UNIT II

MATERIALS

Introduction

A major objective of cost accounting is cost control. Every element of cost has
to be effectively controlled. Out of the three elements of cost i.e. Material,
Labour, and Expenses. Materials form a major chunk of cost of production. An
analysis of financial statements of a large number of private and public sector
organisations reveals that about 55% of cost of production consists of material
cost , on an average. It is essential therefore for every organisation to device a
suitable system of material control from the time of placement of purchase
requisition to the time of final consumption of the material.

Meaning of Material Control

Material Control is a system which ensures required quantity of material of the

required quality at the right time and place with minimum investment of capital.
It may be defined a The regulation of the functions of an organisation relating to
the procurement, storage and usage of materials in such a way as to maintain an
even flow of production without excessive investment in material stock. An
efficient material control is an effective integration of various aspects and
includes scheduling the requirements, purchasing, receiving and inspection,
maintaining stock records and stock control. Material control is accomplished
through periodical reports and records relating to purchasing, receiving,
inspection, and issue of materials.

Need for/ objectives of Material control

As a major portion of cost of production consists of material cost ,the cost

accounting system can be effective only when there is an efficient material
control. The following are the objectives of material control.

1.Ensuring supply of adequate quantity of materials

Sufficient quantity of material should be made available for all the activities and
departments in the organisation so that uninterrupted production can be carried
on and work does not stop to non availability of materials.
2.Optimum investment in materials

Keeping the amount invested in materials under control is a central objective of

material control. Locking up of funds in stocks results in mismanagement of
working capital. Overstocking should be avoided in view of its disadvantages
.Excessive investment and over stocking can be avoided by fixing maximum
stock level for all major items of materials.

3.Favourable terms of purchase

The purchase price and other terms of purchase should be of maximum

advantage to the firm. At the same time, quality and specifications of the
materials should be as per requirements.

4.Control of Wastage

Wastage of material during storage and handling on the production floor should
be minimised .Standards can be fixed for wastage and efforts can be made to
keep the actual wastage below the standard level. Pilferage, theft, etc. should be
minimised to keep material cost within control.

5.Control of obsolescence and spoilage.

Loss due to materials becoming out of date or getting spoiled and unsalable is a
major cause for material losses. Fixing stock levels and utilising materials in
time can minimise such losses.

6.Proper reporting to Management

Management has to be informed frequently about stock of raw materials so that

production is planned. This is possible only if there is proper reporting system
and updating of records by the store keeper.

7.Prevention of Misappropriation of Materials

Proper internal check of receipts, issues and consumption of raw materials helps
in prevention of misappropriation of materials by the employees.

8.Proper control system for settlement of invoices

Suppliers invoice is to be paid only after verifying the physical receipt of

materials to avoid excess payment to the suppliers.
Essentials of Material Control

The process of material control is divided into four stages-

1.Purchase control

2.Issue control

3.Control of Material losses.

A brief outline of various aspects of material control is discussed below:

1.Co-ordination Effective control of material requires effective co-

ordination among the departments involved in purchasing-receiving and
inspection, storage, production, sales and accounting departments so that
adequate materials are available for continuous production and sales. At the
same time excessive investment in materials and over stocking are avoided.

2.Centralising- Purchasing-In order to economise the buying and to avoid

reckless buying of raw materials the purchasing function is to be centralised.

3.Proper scheduling Proper scheduling of materials requirements ensures

availability of materials at the right time.

4.Classification and codification of material leads to easy identification and

proper control of materials.

5.Receipt of Materials-Checking and inspection of material by receiving

department ensure correct quantity and quality of material as ordered by the
organisation.

6.Usage of Forms- Standard forms are to be designed and used for purchase
requisition, purchase order, receiving of materials, requisition of materials and
transfer of material from jobs to stores or to other jobs.

7.Storage of materials should be entrusted to a qualified store keeper to plan

effective storage and avoided losses due to obsolescence, pilferage and theft.

8.Issue of Materials-A good method of issue of materials to various jobs,

processes and orders should be devised to ensure delivery of right material at
right time and right quantity and quality for smooth flow of production.

9.Stock taking-Perpetual inventory should be followed for stock verification to

reveal differences in stock due to pilferage theft and wastage. Moreover
perpetual inventory system avoids closing down of factory for stock verification
and valuation.

10.Levels of stocks- are to be maintained in the form of reorder level,

maximum level and minimum level to avoid shortage and over stocking of
materials.

11.Economic ordering quantity is to be operated for each type of materials to

optimise the cost of buying and storage.

12.Pricing of Issues-A suitable method of pricing is to be followed for correct

valuation of material cost of jobs, orders, processes and valuation of closing
stocks.

13.Control of materials during the production process- Proper Accounting

and records are to be maintained to avoid wastage of materials during
consumption.

14.Suitable reporting system helps management to take decisions regarding

investment in materials and avoidance of obsolete, dormant and slow moving
materials.

Advantages of Material Control

An effective material control system-

1.Ensures availability of material for production.

2.Reduces wastage of raw materials.

3.Achieves economy of buying and storage cost.

4.Reduces pilferage, theft, obsolescence and other material losses.

5.Avoids excessive investment in stocks.

6.Helps in maintaining perpetual inventory system to furnish information to

management regarding materials.

7.Helps in ascertaining value of jobs, processes, and orders.

Materials Management and Organisation of Material Control.

