Topic 2: Part 1

MATERIAL
CONTROL CYCLE &
STOCK LEVELS
Lesson Outline:
1. Material control cycle:
 Classification of Materials
 Material Control System
 Material Purchasing/Procurement Procedure
2. Economic Order Quantity (EOQ)
3. Stock Levels: Min, Max & Reorder level
4. Perpetual, Continuous & JIT Inventory System
5. Stock Valuation (FIFO, LIFO, WA)
Materials
Types of materials
 Direct materials
 Raw materials that can be physically and directly associated
with the finished product during the manufacturing process.
 For car manufacturing, examples are steel, plastic

 Indirect materials
 Raw materials that cannot be easily associated with the
finished product during the manufacturing process.
 Examples = lubricants, polishing compounds
Material Control
A system that ensures that various departments within an
organization coordinate their activities to achieve efficient materials
planning, purchasing and usage.

Key features:
Uses proper forms and records
Consider effective purchasing methods
Provides adequate storage facilities
Operates efficient stock control records
Maintains proper planning and scheduling of materials
requirement
Maintains material cost within budget
MATERIAL CONTROL SYSTEM
• Objectives/importance of material control:

i) To ensure better quality of materials at right quantity at right time for efficient
and uninterrupted production of output.

ii) To minimize the handling cost and time in storing and using the materials.

iii) To protect materials against loss by fire, theft and leakage.

iv) To maintain the cost of materials at the minimum level.

v) To provide information to management about raw materials, their cost and

availability.

vi) To purchase materials at a reasonable price.

vii) To avoid obsolescence of materials by adopting an appropriate method of 5

material issue.
Material Control
Cycle
Material Control Cycle
INVOICE
Production (copy)
Supplier
department
DO

INVOICE MATERIAL
MRN PO (ori)

Receiving
Store Purchasing department
PRN
department department

GRN
Account INVOICE
MATERIAL
department (ori)
IN

Inspection CLICK
MATERIAL department
Procurement Procedures
Procurement procedure is a continuous process and it starts from:

1. Production dept needs materials, prepare & send MRN to Store dept.

2. Stores dept will prepare and send PRN to Purchasing dept.

3. Purchasing dept will prepare and send PO to Supplier.

4. Supplier will send INVOICE (Ori) to Purchasing dept.

5. Supplier will send materials together with INVOICE (Copy), DO to Receiving dept.

6. Receiving dept will issue GRN and the materials to Inspection dept.

7. Inspection dept will inspect the materials and returning unwarranted suppliers (INSPECTION
NOTES). The materials and the GRN are sent to the stores.

8. Purchasing dept will forward the INVOICE to Account dept for payment to supplier
Document Descriptions

Material Requisition  Used to request for materials to be used in the production.

Note (MRN)  Issued by Production Department to Store Department.
Purchase  Used to request for the purchase to be made for stock of
Requisition Note raw material for replenishment.
(PRN)  Issued by the storekeeper and its must be authorized.
 Details of quantity, quality, delivery date and address are
recorded.

Purchase Order  Requesting supplier to supply orders of materials.

(PO)  Issued by Purchasing Department to Supplier.
 Contains all necessary details such as quantity, unit price,
delivery date, method of shipment, etc)
Document Descriptions
Invoice  To charge and demand payment from the company.
 Issued by the supplier.
Goods  To acknowledge that goods are received and checked against
Received Note Purchase Order.
(GRN)
Inspection Note  Inspection made upon receiving materials for quality and
(IN) other inspection.
 Issued by Inspection Department to Purchasing department.
 An inspection note will be sent to purchasing department if
the inspection done found inadequate material.
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Economic Order
Quantity (EOQ)
Economic Order Quantity (EOQ)
 Is the optimal order quantity (how much materials
to be order) that minimizes the total inventory
cost.

 Total inventory cost consists of ordering cost and

holding costs.

