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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.
3.4 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 !