Materials - Purchase Procedure

Purchase Procedure:

The routine functions of the purchase department are as below:

1. Receiving purchase requisition;
2. Ascertainment of the sources of supply & selection of the supplier;
3. Formal purchase order placement & follow-up of delivery;
4. Materials receipt & checking;
5. Invoice checking & passing the same for payment.

When requisition for purchase is received by the purchase department, it understands that it is the time to purchase, i.e. it comes to know when purchase is to be made, what purchase is to be made, & at price purchase is to be made.

1. Receiving Purchase Requisition: -

Purchase requisition is received by the purchase department from various sources, namely:

1. In respect of materials which are regularly stored, purchase requisition is received from the store keeper. As soon as the stock reaches the ordering level mentioned in the bin card, requisition is sent by the store-keeper.


2. In respect of any special materials which are required for a special job, purchase requisition is received from the production control department. The planning & drawing department prepares a bill of material & the requisition is sent on the basis of this. Alternatively, a bill of material is prepared by the planning & drawing department & a copy of this is sent to the store, & on this basis the requisition is send by the store-keeper.


3. In respect of materials which are required for special maintenance or construction, purchase requisition is received from the plant engineer or works manager.


4. In respect of materials, the stock of which is not normally maintained, purchase requisition is received from any other department. For example, office stationery, first-aid materials etc.

Every purchase requisition must be in prescribed form & prepared in triplicate & the person duly authorized should sign the same. The purchase department is authorized to purchase by a valid purchase requisition. Out of the three copies, original is sent to the purchase department, the duplicate is sent to the production control department & the department which makes the requisition, retains the triplicate as office copy.

Whenever a new work order is undertaken, bill of material is prepared by the planning & drawing department. On the basis of bill of material, a purchase requisition may be by the production-planning department or the store keeper.

Bill of Material: -

Bill of material is a complete schedule of materials, special parts etc. which is required for a particular job or work order. A bill of material is prepared by the planning & drawing department whenever a new job or work order is undertaken. Printed form may be used for preparing the bill of material for standard products. A new form may have to be prepared in case of new products.

A bill of material serves as a specification of materials which are required for a job to be executed. To all concerned, it also serves as advance information with the execution. Purchase requisition can be sent on this basis so that the materials can be procured in time. This bill of material authorizes the production department to draw materials from store. On the basis of bill of material, the accounting by exception can be introduced. Work order account is debited by the materials as per bill. Work order account is respectively debited or credited by any over or under drawing of material.

2. Ascertainment of the sources of supply & selection of the supplier:-

This function of the purchase department covers the following-

1. Sources of material is inquired, tenders or price quotations are called etc. ;


2. The tenders or price quotations are scrutinized;


3. The appropriate suppliers are selected. Thus the function ascertains where to purchase:


1. The sources of the materials used by the organizations should be known by the purchase department. Proper enquiry must be instituted in case of new material required for a new work order so that various sources available can be ascertained. In this respect, past records, quotations, catalogues, published statements, press advertisement etc. helps.

Tender may be of various types:

1. When tenders are called from only one source of supply, such tenders are known as single tender.


2. When from a small number of suppliers, tenders are called; such tenders are called restricted tenders.


3. When from all suppliers tenders are called openly through newspapers, journals or other media of advertisement, such tenders are known as open tenders.




2. Opening of tenders or quotations which are normally received in sealed covers on the stipulated date & time by a very responsible officer & tabulation of the tenders or quotations a statement which is called schedule of tenders/quotations is included in scrutiny of the tenders & price quotations. For each item of material a statement is to prepared & payment. The name of the material should be mentioned at the top of the statement & then comes, the names of the suppliers, minimum quantity of supply, rate, time & terms of delivery & payment, other terms & remarks. The purchase department is helped by this statement in selecting the appropriate supplier.


3. Supplier selection is a matter of judgment. The factors to be considered before deciding on the issue are price, quality, samples, grade etc., discount rate, time & terms of delivery, terms of payment, financial resource, goodwill, past experience of the prospective supplier etc. In this respect, purchase department gets help from the schedule of tenders/quotations prepared, past records, buyer’s guide books & other books of relevant information. The objective of buying the right quantity of right quality at right time & at the cheapest price must be fulfilled.


3. Formal purchase order placement & follow-up of delivery:-

 A formal purchase order has to be issued by the purchase department to the supplier, once the selection of the supplier is over. Subject to the acceptance of the order by the supplier, whenever necessary, this order binds the buyer & the seller into a contract. When a formal price quotation is sent by a supplier, it becomes an offer. Similarly, when the purchase order is sent by the buyer, it becomes an acceptance. A contract is created if within reasonable time or before the lapsing of the offer or before the revocation of offer, the order is placed & the supplier becomes obliged for the delivery of the goods at the offered price & the buyer also becomes obliged for accepting the delivery of goods & for making payments.

The purchase department, before placing the purchase order must ensure that, within the limit of the purchase budget or the financial allocated for the purpose, is the amount of the order. If such limit is exceeded, additional amount must be obtained from the finance department of the organization, with prior sanction.

The purchase order should be prepared in five copies (in case of small organizations, at least three copies should be prepared) which are send to the-(i) Supplier, (ii) Receiving department, (iii) Department responsible for making purchase requisition, (iv) Accounts department, (v) Purchase order file.

Unless it is ensured that the goods shall be delivered timely, placing a formal purchase order is not enough. It has to be followed up by the purchase department. Preparation of a schedule of stipulated dates of supply, serially, needs to be made. From time to time, the supplier’s obligation to supply on prescribed date needs to be reminded to the suppliers. In this case, to ensure timely supply, mutual co-operation is required. In case of delay, as per the terms of contract, affected party may impose penalty, which becomes costly.

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Other Topics under Materials costing

• Accounting for Materials
• ABC System/Selective Control System
• Average Cost Methods
• Centralized vs Decentralized Purchase
• Comparison of FIFO& LIFO methods, Next-in-First out (NIFO) Method
• Economic order Quantity (EOQ)
• General Accounting Entries for Materials
• Levels of Stock
• Material Control
• Materials-Introduction
• Materials-Pricing the Issue
• Materials receipt & checking, Constituents of Material Cost
• Periodic Simple Average Method, Periodic Weighted Average Method
• Perpetual Inventory system
• Standard Price Method
• Stock Valuation
• Types of Stores