Financial Memorandum

The Financial Instruction is used alongside other extant rules or circulars, such as the treasury and Financial Circulars that are issued from time to time as situations demands.These circulars which are expanded in detail in the Financial Regulations or Memoranda are issued with the sole aim of ensuring effective and efficient utilization of Public funds or resources available to both the federal, state and local Government.It is therefore, imperative for civil/public servants to understand the management and at the same time how to effectively use these resources or funds to the satisfaction of the various departments of the Local Government Council which is the essence of this Refresher's course. WHAT IS FINANCIAL MANAGEMENT? Financial Management entails planning, organizing, directing and controlling the financial activities of the Local Government Council. This Management entails applying general Management Principles to financial resources of the Local Government Council. OBJECTIVES OF FINANCIAL MANAGEMENT:The financial management is generally concerned with procurement, allocation and control of financial resources of the Public Sector. The objectives are as follows: 1. To ensure regular and adequate supply of funds to the various department of the Local Government Council. 2. To ensure adequate accountability of the funds allocated to each of the departments. 3. To ensure optimum funds utilization 4. To ensure that regular accounting system is maintained 5. To ensure compliance with the financial regulations in discharging their statutory responsibilities. FINANCIAL INSTRUCTION/MEMORANDA All the elements that enhance efficiently, reliability and continuity of the Public Sector have been tampered with, resulting in major and severe setbacks for the conduct of Government business. Government business was operated as if laws and rules no longer existed to govern the way and the manner public funds were expanded. Public funds were disbursed illegally without recourse to the Financial Regulations; facilities of the Central Bank of Nigeria (CBN) and the Nigerian Security Printing and Minting Company (NSPM) were recklessly abused; and the contingencies funds were used without regards to the rules governing its operations. It is mandatory for all public officers to ensure strict compliance with the rules and regulations of the Financial Regulations. Primary responsibility in this regards falls on the shoulders of the Permanent Secretaries in their double capacity as Accounting Officers of their Ministries and advisors to their respective Commissioners and Directors. However, at the Local Government Council, it is the Head of the Local Government Administration (HLGA) that functions as the Permanent Secretary and advisors to the various Departmental heads of the council. They are expected to ensure that all officers subordinate to them adhere strictly to these rules and regulations. FINANCIAL INSTRUCTIONS (FI)/MEMORANDA Financial Instructions (FI)/Memoranda are sets of financial rules or instructions that directs or guides public officers and institutions on their responsibilities, powers and financial authorities in dealing with issues of public financial management. OBJECTIVES OF FINANCIAL REGULATIONS (INSTRUCTION) 1. To guide public officers/MDAs on the process and procedures of dealing with accounting for government financial transactions. ii. It serves as instrument of laws and authorities thereby providing checks, balances, financial, control and sanctions against abuse. iii. To ensure uniform standard in the administration and management of public funds/resources. iv. To block leakages/loopholes which could be exploited to filter away the meager resources of Local Government Councils. LEGAL BASIS OF FINANCIAL REGULATIONS Financial Instructions (FI) is governed by the following: (i) The constitution of the Federal Republic of Nigeria (1979 as amended, 1989 and 1999). (ii) The Finance (Control and Management) Act, 1958 (amended 1990) (iii) The Audit Act 1956 (iv) The Annual Appropriation Act (v) The Public Service Rules (vi) The Financial Regulation and Revenue Allocation Laws specifically sections 74 to 87 and sections 149 to 159 of the constitution. (vii) Treasury and Finance Circulars (viii) Public procurement Act, 2007 (ix) Pension Reform Act, 2004 (as amended 2014) Examples of Abuse Financial Regulations (Instructions) a. Public funds are appropriated with impunity b. Contracting and procurement procedures are largely circumvented (disobeyed or breached) c. Internal audit functions of checks and balances are undermined d. The use of Accounting Manuals appear to be unpopular e. Mandatory financial reports and returns are in arrears