ns: Or (Oct. 2011) piscuss the meaning and methods of Material Control, Control: Materials constit Materials " tute an import proportion ‘of company's funds is invested i Portant part of the cost of a product. A significant (Dec. 2016, Marks 15) tem of materials control can make a lar i The implementation of a proper a efcient system of material control wil be that whieh ores Renae Te eee material of right quality at the right time so as to maintain an even flow 0 aera eee fime avoiding excessive investment in inventories. joa production anid ct the same Thus, the term ‘Materials Controt’ refers to the system of controling and regulating purchase, storage and issue of materials in such a way so as to ensure uninterrupted flow of materials to producti and at the same time avoiding excessive investment in inventories.” In short, we can say that Materials Control is a system of taking care of inventories and their cost ftom the ste of procurement to the stage of their ultimate consumption. 2 Objectives of Material Control: ‘The following are the main objectives (or advantages) of material control system: (1) Continuous Availability of Materials: The primary and main objective of material control system is to ensure the continuous availability of all types of materials required in the factory so that the production is not interrupted for want or shortage of any material. (2) Lower Price: Another objective of material control system is to see that the all the materials and stores are procured on the most favourable terms and at the lowest possible price. (3) Proper Quality: While purchasing materials, it must be checked that it is of requisite quality. Quality of material should not be sacrificed at the cost of lower price. (4) No Under-stocking: Under-stocking may lead to materials running out of stock at a time when they are urgently needed. It may hold up or delay the production process. Delay or stoppage in production may prove very costly and may result in loss of profits. Thus, material control should ensure that there is no under-stocking. (5) Optimum Investments in Inventories: A good system of material control ensures optimum level of Investment in inventories. Over-stocking of materials should be avoided as it locks up working capital and causes high storage costs thereby resulting in loss of profits. (6) Efficiency Increase: The next objective of material control is to increase working efficiency of Production departments. Making available to the production departments the right quantity of Materials of right quality at a right time can increase their manufacturing efficiency. (7) Effective Utilisation of Materials: Effective utilisation of materials should also be the objective f a good system of material control. (8) Avoiding or Minimising Wastage: Another objective of material control is to avoid or minimise wastage at all stages like at the time of procurement of materials or at the time of its storage of at the time of its use in the factory. Efforts should be made to avoid or minimise losses of materials occurring due to various reasons like spoilage, pilferage, theft, leakage, ‘evaporation etc. Information about Materials: Providing necessary information to the management soot Hs availabilty of materials by keeping proper records of all inventory items should also 5 Objective of material control system. (10) Fixing Responsibility: The system of materials control mus fixed for various activities related to purchase, storage and handling (9) tbe such that a responsibility could of materials.TECHNIQUES / METHODS OF MATERIAL CONTROL The following techniques are commonly used by firms for material control: Use of Control Ratios Use of Budgetary Techniques Use of Perpetual Inventory Records and Continuous Stock Verification DETERMINATION OF VARIOUS STOCK LEVELS — (1) Re-order Level Re-order Level is also known as ‘Ordering Level’. It is the level at which purchase requisition jg initiated for getting the fresh supplies of stock items. This level is fixed somewhere above tte minimum stock level. As soon as the stock of a particular material in store approaches the re-order level, the storekeeper fills up a purchase requisition slip and sends it to the purchase department After that, the purchase department takes prompt action to purchase and replenish the stock. Formula for Computing Re-order Level: Re-order Level = ESS Maximum Consumption eS —— > Determination of Stock Levels ? > Economic Order Quantity e > ABC Analysis , > Just-in-time Inventory System ) > VED Analysis > Two Bin System > > > Re-order level is normally fixed by taking into account the following two factors: (i) Maximum rate of consumption. (ji) Maximum delivery period i.e. time gap between the date of issuing orders and the receipt materials. (2) Minimum Level It represents the minimum quantity of material which should always be maintained in stores so as 0 