relevant inventory costs.
  • Important Assumptions of EOQ Model: Constant demand, no lead-time, zero stockouts, stable purchase prices, instantaneous order arrivals, known ordering costs, and fixed holding costs.
EOQ Calculation
  • Total inventory cost expression for minimum optimization: TC=Co+CcTC = C_o + C_c
  • Where ordering costs (CoC_o) and carrying costs (CcC_c) can be detailed through algebraic expressions and trial approaches (i.e., tabular, graphical, mathematical methods).
Example Calculation
  • Use Bayo Limited's information on local bean costs to determine EOQ through the specified methods to analyze how to minimize costs effectively.