Material management aims at minimising the cost through coordination of

planning, purchasing, receiving, storing and control of materials in an effective
manner. In these days of mechanisation and specialisation, logistics of
purchasing and integrating management are practised. This has resulted in
professional development of managers which will make them proficient in
satisfying the requirements of an integrated materials management to bring
together complex, conflicting and related functions of materials management.

Organisation of Material Control

Material control is effected through cooperation and coordination of various

departments involved such as purchasing department, receiving and inspection
department, stores ,production and stock control department.

The role and function of each of these department is discussed below:

1.Purchasing Department is to make the purchase of required quantity of

various items of materials at the right time of good quality at the most
economical price. The following are the functions of purchasing department:

1.Receiving of purchase requisitions from various departments.

2.Inviting quotations from different suppliers to deliver materials as per the

specifications of purchase requisitions.

3.Preparing a comparative statement of quotations of suppliers.

4.Selecting a supplier from the comparative statement of quotations, one who

offers most favourable terms with due regard to quality.

5.Drafting of purchase order and sending it to the supplier.

6.Following up of purchase order to receive the materials at the specified time.

7.Checking various documents and certifying that materials of requisite quantity

and quality are received and

8.Passing purchase invoice for payment if everything is in order.

2.Receiving and Inspection Department-This department plays a vital role in

examining the quality of raw materials and ensuring that sufficient quantity of
materials as per purchase order are received. The functions of this department
are as follows:

1.Receiving materials from various suppliers through various modes of

transport and acknowledge the receipts.

2.Preparing a Goods received note by filling up the details of quantity, grade

and other information about materials by count, weight etc.

3.Inspection of materials to check the quality and other specifications of

materials.

4.Sending the materials received to stores and other places.

5.Communicating ti the purchasing department and accounts department about

materials received and inform them of any damage, shortages etc.

3.Store keeping Department-The main functions of this department are as

given below:

1.Initiate purchase requisitions for materials, based onthe position of stock.

2.Maintain various levels of stock.

3.Receipt of materials from receiving and inspection department.

4.Check the materials received by comparing with purchase requisition and

place them in the proper bins.

5.Issue if materials on receipt of materials requisitions from various

departments.

6.Maintenance of stores records like bin cards, by entering the receipt, issue and
balance of materials.

7.Send periodical reports to the management regarding slow moving, dormant

and obsolete materials to enable them to take suitable decisions and avoid
losses.

4.Production Department- This department plays very crucial role in optimum

utilisation of raw materials and reducing material losses by performing the
following functions:
1.Initiate requisition for raw materials of required quantity and quality at the
right time to carry on with smooth flow of production.

2.Verification of raw material received from stores.

3.Maintain proper records of materials charged to various jobs, processes and

operations.

4.Prepare proper notes for return of material, transfer of material from one job
or department to another.

5.Prepare proper records regarding work in progress ,scrap ,wastage, spoilage

and defectives and send periodical reports to management to minimise these
losses.

5.Stock control Department-This department can be attached to cost

accounting department or this function may be performed by the store keeping
department itself. The main function of this department are:

1.Maintenance of perpetual stock records.

2.Make suitable adjustments of stock, based on the receipt of authorised notes

and

3.Ascertain the average consumption of raw materials in terms of quantity and

value.
Record Maintaining System in Inventory (Stock)

Inventory means stock. Every manufacturing concern has to maintain proper

and accurate records regarding the quantity and value of inventory in hand. The
records may be maintained according to any one of the following two systems.

1.Periodical Inventory system and

2.Perpetual Inventory system.

1.Periodical Inventory System Under this system stocks are verified only at
the end of the accounting period, usually a year.

2.Perpetual Inventory System - This system is also known as Automatic

Inventory System. It is an important aid to material control. Its main object is to
make available details about the quantity and value of stock of each item, at all
time. It consists of maintaining records for each type of material showing the
quantities and values of material received ,issued and in stock. It also covers
continuous stock taking.

Definition The Institute of Cost and Management Accounts (ICMA)

London., defines the perpetual inventory as a system of records maintained by
the controlling department which reflects the physical movements of stocks and
their current balance.

From the above definition it is clear that the perpetual inventory system
involves:

Maintenance of stock records namely

1. Bin card

2. Stores Ledger

2.Continous Stock Taking.

1.Bin Card- Bin is a place ,rack or cupboard where materials are kept. Each bin
has a card to show the position of stock in the bin. This card is known as bin
card or stores card. Only quantities are entered in the bin card. These cards are
used not only for recording of receipts and issues of stores but also to assist the
store keeper to control the stock.
When the materials are received an entry is made in the receipt column and
simultaneously the balance is entered in the balance column. Similarly when
materials are issued , an entry is made in the issue column and the balance is
entered in the balance column. So the balance in stores can be readily obtained.
The store keeper is answerable for any difference between the physical stock
and stock balance shown in the Bin card. By seeing the bin card the store keeper
can send the material requisition for the purchase of materials in time.

Bin card contains the particulars regarding description of materials ,bin number,
material, material code number, maximum level ,minimum level, reorder level
etc. The specimen of the Bin card is given below:

BIN CARD

Name of the Material Minimum Level

Material Code No. Maximum Level

Bin No. Re- order Level

Stores Ledger Folio No. Re-order Quantity

Receipts Issues Balance

Date Goods Qty Requisition No. Qty Qty Remarks

Received Note
No.
Advantages

1.It enables the store keeper to plan the receipts and issues of materials and keep
the stocks within the minimum and maximum levels.

