MATERIALS MATERIALS

Physical Commodities used to make final end-product Ensuring supply of Primary

material at Proper objective is to
Important part of the manufacturing cost – 55% Material Control time minimise
(approx.) Quality & Quantity material cost
Proper Planning & Control is must Primary
Involves objective is to
Materials specifically required for a
Inventory Control techniques of minimise
process / production / job
Direct Materials Packing items
maintaining stocks aggregate of
at minimum cost carrying cost,
ordering cost
Materials having minor importance and
and stock-out
Indirect Materials not directly traceable - Soap cost.
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Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6 Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6

MATERIAL CONTROL - ADVANTAGES FUNCTIONS OF DIFFERENT DEPARTMENTS RELATED

TO MATERIAL

Purchase Dept

Eliminates waste Rec. & Insp. Dept
Purchase Dept is responsible for

Reduced risk of fraud & theft efficient purchase of all necessary

Perpetual Inventory goods of proper quality to -Receive all incoming materials
produce, without interruption. -Verify items – count, weight,

Reduces investment in Inventory etc

Reduces the cost of storage -Receive purchase requisitions - Inspection of material - quality

Prevent production delays -Invite quotations or tenders - Deliver goods to proper point
- Selection of suppliers -Inform to Purchase & Accounts
- Issue of PO to Selected supplier Dept. all facts
-Follow up
- Approve purchase invoice for
payment
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Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6 Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6

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FUNCTIONS OF DIFFERENT DEPARTMENTS RELATED Purchase Procedure : Purchase Requisition :
TO MATERIAL It is a form used as a formal request
Contents : to the purchasing department for
Stores Dept. Production Dept. -Requisition Number procuring goods or services
-Check & Accept materials -Make material requisition -Date
from the receiving department timely (Quantity & Quality) -Department
-Identification of the material, -Check & verify received -Code Number
code number and place in the material -Description No. of Copies :Generally three
respective bins. -Keep proper record of -Original to Purchase Dept.
-Quantity
- Issue of materials materials received and charged -First Copy to Prodn. Ctrl. Dept.
- Record of receipt & Issue to production -Delivery Date
-Last Copy retain in department
-Ascertainment of different - Prepare material return note -Types of Requisition
stock level for excess material -Signatures
-Prepare material transfer note -Qty. in stock & Avg.
-Prepare reports on scrap Consumption – By
stores
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Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6 Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6

Purchase Procedure : Purchase Procedure :

Bill of Materials :
Contents : Selection of Possible Sources of Supply :
A Specification of material is a complete
-Requisition schedule of materials, parts, etc. required
Number
for a particular job/work order issued by
-Date the drawing office together with necessary
-Department drawings & instructions -Inquiry and call for tenders on Schedule of Quotations :
quotations Comparative Statement
-Code Number
Advantages of BOM : -Analysis of tenders called for
-Description Periodic Evaluation of
-Quantity Purchase Dept. – As purchase requisition -Selection of appropriate source Supplier(Vendor’s Rating)
-Delivery Date Stores Dept. – Issue control based on BOM
Production Dept. – Smooth Functioning
-Signatures
Accounts Dept. – Costing is easier
-Order No.

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Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6 Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6

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 Purchase Procedure : Purchase Order :
Receiving & Inspecting Material :
Purchase Order : Is a request Contents :
made by the purchaser to a Receiving & Inspecting Material : After inspection and checking
-Name of the buying concern,
supplier to deliver certain goods serial number and date of order preparation of GRN
of requisite quality and quantity -Name & Address of the Supplier
at the terms and conditions -Description of material &
agreed upon. No. of Copies :Generally Contents :
Quantity
-To Purchase Dept. -The serial no. and date
-Date & Place of Delivery
No. of Copies :Generally -To the accounting and stock -Supplier’s name and address
-Price, Discount & Terms of control dept.
-To Supplier Payment
- To the dept. which initiated -Description, code and Quantity
-To Receiving Dept. -Packing & Despatching requisition -Order no., Invoice no. and date
-To Accounts Dept. Instructions
- To the store keeper -Inspection report
- To the dept. which initiate -Signature of Purchase Officer
- Retained in Purchase Dept. -Bin no.
requisition
- Retained in Purchase Dept.
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Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6 Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6

Checking Inward Invoices and Accounting for Purchase : Stores Routine:

-Purchase Requisition Stock Levels

- Purchase Order
Stores Keeping Stores Location & Layout
- GRN
- Testing Report -Ensures adequate supply -Should be near to
- Credit/Debit Note transportation facility
- Prevents under stocking and
over stocking - Easily accessible to all depts.
- Identifications and locations - Situated at place to reduce
Debit Note : is issued when materials received are less than the quantity of items without delay internal transport cost
ordered or do not conform to stated specifications. - Prompt issue of material - Space into racks & racks into
bin
- Protection from loss and
Credit Note: is issued material received is in excess of quantity ordered wastage - Proper numbering of bins
and it is expected. - Protection against pilferage, - Layout as per future
theft and fire expansion plan
- Minimise the storage cost - Similar type of products at
same place & bulky material at
near to user dept.
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Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6 Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6

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 Stores Routine: Stores Keeping Stock Levels

Stores Location & Layout Reordering Level – (Normal

Stock Levels
Minimum Stock Level Usage per period x Avg.
Reordering Level + Delivery Time)
Maximum Stock Level -Avg. Rate of Consumption
Reordering Quantity – Min.
Consumption - Lead Time
- Reorder level
-Rate of consumption of material
Min. Consumption Maximum consumption
- Storage space available Reorder Level
= (Min. Cons. Per during the period x
- Lead time from the date of placing the order
Period x Min. Maximum period required
- Nature of material Reordering Period) Slightly more than minimum
stock level to guard against : for delivery
- Working capital required
- Inventory carrying cost - Abnormal Usage
- Market Trends - Abnormal delay in supply Below the minimum stock
- Govt. Restrictions level Avg. cons. X
- EOQ Danger Level Emergency delivery time
- Risk factor – Fire, evaporation, obsolescence
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Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6 Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6

From the following figures relating to two components X & Y compute -Receipt of Material
reorder level, minimum level, maximum level and average stock level : Other Functions of Stores - Issue of Material
Comp. X Comp. Y - Return to Stores
Maximum Consumption for Week 75 units 75 units
Avg. Consumption for Week 50 units 50 units -Bin Card
Stores Records - Stores Ledger
Minimum Consumption for Week 25 units 25 units
Reorder Period 4-6 Weeks 2-4 Weeks
Bin Card Stores Ledger
Reorder Quantity 400 units 600 units
-Maintained by Storekeeper -Maintain by costing dept.
1. Reorder Level 75x6=450 units 75x4=300units - Quantitative details only - Quantity & Value both
- Entries at the time of trans. - Posted after transaction
2. Minimum Level 450-(50x5)=200 300-(50x3)=150
- Inter dept. transfers do not - Inter dept. transfers appear
3. Maximum Level 450-(25x4)+400 300-(25x2)+600 appear for costing purpose
=750 units =850 units
4. Average Level (750+200)/2 (850+150)2 Quantity balances of both Bin Card & Stores Ledger should tally
475 units 500 units
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Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6 Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6

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 Inventory Models for Replenishment of Stores Inventory Control Techniques

1. Fixed Order Quantity System – whenever the stock

reaches at reorder level order of fixed quantity i.e. EOQ
2. Replenishment System – where reorder time is fixed but Physical Inventory Verification ABC Analysis
order quantity is the difference between maximum stock
By Counting, Weighing, EOQ
level and stock in hand on the date of review. Measuring or Estimating
3. Modified replenishment system – where reordering Inventory
quantity is variable but it should not be below the fixed Perpetual Inventory System Turnover
lower limit, when the order is placed at a fixed period of
time. i.e. combination of above with lower limit. Periodic Inventory System Input – Output
Ratio
4. JIT Purchasing – Purchasing just before use. Close
relationship with supplier. The main aim is to reduce stock Inventory Turnover = RM Consumed / Avg. Inventory
level. Input & Output Ratio = Input of RM / Output
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Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6 Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6

Inventory Control Techniques

Illustration: Plan of ABC Selective Control :
The following information is obtained from the accounts of XY
ABC Analysis company ltd.:
Item No. Units Cost/unit Item Units Cost
1 7000 5.00 7 60000 0.20
% of Items - 10 % of Items - 20 % of Items - 70 2 24000 3.00 8 3000 3.50
% of Value - 70 % of Value - 20 % of Value - 10 3 1500 10.00 9 300 8.00
A Items – High B Items – Moderate C Items – Low 4 600 22.00 10 29000 0.40
Consumption Value Consumption Value Consumption Value 5 38000 1.50 11 11500 7.10
-Very Strict Control - Moderate Control - Loose Control 6 40000 0.50 12 4100 6.20
A-Rs.50000 & above, B-Rs.15000-Rs.50000, C-Below Rs.15000
- V. Low Safety Stock -Low Safety Stock -High Safety Stocks
- Maximum Follow-up - Periodic Follow-up - Follow-up in
exceptional cases
- Rigorous Value - Moderate Value
Analysis Analysis - Minimum Value
Analysis
- Must be handled by - Can be handled by
Sr. Officer middle management - Can be fully delegated
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Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6 Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6