avoid the risk of stoppage of production due to shortage of materials. In other words, this is the level below which stock should not be allowed to fall except under abnormal conditions or in emergencies Ifthe stock of any particular material falls below the Minimum Level, there willbe af danger of stopp? of production and therefore, management should give top priority to the acquisition of its fest delivery. Minimum level is also known as ‘Safety Stock’ or ‘Buffer Stock’, Formula for Computing Minimum Level: Minimum Level’ = Re-ordering Level - (Normal Con: Chie + Re-ordering mn sumption x Normal Re-o a Level = (Average Rate of Consumption x Average Re-ordet Minimum level is fixed by taking into account the followin : (i) Nature of material, 9 factors: (ji) Re-order level. (ii) Normal rate of consumption of material. (iv) Normal lead time i.e, normal time required to get fresh delivery.MATERIALS. 53 ul A the storage space. P of company's funds in stores and at the same time saves Formula for Computing Maximum Level: ‘Maximum Level = ~~ Re-order Level + | + Re-order Quantity - (Minimum Consumption x Minimum Re-order Period) Maximum level is fixed by taking into account th (i) Nature of material. « {i Storage space available, (i) Chance of deterioration and obsolescence, fv) Lead time i.e. time required to obtain suppl (1) Rate of consumption of material. fresh cupplcs. (ui) Economic order quantity (EO). (vil) Cost of storage. (vii) Government restrictions. (x) Funds required. {&) Maximum requirement of material at any point of time. (xi) Expected fluctuations in prices. (4)Banger Level: Danger level means a level below which actual allowed to fall except under emergency conditions. Generally, this Teves xed below te minimum level and is meant for taking corrective action. As and when the stock of material reaches at this evel, there is imminent danger of stoppage of production. In such a situation, normal issues of the material are stopped and materials are issued only under specific instructions for important jobs. ‘The purchase manager has to make special arrangements to get the fresh supplies of materials which reach at their danger level even if it involves payment of higher price or transport costs. Formula for Computing Danger Level: e following factors: Maximum Re-order Period for Emergency Purchases (5) Average Stock Level: Average stock level indicates the average inventory of materials held by a firm during the year. Formula for Computing Average Stock Level m Level + Maximum Level) ] Me aE REST fs “ECONOMIC ORDER QUANTITY. (EOQ) The total cost of material purchased can be ascertained as follows: a Cost of Materials = Material Acquisition Cost + Material Carrying Cost the Manufacturing concem, the purchase manager is usually faced with creda of various items which should be ordered and purchased at a time i cuanto Purchased at one pont of ie? if purchases of material are made in bu other hand, it inventory carrying cost will be high F inion tes enanes et mconosroony ao shi to be placed. Thus, i te auentt preted each time the purchases are to be made so as to minimise these Wo coats The Minimum jg Tatetial to be ordered at one time for which both ordering an Is known as Economic Order Quantity (EOQ). + Material Ordering Cost the problem of deciding time i.e. How much i (en large i kept in stores. On the a5 more units are to be kept in Sor ine the quantity that54 FINAL-TOUCH TO COST ACCOUNn, Y W i j From the above discussion itis clear that two types of cost i.e. inventory carrying cost and ordey, cost play a significant role in the determination of the size of Economic Order Quantity. These, cast are discussed below: aa Cant Inventory Carrying Cost : rane ng ore ome ah @ materials in tho Tis the cost of and incges, nd ne malariais in he store for purchase of materials and includes: oe (1) Cost of storage space like Rent, lighting | (1) Cost of staf postedin parchasing deparimen, heating, air-conditioning etc. (2) Cost of staff poste ne Inspection section (2) Salaries to stores personnel. (3) Cost of staff posted in the paymey (3) Cost of bins and racks provided for storing department. materials. (4) Cost of stationery used. 2 (4) Cost of maintaining the materials to avoid the | (5) Postage/telephone/mobile/fax/e-mail deterioration. charges. (5) Interest payable on the money invested in the | (6) Cost of floating tenders/ cost of inviting | materials. quotations. " : (6) Cost of obsolescence. i (7) Cost of comparative evaluation of tended’ (7) Materials handling costs. quotations. = (8) Inventory insurance costs. (8) Other administration overheads of te (9) Store-keeping/ clerical costs. purchase department. (10) Cost of losses in stores due to deterioration, | (9) Inspection cost. wastage, breakage, pilferage, evaporation | (10) Transportation costs incurred in procurement etc. of materials. Methods for Determin Method 1: