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Cost Accounting · Material Costs

Purchase Procedure in Cost Accounting for CMA Inter

Updated 10 October 2026 · Fact-checked

Purchase procedure is the sequence of documented steps a business follows to buy materials: purchase requisition, selecting suppliers and getting quotations, purchase order, receiving and inspecting goods, goods received note (GRN), and checking the supplier's bill before payment. Each document gives control and an audit trail. In exams, name the documents in order and state each one's purpose.

Understand Procurement and Purchase Procedure

Materials are often the biggest part of cost. If buying is careless, you pay too much, buy too much, or pay for goods you never received. A purchase procedure is a set of steps that stops this. Each step produces a document, and each document is checked by a different person or department.

The cycle starts when a need is raised. The store keeper or a user department sends a purchase requisition to the purchase department. It says what is needed, how much, and by when. It is an internal request. It is not an order to a supplier.

The purchase department then finds suppliers, invites quotations or tenders, compares price, quality, delivery time and credit terms, and selects one. It issues a purchase order (PO), which is an external document sent to the supplier. Once the supplier accepts it, it becomes a binding offer to buy on stated terms. Copies go to the stores, the accounts department and the requisitioning department.

When goods arrive, the receiving section counts them and the inspection section checks quality. The store then prepares a goods received note (GRN), recording quantity actually received against the PO. Goods rejected are recorded in a separate rejection or inspection report and returned to the supplier. The GRN is the proof that goods came in and is the basis for stores ledger entries.

Finally, accounts checks the supplier's invoice against the PO (price, terms), the GRN (quantity received) and the inspection report (quality accepted). Only a matching bill is passed for payment. This is often called a three-way match. Any difference is raised with the supplier.

Key rules to remember

Order of the procedure
Purchase requisition → Quotations and supplier selection → Purchase order → Receipt and inspection → GRN → Bill checking → Payment
Learn this sequence. Questions often ask you to arrange or explain the steps in order.
Three-way matching
Invoice checked against Purchase order (rate, terms) + GRN (quantity received) + Inspection report (quality accepted)
Payment is made only for quantity accepted, at the rate agreed in the PO.
Amount payable for a bill
Amount payable = Quantity accepted × PO rate − trade discount + taxes and other agreed charges, less any advance paid
Use accepted quantity, not the quantity invoiced or dispatched. Treat recoverable GST as per the question.
Cost of material purchased
Cost of purchase = Purchase price + non-recoverable duties and taxes + freight, handling and other directly attributable costs − trade discounts and rebates
Consistent with the CAS 6 and AS 2 approach to material cost. Recoverable taxes such as eligible input tax credit are excluded.

How to solve Procurement and Purchase Procedure questions

Use this method for both theory and numerical questions on purchase procedure.

  1. 1Identify what is asked: list of documents, explanation of a step, a flow of the cycle, or a bill-checking calculation.
  2. 2Write the cycle in order: requisition, quotations, purchase order, receipt and inspection, GRN, bill checking, payment.
  3. 3For each document, state who prepares it, who receives copies, and its purpose.
  4. 4For calculations, pick the quantity accepted from the GRN or inspection report, not the quantity invoiced.
  5. 5Apply the PO rate and terms. Subtract trade discount, then add taxes and charges as the question specifies.
  6. 6Compare with the supplier's bill and state the difference, if any, and the action: pay the correct amount or raise a debit note or query.
  7. 7Close with the control point: which check caught the error or prevented the loss.

Quickest way: Document-purpose-owner shortcut

When to use it: Use it for short theory answers and for MCQs that ask which document does what.

  1. Remember: Requisition = internal request by store or user. PO = external order to supplier.
  2. GRN = proof of goods received, prepared by stores. Inspection report = quality result.
  3. Bill is paid only after matching PO, GRN and inspection report.
  4. For numbers: accepted quantity × PO rate, then adjust discount and charges.

Common mistakes in Procurement and Purchase Procedure

  • Treating purchase requisition and purchase order as the same document.

    Both mention item, quantity and date, so they look alike.

    Fix: Requisition goes inside the business to the purchase department. The order goes outside to the supplier.

  • Saying the purchase department raises the requisition.

    Students link all purchase documents to the purchase department.