2.It provides up to date record of materials received, issued and balance in

stock. This helps in the successful operation of a perpetual inventory system.

3.By seeing the bin card the store keeper can send the material requisition for
the purchase of materials in time.

2.Stores Ledger-Stores ledger is kept in the costing department. It contains

accounts for each class of material. It is usually maintained in the loose leaf
form. It is written up by the stores accountant or stores clerk. In the stores
ledger, stores received and issued are recorded both in quantity and value. As
the ledger contains a continuous record of stores received, issued and also the
balance on hand at any time, it is considered as part and parcel of perpetual
inventory. The balance of quantity as shown by bin card and stores ledger
should agree.

Stores ledger contains the particulars regarding maximum and minimum levels
stock, re-order level , re-order quantity, description of materials, code number at
the head of the account. A proforma of stores ledger is given below:
 STORES LEDGER

Name of the Material: Minimum Level

Code Number: Maximum Level

Description: Reorder Level

Re-order Qty.

Date Receipts Issues Balance

G.R.No Qty Rate Value M.R. Qty Rate Value Qty Rate Value
No

G.R.No- Goods Received Note M.R.No- Material Received Note

Continuous Stock Taking

Continuous stock taking is an essential feature of the perpetual inventory

system. Under continuous stock taking system a permanent stock taking team is
appointed. This team daily or at frequent intervals verifies the physical stock of
different items selected at random. Thus stock verification is done throughout
the year. The differences between the actual stock and the balance shown by the
bin card are noted. Reasons for difference are investigated. For each difference
to costing profit and loss account or charging to production overhead.

Perpetual inventory and continuous stock taking are not the same. Perpectual
inventory system refers to the system of maintaining stock records and
continuous stock taking. On the other hand, continuous stock taking is only the
physical verification of actual stock with stock records.
Advantages- The following are the advantages of perpetual inventory system.

1.It is not necessary to stop production as in the case of periodical stock taking.

2.Stores records are kept up to date.

3.The discrepancies are immediately detected and corrective action is taken.

4.Bin card and stores ledger give ready figures of stock position at any time.

5.Stock verification is systematic and more reliable as it is done by the experts.

6.Stock levels can be revised from time to time in order to avoid over stocking
or under stocking of materials.

7.The elements of surprise check prevents employees from misuse of materials.

8.Determination obsolescence etc can be avoided.

9.As stock figures are readily available, preparation of interim profit and loss
account and balance sheet is easy.

10.It facilitates proper planning of production programmes, framing buying

policies etc as ready information of stock position is available.

Distinguish between continuous stock taking and periodical stock taking

Continuous Stock Taking Periodical Stock Taking

1.It is held throughout the year. 1.It is held once in a year.

2.It is a continuous process 2.It is completed at one sitting.

3.It requires permanent stock taking 3.It is carried out by a temporary

team consisting of experts. committee composed of persons from
other departments.

4.It is a costlier method 4.It is a cheaper method

5.Normal and routine work will not 5.Normal and routine work will be
 be affected affected

6.Discrepencies can be rectified There is delay in taking action.

without delay

Documents used in the Process of Material Control

The following documents are used in the process of material control

1.Purchase Requisition- Purchase requisition is a document which authorities

the purchase department to purchase goods. The purchase department receives
purchase requisition from various sources, namely, store keeper, production
department, plant and maintenance engineer and heads of their departments
.The purchase requisition contains code number, description and quantity of
materials required and the signature of the requisitioner.

2.Purchase Order- A purchase order is a requisition made by the purchaser to

the supplier to deliver certain goods of requisite quantity and quality at the
terms and conditions agreed upon. Purchase order is an evidence of the contract
between the purchaser and the supplier. It contains name and material and
quantity ,price ,discount, terms of payment etc.

3.Goods Received Note- Goods received note is prepared is prepared by the

department receiving the goods from the supplier. The physical quantity and
quality of materials are carefully checked before they are sent to stores. The
goods received note is a proof of the receipt of the goods by the store keeper.

4.Material Requisition Note-It is a document which authorities and records the

issue of materials for use. Materials should be issued by the storekeeper only on
the presentation of a duly authorised material requisition note. The material
requisition note should be signed by the requisitioner and authorised by a higher
authority.

5.Bin Card- Bin card is a card attached to each bin. Only quantities of materials
received, issued and the balance are recorded in the bin card. It is maintained by
the store keeper. It shows the stock of material at any time. It is very useful in
material control.

6.Stores Ledger- Stores Ledger is kept in the costing department. It contains

accounts for each class of material. It is usually maintained in the loose leaf
form. It is written up by a stores accountant or stores clerk. In the stores ledger,
stores received and issued are recorded both in quantity and value.

7.Material Return Note-Materials supplied to a job may be in excess of its

requirement or may be defective. In such a case the concerned job will return
the material to stores along with a material return note. On receiving the
materials the store keeper will make an entry on the receipt side of the bin card.
Then their materials received note will be sent to the cost office which will give
necessary credit to the concerned job.

8.Material Transfer Note- Material transfer note is a document which records

transfer of surplus materials from one job to another or from one department to
another. Such should be discouraged because it will make control materials
difficult.
Bill of Materials- A bill of material gives a complete list of materials required
for a particular job or work order. It is generally prepared by the planning
department as soon as the work order is received. When the job is started all the
materials listed in the bills are sent to the production department. For regular
products printed forms of bill of materials may be used. In the case of large jobs
a separate bill of materials may be prepared for each part of the job. Thus the
bill of material serves as purchase requisition to the purchase department,
material requisition to the store keeper and work order to the production
department.

