materilas controlswip

8/8/2019 MATERILAS CONTROLSwip

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PREPARED BY

Mr. Madhav Verma

Unit 2/Material control/Mr.Madhav Verma 1


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Chapter check list:-y Material/inventory control

y Concepts and techniques

y Classification and codification of materials



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Materials meaningy It refers to raw materials used for production ,sub-

assemblies and fabricated parts.

y I

t refers to all commodities that are consumed in theprocess of manufacture.It is defined as any thing thatcan be stored,Stacked or stockpiled.

y It can be classified into two

materials

Direct materials Indirect materials



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Direct materialy Are those materials whose consumption can be identified

with specific production units and which usually becomepart of the finished product.

y It includes;-y Component parts used in a product. E.g. Tyres and tubes in

a car, picture tubes in a television etc.

y Any materials used in the production but wholly consumed

in the production process e.g. fertilizer used in growingplants.

y Any primary packing materilas, i.e., any container soldwith the final product,e.g., cans for tinned food and drink,bottles for beer,etc.



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Indirect materilasy Are those which cannot be conveniently identified

with individual cost units examples are coal, grease

and oil, soap,sandpaper etc.



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inventory:y According to Accounting Principles Board- the

aggregate of those items of tangible personal property

which1. are held for sale in the ordinary course of business,

2. Are in the process of production for such sales

3. Are to be currently consumed in the production of

goods or services to be available for sales



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Material controly Why we need material control?

y Because it consist of a large portion of the cost. thus asystem has to be in place which ensures efficientpurchasing of materials, their efficient storing and efficientuse or consumption.

y Meaning:-

y Material or inventory control may be defined as systematic

control and regulation of purchase, storage and usage ofmaterials in such a way so as to maintain an even flow ofproduction ,at the same time avoiding excessive investmentin inventories. Efficient material control cuts out losses andwastes of materials that otherwise pass unnoticed.



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Objectives of material controly No under stocking: right thing will be available at the

right time.

y No over stocking: only required quantity is purchasedy Economy in purchasing:

y Proper quality:

y Minimum wastage: store materials in a safe place.

y Information about materials in terms of authorizedissue, properly charged to various departments

y Refer Jawahar lal orArora



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Technique of inventory control.y Various techniques commonly used for inventory control are

listed below:

1. ABC technique.

2. Stock levels- minimum.3. Economic order quantity (EOQ)

4. Proper purchase procedure.

5. Proper storage of materials.

6. Inventory turnover ratio to review slow and non-movingmaterials.

7. Perpetual inventory system.

8. Fixation of material cost standards (used in standard costing)

9. Preparation of material budgets.



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ABC Technique.y ABC technique is value based system of material

control. In this technique, materials are analyzed

according to their value so that costly materials areclassified according to their value-high, medium andlow values, which are known As A,B,C itemsrespectively.ABC technique is sometimes called Alwaysbetter control method.

y Aitems-these are high value items which may consistof only a small percentage of the total items handled.On account of the most experienced personnel.



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y B items-these are medium value materials whichshould be under the normal control procedures.

yC items-these are low value materials which mayrepresent a very large number of items. Thesematerials should be under simple and economicalmethods of control.

y

The point of classifying stocks into A,B, and Ccategories is to ensure that material managementfocuses on Aitems where sophisticated control.

y Thus, ABC is a technique of selective control



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Advantagesy Closer and stricter control can be exercised on those

items which represent large amount of capital

invested.y Investment in inventory is regulated and funds can be

utilized in the best possible way.

y Economy in stock carrying costs.

y It helps in maintaining enough safety stock for Ccategory items

y Selective controls helps in maintaining high stockturnover rate.



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2.Economic order quantity.y It a scientific method for calculating optimum order

quantity so that carrying cost and storage cost are

brought to minimum.y Formula of EOQ

y Were,

y U= annual usage /consumption in units

y O= cost of placing ordery I=percent cost of carrying inventory

y C=Cost per unit of materials

CI

OU

.

..2



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Stocks levels.y In order to avoid over stoking and under stocking,

most of the large companies adopt a scientificapproach of fixing stocks levels. These levels are:-

1. Maximum level

2. Minimum level/Safety stock

3. Re-0rder level/re-order point

4. Re-order quantity/EOQ

y By adhering to these levels, each items of materialswill automatically be held within appropriate limitsof controls.