f. Political officer holders pay inadequate attention to Financial Regulations or Instructions in their official duties. Implications of Abuse of Financial Regulations 1. Poor attitude of political office holders to fiscal Management 2. Economic difficulties as is presently being faced by our country 3. Unethical practices by public servants 4. Political interference 5. Loss of Government revenues 6. Corruption and misapplication of public funds by public servants Some Offences and their Sanctions 1. Failure to Answer Audit Query Any Accounting Officer or Public officer who fails to give satisfactory explanations to audit queries within stipulated time shall be surcharged and removed from the duty or dismissed and prosecuted. Where it involves an Accounting officer, he or she shall be reported to the Governor. 2. Inflation of Contracts Anyone alleged to be involved in the inflation of contracts shall be given 5 days within which to respond to query and where the inflation of contract involves the Tender Board, all the members that approve the contract shall be severally and collectively sanctioned. 3. Payments for jobs not Executed (a) Where a contractor or supplier who is paid mobilization fees for a job fails to perform, he or she shall be given 30 days to refund the money, failing which the mobilization fee shall be recovered from him/her through the EFCC and contractor blacklisted. (b) Any public officer who fraudulently pays money to a contractor for poor quality of work or for a job not executed shall be required to refund it and shall be removed from the scheduled and matter referred to Economic and Financial Crimes Commission (EFCC). The EFCC is a Nigerian law enforcement agency that investigates financial crimes such as advance fee fraud and money laundering. The EFCC is empowered by law to investigate and to prosecute only economic and financial crimes in accordance with section 46 of the Economic and Financial Crimes (Establishment) Act. 4. Irregular or Wrong Payment Any public officer who makes an irregular payment from public funds, shall be given 21 days' notice for explanation, else the amount involved shall be recovered from the officer, and be removed from the schedule. 5. Shortage or Losses of Stores by Store Officer Where a store keeper or officer in-charge of store fails in this regard, he shall be given 14 days to explain, he shall not be surcharged the total cost of the loss, but shall be removed or transferred to another schedule. 6. Shortage or Losses of Stores of Cash by Cashier Where a cashier or officer suffers a loss or shortage, he has 7 days within which to answer query, failing which he shall be surcharged the full amount and transferred to another schedule. 7. Payment to non-existent Employees (Ghost Worker) Any public officer who authorizes payment of public fund to a ghost worker and/or knowingly processes such payment shall be charged for gross misconduct, removed from the schedule and reported to EFCC for prosecution. 8. Non-Recovery of Advances The Head of Accounts who is to recover personal advances from staff shall be requested within 21 days to offer written explanations on this for negligence and shall be surcharged or advance recovered from him, as he equally face charges for gross misconduct under the Public Service Rules. 9. Non-Rendition of Returns The Head of Accounts or his equivalent in the MDA who fails to render monthly Transcript/ Trial Balance shall be requested to answer query within 21 days, failing which allocation of fund to the MDA shall be suspended indefinitely. 10. Non-Retirement of Advances and Imprest Any public officer who fails to respond to a query issued to him within days for non-retirement of advances or imprest shall be surcharged and the total amount involved recovered. He/she shall not be granted further advances or imprest until retirement of previous or outstanding ones. Local Government The United Nations for Public Administration defines Local Government as a political sub-division of a Nation which is constituted by law and has substantial control of local affairs or to exact labour for prescribed purpose. The 1976 Local government reforms defines Local Government as Government at Local level, exercised through representative council with specific power with defined areas.From the above definition, it can be underscored that: (i) Local Government Area constitutes the geographical entity of a local government. E.g Obio/Akpor Local Government, Emohua Local Government etc. (ii) Local Government Administration - This is the process or activities of running Local Government. It involves the setting up of objectives and council policies and the performances of Executive duties at the Local