3.1 FUNCTIONS OF PURCHASING DEPARTMENT

1. Reduce the investment in stock to the lowest level consistent with operating requirements.

• The department determines what materials are required, how much is required and when they are required.

• The quantities should be bought in economic size so that there may not be over stocking.

2. Responsible for price, quality and delivery

* all of which are crucial factors. * Late or non-delivery, poor and substandard materials, incorrect specification; are all likely to have at least as great an impact on profitability as paying an unnecessarily high price.

3.2 Purchasing Procedure

3.2 Receiving Procedure

3.2 Issuance Procedure

3.3 Store Organisation

3.4 STORE CONTROL Stores control is very

important. Large amounts of

capital invested are locked up in stocks of materials.

One of the major objectives of a stores control system is to ensure that “stock out” or “over stocking” do not occur

The stock levels to be properly determined are:a. The re-order level (ROL)

b. The minimum stock level

c. The maximum stock level.

a).Re-Order Level

Level which is suitable to initiate new purchase

Formula :Re-Order Level = Maximum Consumption X Maximum Re-Order Period

b). Maximum Stock Level

Level which is stocks should normally be allowed to rise

Maximum Stock Level = Re-Order Level+EOQ– (Minimum Consumption X Minimum Re-Order Period)

Note : EOQ is a mechanism to control the investment on stock. It will be used to determine ordering size @ capacity to minimize the cost (stock) ie storage & holding cost

EOQ = 2UOIC

Where :U = annual usage of raw materialsO = ordering costI = percentage of storage costC = unit cost of raw materials

Example :

Annual usage of raw mateial 6,000 unitsOrdering cost RM30.00Storage cost 20%Unit cost RM5.00

Calculate EOQ

Solution :

EOQ = 2UOIC= 2 x 6000 x RM30 RM 5 x 20%= 600 units

No of order/year = UEOQ= 6000 units = 10 times 600 units

c). Minimum Stock Level

the level which stocks should not normally be allowed to fall.

Minimum Stock Level = Re-order Level – (Normal @Average Consumption X Normal @ Average Re-Order Period)

Let’s try an example :

EOQ 2,000 units Re-order period 3 to 5 weeks Maximum consumption of materials500 units /week Minimum consumption of materials 300 units /week Normal consumption of materials 400 units /week

Calculate :

a. Re Order Level

b. Minimum Stock Level

c. Maximum stock level

Exercise 1 :

Information regarding raw material coded as AZ001 are as follows :

Average consumption 100 unitsMinimum consumption 60 unitsMaximum consumption 130 unitsRe Order Period 20-26 daysEOQ 4000 units

Required : Calculate

a.Re Order Levelb.Minimum Stock Levelc.Maximum Stock Level

Solution :

Re order level = Max consump x Max re order period= 130 units x 26 days= 3,380 units

Minimum Stock Level = ROL – ( Average Consump x Average Re Order period)

= 3380 – (100 x 23 days)= 1080 units

Maximum Stock Level = ROL + EOQ – ( Minimum consump x Minimum re order period

= 3380 units + 4,000 units – (60 units x 20 days)= 6,180 units

3.5 Stock Valuation FIFO WEIGHTED AVERAGE

http://www.youtube.com/watch?feature=player_detailpage&v=ExNsFh0_39s

Try out an example using that three methods !

Example 1 :

Data for a raw, ABC for July 2012 :

Date Received Unit

Purchase price/kg

Issued Unit

July 1 150 RM4.00

July 5 100 RM4.50

July 6 80

July 12 100

July 20 90 RM4.80

July 24 80

Prepare store ledger account based on FIFO method, LIFO method and Weighted Average Method.