A specimen form of Bill of Materials is shown below

XYZ LTD.

BILL OF MATERIALS

Job order No. No.

Department Authorised Date:

S.No Description Code Qty For office use

of Material No. required
Rate Amount Remarks

Drawing Officer Store Keeper Accounts Officer

______________ ______________ ______________

Advantages

The bill of material serves the following purposes

1.A bill of material is kind of written authorisation to the store keeper for issue
of materials

2.It serves as a purchase requisition to the purchase department.

3.It is possible to calculate the material cost of all articles before they are
produced.

4.Procurement of materials can be planned in advance to avoid production

delays.

5.It may used as a guide for controlling consumption to materials as it provides

a complete list of materials required for each job.

6.A copy of bill of material to the accounts department will render the work of
accounting easier and speedier.
Inventory Control and its Techniques

Inventory control is a system which ensures the maintain of required quantity of

inventories of the required quality at the required time with minimum amount of
investment.

The terms inventory includes raw materials, stores, suppliers, spare parts, tools,
components, assemblies partly finished goods and finished goods.

The objective of inventory control is to achieve maximum possible inventory

turnover.

Factors on which the quantity of Inventory Maintained is Based.

1.Availability of Finance

2.Quantity, Discounts Allowed.

3.Storage space available.

4.Ordering cost

5.Receiving cost

6.Risk of Loss due to price fluctuations.

7.Risk of loss due to evaporation, obsolescence, theft, deterioration etc.

8.Economic Ordering Quantity.

9.Time to obtain delivery or lead time.

Objectives of Inventory Control

1.Keeping required material of adequate quantity in order to avoid disruption of

production.

2.Optimising investment in inventory and reducing carrying cost.

3.Following the policy of M.B.E(Management by Exception ) by reliving the

top management from involving in each and every decision relating to
inventory.
Vital Role of the Cost Accounting Department in Inventory Control.

1.Maintaining price records of all items of stores.

2.Pricing of Material Issues.

3.Preparing material abstract to identify the material cost of jobs, departments

and cost centres or processes.

4.Maintenance of stores inventory subsidiary ledgers to record receipts and

balance of materials under the perpetual inventory system.

Inventory Control Techniques

The following are various inventory control techniques used in different

industries.

1.Levels of stock and Economic Ordering Quantity.

2.ABC Analysis [Stock control According to Value]

3.VED Analysis.

4.Perpectual Inventory System.

5.Just in Time Inventory.

6.FNSD Analysis.

7.Automatic Order System.

8.Ordering Cycle Method.

1.Levels of Stock

The purpose of material control is to maintain their stock of raw materials as

low as possible. At the same time they must be made available as and when
required by the production department. There may be over stocking or under
stocking of materials if there is no proper planning.

Proper maintenance of stock level of each material is the main function of their
stores department .Following are the different levels of stocks to be fixed by the
store keeper for the purpose of material control.
1.Maximum Level

2.Minimum Level

3.Re-order Level

4..Danger Level

5.Average Stock Level

1.Maximum Level: This is the level above which the stock should not be
allowed to exceed at any time. This is fixed by taking into account the following
factors.

Formula

Maximum Level =

Re-order level + Reorder Qty (Minimum consumption x Minimum Re-

order period)

2.Minimum Level :This is the level below which stock should not be allowed
to fall at any time. If the stock goes below this level, there is a danger of
stoppage of production for want of materials. Minimum level is fixed by taking
into account the following factors.

a. Rate of consumption of material.

b. Time required to obtain fresh supply of material.

c. Re-order level.

Formula

Minimum Level = Re-order Level (Normal consumption x Normal Re-

order Period).

3.Re-order Level: This is the level at which a new order for material is to be
placed by the store keeper. In other words, this is the level at which a purchase
requisition is made out. It is fixed in between maximum level and minimum
level to ensure that the stock of hand does not fall below minimum level before
the receipt of ordered material. This level is fixed by taking into account the
following factors.
a.Rate of consumption of material

b.Minimum Level

c.Delivery time

d.Variation in delivery time.

Formula

Re- order Level = Maximum consumption x Maximum Re- order period

Economic Order Quantity (EOQ)

It is not a stock level. It is the ideal quantity of materials to be purchased at any

time .If purchases are made in large quantities, the cost of holding the stock will
be higher but the cost of purchasing would be less. On the other hand if
purchases are made in small quantities, the cost of holding the stock will be less
while the cost of purchasing would be high. Therefore the most economical size
of order is that the costs of purchasing as well as the costs of holding will be at
the minimum.

Formula

2AO
EOQ = ------------
C
A Annual Consumption in units.
O Ordering and receiving cost per order.
C - Cost of carrying inventory per unit per annum.
Danger Level- This is fixed below minimum level. When the stock reaches this
level, urgent action for purchase of material is taken.
Formula
Danger Level = minimum Rate of Consumption x Emergency Delivery
Time
Average stock Level This level indicates the average stock held by the firm.
It is calculated as follows.

