CHAPTER FIVE

STORAGE
5. 1 STORAGE FUNCTION & RESPONSIBILITIES

• Materials form a very high percentage of the

cost of production of a product. It is, therefore,
necessary to have a close watch on the proper
use of the materials.
• The best method of maintaining materials
properly is store keeping.
 Cont...
• It is a service function in a manufacturing concern,
which deals with the physical storage of goods
under the keeper of a well trained and experienced
person termed as "storekeeper" or "store
controller". Un worked or raw materials are usually
known as stores and the place where such materials
are kept in stores
 OBJECTIVES OF STOREKEEPING

• The main objectives of storekeeping are to receive, to

store and to issue the raw materials or goods at the
minimum cost.
• In brief, the objectives of storekeeping are:

1. Receiving handling and issuing goods economically

and efficiently.
2. Using the storage available space and labor effectively.
Cont....
3. Protection of all goods in stores against all losses,
fire, theft and obsolescence
4. Facilitating inventory taking from time to time by
the internal audit department or the management.
5. Maintaining regular supply of raw materials at all
times when properly authorized.
6. Facilitating ordering of required materials.
 FUNCTIONS OF STOREKEEPING

• In order to achieve the above objectives the stores

department or the storekeeper must perform the following
function:
 To collect materials from vendors/supplier against orders
placed and from manufacturing departments at the end of a
particular job or activity.
 To verify the goods received from vendors by the orders
forms and to report of return the goods to them if they are
not up to the mark as per order placed.
 Cont...

Storing all materials in a safe and in a convenient

manner so that it may be immediately available as and
when required.
To use the storing space to the maximum of its
capacity with the minimum of labor.
To ensure cleanliness and tidiness in the store.

To maintain all records of receipts, issues and

balances in hard.
 Cont...
To provide maximum store keeping services to the
manufacturing and sales departments at a minimum
cost.
 To cooperate closely with the buying officer,
planning officer, production manager for planning
effectively for Inventory control.
 To inform the purchase department from time to
time about the materials required in the store.
LOCATION & LAYOUT
In stores layout, the governing criteria are:
 Easy movement of materials,

 Good housekeeping, and sufficient space for men and

materials handling equipments,
 Thoughtful use of storage equipments, such as shelves,
racks, pallets and
 Proper preservation from rain, light and such elements.
These problems are more important in the case of items that
have limited shelf life
 Cont...
The number of end users and
 Their location,
 The volume and variety of goods to be
handled,
 The location of the central receiving
section and
 Accessibility to modes of transportation
such as rail or road.
 STORES SYSTEM & PROCEDURES
• The real function of storekeeping starts only after
the materials are received in stores.
• A store is a place where materials can be kept
scientifically and safely.
• It is obvious that materials should be kept in
stores where they will be safe against
deterioration and stealing.
Cont....
• They should be kept in a manner that they can
be quickly delivered to the other departments
as and when it is requisitioned.
The following are some of the important
points to be noted in this connection.
Cont...
• In large factories several storerooms may be
provided.
• They may be located in different plants or at
several places in the same plant or at different
places for different commodities.
Cont...
• In such cases where a number of storerooms
are maintained, separate storekeeper is
appointed as in charge of individual
storerooms and they report their activities to
the general or head storekeeper.
Cont...
• The head storekeeper is usually appointed to
control and coordinate the storekeeping
activities properly of all the storerooms.
• The number of storerooms depends upon the
size and the importance of the materials and
the nature of materials.
Cont...
• The activities generally undertaken by the stores
department are as follows:
Receiving in coming materials from the
receiving section or vendors.
Classification of goods.
Cont...

Identification of materials.
Placing the goods at appropriate place
Storing
Maintaining stores records and accounts.
Issuing materials.
Cont...
• Two basic systems can be used in physically
controlling stores materials:
1. A closed stores system.
2. An open stores system.
Cont...
• The application of each depends on the nature and

requirements of a specific production operation.

• As a general rule, most firms use one system for

certain materials and the second system for others.

 1. Closed system

• All the materials are physically stored in a closed

or controlled area.
• Wherever possible, the general practice is to
storage physical control by locking the storage
area.
Cont...
• As a rule, no one other than stores personnel is
permitted in the stores area.
• Material enters and leaves the area only with the
accompaniment of an authorizing document.
 Open system
• It represents the second major type of stores system.

• Its widest use is in highly repetitive, mass production

types of operations that exhibit a continuous and
predictable demand for the same materials.
• Most JIT manufacturing systems exemplify this
situation
STOCK RECEIPT, ISSUE AND DISPATCH

• Storekeeping is a very important activity in a

manufacturing concern.
• The storekeeper performs several functions
and bears all liabilities as to receiving storing
and issuing of materials.
Cont...
• However, a large firm usually has many
function diversions of the stores namely
receiving section, stores section, Accounting
section and Issuing and dispatching section.
• A brief description of these may be given
below:
1. Receiving section

Their duties are as follows:

