The above manufacturing ltd. Need a proper procedure followed in procurement of material. The unsystematic procedure for purchasing the materials the manufacturing ltd. Uses can cause a lot of problems for the company. The most important being what exactly is the cost of the closing stock, or the stock remaining of the item. Moreover it can also cause over stocking of the item as the purchases are made on ad hoc basis, which is basically buying the items when you think you need them but you are not certain about it, because you really do not know how many of those items are remaining in the storage.
Furthermore, a lot of money can be spend in the purchasing process through charging the goods that were not delivered, quantity discounts due to in adequate purchases, over pricing of goods. This all happens because there is no proper documentation and recording made of the purchases.
To avoid these losses, the procedure below must be followed by the manufacturing ltd.
Requisitions: the department that is responsible for purchasing the items should accept request from the department that needs the material. The request for the items should be made in advance and in good time in order to avoid rushed purchases. The items or materials that are needed should be purchased and nothing more.
Need Assessment: the department that is responsible for purchasing the materials, should inspect whether the departments requesting for the items, really need it or not. Also they should establish the quantity and quality of the items or materials required.
Inquiry: the purchasing department than should inquire about the potential suppliers, and the prices and quality of the items they are selling. Most of the time the company will have regular suppliers for the goods they regular need, however is good to know what other alternatives are there in the market.
Reply to inquiry: the potential supplier may respond by issuing price lists, catalogues or quotation.
Vetting Suppliers: after going through the price lists or the catalogue the firm should find out if the supplier is trust worthy and if the prices and quality of the goods are reasonable. This way they can negotiate a prices with the suppliers.
Order: the company should then place the order with the supplier. The negotiation should not only be about the prices, but also about when the delivery should happen, and discounts for early payment, the duration the supplier is willing to wait for the payment and if there is any defective item the company can get a refund. All these terms should take place before placing the order.
Receiving the good: after the placing of order, the company will receive the goods, and they should record in the ledgers and other documents e.g. pricing stock document.
Storage of the good: after receiving and inspecting the items, they should be stored in a proper storage facility. And also be recorded accordingly.
The company should also choose a suitable storage facility. It can either use the centralized storage facility, where all the materials are kept in one main store regardless of their nature, this method is suitable for small business. Or the company can choose a decentralized storage facility, where the materials are stored in separate departments. Or the imp rest storage facility also known as the hybrid, where the company uses both these methods.
Not only what type of storage facility is important but the location, building, facilities, transport, insurance, security and safety, ventilation and staff should also be taken into consideration. All these will help in keeping count and securing the items purchased in the company.
The company should also know how much stock it can hold to avoid stock outs or excessive stock that can cause damage.
In order to have a well-managed stocks the company should consider calculating the reorder level: this is calculation made of the stock volume to know when exactly the order should take place and when the items should be delivered, before running out of the items. Also the maximum stock level should be calculate: this is calculation made to the maximum level of each item in the department, in order to avoid over stocking of the goods. The minimum stock level should also be calculated: in order to know the minimum amount of each item in the department to avoid running out of the item when needed. The average stock material should also be calculated in order to know the average of each items in the department.
When holding items it is important for the company to determine, the lead time, space, nature of stock, consumption, discounts and storage costs. This is so the company can avoid expiry dates, items not to perish because they were stored for long, the items not to be out dated and many more.
After taking all the above into consideration the company than should have a proper inventory ledger account for stock valuation
This is to know the exact price or worth of the materials in the store at a certain period. In other words know how much in the closing stock of the items in the store.
They are several methods that can be used in order to know that however we are going to focus on the three most common method used.
First in First out (FIFO): the materials that are received in the store are the ones that are issued or sold off first. In the method whenever items are purchases the stored ledger us updated with the price of the item. Then when the item is issued or sold. The item of the earliest batch is the one given out. All quantities that were issued should correspond with the prices at which they were required. In this method the cost of the closing stock is the latest price in the market.
Last in First out: this method is the exact opposite of FIFO. In this method whatever item was purchased last in the one that is issued first. In other words the latest items in the stores are the one that are used or sold off. In this method when an item is received the ledger is debited accordingly. Then when the items are issued they are issued from the latest batch. In the method the cost of the closing stock is the earliest price of the items.
Weighted average: in this method when issuing out an item the average price is determined. When an item is purchased it is recorded in the ledgers accordingly. In this method no reference is made to the batch when issuing the item. The price of the item issued is determined by taking the perpetual value and dividing it by units in stock before the issue. In this method the cost of closing stock is the average price of the items remaining.
Here is an overall look of how the inventory ledger should look like: The manufacturing ltd, should choose a suitable method for the company and they have to be constant with it. In my opinion the manufacturing company should use Last in First out method (LIFO). This is because for items like raw materials, the issued production will be charged at the rates near to the market rate, hence it is easier to determine the selling production cost.
In a nutshell, in order for the manufacturing company be able to increase its profits, and avoid unnecessary expenses, over stocking of products and have a good stock, purchasing, storing, holding and levels it needs to follow a systematic procedure. Moreover in order to know the prices of the items that are remaining the storage it should have a proper inventory ledger.
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