Sample problems with solutions on Material levels

Problem 1:

Normal usage: 100 units per day

Maximum usage: 130 units per day
Minimum usage: 70 units per day
Economic Order Quantity:5000 units
Re-order Period: 25 to 30 days
From the above information you are required to calculate:
(i) Re-order Level
(ii) Minimum Level
(iii) Maximum Level

Solution:
(i) Re-order Level = Maximum daily usage × Maximum Re-order period
Reorder Level = 130 × 30 = 3900 units
(ii) Minimum Level = Re-order Level – Average usage for average re-order period.
Minimum Level = 3900 – (100 × 27.5)
Minimum Level = 3900 – 2750 = 1150 units
(iii) Maximum Level = Re-order Level – Minimum quantity used in re-order period + Economic
Order Quantity
Maximum Level = 3900 – (70 × 25) + 5000
Maximum Level = 3900 – 1750 + 5000 = 7150 units

Problem 2:
Two types of materials A and B are used as follows:
Minimum usage: 20 units per week each
Normal usage: 40 units per week each
Maximum usage: 60 units per week each
Re-order Quantity (EOQ): A 400 units, B 600 units
Reorder Period: A: 3 to 5 weeks, B: 2 to 4 weeks
Calculate for two types of materials:
(a) Ordering Point or Re-order Level
(b) Minimum Level
(c) Maximum Level
(d) Average Stock Level
Solution:

(a) Ordering Point or Re-order Level = Maximum usage × Maximum re-order period
Ordering Point of Material A = 60 × 5 = 300 units
Ordering Point of Material B = 60 × 4 = 240 units
(b) Minimum Level = Ordering Point – (Normal usage × Normal re-order period)
Minimum Level of Material A = 300 – (40 × 4) = 140 units
c) Maximum Level = Ordering Point – (Minimum usage × Minimum re-order period) + EOQ
Maximum Level of Material A = 300 – (20 × 3) + 400
Maximum Level of Material A = 300 – 60 + 400 = 640 units
Maximum Level of Material B = 240 – (20 × 2) + 600 = 800 units
(d) Average Stock Level = ½(Minimum Level + Maximum Level)
Average Stock Level of Material A = ½(140 + 640) = 390 units
Average Stock Level of Material B = ½(120 + 800) = 460 units

What is lead time?

The timing difference between placing an order with the supplier and arrival of the goods is known as
the lead time.

What is safety stock (also known as buffer stock)?

In some scenarios, it may be unlikely that the reorder level could be estimated accurately. This is
because the demand and the lead time of the goods could differ than the usual trends and in that case
the business may run out of stock. So, a level of safety stock is set to avoid such a condition. It is also
known as buffer stock.

OBJECTIVES OF MATERIAL CTRL

1.ENSURING UN-INTERRUPTED PRODUCTION

The main objective of the material control is to ensure the un-interrupted supply of materials for
smooth flow of production. Material control helps in making available the right type of materials at
right time. For this purpose, various material levels are set up such as:

Maximum level

Minimum level

Re-order level

Danger level, etc.

The setting up the materials levels and following them ensures the availability of materials at all the
time and non-stoppage of production process.

2.PROVISION OF REQUIRED QUALITY OF MATERIALS

Material control is also associated with acquiring the quality material for production process. The
material control department ensures the supply of quality material from the supplier which is to be used
in the production process. As if the quality of material is not proper, it will ultimately affect the
goodwill of the concern.

3.MINIMISATION OF WASTAGES AND LOSSES OF MATERIALS

Materials constitute the major source of cost to the enterprise. Material control system is being
installed in the enterprise to ensure its minimal loss and wastages. For this purpose, various techniques
are used such as:

ABC analysis (Always Better Control)

VED analysis (Vital Essential Desirable)

ABC analysis is used to classify the materials on the basis of its importance and then applying the
required degree of control.

VED analysis categorize all the material of the business concern into three categories i.e. vital,
essential and desirable and on the basis of this, the control is exercised on materials.

The minimization of losses and wastages of materials ultimately leads to cost reduction and cost
control.

4.CONTROL INVESTMENT IN STOCK OF MATERIALS

Material control system ensures no under-investment or over-investment in stock keeping. The main
aim is to make available only that amount of raw materials which are needed. There should be no
holding of idle stock. This may lead to lock up of large amount of capital. Efficient material control
system aims at keeping the optimum level of stock at all the times. This may be done by using the
techniques like:

Economic Order Quantity

Material Levels
Perpetual Inventory System

5.AIMS AT FIXING THE RESPONSIBILITY

In a materials control system, the personnel is required to perform the duties of keeping the records
regarding materials receipt, issue, inspection etc. the material control system aims at fixing the
responsibility of operating units and individuals connected with the handling of the materials.

6.TO KEEP THE RECORDS

Material control system ensures the proper record keeping of the materials purchased, stored, issued
and received. This can be made possible by adopting the perpetual inventory system. For keeping the
records, following systems are used:

Bin Card

Stores Ledger

PERPETUAL INVENTORY SYSTEM

Perpetual Inventory System refers to a system of maintaining such records as will reflect the receipts,
issues and balance of all items of materials in store all the times.

ACCORDING TO CIMA , UK

“Perpetual Inventory System is a system of records maintained by the controlling department, which
reflects the physical movement of stock and their current balance.”

The records maintained in a manufacturing concern for material accounting are divided into two parts:

Bin Card: It is maintained in the stores department and shows the quantities of materials received,
issued and balance in hand after each receipt and issue.

Stores Ledger: It is maintained by costing office and deals with the quantities and values of materials
received, issued and balance in hand.

ABC ANALYSIS

ABC analysis is a technique that is followed for the purpose of exercising control over materials
according to their importance or value.
Category ‘A’ consists of materials which consists 5% to 10% of the total items in a store and represent
70% to 85% of the total store value. It represents less items with high value.

Category ‘B’ consists of materials which consists of 10% to 20% of the total items in a store and
represent 10% to 20% of the total store value. This category represents medium quantity and value.

Category ‘C’ consists of materials which consists of 70% to 85% of the total items in a store and
represent 5% to 10% of the store value. This category represents high quantity but small value.

It is also known as Always Better Control method since it aims at obtaining maximum control over
materials and minimum cost of control.

VED ANALYSIS

This technique of material control is used in connection with the spare parts. Under this

‘V’ stands for ‘Vital’

‘E’ stands for ‘Essential’

‘D’ stands for ‘Desirable’

Vital spare parts are those parts, the unavailability of which will interrupt the production process for
quite some time.

Essential spare parts are those spares, the absence of which cannot be tolerated for more than few hours
or a day.

Desirable spare parts are those spares which are needed but their non-availability for even a week or so
will not lead to interruption in production.

MATERIALS TURNOVER

Turnover of materials refers to movement into and out of an organization. It can be calculated by
comparing balance of stores with the total issues or withdrawal during a particular period of time.

Material Turnover Ratio= Value of materials consumed during the period/ value of average stock
Average stock= Opening stock+ Closing stock/ 2

High material turnover ratio indicates that the material item is fast moving and exhausts easily.

Low material turnover indicates that the material items are slow moving and organization should not go
for over stocking of materials.