Formula

Average stock Level = Minimum Level + of Re-order Quantity

(or)

Maximum Level + Minimum Level

__________________________

2.ABC Analysis

Efficient store keeper requires sufficient control over all items of stores.
However greater care is necessary in the case of costlier items. Therefore ABC
analysis envisages varied degree of care and control for different categories of
materials, according to their value. Hence it is known as selective value
approach. It is also referred to as Always Better Control system.

The inventory of some concerns may consist of a small number of items

representing a major portion of their inventory value, and a large number of
items may represent only a minor portion of the inventory value. In such
concerns ABC analysis is very useful.

Under ABC analysis the materials are classified into three categories on the
basis of their value

Category A - High value materials

Category B - Medium value materials

Category C - Low value materials

The concept may be made clear by the following illustration

Category Qty %toTotalQty ValueRs. %toTotal Average

value cost p.a.

A 40 10 70,000 70 1,750

B 80 20 24,000 24 300

C 280 70 6,000 6 2,142

400 100 1,00,000 100

Category A materials account for 10 percent of the total quantity of materials.

But, in terms of value, they account for 70 percent of the total. Hence,
maximum control must be exercised on category A items.

Category B materials represent 20 percent of the total quantity and their share
in the total value is 24 percent. These items require reasonable degree of care
and control.

Category C materials represent 70 percent of the total quantity but value is only
6 percent of the total of inventory. They need a simple and economic system of
control.

Advantages

1.It ensures closer and stricter control on costly items in which large amount of
capital has been invested.

2.Scientific and selective control helps in the maintenance of high stock -turn
over ratio.

3.Investment in inventory can be regulated and funds can be utilised in the best
possible manner.

4.Management time is saved since attention is paid only to some of the items
having more value.
3.VED Analysis

Vital, Essential and Desirable analysis is done mainly for control of spare parts,
Spares are controlled on the basis of their importance.

Vital spares are crucial for production. Non- availability may stop production.
The stock out cost of these spared is very high.

Essential spares are spares are spares the stock out of which cannot be
sustained for more then a few hours and cost of loss of production is high.

Desirable spares are needed but their absence for a short time may not lead to
stoppage of production.

4.Perpetual Inventory System

The ICMA defines perpetual inventory as A system of records maintained by

the control department which reflects the physical movement of stocks and their
correct balance. It is clear from the above definition that perpetual inventory
system:

a. it is a method or system of recording materials.

b. reflects the physical movement of materials and records the balance of

material after every receipt and issue.

C. facilitates regular checking and avoids the need for closing down for stock
taking.

The records forming part of the system are:

1. Bincard card maintained by the store keeper in which all the physical
quantities of receipts, issues, and balance are recorded.

2.Stores Ledger Cards maintained by the costing department in which

quantities as well as values of receipts ,issues and balance are recorded.
Physical verification of the stores is also made by a programme of continuous
stock taking. Any shortage or surplus noted are immediately rectified. Thus
bincard card, Stored ledger card and Physical verification together constitute the
perpectual inventory system.
Merits of Perpetual Inventory System

1.It is not required to close the operations to verify stocks as it has been done
throughout the year.

2.Profit and Loss A/c and Balance sheet can be prepared at any time as stores
ledger accounts reveal stock quantity and value at any time of the year.

3.Continous stock taking ensures reliable check on stocks.

4.As stock verification is done systematically more reliable figures are revealed.

5.Continous stock taking acts as vigilance on the work of store keeper and
accountant to maintain accurate records and quantities.

6.Production is planned according to the quantity of raw material available as

the perpetual inventory reveals the information about stock at all times of the
year.

7.Parallel maintenance of bincard and stores ledger card facilitates operation of

internal check system.

8.Investment in stores is controlled by comparing actual stocks with maximum

and minimum levels.

9.Correct stock figures are made available to insurance company to claim

against loss on account of fire.

5.Just - in - Time Inventory (JIT)

Business concerns are giving maximum attention to reducing stock levels by

establishing cardial relationship with suppliers to arrange for frequent delivery
of quantities. This is called Just- in time purchasing.

The objective of just- in time purchasing is to obtain delivery of material

immediately before their use. This is possible with the co-operation of the
supplier .The company guarantees to reasonable prices.

Just in time buying of raw materials recognises the disadvantages associated

with high inventory cost with high inventory levels. Hence JIT advocates
making timely purchases as and when need for raw materials arises. The
purchases are made proven suppliers who can make ready delivery of goods as
and when need arises.
Main Advantages of JIT Purchasing

1.The investment in stocks is minimum.

2.The clerical work relating to issues is minimised. As the purchase price of

different lots will not fluctuate much the issue price is same. This results in
reduction of clerical cost.

c. Good rapport with vendors has several long term benefits

d. Carrying cost of inventories is practically negligible.

6.FNSD Analysis

Under FNSD analysis the stores items are divided under four categories. The
basis of classification is their usage rate. Descending order of usage is followed
where by

F stands for fast moving items that are consumed quickly.

N stands for normal moving items which are exhausted over a period of a year
or so.

S stands for slow moving items which are not consumed frequently but are
expected to be exhausted over a period of two years or more.

D stands for dead items and the consumption of such items is nil.

Stock control under FNSD is done by continuous monitoring of all the four
categories of items. Fast moving items are properly ordered to avoid stock out
of such items .Normal moving items are reviewed at regular intervals and orders
for restoring shall be made as per a planned schedule.