 Must:
 (1) Make sure stock-out (not enough inventory) does
not occur
 (2) Make sure do not carry surplus or unnecessary
inventory
A. Holding/Carrying/Storage costs represent costs incurred on
holding inventory in hand.
Examples:
 Insurance against theft, loss or damage
 Rates (tax on property)
 Depreciation

 Obsolescence, theft, or spoilage

B. Ordering costs are costs incurred on placing and receiving a new
shipment of inventories.
 Examples:
 Transportation costs
 Receiving costs (Cost of the labor required to inspect goods when they are received)
 Production costs
 Set-up costs
 Telephone charge in making the order
 Administration cost to place an order
EOQ
Underlying assumptions:
 Constant demand
 Constant carrying cost/ ordering cost
 Constant unit price
 Quick delivery
 Replenishment is made instantaneously
Determining the EOQ

The EOQ and the total inventory costs

can be determined using :

1. Formula approach, or
2. Tabulation approach, or
3. Graphical approach.
1. EOQ Using the Formula Approach

𝐸𝑂𝑄=
√(
2(𝐶𝑜)(𝐷)
𝐶𝑠 )
Co = Cost of Ordering
D = Annual Demand
Cs = Cost of Storage/Carrying/Holding
Example 1
Question:
Find the EOQ where;
 The forecasted demand is 1,000 units per month
 The ordering cost is RM350 per order
 The cost per unit is RM8
 Estimated storage cost are 15% per annum
Answer:  2(350)(12 x1000) 
EOQ   
D = 1000 units per month x 12  0.15 x8 
Co = RM350 per order
 8400000 
Cs = 15% x RM8 = RM1.20 EOQ   
 1 .2 
EOQ  2,646units
2. EOQ Using the Tabulation Approach

This is where determining the EOQ using tabulation of the

number of orders or order size. Its another of trial and error
method on finding the EOQ.

 Calculate:

1) Annual Demand (D)

2) No of order = D/Q (no of times)

3) Average Stock = Q/2

4) Annual Cost of Ordering = D/Q x Co

5) Annual Cost of Storage/Holding/Carrying = Q/2 x Cs

6) Total cost
Annual Demand (D) -units

Order Quantity/Order size

How many units to order each time
(Q) -units
No of orders
(D/Q) -times How many times to order per year

Average Stock (Q/2) -units

Average stock held in store

Annual Cost of Ordering

(D/Q x Co) cost incurred on obtaining the inventory

Annual Cost of Storage

(Q/2 x Cs)
cost incurred for holding the inventory in hand

TOTAL COST (RM)

Cost of ordering + Cost of storage Note:
CS = Holding/Carrying/Storage cost per unit of individual item
 CO = Cost per order/ordering cost
Example 2:
The following information is available for a company:
Storage cost, Cs = RM1.50
Ordering cost, Co = RM10
Annual Demand, D = 10,000 units
Required:
Calculate the total costs & the EOQ at the following different
order size:
i. 100 units
ii. 1,000 units
iii. 2,000 units
 Annual Demand (D) 10000 10000 10000

Order Quantity/Order size 100 1000 2000

(Q)
No of orders
(D/Q)

Average Stock (Q/2)

Annual Cost of Ordering

(D/Q x Co)

Annual Cost of Storage Storage cost, Cs = RM1.50

(Q/2 x Cs)
Ordering cost, Co = RM10
TOTAL COST Demand, D = 10,000 units
Note:
CS = Holding/Carrying/Storage cost per unit of individual item
 CO = Cost per order/ordering cost
 Annual Demand (D) -units 10,000 10,000 10,000

Order Quantity/Order size 100 1,000 2,000

(Q) -units
No of orders 10,000/100 10,000/1,000 = 10 10,000/2,000 = 5
(D/Q) -times =100

Average Stock (Q/2) -units 100/2 = 50 1,000/2 = 500 2,000/2 = 1,000

Annual Cost of Ordering 100 x RM10 = 1,000 10 x RM10 = 100 5 x RM10 = 50

(D/Q x Co)

Annual Cost of Storage 50 x RM1.50 = 75 500 x RM1.50 = 750 1,000 x RM1.50 = 1,500
(Q/2 x Cs)

TOTAL COST 1,000 + 75 = 1,075 100 + 750 = 850 50 + 1,500 = 1,550

Storage cost, Cs = RM1.50

Ordering cost, Co = RM10 EOQ is the order that has
minimum total cost EOQ is at 1000 units at the lowest cost
Demand, D = 10,000 units RM850
3. EOQ Using the Graphical Approach
 Stock Levels:
Min, Max & Reorder
level
Inventory Investment
Important considerations that management must give are:
Availability of storage space
Availability of funds
Storage and materials handling costs
Risk of loss due to damage, obsolescence, pilferage or
deterioration and evaporation
Delivery delays or lead time
Economic order quantities
Inventory Control Levels

The planning and maintenance of stock

levels is effected by the calculation of the
following:
 Re-order level
 Minimum stock level (buffer stock)
 Maximum stock level
 Average stock level
Bar gate stock graph