level. KEY CHARACTERISTICS OF LOCAL GOVERNMENT # Financial memorandum (FM) **LOCAL GOVERNMENT** (1) Local Government must have legal personality separated or distinct from the State and Federal Government. (2) Local Government must have specific powers to perform certain range of functions. (3) Local Government must enjoy substantial autonomy. (4) Most officials of Local Government council are elected while those of Local Administration are appointees of the Local Government Service Commission. FUNCTIONS OF LOCAL GOVERNMENT The 4th schedule of the 1999 constitution of Federal Republic of Nigeria as amended stated the functions of Local Government Council as follows: a) **Mandatory Functions:** (i) Establishment, Maintenance and Regulation of Slaughter houses, slaughter slabs, markets, motor parks and public conveniences. (ii) Provision of roads and streets and numbering of houses. (iii) Construction and maintenance of roads, streets lighting, drains, parks, garden, open space etc. (iv) Registration of Birth, death and marriages. (v) Provision and maintenance of public conveniences, sewage and refuse disposal. (vi) Control and regulation of: a. Shops and Kiosks b. Out-door advertising c. Restaurants, bakeries and other places for sales of food to the public d. Movement and keeping of pets of all kinds. (vii) Assessment of privately owned houses or tenements for the purposes of levying such rate as may be prescribed by the State House of Assembly. b) **Permissive functions:** In section 2 of the same schedule, there is provision for the "parliapatron" of such council in the government of a state in respect of the following matters: (a) The provision and maintenance of primary (school) educations (b) The development of Agriculture and other natural resources other than the exploration of minerals. (c) The provision and maintenance of health services. (d) And such other functions as may be conferred on Local Government Council by the State House of Assembly. SOURCES OF GOVERNMENT REVENUE The financial business in the public service or sector is similar to what is applicable to the private sector. In the public sector, the government has to live and perform its duties to the Nation; as a result, there must be a means of livelihood called money. The money required by the government to perform its duties must be obtained from somewhere; and utilized on something. Thus the government financial problems falls under three areas, which are: a) Where to get money? b) How to keep the money? c) How to utilize the money? The above problems are more compounded because the Federal, State and Local Government in this modern time has many functions to perform. Its activities are no longer confined to more maintenance of peace, order and security. Important economic, industrial and social schemes form part and parcel of the activities of a modern Nation, State and Local Government. There are basically two (2) sources of revenue (Funds) available to Local Government viz: A. External source B. Internal source A. **The External sources** include all sources of revenue accruing to the council from outside its system. It forms the largest sources of funds to Local Government. These sources comprises up: (i) Allocation from Federation Account (ii) Allocation from State Government 10% internally generated revenue. (iii) Value Added Tax (VAT) (iv) Miscellaneous Grants **STATUTORY ALLOCATION FROM FEDERATION ACCOUNT** This revenue allocation is handled by a committee known as: FAAC-The Federation Accounts Allocation Committee. This committee was established by the Revenue Allocation and Distribution Acts, 1981 amended in 1992. The primary function of this committee is to share the revenue accruing to the Federation Account among the three (3) tier of Government in accordance with the provisions of section 162 (1-7) of the 1999 constitution **COMPOSITION OF FAAC** 1. The Accountant-General of the Federation (AGF) 2. Minister of Finance 3. The Accountant - General of each of the 36 states of the Federation 4. The Commissioners of Finance of each of the States of the Federation. B. Internal Sources - This comprises of revenue accruing to the state. In line with the provisions of the 1999 constitution, section 162 (6-8) stipulates the establishment of an Account by the State Government in favour of the Local Government Councils. All monies accruing to the Local Government Council in the State from the Federation Account go directly into the State Joint, Local Government Joint Accounts. This 1999 constitution requires each the State Government to contribute 10% of its internally Generated Revenue (IGR) and share same to the Local Government Councils. The meeting of the State Joint Account