Stock of slow moving items of stores are reviewed very carefully to avoid over
stocking of such items. Dead stock items are taken as obsolete items which have
become outmoded and have no further use. Alternative uses should be found for
dead stock items or else they should be disposed of at the earliest so that their
value may not deteriorate further.

7.Automatic Order Systematic

This method of inventory control is done with help of computers. Order for
fresh purchases are automatically placed when the inventory reaches order point
quantity (OPQ).For each type of material, records are maintained by data
processing in the form of receipts and issues. When the records show order
point the staff concerned place order for necessary quantity. This system
ensures that materials are always promptly replaced.

8.Ordering Cycle Method

In this method the review of materials held in stock is done in a regular cycle.
The length of cycle depends on the nature of material. Materials which are
expensive and essential have a shorter review cycle and non vital materials
have longer review cycle. At the time of review order is placed to bring the
inventory to the desired level.

Order cycle method is also called 90-60-30 cycle method. The maximum stock
level is equal to 90 days supply. When the inventory reaches 60 days supply an
order is placed for 30 days supply. The reorder point is equal to 60 days supply
and reorder quantity would be equal to 30 days supply.

Cost of Material
A. Selection of Supplier

Problem No.1

After inviting tenders two quotations are received as follows:

Supplier A :Rs. 2.20 per unit

Supplier B : Rs.2.10 per unit plus Rs.2,000 fixed charges irrespective of units
ordered.(1) Calculate the order quantity for which the purchase price per unit
will be the same.(2)The purchase officer wants to place an order for 15,000
units. Which supplier should be selected?

Problem No.2

B. Computation of Purchase Price

A supplier quotes for material M as follows:

Lot price 200Kg @ Rs. 5 per Kg.

500 Kg @Rs.3.5 per Kg.

800 Kg @ Rs.2.5 per Kg.

He allows a trade discount of 25% and a cash discount of 3% if payment is
made within 15 days. One container is required for every 100 Kgs of the
materials and the containers are charged at Rs.15 each but credited at Rs.10 on
return. The buyer decides to buy 800 Kgs. Transport charges amounting to
Rs.200 are charged by the supplier. Calculate the purchase price of 800 Kgs.

Problem No.3

C. Purchase Price Computation with Material Price

In a truck load, the following materials were received

Code Material Quantity Rate

No.

M2010 Carbon Black 3,050 Kgs 4.00 Per Kg.

P5025 S.H.Phosphate 2,050 Kgs 3.00 Per Kg.

Sales Tax was charged at 5%

Railway Freight Rs.1,050

Transport Charges Rs.100

Loading & unloading Rs.50

The Goods Received Note from the store keeper showed the following
quantity.

M2010-3,000Kgs.

P5025- 2,000 Kgs. From the above figures you are required to calculate the
purchase rate per Kg. Of Carbon Black and S.H.Phosphate.

Problem No.4

D.Purchase cost of Materials in Mixed Lots

A truck load of materials of different grades was purchased

forRs.2,25,000.Materials are sorted into the following grades whose market
price is shown against each of them.
 Units Selling price

Per unit

Grade I 25,000 6.00

Grade II 15,000 5.00

Grade III 10,000 2.50

Find out the purchase rate per unit of each grade of the material assuming that
all the grades yield same rate of profit.

Levels of Stock-Formula

1.Maximum Level

Formula

Maximum Level =

Re-order level + Reorder Qty (Minimum consumption x Minimum Re-order

period)

2.Minimum Level

Formula

Minimum Level = Re-order Level (Normal consumption x Normal Re-

order Period).

3.Re-order Level

Formula

Re- order Level = Maximum consumption x Maximum Re- order period

4.Danger Level

Formula
Danger Level = Minimum Rate of Consumption x Emergency Delivery Time

5.Average Level
Formula

Average stock Level = Minimum Level + of Re-order Quantity

(or)

Maximum Level + Minimum Level

__________________________

Levels of Stock

Problem No 1

Find out the Re-order Level

Maximum usage 300 units, Minimum usage 200 units.

Re-order period 8 to 10 days.

Problem No 2

Find out the Maximum consumption

Re-order level 4,000 units, Minimum level 2,000 units

Re-order period 2 to 4 weeks.

Problem No-3

From the following information, calculate

1.Maximum stock level 2.Minimum stock level 3.Re-order level

Minimum consumption 240 units per day

Normal consumption 300 units per day

Maximum consumption 420 units per day

Re-order quantity 3,600 units

Re-order period 10 to 15 days

Normal order period 12 days

Problem No- 4

From the following particulars , calculate

1.Maximum level 2. Minimum level 3.Re-order level

Normal usage 100 units per day

Minimum usage 60 units per day

Maximum usage 130 units per day

Economic order Quantity 5000 units

Re-order period 25to 30 days

Problem 5

Calculate the Minimum stock level, Maximum stock level and Re-order
level from the following information

Minimum consumption 100 Kgs per day, Maximum consumption 150 Kgs per
day, Normal consumption 120 Kgs per day ,Re-order period 10-15 days, Re-
order quantity 1500 Kgs, Normal re-order period 12 days, Time for emergency
supplies 3 days.

Problem No 6

Two components A and B are used as follows;

Normal usage 50 units each per week, Minimum usage 25 units each per week,
Maximum usage 75 unit per week, Re-order quantity A- 300 units, B 500
units, Re-order period A- 4 to 6 weeks, B- 2 to 4 weeks. Calculate for each
component 1.Re-order level, 2.Minimum level, 3. Maximum level 4.Average
stock level.