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Maximum levely Stock should not be held more then this level

formula:

maximum level=re-order level+ re-order quantity

(min rate of consumption min re-order period)



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Minimum level/safety stocky It is that level below which stock should not normally

be allowed to fall

minimum level = reorder ( normal consumption . normal reorder period)



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Re-order level/ Re-order pointy This is that level of material at which purchase

requisition is initiated for fresh supplies.

y

Or if you reach this level new purchase is made.y Reorder level =Max con Max re-order period



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Danger levely Danger level is a level at which normal issues are

stopped and materials are issued for important jobs

only.y This level is fixed below min stock level.

y Danger= normal consumption max.re-order period .. under emergency conditions.



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Average stock levely Average stock = ( minimum level + maximum level)

y 2

y Or,y Average stock level =minimum level + reorder quantity

y 2



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Inventory Turnover Ratioy Indicates the speed with which inventory is consumed

y Ahigh ratio indicates fast moving stock, low ratio indicates slow moving stock

y Inventory Turnover Ratio = Materials Consumed / Average Stock Held

expressed in timesy Materials Consumed = Opening Stock + Purchases Closing Stock

y Average Stock = (Opening Stock + Closing Stock)

y Days of Inventory = 365 / Inventory Turnover Ratio

yCan be computed for stock categories to determine fast moving, slow moving,dormant or obsolete stock

y Ideal level is determinedwith reference to level of other firms or the industry

average or with the budgeted inventory level.



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y Can be computed for stock categories to determine fast moving, slowmoving, dormant or obsolete stock

y Ideal level is determined with reference to level of other firms or theindustry average

y Slow, non-moving, and obsolete and obsolete materialy Slow moving is that material which have a low turnover.y Dormant/ non-moving are those material which have no demand at

present ,say due to seasonal; demand.these material may be required infuture.

y Obsolete materialy Represent those which have become useless with the passage of time.y Detection of slow and non moving material find or set a standard ratey = budgeted consumptiony Average stock levely Compare this level with the actual stock turn over ratio.



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Purchase of materialsy It is the function of buying materials, generally

supplies, tools .office stationery and other items. The

essential of efficient purchasing are right quantity,right quality ,right time ,right place, right sources anddelivery at the right place.

yVarious methods of purchase are.

y

Just in time purchasing(JIT)y Is a method of purchasing materials immediately

before they are required for use in production.

y Purpose is to reduce stock levels.



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Centralized and decentralized

purchasingy Centralized purchasing :- here purchase are made by one

single purchase department.

y

Decentralized purchasing:- here purchase is done by eachbranch or department.

y Advantages

y Specialization and expert purchasing staff can beconcentrated in one department

y Higher traded count ,easy payment etc

y Standardization of quality of raw materilas is faciliated

y Better control over purchasing.



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Disadvantagey Separate department has to be maintained.

y Not suitable for branch located in far of distance.



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Purchase procedure.y Procedure may differ from firm to firm.

y Purchase are initiated through purchase requisition.

y Purchase requisition is a form used as a formal request topurchase department to order goods or services.

y Inviting tenders and selecting suppliers.

y Preparation and execution of purchase order.

y Receipt of materilas

y Inspection and testing of materialsy Debit note are issued upon the supplier in the respect of

rejected materilas

y Passing invoices for payments.



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Classification and codification of

materialsWhy classify and codify..

Because the name and description of materials are often

long and vague. in order to avoid length and ambiguityin description and names of materials, a symbol maybe assigned to each items of materials which is knownas a code. Codification is the procedure of systematic

assignment of symbols for each items of store. Suchcodes may be either numeric, alphabetic or acombination of both.

These are short names of materials.



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y Classification of materilas refers to grouping of materilasaccording to their nature in suitable categories .e.g.copper, iron , aluminimum may be classified as metals.

y Advantage

y Duplication in description is avoided as each code refers toonly one type of items.

y Clerical effort is reduced as length in description isminimized.

y Secrecy of material used in production is maintained

y Coding is essential in mechanized accounting.