    Fix: The store keeper or the user department raises it. The purchase department acts on it.

  • Paying the bill on invoiced quantity instead of accepted quantity.

    The invoice figure is the most visible number in the question.

    Fix: Take quantity from the GRN and inspection report, net of rejections, and apply the PO rate.

  • Confusing GRN with the supplier's delivery challan or invoice.

    All three relate to the same delivery.

    Fix: The challan and invoice are supplier documents. The GRN is your own record of what you actually received.

  • Skipping the inspection step or placing it after payment in the flow.

    Students memorise a short list and drop steps.

    Fix: Write the full sequence: receipt, inspection, GRN, then bill checking and payment.

Worked examples

Example 1

Explain the procedure for purchasing materials in a manufacturing company, naming the documents used at each stage.

Show the solution
  1. Need: the store keeper or user department sends a purchase requisition stating item, quantity, quality and required date, with authorised approval.
  2. Sourcing: the purchase department invites quotations or tenders, compares price, quality, delivery and credit terms, and selects the supplier.
  3. Order: a purchase order is issued to the supplier with item, quantity, rate, delivery date and terms. Copies go to stores, accounts and the requisitioning department.
  4. Receipt: the receiving section counts the goods against the PO and sends them for inspection. Rejected goods are recorded and returned.
  5. GRN: the store prepares a goods received note for the quantity accepted. It is the basis for stores ledger entries.
  6. Bill checking: accounts matches the invoice with the PO, GRN and inspection report, then passes the bill for payment.

Answer: The cycle is requisition → quotations and selection → purchase order → receipt and inspection → GRN → bill checking and payment. Each document is prepared by a different section, which gives control and an audit trail.

Example 2

A purchase order was placed for 500 units at ₹80 per unit. The supplier invoiced 500 units. The GRN shows 500 units received, but inspection rejected 40 units. A trade discount of 5% on the PO value of accepted units was agreed. Freight of ₹1,200 is paid by the buyer and is part of material cost. Calculate the amount payable to the supplier for the goods and the cost of materials accepted. Ignore taxes.

Show the solution
  1. Accepted quantity = 500 − 40 = 460 units.
  2. Gross value = 460 × ₹80 = ₹36,800.
  3. Trade discount = 5% × ₹36,800 = ₹1,840.
  4. Amount payable to supplier = ₹36,800 − ₹1,840 = ₹34,960.
  5. Cost of materials accepted = ₹34,960 + freight ₹1,200 = ₹36,160.
  6. Cost per unit = ₹36,160 ÷ 460 = ₹78.61 (approx.).

Answer: Amount payable to the supplier is ₹34,960. Cost of the accepted materials is ₹36,160, about ₹78.61 per unit. The invoice should be corrected or a debit note raised for the 40 rejected units.

Exam tips

  • For a 'discuss the procedure' question, write the steps in order with the document name in bold, who prepares it, and its purpose.
  • Always state the three-way match when explaining bill checking. It earns easy marks.
  • In numerical questions, take the accepted quantity first and then apply rate, discount and charges.
  • In MCQs, watch the words internal versus external, and received versus ordered, to separate requisition, PO and GRN.
  • Add a line on control: separation of duties between purchase, stores and accounts.

Practice questions from Material Costs

Procurement and Purchase Procedure in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Procurement and Purchase Procedure: frequently asked questions

What is the difference between a purchase requisition and a purchase order?

A purchase requisition is an internal request from the store or user department asking the purchase department to buy something. A purchase order is sent to the supplier and states the terms on which the buyer will purchase. The requisition starts the process and the order commits the buyer.

What is a goods received note (GRN) and why is it used?

A GRN is a document prepared by the stores when goods arrive, recording the quantity actually received against the purchase order. It is used to update the stores ledger and as evidence when checking the supplier's bill. It prevents payment for goods that were not received.

Who prepares the purchase requisition?

Usually the store keeper, when stock reaches the reordering level, or a user department that needs special items. It is then approved by an authorised person and sent to the purchase department.

How is the supplier's bill checked before payment?

Accounts compares the invoice with the purchase order for rate and terms, with the GRN for quantity received, and with the inspection report for accepted quality. Any mismatch is resolved with the supplier before payment is made.