Unit - II

Economic Order Quantity (EOQ)

It is not a stock level. It is the ideal quantity of materials to be purchased at any

time .If purchases are made in large quantities, the cost of holding the stock will
be higher but the cost of purchasing would be less. On the other hand if
purchases are made in small quantities, the cost of holding the stock will be less
while the cost of purchasing would be high. Therefore the most economical size
of order is that the costs of purchasing as well as the costs of holding will be at
the minimum.

Formula

2AO
EOQ = ------------
C
A Annual Consumption in units.
O Ordering and receiving cost per order.
C - Cost of carrying inventory per unit per annum.
Problems
Problem No. -1
Calculate Economic Order Quantity
Annual requirements 3600 Kgs
Cost of placing and receiving one order Rs.10
Annual carrying and storage cost Rs.20 p.u
Problem No. - 2
Calculate Economic Order Quantity from the following

Consumption during the year 600 units

Ordering cost Rs.12

Carrying cost 20%

Price per unit Rs.20.

Problem No.-3

Find out the Economic Ordering Quantity from the following

Annual usage Rs.1,20,000, Cost of placing an order Rs.15,

Annual carrying cost 10 % of inventory value.

Problem No. 4

Cost of material is Rs.30 p.u. Total annual needs are 800 units. Annual return
on investments is 10%,Rent,Insurance and taxes per unit, per annum Re.1,cost
of placing an order is Rs.100.Calculate the Economic Order Quantity.

Problem No. - 5

From the following particulars given below, calculate Economic Order Quantity
and the number of orders to be placed per year.

Total consumption of material per year 10,000 Kgs. Buying cost per order
Rs.50. unit cost of material Rs.2 per Kg. Carrying and storage cost 8% on
average inventory.

Problem No.- 6

The daily demand for a mechanical part is about 25 units. Every time an order is
placed, a fixed cost of Rs.25 is incurred. The daily holding cost per unit is 40
paise. Determine the economic lot size.

Problem No.- 7

A Ltd. Manufacturers product X and provides the following information.

Calculate Economic Order Quantity.

Monthly demand 2000 units.

Annual carrying cost 12%

Raw material required per unit of finished product 2 Kg.

Ordering cost per order Rs.180

Purchase price of input unit Rs.25Kg

Unit - II

PRICING OF ISSUE OF INVENTORY

Pricing of Materials

When materials are issued for any production work of any job, they have to be
valued in the costing department. If materials are purchased for any particular
job, the total cost of the materials can be charged to that job. But generally raw
materials are purchased in anticipation and issued whenever they are needed for
production, assuming that the rate of raw materials is the same. But this is not
the case always. Prices of everything change on the prevailing condition of the
market. The stock lying in the store consists of many purchases at different rates
and when issued, they create problems as to the fixation of the price. Therefore
the important methods of pricing of materials issued are:

(A)Actual Price Method

1.First in first out (FIFO)

2.Last in First out (LIFO)

3.Specific price

4.Base Stock

5.Highest in first out(HIFO)

(B)Average price Method

1.Simple average

2.Weighted average

3.Periodic simple average

4.Periodic weighted average.

(C)Other Methods

1.Standard price Method

2.Market price Method

3.Inflated price Method.

No hard and fast rule can be laid sown in selecting the pricing method. However
a suitable system of pricing materials is to be selected by considering the
following points.

1.The system of pricing materials must recover the cost price of the materials.

2.It must be as far as possible near to the market or current price.

3.Adopt a good system so as to remove the wide fluctuations in the prices.

4.It depends upon the policy of the management.

5.First come first served is a logical system.

6.Deterioration and obsolescence can be avoided.

First in First Out (FIFO) Method

Under this system, materials are issued in the order in which they are received
in the store. The material received first will be issued first. First come first
served. In other words old stocks are issued first and new stocks will be issued
afterwards. As a result of this system, when we value the closing stock of
materials, that will be at the latest price.

Advantages

1.The method is simple and easy to operate.

2.Closing value of materials will reflect at current market price.

3.This system is good for slow moving materials.

4.When prices are falling this method gives better result.

5.First come ,first served is a logical system.

6.Deterioration and obsolescence can be avoided.

Disadvantages

1.When prices fluctuate, calculation becomes complicated.

2.Complicated calculation will invite clerical errors.

3.Under fluctuating prices, materials charged to different but similar jobs vary,
leading to non- comparison.

4. When prices fall ,jobs are charged with higher price of earlier materials, the
quotations are less competitive.

5.When materials are returned to the store, they are treated as new purchases,
for the purpose of next issue.
 STORES LEDGER (FIFO)

FIRST IN FIRST OUT METHOD

Name of Article -------- Folio--------------

Code---------- Maximum Level---------
Bin card No.--------- Minimum Level----------
Units------- Reordering Level---------
Reordering Quantity-----

Receipts Issues Balance

Date Particulars Qty. Rate Amount Qty Rate Amount Qty Rate Amount
Rs. Rs. Rs. Rs. Rs. Rs.
FIFO

Problem No. -1

From the following details prepare the stores ledger account by adopting FIFO
Method. What would be the value of stock at the end of the period?

Dec 1 opening stock 1000 units @ Rs.2.00 each.

3 Purchased 800 units @ Rs.2.10 each.

5 Issued 1200 units.

10 Purchased 1600 units @ Rs. 2.10 each.

Problem No . 2

From the following particulars ,prepare stores ledger adjustment account under
FIFO Method.