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Basic principal of coding.y Each codes should be unique.

y Codes must be clear and identify materials.

y Codes should be brief.y Elastic.

y Mnemonic..that is easy to remember.



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System of codingy Numerical and decimal.

y Herr number are allotted to each items. And subgroup

are indicated by decimal.y E.g.


Maingroup

sub groups sub division of subgroups

Coal 31 Copper sheets 33.1 copper bar grade 1 33.21

Wood 32 Copper bras 33.2 copper bar grade 2 33.22

Copper 33 Copper wire 33.3 copper bar grade 3 33.23


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Alphabetic or Mnemonicy Items are denoted by combination of alphabets


Name of items codes

Mild copper bar MCBCast iron sheet CIS

Stainless steel wire SSW


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Alpha numericaly Here items are denoted with the use of alphabets and

numbers.


items codes

Mild copper bars of 6length

MCB6

Toughened steel tubes of diameter

TST34

Brass strips of thickness BS14


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y Codes of materials should appear on all documentsrelating to the movement and use and should be

marked against appropriate bins..



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Store recordsy Perpetual Inventory Records. This records show the

movement of inventory. That is receipt of materials,

issues of materilas to the production department andalso balance in stock.

y Documents. The documents are used to authorizemovement of materilas into and out of stores.



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Bin card ( stock card)y Abin is a container in which material is kept. separate

bin cards are maintained by the storekeeper for each

items of materials in store. The bin cards shows thedetails of receipt and issues of materilas and thebalance in stock at any time.

y This card is attached to the bin, drawer or anycontainer in which materilas is stored.

y It contains quantitative records of receipt, issues andclosing balances of material items in store.



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Two bin system.y In this system two bins are maintained for each of

materials. One bin constitute the minimum stock from

which materilas are issued and the other bin constitutethe minimum stock from which issues are made onlywhen stock in the regular bin is exhausted.

y The idea of two bin system is to provide automaticstock bin is already known. the idea of two bin systemis to provide automatic information about reachingminimum stock level.



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Store ledgery Is the ledger maintained in the cost accounting

department and is one of the basic records for materialaccounting in a cost system. it give the sameinformation as the bin cards in addition, it givesmonetary values of materials. Aseparate ledger foliosare maintained in it for each items of materials.

y It mainly has three section. i.e. receipt, issues andbalance.

y Sometimes an additional two section are added on-order and material reserved column.



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Inventory systemy There are mainly two inventory system.

y Periodic inventory system

y Perpetual inventory systemy Periodic inventory system :-here stock taking is

done at the end of the year. production is generallysuspended when this is done.

y Perpetual inventory system



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Perpetual inventory systemy It is the method of recording stores balance after each

receipt and issues to facilitate regular checking andobviate closing down from stock-taking.

y Perpetual inventory system is operated by taking thefollowing steps:

y Reconciliation of bin cards and stores ledger accounts.

yContinuous stock-taking

y perpetual inventory system is a system of keeping up-to-date records, the continuous stock-taking isphysical checking of records with actual stock.



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Advantage of perpetual systemy Helps avoid the long and costly work of physical

checking.

y As stocks figures are readily available at all times, theprofit and loss accounts and balance sheet can be

easily prepared at interim periods.

y Adetailed and reliable check on stores in obtained.

yIt helps to keep the stock with in limits.

y Asystem of internal check remains in operation allthe times



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Important lets revisey Two Bin System Bin has two parts, the smaller one for reorder stock level and

the other for the remaining material

y Issues are made from the larger bin, fresh order placed when it become empty,material used from smaller bin till replacement received and filled

y Periodic Inventory System Physical stock taking done periodically, requiringshut down

y Records then physically reconciled

y Perpetual Inventory System Records updated at every receipt and issue

y Done using bin cards and stores ledger

y Continuous stock taking done by random checks of the bin cards and storesledger



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Methods of pricing materials issuesy When materials are issued from stores to production

department, a question arises regarding the price atwhich materials issued are to be charged. this is

because the same type of materials may have beenpurchased in different lots at different lots at differenttimes at several different prices. this means that actualcost can take on several different values and somemethod of pricing the issue of materilas must beselected .this basic problem of pricing the issues ofmaterilas is illustrated in the following stores ledgeraccount.



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