Mathematical Formula Method Under this method the following formula is used for computing Economic Order Quantity: ion of Economic Order Quantit) as Consumption per annum (i.e. Annual usage/, requirements of material) = Ordering cost per order Inventory carrying cost per unit per annum — Hoa u The computation of Economic Order Quantity by mathematical formula method is shown with t® help of following examples: Example 1: (when annual usage/consumption of material is given in units) Annual usage: A 5,000 units Materials Cost: % 20 per unit : Cost of placing and receiving one order: = 100 Annual carrying cost of inventory: 5% of Average Inventory Here, C = Consumption per annum (i, = i ot Secimenusramgn * Mwsman) + $n wt Ile Inventory carrying cost per unit per annum 20 2 x 5,0 —£0Q: = : z x 5,000 x 100 1 Thus, Economic Order Quantity is 1,000 units, This means that § orders (6,000/1,000) pet ant should be placed. : 1 (Le, 20 * 5%) 1,000 unitsRIALS mate 55 ample 2: (when annual usage/consum; , & xfnual consumption: iption of material is given in rupees) Cost of placing and receiving one order: ue) ‘Annual carrying cost of inventory: Say : 5% of consumption Consumption per annum (i.e. Annual usage) Ordering cost per order = : 1,00,000 Inventory carrying cost (annual) = coe aos coo 2co | 2 1,00,000 » 100 = |. 2 20,000 1 0.05 thus, Economic Order Quantity is € 20,000. This should be placed. means that 5 orders (1 ,00,000/20,000) per annum Method 2: Tabulation Method The pereeien of Economic Order Quantity by this method is shown with the help of one example as follows: ‘Annual usage: 5,000 units Materials Cost: % 20 per unit Cost of placing and receiving one order: % 100 ‘Annual carrying cost of inventory: 5% of Average Inventory Table showing the Economic Order Quantity is given below: Annual | No.of | Units per] Value per | Average | Carrying | Ordering | Total cost usage | orders| order. _| order @&_| inventory | cost | cost @& ® per A 20 per value * | 100 per year | (Annual usage unit | (Value per order | (Carrying cost + No. of orders) order +2) Ordering cost) 5,000 | 4 5,000. | 1,00,000 [| 50,000 | 2,500 100 2,600 units | 2 2,500 | 50,000 | 25,000 | 1,250 200 4,450 3 1,667 | 33,340 | 16,670 834 300 1,134 4 1,250 | 25,000 | 12,500 625 400 4,025 5 4,000 | 20,000 | 10,000 500 500, 1,000 6 833°] 16,660 8,330 ai7 600 4,017 7 714 | 14,280 7,140 387 700 1,057 8 625 | 12,500 6,250 313 800 1113 9 556 | 11,120 5,560 278 900 4,178 10 500 | 10,000 5,000 250 | 1,000 4,250 Thus, EOQ is 1,000 units and when orders are placed under Economic Order Quantity the carrying cost and the ordering cost are the same and the total cost is minimum. ABC ANALYSIS ABC analysis is an important technique of inventory control. Under this technique, materials are classified according to their value into 3 categories namely A, B and C. Category ‘Aconsists of those items which require heavy investment but are less in quantity. Category 8 consists of those items which require medium investment and are moderate in quantity. Category © consists of those items which do not require much investment but are large in quantity. This classification is made for the purpose that costly and more valuable materials can be given more attention and care by the management as compared to the items of low value. The normal procedure followed by most of the companies for classifying various inventory ites into three categories A, B and Cis illustrated below:56 FINAL-TOUCH To Cost Accoy, y Nn mf! (i) Category A: Items which are small in number (or quantity) i.e. about § to 10 pe, total items handled by stores but require heavy investment ie, about 70 to 80 peregnt fh inventory value are usually put under this category. cPN (i) Category B: items which are moderate in number i.e. about 20 to 25 percent ofthe handled by stores and require medium investmenti.e. about 20 t0 25 percent of oq value are grouped in Category B. Mey (ii) Category C: Items which are large in number i.e. about 70 to 80 percent ofthe tot, handled by stores but require low investment i.e. about 5 to 10 percent of total inventor a are included in this category. Table showing ABC Analysis Category % of Total % of Total “© Control Requi Quantity Value Kp Regular and clo ‘ 5-10 70-80 | ied ee onto be (High Value items) = B Occasional or moderate cont 20-25 20-25 F : : (Medium Value items) will be considered satisfactory c Control may be exercised ina (Low Value items) 70-80 5-10 general manner. i.e. Leas control is required | The percentages given in the above table are only guidelines and can be changed by te management according to its own requirements. From the above table, it is clear that items under Category A would be of high value, those und Category B would be of medium value, while those under category C would be of low value. Ths, Such classification of materials into three categories based on value calls for different