Reorder level: the amount at which new stock is ordered. 300 items are ordered and it takes two weeks
lead time for ordered stock to arrive. There is always a buffer stock of 100 items held in case deliveries
are held up or there is an unexpected large order.
Minimum stock level: the lowest amount of items to be stored on site or buffer stock (100).
Maximum stock level: the largest amount of items to be stored on site (500).
Re-order Level
Re-order = Maximum consumption x Maximum Re-order period

Minimum Stock Level/ Safety Stock

Minimum = ROL – (avrg consumption x avrg re-order period)

Maximum Stock Level

Maximum = ROL – (Minimum consumption x minimum re-order period) + EOQ

Average Stock Levels

Average Stock Level = Max stock level + Min stock level
2
Test Your IQ….
Answer the question using the following data:
Consumption rate 60 – 130 units per day
Lead Time 20 – 26 days
EOQ 4,000 units

Required:
Determine:
 Reorder Level (ROL)
 Min. Stock Level
 Max. Stock Level
 Average Stock Level
 Solutions Consumption rate:
60 – 130 units/day
i. ROL = Max consumption x Max Re-order period
Lead time: 20 – 26 days
= 130 units X 26 days = 3,380 units
EOQ: 4,000 units
ii. Min. Stock Level= ROL – (avg consumption x avg re-order period)
= 3,380 – [(60+130/2) X (20 + 26)/2) = 1,195 units

iii. Max. Stock Level= ROL – (Min consumption x min re-order period) + EOQ
= 3,380– (60 X 20) + 4,000 = 6,180 units

iv. Average Stock Level = Max stock level + Min stock level 2
= 1,195 + 6,180 = 3,688 units 2
Issue on over stocking & under stocking
 The objective of material is to maintain optimum
stock.

 The principle which should be kept in mind is that

there should not be any over stocking or under stocking
of materials, as both these situations involve costs.
Problems associated with...

Over Under
High cost of Production hold
stocking stocking ups
storage

Need for Firm may end up

security paying for idle
measure labour cost

Organization may
Money tied up lose its important
in stock customers

Cannot cope with

Risk of
unexpected
deterioration of
changes in
stocks
demand
Choose the correct term or document for each of the following
descriptions:
No. Descriptions Term/Document

1. The form submitted by storekeeper to

purchasing department identifying which
material to be purchased. Reorder level Purchase
Requisition
2. The cards located near to material showing the
form
quantity of material received, issued and its
balance. Goods Periodic
3. The inventory system that requires the Received inventory
quantity, cost and value of the inventories be Note system
updated on continuous basis with daily Bin card Economic
inventory movement. Order
4. Once the stock level reached this stock level, Quantity
company must place new order from supplier
to avoid delay production process.
 PYQ FEB2021 [QUESTION 2(B)]

Sesuji Cakery Enterprise produces varieties of instant cake mix flour. The most popular product
Sesuji produces is Gingerist Cake. One of the raw materials used to produce Gingerist Cake is a
premium pastry flour called ‘Cucuki’. A unit of Gingerist Cake requires 0.5 kg of Cucuki. The
bakery produces 320 units to 530 units of Gingerist Cake per week. The demand for the
Gingerist Cake is constant at 450 units per week.
 
Currently, the Cucuki are purchased from France with the cost of RM100 per kg. It takes 1 to 3
weeks for the Cucuki to be delivered. The telephone charges in making the order is RM27 per
order and the cost of printing and stationery is RM13 per order.

The storage cost for each kilogram of stock is 10% from the cost of Cucuki.
(Assume there is 50 weeks in a year).
 
Required:
 
Calculate the followings inventory control level for Cucuki:
i. Economic Order Quantity (EOQ) using formula method.
ii. Reorder level.
iii. Maximum stock level.
 Solutions:

√(
Demand = 450 units x 0.5kg x 50 wks
i.
𝐸𝑂𝑄=
2(𝐶𝑜)( 𝐷)
𝐶𝑠 ) Ordering cost per order = 27 + 13
Storage cost per kg = 10% x RM100

¿
√( 10 )
2( 40)(11,250) 300 kgs

ii. Re-order level = Max Consumption x Max reorder period

= (530 units x 0.5 kg ) x 3 wks = 795 kg

iii. Max stock level = ROL – (Min Consumption X Min Reorder period) + EOQ
=795 kgs – [(320 x 0.5) x 1 ] + 300 kgs= 1,270 units