Allocation Committee (JAAC) holds every month after the conclusion of FAAC meeting at every state of the Federation for the purpose(s) of sharing the total available revenue. **COMPOSITIONS OF JAAC** 1) The Accountant-General of the State 2) The chairman Local Government Service Commission 3) The Commissioner of Finance 4) The Chairman of each of the Local Government Council 5) The treasurer of each of the Local Government Council Other sources of Internal Revenue to Local Government are: . Taxes/Capital rates . Rates/tenement . Local Licenses, fees and fines . Earning from commercial undertaking . Rent on Local Government properties . Interest payment and dividend . Miscellaneous receipts . Grants and Aid . Borrowing FUNCTIONS/DUTIES/RESPONSIBILITIES OF LOCAL GOVERNMENT STAFF 1. Head of Local Government Administration - The Rivers State Local Government Law volume two (2) of 2012 made provision for the establishment of the office of the Head of Local Government Administration (HLGA) in the Local Government Council. This office/ is the highest office/officer of the Local Government Council aside the Elected Chairman of the Council. He/she is more or less the Permanent Secretary of a Local Government Council. FUNCTIONS (1) He/she is the Accounting officer of the Local Government Council (8) Advises the Council on policy matters. (iii) Co-ordinates the activities of the Head of Departments of the Local Government Council. (iv) He/she sigh all payment schedule with the Local Government Chairman, Director of Admin and Treasurer. (v) Attends conical meetings (vi) Liaise with the Local Government Service Commission on progression, discipline, promotion, transfer etc of Senior Staff of the Council (vii)Liaise with the Local Government Service Commission in co-ordinating training activities for Local Government staff. (viii)Be the administrative Manager and Controller of Council staff. (ix) Assist the council secretary in the formation, Execution and Review of Local Government policies. (x) Carryout such other functions as may be assigned to him by the Finance and General Purpose Committee (F&GPC). LOCAL GOVERNMENT TREASURER AND DIRECTOR OF FINANCE The Rivers State Local Government Law of 1999 amended in 2012 provides that the Treasurer is the Chief Accountant and the Head of the Finance Department. FUNCTIONS 1) Performs duties as the Chief Accounting officer of receipt and payment of the Local Government Council. ii) Shall be in attendance of the Executive Committee meeting and other committees meetings as the Chief Financial Adviser of the Local Government Council. iii) Shall be responsible for the Administrative Control of the finance department of the Local Government Council. iv) Responsible for budgetary control and supervision of the Accounts of all departments of the Local Government Council. v) Prepares and publishes monthly financial statements. vi) Be a signatory to Local Government Council cheques and vouchers. vii) Facilitate the work at the Audit alarm committee. viii) Responsible for the sound Administration and effective organization and working of the finance department. ix) Perform such other related functions / duties as may be assigned to him/her by the Executive Chairman of the Council. DIRECTOR OF ADMINISTRATION AND GENERAL SERVICES FUNCTIONS/DUTIES 1) Heads the Junior Staff Management Committee as the Chairman. 2) Assist in the review of Local Government Council policies. 3) Perform other functions/duties that may be assigned to him/her by the Chairman or Secretary of the Council. DIRECTOR OF WORKS, LANDS, HOUSING AND SURVEY This is headed by an Engineer. FUNCTIONS i) General Administration of the Department ii) Assist the Council in initiating viable projects iii) Produce project drawings and bills of quantities. iv) Supervise Council projects to ensure good quality jobs. v) Ensure regular maintenance of electricity plant, vehicle and equipment. vi) Register Building Plans FINANCE DEPARTMENT DUTIES AND RESPONSIBILITIES The Finance Department will be responsible for: (i) The care and custody of the Local Government Council finance whether in cash or head in the Local Government Bank Account. (ii) Ensures that all revenue due the Local Government is collected promptly and properly paid into the Local Government funds. (iii) He/she ensures that all payments out of the Local Government funds are properly authorized and such payments relate to duties entrusted to the Local Government (iv) Participates fully in the preparation of Local Government estimates. (v) Ensures that the prescribe Accounts and records of Local Government finance transactions are properly kept. (vi) Prepares relevant schedules for Auditors (vii) Maintains the stock ledger (viii)Ensures