degrees control over inventory. Just-in-time inventory system is a system of material control which aims at reducing inventoy holdings so that the inventory carrying/storage costs are minimised. This system is, now -3-da/5 used by most of the manufacturing concems for reducing their investments in materials to t? minimum. Just-in-time purchasing is an important element of this system. Just-in-time (JM Purchasing Is the purchasing of materials in such a way that materials reach the compan/$ premises just-in-time when these are actually required for production. It means the raw mate are purchased just-in-time so that delivery immediately proceeds to the production process: F® the successful implementation of this system itis necessary that the orders for materials should? Placed only with those suppliers who can make quick delivery of goods as and when need afi Advantages of JIT inventory System: (1) Lower investment in materials. (2) Reduces inventory carrying/storage costs. (3) Smoother output. (4) Reduces materials wastage. (6) Reduces materials handling costs. (6) Increases productivity.MATERIALS 57 VED ANALYSIS This technique is mainly usi classified on the basis a a of spare parts. Under this technique the materials are meer 'y for production in the following three categories: 2 E~Essential 2 D-Desirable Vital materials or spares are tho: i se i materials even for a short time will seam are very critical for production. The shortage of such vot of vital items is very high. in immediate stoppage of production. Thus, the stock-out Essential materials/spares are i rraterals will not result in th Ca which are essential for production. The shortage of such carta Sa 1e immediate stoppage of production. However, If the shortage of such materials continues for a few hours or a day, production will stop. persis pane are those which are required for production but the absence of which for even ea rot result in the stoppage of production. Production department can continue is ferials for some time say a week or 15 ilability of i tins oratticvloa! y days because of availability ofits Thus, the main purpose of VED analysis is to ensure uninterrupted supply of goods, materials oF spares which are very critical for production. The main difference between the VED analysis and ABC analysis is that the VED analysis is based on the classification of materials on the basis of thelr criticality for production while ABC analysis is based on the classification of materials on the basis of their value. TWO BIN SYSTEM Two bin system is a simple and most economical technique of materials control. Under this technique, each item of material is stored in two bins ona continuous basis. One bin will be smaller and the other larger. The smaller bin is used for storing the quantity equal to the minimum stock level. The larger bin is used for storing material over and above the minimum level. Materials are first issued from the large bin. I in, the material is started issuing from f the material finishes in that bit the small bin. The issue of material from the second bin is a signal to the purchase department for placing a fresh order for replenishment of material in the first bin. CONTROL RATIOS by the use of the following two ratios: Inventory control can also be exercised {a) Input - Output Ratio: This ratio establishes the rel final output. The formu ation between quantity of material used in the manufacture and the Ia for calculating input-output ratio is as follows: quantity of material in the Input Quantity 44, 2. “ io = 7 Input - Output Rati Sutput Guanty is material in 1 °X’ is put into manufacture and the content of this output ratio will be calculated as follows: 10 kg. = x 100 = 105.26% output Ratio = Input - Output Rati ase of raw material For example, if 10 kg- g., the input the final product is 9.5T ACCOUNTING 58 FINAL-TOUCH TO COS" (Sept. 2005) (b) Inventory / Stock Turnover Ratio: ‘mula for computing This ratio provides a basis for measuring inventory performance. The fort inventory turnover ratio is given below: / i Cost of material consumed during a pe Inventory Turnover Ratio = . Re Average Stock of materials during the period jo indicates slow High inventory tumover ratio indicates fast moving materials and the low ratio indi moving materials. Inventory Turnover Ratio (in no. of days) or Inventory Conversion Perio« a? Inventory tumover ratio can also be calculated in number of days. In that case it will indicate the average number of days for which the average inventory is held, By comparing the number of days in the case of two different materials, we can find the material wivoh te fast moving and which is slow moving. Inventory tumover ratio in number of days can be computed as follows: Days of the period Inventory Turnover Ratio ‘moving materials and the high inventory conversion Low inventory conversion period indicates fast. Period