Receiving the materials, making them unpacked
and recording the receipts in "Goods Received
Book".
Checking or companying the goods with the order
placed by the purchasing department.
Cont...
If there is any discrepancy, it should be
immediately reported to the purchasing
department so that the necessary steps may be
taken for the return of goods by the
department.
Cont....
 In order to satisfy itself with the quality of goods
received, the services of engineers or chemist etc.
may be obtained and getting the quality of materials
checked.
• In large firms, testing laboratory may be maintained
for the purpose or inspecting staff may be appointed
for inspection.
 Cont....
Once the goods are thought fit for acceptance,
receiving section will prepare a "Goods Received
Note". Four copies of this note are prepared and
three copies are sent to the storekeeper along with
the goods received, storekeeper then sends two
copies of it to the account department and
concerned department of which materials required
after having one copy with them.
2. Issuing and dispatching section

• The issue section undertakes the responsibility of

issuing the materials to the using departments.
• In order to prevent malpractices, the materials
must be issued only against the properly
authorized requisition slips.
• These requisitions must be properly checked and
scrutinized to avoid over issue of materials.
Cont...

• All requisitions received must be posted

immediately or daily on the bin cards and on the
stock control cards.
• The finished goods are also dispatching from this
section based on the advice from the sales
department. It should be properly recorded in
terms of scientific manner for the purpose of
knowing exact quantity of inventory at any times.
 Stores accounting
• In relation to the estimation of the product for pricing
decisions, stores accounting assumes a key role.
• Material costing is very important in terms of the
valuation of the cost of materials consumed by the
production department as well as in terms of the
estimation of the value of materials held in stock.
1. First-in-First Method (FIFO)
• Under this system, it is assumed that the materials
first received are to be issued first. Thus units
issued are priced at the oldest cost price listed on
the store-ledger sheets.
• It does not, however, mean that the materials
received first are physically issued on first in first
out basis but an attempt is made to issue the
materials first which run the risk of obsolescence.
 Cont...
• As soon as the oldest batch is exhausted in records, the
price of the next oldest batch is charged and this
practice goes on.
• Merits

– It is most suitable when the prices are falling.

– Simple to understand and easy to operate

– It is correctly as curtained for cost of job or work-

order
 Cont...

– Closing stock of raw materials are valued at recently

purchased price.
– It is logically correct because it takes into account the
normal procedure of utilizing the oldest materials in
stock.
• Demerits
– Possibility of clerical errors in ascertaining the prices.
– It is not suitable when the prices are rising.
2. Last-in-first-out Method (LIFO)

• It is just reverse of the FIFO method as it

assumes that the materials most recently
received are to be issued first and the jobs and
work orders are charged out the jobs and work
orders are charged out on that basis.
Cont...
• Thus, in this method the price of the last
consignment is used for pricing materials
issues until it is exhausted, then the next
consignment pricing is used and so on through
succession consignments.
Cont...
• Merits
– It is most suitable when the prices are rising
– It recovers current prices of materials and
possibility of as curtaining the job or work order
accurately.
– Current costs are correlated with current sales and
management gets a accurate picture of profit or loss.
Cont...
Demerits
• It is possible for clerical error.

• Comparison of jobs becomes difficult.

• It is not suitable when the prices are falling.

3. Average cost method
• The principle underlying the average cost
method is that the identity of materials of
different lots is lost as soon as they are
received in store and therefore, it is not then
proper to charge the production at a purchase
price of a particular lot.
• The correct approach to this problem may be
the average cost method at which the issues of
materials should be priced
Cont...

Average may be of two types:

Simple average price
Weighted average price
 Simple average price method

• Under this method, the price is calculated by

dividing the total of units purchase price of
different lots of materials in stock by the number
of prices used in the calculation.
• The quantity of stock is ignored for this purpose
suppose there are 4 lots of materials in stock.
 Cont...
• The purchase prices of these are Birr 2,2.5, 3, 2.75
per unit, the average price to be charged for the next
issue will be:
= Birr 2+2.5+3+2.75 = 10.25 = Birr 2.56 per unit

4 4
 Cont...
Merits
• It is very easy to operate.
• It gives satisfactory results when the prices are not
fluctuate more.
Demerits
• It is not charging actual cost to the production.
• It is not a scientific method for not considering
the quantity of materials at different prices.
Weighted average price method
• Under this method, the issue price is calculated
by dividing the total cost of materials in hand
by the total quantity of materials in hard.
• This average price is thus calculated by taking
the quantity of materials in hand into
considerations.
• The average price so calculated will be
charged to production until a new purchase is
made.
Cont....
• Merits
It is more scientific method.
It is most suitable when the prices are not fluctuate
more.
• Demerits
It is possible for clerical work.
It is not a actual cost to the production.
Market price or Replacement price method

• Under this method, the issue of materials is

priced at the replacement price or market price
on the date of issue of materials.
• A replacement price is a price at which an
identical asset can be replaced or purchased
from the market.
• Thus, under this method, cost price of the
material issued is not considered at all.
Standard cost method
• Under this method, issue price of materials is
fixed in advance which is termed as standard
price. All receipts of materials under this
method are recorded at based neither on cost
nor on market price.
• The standard piece is fixed for each material
after taking into account various factors such
as quantity of materials to be purchased,
market conditions, freight and warehouse
expenses etc.
End