Material Control Introduction Material is the first and most important element of cost. In most of the manufacturing organisations, materials form the single largest component of cost. The term material simply means any commodity or substance which is processed in a factory in order to be converted into finished product. Materials may be classified as follows Raw Materials are the basic materials supplied in crude form to be used for production, e.g. jute, cotton, steel, timber, rubber, coal ete. Components are not raw in nature rather are finished parts made out of raw materials which are assembled to make the finished product, e.g., tyres and tubes in cycle industry, stabilisers in ‘AC. and fridge manufacturing, batteries in car manufacturing, monitors in computer manufacturing, etc. Tools are the appliances used in the manufacturing operations, e.g., hammers, screw-drivers, drills, milling cutters, etc Spare Par‘ d for the maintenance of plant, machinery and buildings and for smooth running of produ: i. schedule Consumabie Stores are the items used for smooth running of the machines, e.g., lubricants, cil, cotton weste, rags, brooms, etc. include both direct and indirect materials. Direct and indirect materials are both treated as stores items, whereas stock of finished goods is not treated as a stores item. Direct and indirect materials purchased for stock purposes to be issued to different jobs, work orders or departments as and when required are known as stores. On the other hand, finished goods are treated as stock. We may also refer to the commonly used term ‘inventory’ which includes the stock not only of raw materials but also stores and spares, work-in-progress and finished goods. Thus, stock of materials is only a part of the inventory held by a manufacturing unit. Materials which form part of a finished product are known as direct materials, In other words, direct materials can be conveniently and accurately allocated to a particular unit of cost. For example, leather used in the making of a pair of shoes and yarn required for a metre of cloth, are direct materials. Indirect material, on the other hand, cannot be treated as part of the finished product because it cannot be conveniently and accurately allocated to a particular unit of product. Examples of such materials can be nails used in the making of shoes, cotton waste and lubricating oil required for the maintenance of machines, buttons and threads used in a suit ete. To sum up, materials include physical commodities used to manufacture the final end product. Itis the starting point from which the first operations start Out of all the factors of production, material is the most flexible and controllable input. Material has two unique features : First, it is inventoriable and does not get waste and exhaust (unless it is deteriorated) with the passage of time as labour is wasted with the passage of time Whether in use or not. Second, material can be purchased in varying quantities according to the Tequirements of the firm whereas other elements of cost like labour and other services cannot beWig MATERIAL Casily va efforts (Tied once agement experts put in tl mal Vota, 2 conte matey are : daar a < th rials al cost. action as is clear from an ang} Font acial start for nearly 60 per cent ofthe cost Of PONT gector organisations, my 4 ablished. That is why cost 47° ink : ate} fvate all 4 i to flows Othe avenge 2 aes rambo Pe gerent manulactonng NNaie ia laterials expen od TURE AVERAGE MATERIALS EXPENDITUNT _ a pe ‘Penditure Industry grouP on mater: = Materials (per ceny) re Above 65 oving equioment, sugar, woo! Cotton yarn, earthm 60—65, vehicles, fabrication Cotton textiles, bread 55—60 non-ferrous — im ne fig Slack rio tyre, machine tools, cement, electricity 45— " a ee Pharmaceuticals F ee _Stoel newspaper, fez, ster 64 paise in a rupee are spent on f one rupee of cost is spent on t that any saving made in the juction and improving the _ According to the Indian Association of Materials Management, aterials by Indian industries, 16 paise on labour and the resto Skerheads. Thus, the importance of material eontrl lies i the fc of materials will in reducing the re ve hi i profitability of a concer, Studies by experts in tis eld have highlighted the fact rate organisation can effect 5% saving in material cost, it would be as good as increasing ‘he Production or sales by about 36% f ; Proper control of materials is necessary from the time orders for purchase o alta bE placed with suppliers until they have been consumed. The object of material control is to attack material cost on all fronts £0 that cost of material may be reduced. In other words, efforts are to be made to reduce the cost of material when it is purchased, stored and used. Meaning of Material Control Material control is a system which ensures that right quality of material is available in the right quantity at the right time and right place with the right amount of investment. It can be defined as a comprehensive framework for the accounting and control of material cost designed with the object of maintaining material supplies at a level so as to ensure uninterrupted production but at the same time minimising investment of funds. In simple words material control is a systematic control over the purchasing, storing and using of materials so as to have the