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Chapter 6

Material & Labour

Topics covered in this lecture

Management of materials Valuation of Materials Labour control Labour remuneration

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

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

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

Acquisition of Stock
What is required? How much is required? ( Do I require safety stock) When is it required?

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

Order Point

The level of inventory reached before placing a new order is known as 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

Determining the order size

Economic order quantity Optimal order size that needs to be placed EOQ = 2 FS / CP

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 authorisation has been given for the purchase with all relevant details

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 classifcation policy 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 easily accessible Entrances should be kept to a minimum

Issuing of Stock
Importance of stock requires tight and formal processes Stock should only be issued on the basis of a requisition Provides authorisation for the storekeeper Source document for accounting entries

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 Purchases accounts

Stock Valuation Methods

LIFO Last in first out FIFO first in first out Weighted average cost Standard Price Market Price Method