2. 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. 3.2 Purchasing Procedure Received PR from department who need the materials Review that PR Ask for quotation from supplier Review the quotation Select supplier Issue PO PD should select the most suitable supplier Can give the best price, good reputation, best materials, other benefits they can offer ??

4. 3.2 Receiving Procedure Received materials ordered Verified DO with the POMaterials send for storage at warehouse

5. 3.2 Issuance Procedure Materials can be issued after approval Material Controller will go through the materials requisition received. The issued item must be recorded in bin card.

6. 3.3 Store Organisation Centralised Store One centre will handle the purchasing and controlling Benefit ? Uncentralised Store Each department/branch handle the purchasing by them self Benefit ?

7. 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.

8. a).Re-Order Level  Level which is suitable to initiate new purchase  Formula : Re-Order Level = Maximum Consumption X Maximum Re-Order Period

9. 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)

10. 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 = 2UO IC Where : U = annual usage of raw materials O = ordering cost I = percentage of storage cost C = unit cost of raw materials

11. Example : Annual usage of raw mateial6,000 units Ordering costRM30.00 Storage cost20% Unit costRM5.00 Calculate EOQ Solution : EOQ = 2UO IC = 2 x 6000 x RM30 RM 5 x 20% = 600 units No of order/year = U EOQ = 6000 units= 10 times 600 units

12. 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)

13. Let’s try an example :  EOQ2,000 units  Re-order period3 to 5 weeks  Maximum consumption of materials500 units /week  Minimum consumption of materials300 units /week  Normal consumption of materials400 units /week Calculate : a. Re Order Level b. Minimum Stock Level c. Maximum stock level

14. Exercise 1 : Information regarding raw material coded as AZ001 are as follows : Average consumption100 units Minimum consumption60 units Maximum consumption130 units Re Order Period20-26 days EOQ4000 units Required : Calculate a.Re Order Level b.Minimum Stock Level c.Maximum Stock Level

15. 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

16. 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 !

17. Example 1 : Data for a raw, ABC for July 2012 : DateReceived Unit Purchase price/kg Issued Unit July 1150RM4.00 July 5100RM4.50 July 680 July 12100 July 2090RM4.80 July 2480 Prepare store ledger account based on FIFO method, LIFO method and Weighted Average Method.