minimum possible cost of materials. Matz, Curry and Frank state in their book ‘Cost Accounting’ as follows “Because materials constitute such a significant part of product cost and since this cost is controllable, proper planning, purchasing, handling and accounting are of great importance, Material control is accomplished through functional organisation, assignment of responsibility and documentary evidence obtained in various stages of operations from the approval of sales and pudgets to the completion of products which are ready fo production budgets to : } ich are ready for sale and si rial Eontrol involves recording on printed forms all steps and movements which sec oa a ‘and utilisation of materials. Effective control also requires the r in the acquisition summaries and reports. » systematic Preparation of periodic Dimensions of Material Control Material control has two dimensions : (1) quantity or unit control, Production executive and storekeeper are primarily int their interest 1s to see that there should be no stock out problem, « tRecatives are interested that too much money should not be invece adh encom materials shouldbe efficiently and effectively utgiany ee petheial control, material control should meet these ty fingatenance of sufficient quantity of every item of m, mmaincenance of an inventory that is not detriment trol and (2) rupee or financial ‘uantity control because other hand, finaneial aterials and every rupee i: in view unit aaa control and terial fon ne objectives : (1) the = financially oot perations, andnn eeeee---,llltt—t MATERIAL CONTROL WA-5. Aspects of Material Control There are two aspects of material control as given below : (a) Accounting Aspect. This aspect of material control is concerned with maintaining documentary evidence of movement of materials at every stage right from the time sales and production budgets are approved to the point when materials are purchased and actually used in production ope (6) Operational Aspect. This aspect of material control is concerned with the maintenance of material supplies at a level so as to ensure that material is available for use in production and production services as and when required by minimising investment in materials. Need for (or Objectives of) Material Control No system of costing can be considered as complete without a proper control of materials as materials constitute a major portion of cost of production. Following are the various objectives of material control : 1, Availability of materials. There should be a continuous availability of all types of materials in the factory so that the production may not be held up for want of any material. Minimum quantity of each material is fixed to permit production to move on schedule 2. No excessive investment in materials. There should be no excessive investment in stocks. Investment in materials must not tie up funds that could be better used in other activities. Overstocking should be avoided keeping in view the disadvantages it carries. For this purpose, @ maximum quantity is assigned to each item of material above which stock should not be exceeded 3. Reasonable price. While purchasing materials, it is seen that it is purchased at a reasonably low price. Quality is not to be sacrificed at the cost of the lower price. The material purchased should be of that quality alone which is needed. 4, Minimum wastage. There should be minimum possible wastage of materials while these are being stored in the godowns by storekeeper or used in the factory by the workers. Wastage should be allowed upto a certain level known as normal level of wastage and it should not exceed that level. Leakage or theft of materials must be avoided to keep the cost of production under control. Storekeeper and workers should be trained to handle the materials in a scientific way to avoid the wastage. The storekeeper is to keep the stores neat and tidy to avoid the wastage due to rust, dust or dirt, 5. No risk of spoilage and obsolescence. In order to avoid spoilage and obsolescence, a maximum quantity of each material is determined and a proper method of issue of materials is followed. The materials received earlier should be issued earlier. 6, Ready information about availability of materials. The storekeeper can supply this information because he keeps an up-to-date record of every item of stocks under a proper system of material control. 7. Misappropriation of material. Material can be easily misappropriated by employees because generally misappropriation of cash is considered to be more serious than misappropriation in kind, Therefore, this requires an internal check on materials which is a part of material control. &. Right amount of payment to suppliers. Invoices received from suppliers should be approved for payment only if the items of materials ordered have been received and properly checked to avoid excess payment to suppliers | Control Essentials of Mate! L. There should be proper co-operation and co-ordination among the departments involved in shetkasing, receiving and inspection, storage, tales, production and accounting so that Hones afc no inadequate availability of materials which may disrupt production and there may Pe the same time, purpose of co-ordination is that there should be no excessive dose ae aterials leading to unnecessary carrying costs and obsolescence