Material Control
Thus, material control can be defined as a systematic control
over purchasing, storing and consumption of materials, so as
to maintain a regular and timely supply of materials at the
same time avoiding over – stocking. There are mainly three
stages where material control is exercised; viz.
At the time purchase
During storage
At the time of issuing
The essentials and objectives of material control
To make sure the supply of material in right quantity and
quality at the right time.
To maintain a balance between price, quality and
delivery in choosing a supplier.
To ensure that the investment of capital in stocks is not
tied up.( avoiding over-stocking)
To avoid abnormal wastages, leakages…etc.
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To avoid obsolescence of materials
To provide the management with information with
regard to materials. (purchases issues and stocks)
To ensure proper storage and utilization.
To facilitate for stock taking.
To check stock levels physically on a regular basis.
Material purchasing and holding procedure
Step 1 – Material requisition
Irrespective of whether it is for stock item or non-stock item,
formal request should be made by the relevant department/
section to the stores, by using a formal format called
“Material Requisition Note” (MRN)
Step 02 – Purchase requisition
This is an important step involved in purchasing procedure.
The stores (sometimes, by an other department) used to
make a formal request to the purchasing department using a
format called “purchase Requisition Note” (PRN)
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Step 03 – Searching for suppliers
Step 04 – Calling for quotations
Step 05 – Selection of suppliers / suppliers
Step 06 – Raising the ‘purchase order’ (PO)
Step 07 – Reception, inspection and receiving the items
Step 08 – Making payment to the supplier
Economic Order Quantity (EOQ)
This is the size of the order at which the total inventory cost
(Total ordering cost plus total holding cost) is minimized. In
other words, it can be defined as the size of the order which
minimizes the total of ordering costs and holding costs. i.e.
total costs.
EOQ = 2DCo
Ch
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1. Calculate economic order quantity from the following
information
Annual usage : 600 units
Cost of placing an order : Rs. 12
Price of material per unit : Rs. 20
Holding cost per item per annum : 20% of unit price
2. From the following information, calculate Economic order
quantity and the number of orders to be placed in one
quarter of the year
i) Quarterly consumption of materials = 2,000 Kg
ii) Cost of placing one order = Rs. 50
iii) Cost per unit = Rs. 40
iv) Storage and carrying cost = 8% of
Average inventory
3. A company manufactures a product from a raw material,
which is purchased at Rs.60 per Kg. The company incurs a
handling cost of Rs. 360 plus freight of Rs.390 per order.
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The incremental carrying cost of inventory of raw material
is Rs. 0.50 per Kg per month. In addition, the cost of
working capital finance on the investment in inventory of
raw materials is Rs. 9 per Kg per annum. The annual
production of the product is 100,000 units and 2.5 units
are obtained from one kg of raw material.
Stocks levels
Re order level or ordering level
This is that level of material at which purchase requisition is
initiated for fresh supplies. This level is fixed somewhere
above minimum level.
Re-order level = maximum Maximum
x
Consumption re-order period
Minimum level
Minimum Re order Normal Normal
= - x
Level level consumption re-order period
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Maximum level
This is that level above which stocks should not normally be
allowed to rise. The maximum level may, however, be
exceeded in certain cases.
Maximum Re-order Re- order Maximum Minimum
= + - x
Level level quantity consumption re-order period
Average Stock Level
Average stock level = Minimum level + Maximum level
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Ex;
The following data relate to a stock item
Maximum usage per month = 200kg
Minimum usage per month = 100kg
Lead time = 2 – 6 months
Re-order quantity (EOQ) = 750kg
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Calculate various stock levels
Two materials A & B are used as follows;
Minimum usage - 50 units per week each
Maximum usage - 150 units per week each
Normal usage - 100 units per week each
Re-order quantity - A – 600 units; B – 1,000 units
Delivery period - A – 4 to 6 weeks; B – 2 to 4 weeks
Calculate various stock levels
Pricing of material issues and valuation of stocks in hand
There are a number of methods used to price the material
issues and to value the stocks in hand. Whereas, only three
methods would be discussed at this level based on their
practical importance. Viz;
1) First in, first out (FIFO) method
2) Last in, first out (LIFO) method
3) Weighted average (AVCO) method
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First in First out (FIFO)
This method is based on the assumption that materials which
are purchased first are issued first. After the first batch is fully
issued. The price of the next batch received becomes the
issue price.
Weighted Average Cost (WAC)
This method gives due weight to the quantities held at each
price when calculating the average price. The simple formula
is that weighted average price at any time is the balance
value figure divided by the balance units figure.
1. The following were the receipt and issues of material “Y”
during March 2025.
3/1 Opening balance 5,000 units Rs.20 per unit
3/3 Purchases 1,000 units @ Rs.22 per unit
3/10 Purchases 800 units @ Rs.24 Per unit
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3/15 Issues 1,800 units
3/20 Purchases 600 units @ Rs.25 per unit
3/25 Issues 400 units
From the above prepare the stores ledger using,
1. FIFO method
2. WAC method
3. At the beginning of October, the Delhi Sulphate Co. had
10,000 units @ Rs. 2 per unit. Further purchases were the
month as follows.
10/4 2,000 units @ Rs. 2.50
10/10 5,000 units @ Rs. 3.00
10/20 10,000 units @ Rs.3.50
The issues to production were as below;
10/12 16,000 units
10/25 10,000 units
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What will be the value of closing stock at the end of the
month, if materials were issued according to;
a) First-in first-out method
b) Last-in first-out method
c) Weighted average method
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