UNIT 2 COST ACCOUNTING THEORY

Centralised Purchasing (Centralised Buying)

In a large concern usually there will be a separate department called purchase department to purchase materials. The purchase department will purchase materials for the entire organisation. This is called centralised purchasing. Thus, centralised purchasing means purchasing for the whole organisation by a single purchase department.

Advantages of Centralised Purchasing

Centralised purchasing is generally preferred because it has the following advantages:

1. Efficient buying on account of specialised knowledge and skill in the art of purchasing.

2. Advantages of bulk purchase.

3. Reduces cost of purchase.

4. Ensures uniform quality of materials.

5. Exercises effective control over inventories.

6. Involves less clerical work because all records relating to purchases are kept at one place.

7. Avoids the problem of overstocking and understocking of materials.

Disadvantages of Centralised Purchasing

Centralised purchasing suffers from the following limitations:

1. Huge costs are required to set up and maintain the purchase department.

2. It may cause delay in getting the materials.

3. It is not suitable for plants or branches located at different places which are far and wide.

4. It may result in wrong purchases.

5. It is not possible to enjoy the benefits of local purchase.

Purchase Procedure

(Purchase Control)

The purchase procedure may differ from firm to firm. However, the basic steps (purchase routine) in purchasing materials are common. These are as follows:

1. Receiving purchase requisition

2. Inviting quotations and tender

3. Selecting the supplier

4. Placing purchase order

5. Receiving of materials

6. Inspection of materials

7. Checking the invoice and making payment

1.Receiving Purchase Requisition:

 The purchase department will start purchasing materials only after receiving a purchase requisition. Purchase requisition is a formal request to the purchase department to purchase materials specified in it. Thus it authorises the purchase department to purchase materials.

2. Inviting Quotations and Tenders: 

On receipt of the purchase requisition, the next step is to

select the supplier from whom materials are to be purchased. Generally, the purchase department maintains a list of suppliers for every type of material. The purchase department has to select the best supplier in terms of price, quality etc. The supplier is selected by issuing tenders inviting price quotations from the suppliers. A tender is a written letter or an advertisement given in newspaper inviting the prospective supplier to quote their lowest price and other terms and conditions.

3.Selecting the Supplier 

On receipt of quotations a comparative statement of all quotations received is prepared to know the lowest price quotations and best terms and conditions offered

4.Placing Purchase Order: 

After selecting the supplier, an order for purchase is placed. Purchase

order is an order placed with the supplier asking him to deliver materials or goods stated therein. It is a written authorisation to the supplier to supply a specified quality and quantity of materials in accordance with the terms and conditions agreed upon.

5.Receiving of Materials:

 In small concerns the responsibility of receiving and inspection of

materials is entrusted to the storekeeper. But in large concerns there will be a separate receiving department to receive materials.

6.Inspection of Materials:

 In large concerns, there will be a separate inspection department.

The receiving department has to send the materials along with a copy of the goods received note to the inspection department for inspection.

7.Checking the Invoice and Making Payment:

 This is the last step in the purchase

procedure. Generally, the supplier sends an invoice in respect of materials supplied