Purchase of Productive Materials:

Learning Objective:

1. Explain the procedure of purchasing productive materials.

The actual purchase of all materials is usually made by the purchasing department headed by a general purchasing agent. In some small and medium size companies, however, department heads or supervisors have authority to purchase materials as the need arises. In any case, systematic procedures should be in writing in order to fix responsibility and to provide full information regarding the ultimate use of materials ordered and received.

The purchasing department should receive purchase requisitions for materials, supplies, and equipment; keep informed concerning sources of supply, prices, and shipping and delivery schedules; prepare and place  purchase orders; and arranging for adequate and systematic reports between the purchasing, the receiving, and the accounting departments.

An additional function of the purchasing department in many enterprises is to verify and approve for payments all invoices received in response to purchase orders placed by the department. This procedure has the advantage of centralizing the verification and approval of invoices in the department that originates the purchases and that has complete information concerning items and quantities ordered, prices, terms, shipping instructions, and other conditions and details of the purchases. However, invoice verification and approval by the purchasing department may violate sound procedures and principles of internal control, particularly if the same individual prepares an order and later approves the invoice. Consequently, invoice audit and approval in many instances have been made a function of the accounting department, which receives a copy of the purchase order. The purchase order carries all necessary information regarding prices, discount agreement, and delivery stipulations, as well as the number of the account to which the order is to be charged. Furthermore, the centralization of invoice approval in the accounting department helps avoid delaying payments beyond the discount period.

You may also be interested in other useful articles from “controlling and costing materials” chapter:

1. Purchases of productive material
2. Purchases of supplies, services, and repairs
3. Materials purchasing forms
4. Receiving materials
5. Invoice approval and data processing
6. Correcting invoices
7. Electronic data processing (EDP)  for materials received and issued
8. Cost of acquiring materials
9. Storage and use of materials
10. Issuing and costing materials into production
11. Materials ledger card – perpetual inventory
12. First-in-First-Out (FIFO) Costing Method
13. Average Costing Method
14. Last-in-First-Out (LIFO) Costing Method
15. Other Methods-Month end average cost, last purchase price or market price at date of issue, and standard cost
16. Inventory valuation at cost or market whichever is lower
17. American Institute of Certified Public Accountant (AICPA) cost or market rules
18. Adjustments for departures from the costing method used
19. Inventory pricing and interim financial reporting
20. Transfer of materials cost to finished production
21. Physical inventory
22. Adjusting Materials Ledger Cards and Accounts to Conform to Inventory Accounts
23. Scrap and waste
24. Spoiled goods
25. Defective work
26. Discussion Questions and Answers about Controlling and Costing Materials

Other Related Accounting Articles:

• Purchase of Supplies, Services, and Repairs
• Receiving Materials
• Electronic Data Processing System (EDP System) for Materials Received and Issued
• Correcting Invoices
• Invoice Approval and Data Processing
• Physical Inventory – Inventory Valuation
• Materials Purchasing Forms
• First In First Out (FIFO) – Materials and Inventory Costing Method
• Transfer of Materials Cost to Finished Production–Inventory Valuation
• Cost or Market Whichever is Lower–Inventory Valuation