that Bank reconciliation statements are prepared as at when due. (ix) Keeping and storing all accounts and records of Local Government Council in an orderly manner, and ensures that they are readily available to the Auditor-General of Local Government, Internal Auditors and other persons authorized statutorily to inspect such accounts and records. (x) Exercise control over accounts and financial records kept by other Department officers and ensures that such accounts and records are submitted to the Finance Department for checking and reconciliation at the prescribed time. (xi) Deals with queries and shows how they were cleared. (xii)Evolving and maintaining an effective accounting system (xiii) Ensures that the Internal Control System is adequate. (xiv)Maintains the Fixed Assets Register of the Local Government Council. (xv)Conduct continuous and end-of-year stock taking. (xvi) Ensures that all correspondence concerning the financial transactions and financial affairs of Local Government. EXECUTIVE CHAIRMAN FUNCTIONS/DUTIES The Financial Memoranda (FM) section 1-10 (1-13) and the 1999 Rivers State Local Government Law part III section 31-33 and Amended in 2012 volume 2 provides the duties and responsibilities of the Executive Chairman of Local Government as follows: (a) The Chairman is the Chief Accounting officer of a Local Government Council but his duties/responsibilities excludes the signing of cheques and vouchers. (b) Shall observe and comply fully with the checks and balances spelt out in the existing guidelines and financial regulation governing receipts and expenditure of public funds and shall be liable for any breach thereof. (c) Shall renders quarterly financial statement of expenditure and Annual Accounts to the legislative arm. (d) He / she presides over the meetings of the Executive Committee (F&GPC). (e) He/she shall ensure strict compliance with the provisions of the Financial Memoranda. (f) He/she shall face periodic checks in order to ensure full adherence to the Financial Control and Management Act of 1958 and all its amendments to this end; (i) All instructions relating to expenditure of public funds by the Accounting officer shall be in writing. (ii) The accounting shall be responsible to account to the public Accounts Committee for all monies voted for each Department and shall be peculiarly liable. (iii) The Chairman as the Chief Executive and Accounting Officer shall render Annual Reports of Local Government in order to ensure accountability and enforce the performance ethic. (iv) He/she shall be boned by the provisions of any other rules, regulations, guidelines and laws governing the roles and functions of a Chief Executive and Accounting Officer. (g) He/she shall ensure that Audit queries addressed to him are answered within the time limit stipulated in the Financial Memoranda. However, where the query concerns him/her, it shall be answered promptly by him/her in person. (h) Ensures the maintenance of strong accounting and Internal Control System. (i) Ensures the practice of good corporate governance. (J) Appends his signature on Statement Number 1: "Responsibility for Financial Statements". (k) He/she shall ensure that any directive issued by the Local Government Council or the Governor's Office concerning any aspects of the financial management of the Local Government, or any decision of the Auditor-General in respect to matters of disallowances and surcharges are properly and promptly implemented. (L) At the beginning of each financial year, the Chief Executive and Accounting Officer shall submit to the Executive Committee (F&GPC), the list (by Name and Department) of each Head of Department in the Local Government who will exercise authority to approve expenditure within the limits referred to in the Financial Memoranda. (m) At the expiration of his term of office, or whenever he/she is leaving office for any reason whatsoever, the chairman shall prepare a comprehensive Handing over Note for his/her successor. (n) It shall be the duty of the Accounting Officer of the Local Government to establish and maintain an Internal Audit to provide a complete and continuous audit of the Accounts and records of revenue, expenditure, plant, allocated and unallocated stores. (o) He/she shall ensure that the recommendations of the Internal Auditor, whether in respect of losses, waste or the improvement of the system or procedures taken thereon including, if necessary, reference to the council for its decision or direction. VICE CHAIRMAN DUTIES/FUNCTIONS 1) Shall be elected with the chairman and shall be assigned responsibility for the Administration of a Department of the Local Government. 