Material Control

Direct material cost includes the cost of material, indirect taxes, Transport, storage and delivery charges, packing and container charges less quantity discount and trade discount

Direct Material Direct materials are those materials which are

directly identifiable and traceable as a part of the final product. ◦ It may be raw material like wood used in making

tables and chairs, ◦ Component parts used in a product ,e.g., tyres and tubes in a car, ◦ Any material used in primary packing of the products, like cans for tinned food and drink.

Materials cost constitutes a prime part of the

total cost of production of manufacturing firms. There fore it becomes very important to have efficient control of materials. Materials control basically aims at efficient purchasing of materials, their efficient storing and efficient consumption.

Material stock control Ordering Purchasing Receipt Storage Issues

Bill of material It is prepared by the Engineering/ Planning

department. Bill of material acts as an authorisation to the stores department in procuring the materials and the concerned department in material requisition from the stores. It is circulated to the following departments: Purchase Department  Stores department  Cost Accounts department  Production department 

Bill of material

Job No. : Si.No: Job starting date: Date: Job date: Si. Finishing Materia Descripti No. l code on

Requested by ____________

Size/unit Qty. Issues Particulars s Date Qty. Rate (Rs.)

Checked by __________

Amount (Rs.)

Approved by ___________

Purchase Requisition Note (prepared by stores) Si NO.: Materia Descr Size l code iption

Date : Qt y.

Job/Deptt Delivery Purchase Order . Date Place No Rate Supplie . r

Authorised signature ______________

Other documents Purchase order Material Inspection Note Goods Received Note Stores/Material requisition note Material Transfer note Material return Note Bin Card Stores ledger

Bin card Bin No. : Level: Material code No. : : Material Description : Receipts Level : Date Stores G.R.N. Ledger Qty. No. : Date No Units

Maximum Minimum level Re-Order Balance Remarks

Issues Req. No

Qty. Units

Qty. units

Methods of Pricing Material Issues: Actual Cost method First in First out method (FIFO) Last in First out method (LIFO) Simple Average Cost Method Weighted Average cost method Standard Cost Method Base Stock Method Market Price Method

ILLUSTRATION-1 From the following information prepare a Stores Ledger Account under FIFO and LIFO method: 1-1-2003 5-1- 2003 10-1-2003 12-1-2003 15-1-2003 19-1-2003 22-1-2003 27-1-2003 31-1-2003

Opening Stock 1000 units at Rs. 5 each. Purchased 900 units at Rs.6 each. Issued 1200 units. Purchased 800 units at Rs. 6.20 each. Purchased 300 units at Rs.6.40 each. Issued 400 units. Issued 600 units. Purchased 200 units at Rs.6.50 each. Issued 600 units.

LIFO AND WEIGHTED AVERAGE METHOD Prepare ‘stores ledger’ and enter the following

transactions adopting the FIFO and weighted average method of pricing out issues:

Sept.1 unit 5 7 9 19 24 27

Opening balance : 50 units at Rs.30 per Issued 2 units Purchased 48 units at Rs. 40 per unit Issued 20 units Purchased; 76 units at Rs. 30 per unit Received back 19 units out of the units issued on 9th September Issued 10 units

A case of shortage of inventory  From the following information select the most suitable

method of pricing materials issues and write up a Stores Ledger Card based on LIFO method: Jan.2003 1 Opening balance 24000 kg @ Rs.7500 per ton. 1 Purchased 44000 kg @ Rs.7600 per ton 3 Issued 10000 kg. 5 Issued 16000 kg. 12 Purchased 10000 kg. @ Rs.7800 per ton. 13 Issued 24000 kg. 18 Issued 25000 kg 22 Purchased 50000 kg. @ Rs.8000 per ton 28 Issued 20000 kg. 31 Issued 22000 kg.

Economic Order Quantity(EOQ)

Economic Order Quantity (EOQ) EOQ =

2 x Annual Consumption X Ordering Cost Storage(holding)cost per unit Storage (holding) cost per unit = Cost per unit X Storage cost(%)

Fixation of Inventory levels:  Re-order level:

= Maximum usage X Maximum lead time or = Minimum stock level + (Average or Normal usage X Average lead time) Minimum stock level = Re-order level – (Average usage X Average lead time) Maximum stock level = Re-order level + Re-ordering quantity – (Minimum usage X Minimum lead time) Danger level = Average usage X Maximum re-order period for emergency purchases Average stock level = Minimum stock level + ½ of Re-order quantity or = ½ (Minimum stock level + Maximum stock level)

Inventory Control ABC Analysis: Under this technique, the items in inventory are classified according to value of usage. This method divides inventory into three classes: A, B and C. Items in class ‘A’ constitute the most important class of inventories so far as the proportion (or percentage) in the total values of inventory is concerned. Items in class ‘B’ constitute an intermediate position while those in item ‘c’ are quite negligible.  Two Bin System  Perpetual Inventory system  Continuous Stock taking  Periodic Stock taking system  VED analysis  FNSD Analysis  Pareto Analysis  JIT