March 2 Purchased 200 units @ Rs. 200 per unit.

4 Issued 150 Units.

6 Purchased 200 Units @ Rs.220 per unit.

10 Issued 100 units

16 Purchased 200 units @ Rs.210.

18 Issued 220 units

24 Purchased 150 units @ Rs.230

25 Issued 190 units

28 Issued 30 units.

Problem No. -3(FIFO Method with Returns and Losses of Materials )

Draw a stores ledger card recording the following transactions under FIFO
Method.

2010 July 1 Opening stock 2000unit @ Rs.10 each

5 Received 1,000 units @ Rs. 11 each

 6 Issued 500 units

10 Received 5,000 units @ Rs.12 each

12 Received back 50 unit out of the issue made on 6th July.

14 Issued 600 units

18 Returned to supplier 100 units out of goods received on 5th

19 Received back 100 units out of the issue made on 14th July

20 Issued 150 units

25 Received 500 units @ Rs.14 each

28 Issued 300 units.

The stock verification report reveals that there was a shortage of 10 units on 18 th
July and another shortage of 15 units on 26th July.
Last - in- First Out Method

Under this method, the material last purchased and kept in stores are issued
first and then the preceding lots purchased are issued.

Advantages of LIFO Method

1.Issues are based on actual cost.

2.Issue price reflects current market price.

3.Product cost will be based on current market price and hence will be more
realistic.

4.There is no unrealistic profit or loss.

5.Simple to operate if purchases are not many and prices are steady or rising.

6.When prices are rising this method is helpful in preparation of quotation or

estimates.

Disadvantages of LIFO Method

1.This method involves considerable clerical work.

2.Under falling prices, issues are priced at lower prices and stocks are valued at
higher rates.

3.Stock of material shown in the balance sheet will not reflect market price.

4.Due to variation in prices, comparison of cost of similar jobs is difficult.

 STORES LEDGER (LIFO)

LAST IN LAST OUT METHOD

Name of Article -------- Folio--------------

Code---------- Maximum Level---------
Bin card No.--------- Minimum Level----------
Units------- Reordering Level---------
Reordering Quantity-----

Receipts Issues Balance

Date Particulars Qty. Rate Amount Qty Rate Amount Qty Rate Amount
Rs. Rs. Rs. Rs. Rs. Rs.
LIFO Problems

Problem No-1

1.Raghul who newly set up a factory uses cost price as the basis for charging
out materials to jobs. The receipts side of the stores ledger account shows the
following particulars.

500 articles bought at Rs.3.00 each.

700 articles bought at Rs.3.10 each.

Successive issues of 300 and 600 articles were made. At what price should
each of these issues be made under LIFO method.

Problem No-2

The stock of a material as on 1 st April was 200 units a@ Rs. 2 each.The

following purchases and issues were made subsequently. Prepare stores Ledger
Account showing how the value of the issues would be recorded under LIFO
Method.

April 5 Purchases 100 units @ Rs.2.20 each.

10 Purchases 150 units @ Rs.2.40 each.

20 Purchases 180 units @ Rs.2.50 each.

2 Issues 150 units

7 Issues 100 units

12 Issues 100 units

28 Issues 200 units

Problem No. -3(LIFO Method with Returns and Losses of Materials )

Draw a stores ledger card recording the following transactions under LIFO
Method.

2010 July 1 Opening stock 2000unit @ Rs.10 each

5 Received 1,000 units @ Rs. 11 each

6 Issued 500 units

10 Received 5,000 units @ Rs.12 each

12 Received back 50 unit out of the issue made on 6th July.

14 Issued 600 units

18 Returned to supplier 100 units out of goods received on 5th

19 Received back 100 units out of the issue made on 14th July

20 Issued 150 units

25 Received 500 units @ Rs.14 each

28 Issued 300 units.

The stock verification report reveals that there was a shortage of 10 units on 18th
July and another shortage of 15 units on 26th July.

SIMPLE AVERAGE METHOD

Issue prices of raw materials are fixed at the calculated average unit price.
When new purchases are named at different rates, the average changes. This
method of simple average is not generally followed, because it fails to recover
the cost price of materials. For Example :

Issue price = Total of unit Prices of Materials in Stock

Number of Prices

100 Units purchased @ Rs.5

200 Units purchased @ Rs.6

300 Units purchased @ Rs.7 Average price = 5+6+7 /3 = 6

When issues are made at the rate of Rs.6, recovery from production = Rs.3600
(600 Rs.6 ; but the actual cost paid is Rs.3800 (100 5 + 200 6 + 300 7).
Therefore there is an under recovery. Hence, this system is not followed. This
defect is removed under the weighted average system.

Advantages

It is Easy to operate
It reduces clerical work
When there are slight fluctuations in price, it gives good result.

Disadvantages

Costs are not fully recovered.

This system is not generally followed.

Problem 1

The following particulars have been extracted in respect of material X. Prepare

Ledger account showing the receipts and issues, pricing the materials issued on
the basis of Simple Average method.

Receipts

3rd Oct Purchased 500 Units at Rs. 4.00 per unit

13th Oct Purchased 900 Units at Rs.4.30 per unit

23rd Oct Purchased 600 Units at Rs. 3.80 per unit

Issues

5th Oct Issued 400 units

15th Oct Issued 400 Units

25th Oct Issued 600 Units