2) He/she shall act for the chairman in his/her absence 3) He/she shall be called upon at any time even after leaving office to account for his/her tenure as vice chairman. COUNCIL SECRETARY Section 36(i) (a-e) of the Rivers State Government Law of 1999 and amended in 2012 volume 2 provides that the Council Secretary shall: (1) Serve as the secretary of meeting of the Executive Committee of the Local Government and keep the record thereof. (2) Co-ordinates the activities of the Department of the Local Government. (3) Liaise on behalf of the chairman of Local Government Council Legislative through the Legislative leader of the Council. (4) Liaise with the Secretary to the State Government on other necessary functions on State/Local Government relations. (5) Perform such other duties as may be assigned to him/her from time-to-time by the chairman. SUPERVISORS a) Serves as political heads of their respective departments. b) Serves as members of the Executive Committee. c) Gives directives to the Head of Departments on general policy issues. d) Assist the Chairman to supervise the Execution of Local Government projects within their respective departments. COMMITTEES OF LOCAL GOVERNMENT The Executive Committee composition: 1) The Executive Chairman as Chairman 2) Vice-Chairman 3) Supervisors 4) Secretary to the Local Government Council as secretary. FUNCTIONS i) To receive and consider the annual estimate proposals of all the departments as collected by the treasurer in preparation of the draft annual estimate of revenue and expenditure of the Local Government. ii) To submit the draft estimate to the legislative council for amendment and approval, subject to the assent of the Executive Chairman. iii) To take necessary disciplinary actions against any officer who has become negligent in the performance of his/her duties. iv) To exercise general supervision over financial management of the affairs of the Local Government including the collection of revenue and expenditure of funds etc. v) Head of Departments (HODs) may be called on, when the Executive Committee is considering issues relating to his/her department to make clarification or any issue purely in an advisory capacity. FINANCE AND GENERAL PURPOSE COMMITTEE (F&GPC) Composition 1) The Executive Chairman 2) Vice Chairman 3) Secretary to the Council 4) Supervisors 5) Treasurer 6) Head of Personnel Management (HPM) 7) Two (2) other officers to be appointment by the Executive Chairman. FUNCTIONS (i) Make recommendations with regards to policies in the preparation of Annual estimate proposals (ii) Receives and considers departmental and committee draft annual estimates of revenue and Expenditure. (iii) Passes accepted or amended draft estimates with recommendations to the council for consideration. (iv) Examines proposals on amendment to revenue earning bye-laws, loans and investments and submit recommendation to council. (v) Examine applications for supplementary estimates, find reallocation and make recommendation to council. (vi) Considers and award contracts in accordance with standing orders. (vii) Considers Auditor's report and make recommendations to council. (viii)Report to council cases of negligence by any staff in the performance of financial duties. (ix) Carries out regular checks to satisfy itself that revenues are promptly collected and accounted for and proper disbursement made. (x) Exercise general supervision and financial management of the affairs of the council. (xi) Submits reports to the council on the proceedings of the committee since the last meeting of the councils; attach copies of all the minutes of the committee's meetings held during the period. The F&GPC holds two(2) types of mandatory meetings namely: Monthly meetings and Annual Meetings. The Monthly meetings is held to considers matters referred to it and also to examine the following statements and reports: a) Monthly reconciliation of Accounts b) Bank Reconciliation Statements c) Revenue collectors charts d) Reports on revenue collectede) Reports on cash flow statement f) Personal and other advances g) It also prepares the council's draft annual estimate at this meeting to be submitted for council's consideration LOCAL GOVERNMENT AUDIT ALARM COMMITTEE COMPOSITION a) State Auditor-General for Local Government as chairman b) Director of Local Government inspectorate of the Ministry of Local Government Affairs c) A representative from the Accountant-General of the State The facilitators to the committee are: All Head of Departments Treasurers to the Local Government Head of Internal Audit It is their individual and collective responsibilities to alert the committee before irregular and regular payment are made. STORES/INVENTORY MANAGEMENT The Financial Memoranda (FM) defines stores