risks. Deeenent if materials should be centralised ie. one purchasing department should be Parnes ene all purchases of materials to avoid reckless buying by all departments authorisetwe that all purchases are made at the most reasonable prices 3. There should be proper scheduling of materials,: MATERIAL CO} 1 Lived by the receiyi codification of maUNrT ay are received PY ae a wh ae rial from one job to the other ed 4 from theft, carelessness, ation an jon of mate! department. Pe Proper inspec Standa: rd forms ., ANd trang es fr requisitions, orders, issue, aa Bi material from the jb tothe at damage, 420 Of materials should be well-plannes roo 7 {eterioration, evaporation and pilferage Bogs Method of iasue of materials to various i de the Fight there is delivery of right type of materials 7 Dery tintity at the time they are needed. ted to facilitate regular checking Perpetual inventory system of materials should be operated 10 1X 0 tt cible te denteiding closing down factory for stock-taking. With this Ftc. determine at any time the quantity and value of each type o! hat all transactions involving 10. A system of internal cheek should be introduced t0 eos perso materials are checked by properly authorised and independent terial should be fixed to 11. Minimum, maximum and re-ordering levels for each type of ma ver-atockings Onre that there is no shortage of materials and that there is mo over-storking: ia 12. Ordering quantity for each type of material should also be fixed to reduce the ordering costs and carrying costs of materials. 8 i 13. A careful choice should be made of the method of valuing the material issues because it 5 the cost of the jobs or processes and the value of the closing stock of materials in the 4 or processes should be followed orders obs, orders oF processes in the store: 14. Adequate records to control materials during production should be maintained to ensure that there is minimum possible wastage. 15. Information about availability of materials should be made continuously available to the management so that planning of production may be done keeping in view the inventory balances in stores, Information about obsolete and defective stock should also be given to the management from time to time so that steps may be taken for the disposal of such arious essentials of material control can be summarised in the or ne next page. i The entire procedure of material control ¢ control, stores control and issue control, form of a flow chart as shown ‘an be divided into three stages—purchaseMethods of Valuing Material Issues or Material Costing Materials issued from the stores are debited to the jobs or work orders which received them and credited to the materials account. These jobs are debited with the value of materials issued to them, Let us at this stage consider, what the value of materials is. Theoretically the value includes al] expenses up to the point of placing materials at the processing plant.’Therefore, the value includes @) the invoice price less trade discount, (ii) the freight, cartage, octroi and insurance on incoming materials, and (iii) expenses of purchase, receiving, storing and record keeping and carriage from the stores up to the process plant. Hence, in order to work out correct costs of jobs or work orders, all these types of expenses should be included in the value of materials issued. However, in practice it is a difficult task because the clerical work involved in making minute calculations for the inclusion of these expenses will be much more than the benefit derived. So, this is not done. Then what is done ? The general practice is to include the invoice price (less trade discount), the freight, cartage, insurance and octroi on the incoming materials. For example, if 100 units of a particular material have been purchased at the invoice price of € 2,190; trade discount allowed is Z 100 and % 200 have been spent as freight, cartage, insurance and octroi on the incoming of the % 2,100 — <0 -e ae material to the stores ; the value per unit of material will be unit. The issue price of the material issued to jobs will be & 22 If the same purchase price is paid for all lots of a given material, no difficulty would be encountered in the valuation of that material when it is issued to jobs or work orders. However, that is not the case and the price always changes in accordance with the market conditions. The stock of a given material will, therefore, consist of purchases made at different times at different prices, which poses @ problem as to what should be the price when the material is issued. There are many methods of pricing material issues, the most important being A. Cost Price Methods (i) First in First out (iv) Inflated Price (vii) Highest in First out, (Gi) Last in First out Gi) ast Average Cost (v) Specific Price (vi) Base StockMATERIAL CONTROL /1-27 B. Market Price Methods @) Replacement Price 40) Realisable Value C. Standard Price Methods a ; G@) Current Standard Price (i) Basic Standard Price made of the methods of valuing the material issu id the value of th ial issues g A very careful choice has to be 1 ences the cost of e influences the c t of the jobs closing balances of material in the stores. The various methods of pricing mater above are the cost-assignment methods and do not necessarily relate to the physical flow of materials on and off the shelves. Generally accepted accounting principles require that the materia costing method used must be rational and systematic. A good method of valuing material issues should satisfy the following conditions : s because it ue price should recover the cost price of the materials 2. Thei: ue price must be near the market, price so that the effect of current market prices is revealed in the cost of issues. 