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 Statement of Total Cost & Ranking :
Item No. Unit Cost/unit TC % of Ranking

1 7000
Rs.
5.00
Rs.
35000
TC
9.84 4
Economic Ordering Quantity – A technique of Inventory Control
2 24000 3.00 72000 20.24 2
3 1500 10.00 15000 4.22 7
4
5
600
38000
22.00
1.50
13200
57000
3.71
16.02
8
3
An EOQ is the number of units per order to be purchased which
6
7
40000
60000
0.50
0.20
20000
12000
5.62
3.37
6
9
will minimise both carrying cost and ordering cost.
8 3000 3.50 10500 2.95 11
9
10
300
29000
8.00
0.40
2400
11600
0.67
3.26
12
10
Carrying Costs : are costs which are incurred on the
11
12
11500
4100
7.10
6.20
81650
25420
22.95
7.15
1
5
maintenance of materials in the stores and include clerical,
355770 100.00
handling and transportation costs in relation to stock, interest
Statement Show ing % of total items and of total cost:
Category Item no. Total % of tot Cost % of tot on capital blocked in stores, obsolescence, pilferage, loss on
Items Items Rs. Cost
A 11 81650 holding stocks, rent, insurance,etc.
2 72000
5 3 25 57000
210650 59.21 Ordering Cost: are the costs of getting a material into the
B 1 35000
12 25420 stores and are incurred each time an order is placed for the
6 20000
3 4 33.33 15000 purchase of the item.
95420 26.82
C 4 13200
7 12000 E = 2UO/C
10 11600
8 10500
9 5 41.67 2400
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49700 13.97 Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6
355770 100.00

Economic Ordering Quantity – Illustration Economic Ordering Quantity – Illustration

In Value : Tabular Method :

Annual Consumption = Rs.810000, Ordering Cost : Rs. 10/order, Annual Computation of Economic Order Quantity:
Annual No. of Units/ Avg. Carrying Ordering Total
Carrying cost = 20% of consumption
Usage Orders Order Inventory cost @ Rs.4 Cost Rs.100 Annual
E = 2UO/C = 2x810000x10/0.2 = Rs.9000 per Units per unit on per order Costs
annum Avg. Inventory
Rs. Rs. Rs.
800 1 800 400 1600 100 1700
In Units : 2 400 200 800 200 1000
A Refrigerator manufacturer purchases 800 units of a certain component @ 3 267 133 533 300 833
4 200 100 400 400 800
Rs. 30/unit from outside supplier. The annual usage is 800 units, order
5 160 80 320 500 820
placing and receiving cost is Rs.100 and cost of carrying one unit for one 6 133 67 267 600 867
year is Rs.4. Calculate EOQ. 7 114 57 229 700 929
10 80 40 160 1000 1160
E = 2UO/C = 2x800x100/4 = 200 units i.e. 4 orders
per annum Here Rate of material is constant i.e. Rs.30/unit. In total cost it will be added. But if
the rates are variable then one column for rate and after that EOQ will be determined.
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Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6 Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6

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 INVENTORY TURNOVER
Input Output Ratio
Illustration: Material X Material Y
Rs. Rs. Illustration:
Opening Stock 1000 1200 Input of Raw Cotton - 100Kg
Purchases 5200 4600 Finished Cloth - 90Kg
Closing Stock 600 1600 Cost / Kg. Of Raw Cotton - Rs. 4.50
Inventory Turnover :
Mtrl. X Mtrl. Y
Rs. Rs.
1 Materials Consumed:
Opening Stock 1000 1200
Add: Purchases 5200 4600 Input Output Ratio = 100 Kg. / 90 Kg. = 1.11/ Kg.
Total 6200 5800
Less: Clsg. Stock 600 1600 RM Cost of Finished Output/Kg = Rs. 4.50 x 1.11 = Rs. 5/kg
RM Consumed : 5600 4200

2 Avg. Inventory Held 800 1400

3 Inventory Turnover = 1/2 7 3

Inventory Turnover 52 122 25 26

Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6 Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6
Period (Days) = 365 / 3

Material Cost

Basic Price of Materials & Valuation of Inventory :

Adjustments for : Actual Cost
Discounts Lower of the Cost / Market
Charges for transport Price
Cost of Containers Replacement Cost
Sales Tax, excise duty,
Insurance, etc.
Valuation of Issue :
FIFO
LIFO
Avg. Price Method

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Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6