as all movable property purchased from public funds or otherwise acquired by Government. Classification of stores: For accounting purposes, the FM classified stores into two classes: a) Allocated stores b) Unallocated stores The FM further divided it into three categories defines as follows: (i) Non-Expendable stores e.g. plant and machinery, motor vehicles, furniture etc. (ii) Expendable stores: This contains serviceable tools such as maintenance tools e.g. shovels, paintbrushes, etc. (iii) Consumables stores: This contains items that are used immediately they are issued e.g soap, foodstuffs, stationery etc. (A) Allocated Stores: These are stores, cost of which chargeable to and remains a charge to the sub-head of expenditure in which funds for the purchases are provided for in the estimates. They may be either purchased directly or obtained from the unallocated store stock. These stores are taken on numerical charge and may be placed in an allocated store. These stores should be directly charged to their respective votes. (B) Unallocated stores: These are those purchased for general stock rather than for a particular work or services for which the final vote of charge cannot be stated at the time of purchase (FM section 34 (1). Their cost is debited to an unallocated stores sub-head in the Expenditure estimate. STORE KEEPER Every store should be under the control of a store-keeper who is charged with the following responsibilities: (i) Maintenance of Proper books of accounting records (ii) Proper arrangement of the store (iii) Proper cleanliness of the store (iv) Initiate purchase requisition where the store department is not the purchasing department (v) Receipt of store items from the supplier after ensuring that the items supplied confirmed with specification, it is the right quantity and at the right price state on the Local Purchase Order (LPO). (vi) Update the bin card/stock cards (vii) Issue of items out of the store based on a property authenticated store requisition. (viii) Preparation of store receipt voucher (ix) Preparation of store issue voucher (x) Ensure that there is adequate security over the custody of the store. HEAD OF DEPARTMENT The Head of Department is responsible for all stores controlled by his/her department. STORE ACCOUNTANT The Store Accountant is charged with the responsibilities of: 1) Entering of all details of each stores issue made as evidence by the stores requisition and issue voucher. 2) Keeping of the stores summary on form LGT.110 3) Keeping of the unallocated stores ledger and form LGT.109 4) Preparation of monthly statement of stores issued. 5) Compilation at each of month of the monthly summary of stores salaries to show: a) The stock at hand on the tally board completed by the store keeper. b) The actual store at hand as revealed by the physical stock taking. c) The quantity of stock at hand as shown on the unallocated stores ledger TYPES OF INVENTORY CONTROL SYSTEM The two (2) basic inventory control systems are: (a) The re-order level system (b) The periodic review system However, an organization may develop a system to suit its organization and must contain elements of both the periodic review system and re-order level system. This is otherwise known as the hybrid system. RE-ORDER LEVEL SYSTEM This is also known as a two-bin system. The features of a Re-order Level system are as follows: i. Apredetermined re-order level is set for each item. ii. When the stock level falls to re-order level, a replenishment order is issued. iii. The replenishment order quantity is the Economic Order Quantity (EOQ). iv. Stock records are maintained with calculated re-order levels which triggers off the replenishment order. v. Stock is segregated into two bins and stock is drawn from the first bin and replenishment order issued when it becomes empty hence, the name "two-bin system". INVENTORY LEVELS One of the major objectives of stock control system is to ensure that stock outs do not occur and that surplus stocks are not carried. Note: Stock outs occur when there is insufficient stock to meet staff demand or lead requirements. This can led to loss of confidence and goodwill on the Procurement Department. Similarly, surplus stocks result in increased storage costs, which of course lead to reduced profit if it is a profit-making organization. There are three (3) Pre-determined critical levels for each item of materials in stock or inventory which ensures that neither stock outs occur nor surplus stocks are carried or held and these are: a. Maximum Stock Level b. Minimum stock Level c. Re-order Level **MAXIMUM STOCK LEVEL** This is the Level above which stocks should not be allowed to rise. The following should be considered when fixing