3. The issue price should not lead to any significant variation in cost of similar jobs from period to period so far as materials are concerned, otherwise comparison of similar jobs will become difficult. Range of fluctuations in prices of materials should be considered 4. The issue price should not necessitate heavy adjustments in values of stock of materials in the stores ledger at the end of the year, thus making the stores ledger complicated 5. The issue price should take into consideration management policy relating to the valuation of closing stock. 6. A method of valuing material issues should take into consideration the nature of materials used. For example, if the materials are likely to loose weight due to evaporation ete., issue price should be higher than the purchase price to cover wastage of materials. First In First Out (Commonly Called FIFO) Under this method material is first issued from the earliest consignment on hand and priced at the cost at which that consignment was placed in the stores. In other words, materials received first are issued first. The units in the opening stock of materials are treated as if they are issued first, the units from the first purchase issued next, and so on until the units left in the closing stock of materials are valued at the latest cost of purchases. It follows that unit costs are apportioned to cost of production according to their chronological order of receipts in the store. ‘This method is most suitable in times of falling prices because the issue price of materials to jobs or works orders will be high (materials issued from the earliest consignments which were purchased at a higher rate) while the cost of replacement of materials will be low. But in case of rising prices this method is not suitable because the issue price of materials to production will be low while the cost of replacement of materials will be high. Following example will illustrate how issues of materials are valued under this method.MATERIAL CONTROL W4-29 Advantages of FIFO Method i The main advantage of FIFO method is that it is simple to understand and easy to operate. 2. It is a logical method because it takes into consideration the normal procedure of utilising first those materials which are received first. Materials are issued in order of purchases, 80 materials received first are utilised first. 3, Under this method, materials are issued at the pu orders is correctly ascertained so far recovers the cost price of the materials. 4. This method is useful when prices are falling. price ; so the cost of jobs or work cost of materials is concerned. Thus, the method Closing stock of materials will be valued at the market price as the closing stock under this method would consist of recent purchase of materials. 6. This method is also useful when transactions fairly steady. are not too many and prices of materials are Disadvantages of FIFO Method 1, This method increases the possibility of clerical errors, if consignments are received frequently at fluctuating prices as every time an issue of materials is made, the store ledger clerk will have to go through his record to ascertain the price to be charged. In case of fluctuations in prices of materials, comparison between one job and the other job becomes difficult because one job started a few minutes later than another of the same nature may be issued materials at different prices, merely because the earlier job exhausted the supply of the lower priced materials in stock. For pricing one requisition more than one price has often to be taken. 4. When prices rise, the sue price does not reflect the market price as materials are issued from the earliest consignments. Therefore, the charge to production is low because the cost of replacing the material consumed will be higher than the price of issue. Last In First Out (Commonly Called LIFO) Method As against the First In First Out method the issues under this method are priced in the reverse order of purchase i.e., the price of the latest available consignment is taken. This method is sometimes known as the replacement cost method because materials are issued at the current cost to jobs or work orders except when purchases were made long ago. This method is suitable in times of rising prices because material will be issued from the latest consignment at a price which is closely related to the current price levels. Valuing material issues at the price of the latest available consignment will help the management in fixing the competitive selling prices of the products. This method was first introduced in the U.S.A. during the Second World War to get the advantages of rising prices.Advantages of LIFO Method 1 Like FIFO method, this is simple to operate and is useful when transactions are not too many and the prices are fairly steady. Like FIFO, this method recovers cost from production because actual cost of material is charged to