MA2

CH APTER 07: M ATERIALS

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Topic list
§Types of material
§Buying materials
§Valuing materials issues and inventories
§Inventory control
§Inventory control levels
§Computers and inventory control

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4. Inventory control
Inventory control is the regulation of inventory levels, which includes putting a
value to the amounts of inventory issued and remaining. Inventory control also
includes ordering, purchasing, receiving and storing goods.

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4. Inventory control
Locating inventory:
◦ There is a place for everything and everything is in its place. There is no point
in keeping inventory at all if you don’t know where to find it when it is
needed.
◦ We have code of location for goods.

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 4. Inventory control
◦ Bin card is kept with the actual inventory and is updated whenever items
are removed or added.
◦ Bin card does not need to show any information about the cost of materials
◦ The store ledger accounts are normally kept in the cost department or in
the stores office whereas the bin cards are kept in the stores.
◦ 2 advantages of this procedure (perpetual inventory system):
◦ The accounting records can be maintained more accurately and in a better
condition by a cost clerk than by a store assistant.
◦ The balances on the bin cards in the stores can be compared with the
balances on the store ledger accounts.
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4. Inventory control
Coding of materials: each item held in stores can be unambiguously identified
by using inventory codes. The advantages of this are:
◦ Ambiguity is avoided
◦ Time is saved
◦ Production efficiency is improved
◦ Computerised processing is made easier
◦ Code system can be flexible and expandable
Example: A234/1279: might refer to the item kept in row A, bay 2, bin 3, shelf 4.
The item might be identified by the digits 12 and the supplier might be
identified by the digits 79

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4. Inventory control
Issuing Material:
Production Department issue Material requisiton è Store Department locate
the inventory, withdraw, update the bin card and store ledger account
If the amount of material required is overestimated:
The excess should be put back into store accompanied by a Materials returned
note
If materials already issued used for another job:
A Materials transfer note can be raised

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4. Inventory control
Stocktaking: involves counting the physical inventory on hand at a certain date,
then checking this against the balance show in the clerical record.
Two methods:
◦ Periodic stocktaking: usually carried out annually and the objective is to count
all items on inventory on a specific date.
◦ Continuous stocktaking: checking a number of inventory items on a regular
basis so that each item is checked at least once a year. (Less disruptive, less
error, greater control)

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4. Inventory control
Inventory discrepancies: between the physical amount and the amount show in
the inventory records. Possible causes of discrepancies are as follows:
◦ Supplier deliver a different quantity of goods than is show on GRN
◦ The quantity of inventory issued to production is different from that shown on
the materials requisition note
◦ Excess inventory is returned from production without documentation
◦ Clerical error
◦ Inventory items may be wasted because they get broken
◦ Employees may steal inventory
Note: if actual inventory is greater than recorded inventory, the accounting
transaction will be recorded by a store credit note (store debit note use when
there is less actual inventory than recorded)
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4. Inventory control
Inventory costs: includes purchase costs, ordering costs, holding costs and costs
of running out of inventory. A business has to decide the optimum amount of
inventory to hold to minimize the total inventory cost.
Ordering cost: incur when inventories are ordered. The more orders are placed,
the higher the total ordering costs will be. (lower ordering cost è higher
holding cost)
◦ Clerical and administrative cost
◦ Transport costs
◦ Production run costs (if an organisation manufactures its own components)

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4. Inventory control
Holding cost: cost of storing inventory
◦ Cost of storage and stores operations
◦ Insurance costs
◦ Interest charges, obsolescence, deterioration
Stockout costs (cost of running out of inventory)
◦ Lost contribution from lost sales
◦ Loss of future sales due to disgruntled customers
◦ Loss of customer goodwill as the product they required is not available
◦ Cost of production stoppages
◦ Labour inefficiency costs due to frustration over stoppages
◦ Extra ordering costs for urgent, small quantity orders
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4. Inventory control
Other reasons for holding inventories:
◦ To provide a buffer between processes
◦ To meet any future shortages
◦ To take advantages of bulk purchasing discount
◦ To absorb seasonal fluctuations and any variations in usage and demand
◦ To allow production processes to flow smoothly and efficiently
◦ As a deliberate investment policy, especially in times of inflation or possible
shortages

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5. Inventory control level
Inventory control levels can be calculated in order to maintain inventories at the
optimum level.
◦ Reorder level = maximum usage × maximum lead time
◦ Minimum level = Reorder level – (average usage × average lead time)
◦ Maximum level = Reorder level + reorder quantity – (minimum usage ×
minimum lead time

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5. Inventory control level
Re-order quantity: the quantity which is to be ordered when inventory reaches
the re-order level. If this is set to minimize the total inventory cost, it is known as
EOQ (Economic Order Quantity)
Average Inventory = safety inventory + !⁄" Re-order Quantity

Use these term interchangeably: Minimum level, buffer inventory, safety

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5. Inventory control level
Economic Order Quantity
◦ EOQ assumes that the average inventory held is equal to !⁄" of the re-order
quantity (buffer inventory = 0)
◦ Example: Suppose a company purchases raw material at a cost of $16 per
unit. The annual demand for the raw material is 25,000 units. The holding cost
per unit is $6.40 (per annum) and the cost of placing an order is $32. Calculate
the EOQ (to minimize the inventory cost)
𝟐𝑪𝒐 𝑫
◦ 𝑬𝑶𝑸 =
𝑪𝒉
◦ CH: Cost of holding one unit of inventory for one time period
◦ Co: Cost of ordering a consignment from a supplier
◦ D: Demand during the time period
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EOQ Graph

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6. Computers and inventory control
Computerised inventory files: A typical computerised inventory file would
contain a record for each item, each record having fields as follows:
◦ Inventory code (this could be in bar code form)
◦ Description
◦ Supplier code
◦ Supplier’s reference number
◦ Quantity per unit (sometimes called the “factor”)
◦ Cost price per item
◦ Control level (minimum, maximum, re-order level, re-order quantity)
◦ Location (location in store, use when location is not include in the code)
◦ Movements history (issues per day, per week, during the last month…)
◦ Job code (code to be linked to specific job)
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6. Computers and inventory control
Inventory reports:
◦ Daily listing: a daily list of all items ordered, received, issued or place on reserved. To
find out unusual movements or re-order level…
◦ Inventory list: could be for stock taking purposes, with inventory codes, descriptions
and locations
◦ Inventory movements: help to setting control levels and identifying “slow moving
inventory”
◦ Inventory valuation: show current balances and place a value on inventory
◦ Supplier analysis: List all the items purchased from the same supplier

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6. Computers and inventory control
Bill of materials: compiled assembly records, contains detail of the various assemblies
that make up the final product.
A common fallacy: sometimes assumed that computerising inventory records will
guarantee they are 100% accurate. In fact discrepancies are just as likely to occur in a
computerised as a non-computerised system. Stock taking is thus equally important.

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Question
A large retailer with multiple outlets maintains a central warehouse from which
the outlets are supplied. The following information is available for Part Number
SF525

Average usage 350 per day (a) What is the maximum level of
Minimum usage 180 per day inventory?
Maximum usage 420 per day
(b) What is the approximate
Lead time for 11-15 days
number of Part Number SF525
replenishment
carried as buffer inventory?
Re-order quantity 6,500 units
Re-order level 6,300

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Question
A manufacturing company uses 25,000 components at an even rate during a
year. Each order placed with the supplier of the components is for 2,000
components, which is the economic order quantity. The company holds a buffer
inventory of 500 components. The annual cost of holding one component in
inventory is $2.
What is the total annual cost of holding inventory of the component?

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