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    Unit 4 - Material Control

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    Unit 4 - Material Control

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    8 views22 pages

    Unit 4 - Material Control

    Uploaded by

    kevin75108

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 22

    MATERIAL CONTROL

    UNIT - 4
    MANAGEMENT ACCOUNTING FOR
    ENGINEERS
    Materials:
    The term materials”, generally used in manufacturing concerns, refers to raw
    materials used for production, sub assemblies and fabricated parts. The terms
    “materials” and “stores” are sometimes used interchangeably. However both the
    terms differ. “Stores” is a wider in meaning and comprises many other items
    besides raw materials, such as tools, equipments, maintenance and repair items,
    factory supplies, components, jigs, fixtures. Sometimes, finished goods and partly
    finished goods are also included within the scope of this term. It continues an
    important part of the cost of production of commodity. They account for nearly
    60% of the cost of production of large number of organizations.
    What is Material Control?
    Material Control is a management function that is concerned with the storage,
    handling, and use of materials to minimize waste and improve inventory
    accuracy. This process can be beneficial for companies to reduce costs and
    improve organization and productivity.
    Material control basically aims at efficient purchasing of materials, their
    efficient storing and efficient use or consumption.

    It requires maintaining the desired levels of inventories in the best economic


    interest of an entity. The objective is to keep the cost low while meeting
    consumer demand to maximise profits. In simpler words, inventory control
    involves monitoring stock usage, movement, and storage in a business.
    Objectives of Material Control :
    (a) All types of raw materials should be available through out. This ensures
    uninterrupted production schedule.
    (b) There should be no under-stocking, which generally hampers the production
    process.
    (c) There should be no over-stocking, which makes the capital dearer.
    (d) The purchaser is able make a valuable contribution to reduction in cost by
    purchasing raw materials at the most favourable prices.
    (e) Purchase of material should be of the right quality consistent with the
    standards prescribed in respect of the finished goods.
    (f) Proper storage conditions should be provided to different types of raw
    material in order to minimize the loss of material.
    (g) There should be a system to give complete and up to date accounting
    information about the availability of material.
    Inventory control functions and steps
    Inventory control is connected to the purchasing function of an organisation. Functions of
    inventory control managers involve product ordering, storage, and maintenance of stock or
    inventory in a cost-effective manner.
    Steps involved in inventory control are as follows-
    Step 1: To decide the minimum level of inventory
    A production team must maintain a good equation with the sales and marketing teams
    since the latter two teams work closely with customers. It will help them decide the levels
    of inventories, such as the maximum and minimum limits. A business owner can
    understand whether or not raw materials are going to get obsolete before production
    begins. Also, this information helps them stock up scarcely available raw materials to
    produce finished goods without delays.
    Step 2: Setting the re-order levels
    With ever-changing customer tastes and preferences, there may be increased demand for a
    product to meet as a business. It requires advanced preparation and decision to produce
    the ideal quantity to meet the demand. This step requires planning to re-stock the raw
    materials within a committed time to produce the finished products to the customer.
    Step 3: Opting for a sound inventory control method
    The method that a business chooses must help it determine the re-order quantity at any
    given time. Businesses can pick any popular inventory control methods such as ABC
    analysis, Just In Time (JIT), FSN method known as Fast, slow, and non-moving classification,
    and the Economic order quantity (EOQ).
    Techniques and Types of Inventory control:
    ABC analysis-
    It involves categorising inventory into three buckets called A, B and C depending
    upon the importance of the inventory to its profit. A category consists of
    expensive items, and hence a small inventory is held. B category has average-
    priced inventory with medium sales frequency. Category C inventories are low in
    value but with high sales frequency. It requires less inventory control compared
    to A or B.

    Just-in-time (JIT) inventory management-


    It is a technique to arrange raw material orders from suppliers in sync with the
    production schedules to reduce inventory costs. There will be no
    excess inventory stored beyond the production requirements, and hence it leaves
    no scope for dead stock in the organisation.
    VED Analysis
    VED analysis in inventory management deals with the classification of materials based
    on their importance to other materials.
    Vital (V): These are essential materials whose non-availability will be putting a halt to
    business operation. These materials need to be in stock at all times else, production
    will be affected.
    Essential (E): This refers to materials that you require a certain amount of. You just
    require a minimum amount of them to keep production active.
    Desirable (D): This refers to materials that do not really affect production. Production
    can run with or without these materials

    Material Requirement planning (MRP):


    Material requirements planning (MRP) is a system for calculating the materials and
    components needed to manufacture a product. It consists of three primary steps:
    1. Taking inventory of the materials and components on hand,
    2. Identifying which additional ones are needed and
    3. Then scheduling their production or purchase.
    Fast, slow, and non-moving (FSN)-
    It involves the classification of inventories into fast-moving, slow-moving and non-
    moving stock for deciding the pace at which a business can place orders.

    Fast-moving inventory
    Fast-moving inventory comprises inventory that moves in and out
    of stock fastest and most often. Therefore these goods have the
    highest replenishment rate. Items in this category generally
    comprise less than 20% of the total inventory.

    Slow-moving inventory
    Items in this category move slower, so their replenishment is also
    slower. This category comprises around 35% of the total inventory
    in an organization.

    Non-moving inventory
    The last category of this analysis is the least moving portion of the
    inventory and also includes the dead stock. Replenishment of such
    inventory may or may not occur after utilization. This category can
    go as high as 55%-60% of the total inventory in organizations.
    Determination of Inventory Levels and EOQ:

    Inventory Levels:

    Minimum Level = Re-order Level – ( Average consumption X Average re-order


    period ).

    Maximum Level = Re-order level + Re-order quantity – (Minimum consumption X


    Mimimum re- order period)

    Reorder Level = Maximum consumption X Maximum re-order period (or)

    Reorder Level = Minimum Level + (Average consumption X Average re-order period)

    Average inventory Level = Minimum Level + Maximum Level


    2
    Danger Level = Average consumption X Lead time for emergency purchases.
    ECONOMIC ORDERING QUANTITY: (EOQ)

    Purchase department in manufacturing concerns is usually faced with the problems


    of deciding the ‘order quantity’.
    If the order size is big, then the storage cost is higher.
    On the other hand if order size is small, then the ordering cost will be high.
    In order to minimize ordering and carrying costs we need to determine such ordering
    quantity which minimizes both these two costs.
    The size of the order in which both ordering and carrying costs are minimum is
    known as economic order quantity.

    Ordering Costs:
    It refers to the costs incurred for acquiring inputs. These costs include:
    (1) Cost of placing an order
    (2) Cost of transportation
    (3) Cost of receiving goods
    (4) Cost of inspecting goods

    There is an inverse relationship between order size and ordering costs.


    Bigger order quantity means lower ordering costs.
    Carrying costs:
    It refers to the costs incurred in maintaining a given level of inventory.
    These costs include:
    (1) Cost of storage space.
    (2) Cost of handling material
    (3) Cost of Insurance
    (4) Cost of deterioration or obsolescence.
    (5) Cost of store staff

    There is positive relationship between order size and carrying cost.


    Bigger order quantity means high carrying costs.

    ECONOMIC ORDER QUANTITY ( EOQ) FORMULAE:

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