indicates slow moving materials.MATERIALS 59 BUDGETARY TECHNIQUES The main purpose of inve i One eon cGinttol is to discover and maintain the optimum level of Investment in veverinigh storage costs thorety terials should be avoided as it locks up working capital and inventories, it is necessary to ki YY resulting in loss of profits. To control investment in the See a yeartThe now in advance about the materials requirement during a specific peuld be required can be © Gxact quantity of various types of inventories and the time when they Based on this, materials palatial ath edt production plans and production schedules. Based on te, matetats reauoment budget can be prapered. Such a budget will discourage the PERPETUAL INVENTORY SYSTEM AND CONTINUOUS STOCK TAKING Perpetual inventory system is widely used by the business concerns for materials control. Under this system, a continuous record of receipt and issue of materials is maintained by the stores department. It shows the physical movement of stocks and their current balance. It involves the maintenance of such records that will show the receipts, issues and balance of all items in stock at all times. Continuous stock taking is an essential part of the perpetual inventory system. Sometimes the two terms are used interchangeably but there is a difference between the two Perpetual inventory system is a system of records that reflects the physical movement of stocks, jvhereas continuous stock-taking is the physical verification of actual stock with the stock records on a continuous basis. Perpetual inventory system is incomplete without continuous stock taking. Tools of Perpetual Inventory System: Perpetual inventory system comprises of: (a) Bin Cards; (b) Stores Ledger; and (c) Continuous Stock-taking Bin Cards: (See Q. No. 4) Stores Ledger: (See Q. No. 5) Continuous Stock Taking: ‘ess of physical verification of different items of Continuous stock taking may be defined as a proc f stock. Itfs a pre-planned programme and is carried outon a regular basis. Continuous stock-taking deals with limited number of items on a particular day. The items are selected on random basis so that surprise element in stock verification may be maintained. These items are verified by actual counting, weighing or measuring and are then compared with bin card or stores ledger balances. It is possible that the balance of rds or stores ledger may differ from the f stock shown by bin car ‘actuc| balance of stock as ascertained by the physical verification. This may be due to the following reasons: ; (i) Clerical mistakes like wrong posting, (ii) Loss of materials due to improper han (ii) Putting the materials in wrong bins (iv) Theft and pilferage (v) Shrinkage and evaporation (vi) Short or over issue of materials Continuous stock taking can be done without stopping the production. Continuous stock-taking pays more attention to the costly items and items that are critical for production. Continuous stock taking points out the current position of the stores to purchase department so that these can be purchased at the right time. under/over casting, non-posting etc. dling and storage.rananiiey Advantages: The following are the advantages of perpetual inventory system: it F stock-taking is ystem does not require stoppage of business when 7 (1) Perpetual inventory s Carried out. ; a taken promptly, (2) Errors and discrepancies are easily located and, thus, remedial actions can eraat, toss ete, (3) This system has a moral effect on the staff. This reduces the risk of theft, apa (4) Continuous stock verification reveals the existence of obsolete and siow-movin fgurid are (5) Profit & Loss Account and Balance Sheet can be easily prepared as inventory readily available. (6) This system facilitates inventory control, F / taking. ry Can be reduced to the minimum through continuous stock taking. (7) The investment in invento (8) Stock figures are easily available for insurance purposes. Disadvantages: Following are the disadvanta (1) Expensive. (2) More clerical work is involved. (3) Time-consuming as it requires the maintenance of various records. (4) Stock-taking becomes meaningless if bin cards and stores ledger are not up-to-date. ges of perpetual inventory system:Distinction | ne Bin Card Stores Ledger 4. Wrecords only the quantity of material. | 1. It records both quantity and value of material. 2. tis maintained by the storekeeper. 2. It is maintained by the costing department. 3. Posting in bin card is normally made just | 3. Posting in stores ledger is always made after before the transaction takes place. the transaction takes place. = - 4. Itis not an accounting record. 4. Itis an accounting record. 5. Entries in the bin card are made first. 5. Entries in the stores ledger are passed after the recording of transactions in bin card. 6. Bin card is kept inside the stores. 6. Stores ledger is kept outside the stores.