production. Production is charged at the recent prices because materials are issued from the latest consignment. Thus, effect of current market prices of materials is reflected in the cost of sales provided the materials are recently purchased. In times of rising prices, LIFO method of pricing issues is suitable because materials are issued at the current market prices which are high. This method thus helps in showing a lower profit because of increased charge to production during periods of rising prices and lower profit reduces burden of income-tax.nn MATERIAL CONTROL 11-31 Disadvantages of LIFO Method 1. Like FIFO, this method may lead to clerical errors as every time an issue is made, the store ledger clerk will have to go through the record to ascertain the price to be charged 2, Like FIFO, comparison between one job and the other job will become difficult because one job started a few minutes after another of the same type many bear a different charge for materials consumed, merely because the earlier job exhausted the supply of the lower priced or higher priced materials in stock. 3. For pricing a single requisition, more than one price has often to be adopted. 4, The stock in hand is valued at price which does not reflect current market price. Consequently, closing stock will be understated or overstated in the Balance Sheet. Average Cost Method ‘The principle on which the average cost method is based is that all of the materials in store are so mixed up that an issue cannot be made from any particular lot of purchases and, therefore, it is proper if the materials are issued at the average cost of materials in store. Average may be of two types : (i) Simple Arithmetic Average and (ii) Weighted Arithmetic Average. (@ Simple Average Price. “A price which is calculated by dividing the total of the prices of the materials in the stock from which the material to be priced could be drawn by the number of the prices used in that total” ([Link].A) Simple average price is calculated by dividing the total of unit purchase prices of different lots in stock on the date of issue by the number of prices used in the calculation and quantity of different lots is ignored. This method may lead to over-recovery or under-recovery of cost of materials from production because quantity purchased in each lot is ignored. Suppose, following are three different lots of materials in stock when the material is to be issued 1,000 units purchased @ & 10 2,000 units purchased @ % 11 3,000 units purchased @ @ 12 In this example, simple average price will be € 11 calculated as below T1047 114% 3 Simple average price '5 not to be followed because this method of calculating issue price does not recover the cost price of the materials from the production. In the above example, the purchase price of the material in stock is € 68,000 (ie. 1,000 ¥ 10 + 2,000 @ 11 + 3,000x ¥ 12) whereas the recovery from the production according to simple average price method will be € 66,000 (total quantity 6,000 units issued @ f 11 per unit). Thus, there is under-recovery of € 2,000 (i.e, € 68,000 ~ % 66,000). (ii) Weighted Average Price. “A price which is calculated by dividing the total cost of materials in the stock from which the materials to be priced could be drawn by the total quantity of materials in that stock.” ([Link].A) ‘The weighted average price takes into account the price and quantity of the materials in store. Inthe above example, the weighted average price is 7 11.33 per unit calculated as follows : 3,000 x 712 1,000 x ¥ 10 + 2,000 x7 11+3,000x712 _. 1, 4, 1,000 + 2,000 + 3,000 It is better to issue the material at weighted average price method because it recovers the cost price of the materials from production. In the above example, the total purchase price of the materials in stock is ¥ 68,000 and the charge to jobs or work orders 1s also % 68,000 (i.e. 6,000 units @7 11.33). In periods of heavy fluctuations in the prices of materials, the average cost method gives better results because it tends to smooth out fluctuations in prices by taking the average of prices of Various lots in stock. =tWV/1-32 MATERIAL CONTROL Advantages of Average Cost Method 1 wo method is rational, systematic and not subject to manipulation. It is representative of ne prices that prevailed during the entire period rather than of the price at the beginning, end, or at one point of issue during the period because it is based on the average of the : material costs of the various lots available in the store. bi 3 2. Average price method is considered to be the best method when prices fluctuate consider. ably because this method tends to smooth out fluctuations in prices. 3. Issue prices are not to be calculated each time issues are made. Issue prices are changed only when new lot of materials is received 4. This method recovers the cost of materials from production. 5. This method maintains the issue prices as near to the market prices as possible. 6. This method eliminates the necessity for adjustments in stock valuation. Disadvantages of Average Cost Method 1. The greatest disadvantage of this method is that a fresh rate calculation will have to be made as soon as a new lot of materials is purchased which may involve tedious cal- culations. Thus, there are chances of clerical errors. 