financial management 1chapter 6

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Chapter 6Material & Labour

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Topics covered in this lecture

Management of materials

Valuation of Materials

Labour control

Labour remuneration

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Management of Materials

Why?

Net Working Capital:

- Debtors Management

- Creditors Management

- Trading Stock / Inventory / Materials

Management• N.B. for decisions relating to management

decisions

•

Cost Management

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Management of Materials

4 Basic Activities

Anticipating materials requirements

Sourcing and obtaining materials

Introducing materials into the organisation

Monitoring the status of materials as a

current asset The ultimate goal of all of this is to

maximise the profit of the company

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Stock Piling  – Categorisation of

stock Normal Stock 

Buffer Stock  – usage is erratic

Strategic stock  Speculative Stock 

Stock-in-transit

Economical and Technical Stock 

Over-stocking and under-stocking

Average Stock 

Maximum Stock 

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Acquisition of Stock

What is required?

How much is required? ( Do I require

safety stock) When is it required?

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Safety Inventory

Maximum usage x ( maximum lead time – normal lead time)

Example:

- Average weekly usage = 20 units

- Order period = 2 weeks- Order size = 80 units

- Maximum order period = 3 weeks

- 20 units ( 3 weeks - 2 weeks)

- Safety stock = 20 units

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Order Point

The level of inventory reached before placing a new order is knownas the order point

The order point can be calculated as follows:

( Order period x normal usage) + safety inventory Based on above example:

Order point = ( Order period x normal usage) + safety inventory

( 2 x 20) + 20

= 60 units

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Determining the order size

Economic order quantity

Optimal order size that needs to be placed

EOQ = √2 FS / CP 

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Ordering the inventory

Procurement function within a business

Negotiate payment terms, check reliability,lead times, discount policies, etc.

Written orders should be placed with PO

number to serve as proof and authorisationhas been given for the purchase with allrelevant details

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Storage of Inventory

Goods Received Voucher

Storage in a safe place – usually a warehouse

The layout of the warehouse is N.B. should not inhibit or hinder the

flow of inventory The following factors should be taken into account when the layout

of the factory is considered:

Allocation should be done according to a predetermined classifcationpolicy

Safety aspects should be considered

Unique characteristics of each product must be taken into account

Fast moving inventory should be kept in a place that is easilyaccessible

Entrances should be kept to a minimum

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Issuing of Stock

Importance of stock requires tight andformal processes

Stock should only be issued on the basis of a requisition

Provides authorisation for the storekeeper

Source document for accounting entries

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Recording Stock Movements

and Valuation of Inventory 2 Methods of recording stock movements:

Perpetual Inventory Method – maintains

on-going records of stock levels Periodic Inventory Method – no on-going

records held

Stock counts done – Stock and Purchasesaccounts

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Stock Valuation Methods

LIFO – Last in first out

FIFO – first in first out

Weighted average cost

Standard Price

Market Price Method