the Maximum Stock Level: i. Rate of Consumption of Materials. ii. Available storage space. iii. Reliability of supply. iv. Time necessary to obtain new deliveries or supplies le. Lead Time v. Carrying cost. vi. Economic Order Quantity vii. Risk of obsolescence viii. Risk of price fluctuation **MINIMUM STOCK LEVELS** not be This is the Level below which the stocks should allowed to fall. Expectedly, there is bound to be stock outs whenever the stocks level is allowed to fall below this minimum level, and which may eventually lead to stoppages. It is also called a buffer or safety stock. The following should be considered when fixing the Minimum Stock Level: i. Rate of consumption ii. Reliability of the source of supply iii. Load Timer: The Time necessary to obtain delivery of new materials **TERMS COMMONLY USED IN STORES/INVENTORY MANAGEMENT** RE-ORDER LEVEL: This is the fixed point between the maximum and minimum stocks levels where requisitions are raised for new supplies. ECONOMIC ORDER QUANTITY (EOQ): This is the level of activity at which the cost of inventory control is minimized. It is the quantity of stock which is normally ordered each time the stock is being replenished. It is also known as "the Re-order Quantity". LEAD TIME: This is the time between the time an order is made and the time the item is received. PHYSICAL STOCK: This is the number of items physically available in stock at a given time in the store. CYCLE TIME: This is the time between when an order is received and another order is placed. FREE STOCK: This is the physical stocks plus outstanding replenishment. Orders minus unfulfilled requirements. DORMANT STOCKS: These are items which have no demand presently. ORDERING (ACQUISITION) COSTS - These are the costs incurred in placing the order up to the point of receiving the goods into the store or warehouse. CARRYING (HOLDING) COSTS These are the incurred whenever a material is stored in the warehouse. MAXIMUM STOCK LEVEL- This is the level above which stock should not be allowed to rise. **Factors to be considered in fixing maximum stock level:** (a) Rate of consumption of materials (b) Available storage space (c) Reliability of supply (d) Risk of obsolescence (e) Time necessary to obtain new deliveries i.e. lead time (f) Economic order quantity Minimum Stock Level: This is the level below which stock should not be allowed to fall. The following should be considered when fixing minimum stock level: a) Rate of consumption b) Lead Time c) Reliability of supply. **DETERMINANTS OF INVENTORY LEVELS** The determination of re-order level depends absolutely on the certainty or otherwise of the organization, Lead time and utilization rate. Re-order Level (RL) = Lead Time (LT) x Utilization Rate (UR) RL = LTX UR Example 1: The Central Store of Port Harcourt City Local Government Council has a normal weekly usage of 300 units of a certain material and the normal lead time of 3 weeks. Required: Calculate the Re-order Level of the materials. Re-order Level (RL) = Lead Time (LT) x Utilization Rate (UR) Lead Time = 300 units Utilization Rate = 3 weeks RL= 300 units x 3 weeks = 900 units. Note: Where the demand is certain but the Lead Time is variable, the re-order level can be calculated thus: RL = Maximum Lead /Time x Utilization Rate Example 2: Obio/Akpor LG council has a normal weekly usage of 500 units of certain material but the Time between placing an order and receiving stocks into the store varies from weeks to weeks at what level should the order be placed? Solution Re-order Level Max Lead Time x Utilization Rate RL=5 weeks x 500 units = 2500 units. Note: Where both the demand and the Lead Time are variable, the re-order level can be calculated by multiplying the maximum Lead Time by the maximum usage. RL=Max. Lead Time x Max. Utilization. Example 3: Ikwerre Local Government Council has a weekly demand rate for certain stationery which ranges from 300 to 400 units and the Lead Time also ranges from 3-5 weeks. It is the policy of the council to order 1400 units at a time. Required: Determine a) Re-order Level b) Minimum Level c) Maximum Level Solution a) Re-order Level: Max. Lead Time x Max. Utilization Rate = 5 weeks x 400 units = 2000units A SYNOPSIS OF THE MODEL FINANCIAL MEMORANDA (FM) b) Minimum Level = Re-order Level - [Normal Level Time (Average) x Normal Utilization Rate] but RL = 2000units Normal Utilization rate = 400+300/2= 350 Minimum Level=2000-(4 x 350) 2000-1400 = 600units c) Maximum Level = [Re-order Level + EOQ] - [Min. Lead Time x Min. Utilization Rate] Re-order Level = 2000units EOQ = 1400units Min. LT = 3 weeks Min UR = 300 units Maximum Level = [RL + EOQ]-[Min. LT x Min UR] = [2000+1400] - [3 x 300] =3400-900 = 2500units 36