2. Issue price of materials does not represent actual cost price of materials issued but it represents average cost of materials in stores. 3. At the time of rising prices, it over-states profit but not as much as FIFO because average price is lower than the most recent price. (4) Closing stock is not valued at current cost. It is the average cost method which is mostly used by different organisations because it satisfies most of the conditions of a good method of valuing material issues.Techniques of Material Control As discussed in previous chapters, material control aims at eliminati i Pity eC astse ant loess while ths rateriis cu being porciored: vel, ania consumed. A number of techniques are used at planning, procuring and holding stage of material whieh help in exercising and effecting material cost control. Such techniques have been discussed low I. Level Setting Il Economic Order Quantity II]. Just-in-Time Inventory System IV. ABC Analysis V. VED Analysis VI. Perpetual Inventory System VII. Double Bin System VIII. Input-Output Ratio IX. Material (or Inventory) Turnover Ratio X. FNSD Analysis XI. Material (or Inventory) Cost Reports I. Level Setting In order to have proper control on materials, the following levels are set : (a) Re-order Level (6) Minimum Lev (c) Maximum Level (d) Danger Level (e) Average Stock Level ‘These are discussed one by one (a) Re-order Level. It is the point at which if stock of a particular material in store approaches, the storekeeper should initiate the purchase requisition for fresh supplies of that material, This level is fixed somewhere between the maximum and minimum levels in such a way that the difference of quantity of the material between the re-ordering level and the minimum, level will be sufficient to meet the requirements of production upto the time the fresh supply of the material is received. Re-ordering level can be calculated by applying the following formula. Ordering Level = Minimum Level + Consumption during the time required to get the fresh delivery.———FOL / (W22 : ss book ‘ Another formula given by Wheldon in bi Pe SG fe order Period ; a te caicon to get the masteri| flere, marinmoms reorder period meane the maximum period tecrirareption auriae that pest He ner in initi Vheldon has takei materia ern may not stop in any case due to shortage o! erial A from the following particulars a sdering level of materia ILLUSTRATION 1. Calculate the or (Minimum Limit 500 units, (i) Maximum limit 2,500 units. i Gi)_Daily requirement of material 100 units Gv) Time required for fresh delivery 10 days. S . a + wv Ghee Level = Minimum limit + Consumption during the time required for fresh delivery = 500 units +°100 x 10 units = 1,500 units. tock reoches 1 600: ‘Order for the purchase of material should be placed when the material in st me ‘ 5 : its, ILLUSTRATION 2. Calculate the re-ordering level from the following information Maximum consumption = 300 units per day Minimum consumption = 200 units per day Re-order period =8 to 10 days, SOLUTION Re-ordering level = Maximum consumption x Maximum re-order period= 300 units x 10=3,000 units. (6) Minimum (Or Safety Stock) Level. This represents the minimum quantity of the Pray nat Which must be maintained in hand at all times. The quantity is fixed eo that production may not be held up due to shortage of the material. In fixing this level, the following factors are taken into consideration : Cost Accounting’ is as follows 1. Lead time i. time lag between indenting and receiving of the material. It is the time required to replenish the supply. 2. Rate of consumption of the material during the lead time, 3. Nature of the material. Minimum level is not is required against customer's specific order. Formula for the calculation of minimum level given by Wheldon is as follows : Minimum Stock Level =Re-ordering Level _ (Normal Consumption x Normal Re-o rder Period), (c) Maximum Level. It represents the maximum quantity of an item of material which can be ould not exceed this quantity. ‘The quantity is fixed so that there ¢ avoided as far as Possible because of the following required in case of a special material which z Overstocking unnecessarily p, ii 2 i peteatore gine ¥ Plocks working capital which could be profitably utilised 2. Overstocking will need more go ae ? have overstocking. n quality because large : to be paid 4. There are chances of reduction they are consumed. 5, There may be fea of reduction in market value Maximum stock level i fixed by taking (ote 1. Amount of capital available for maintainian 2. Godown space available wen 3. Maximum requirement ofthe store fp 4. Rate of consumption of the materia] during the lead thee & BY point of time. 5. The time lag between indenting and vor th 5, Possibility of loss in stores by deteriggne 2! thet deteriorate in quantity if they are nora gt 7. Cost of maintaining stores, ! Stocks will require more time before 8 of the overstocked materials. sccount the following factors; ores, Production purpose are certain stores whichTECHNIQUES OF MATERIAL CONTROL 1/2-3 8. Likely fluctuation in prices. For instance, if there is the possibility of a substantial increase in prices in the coming period, a comparatively large maximum stock level will be fixed. On the other hand, if there is the possibility of decrease in prices in the near future, stocks are kept at a very reduced level 9, The seasonal nature of supply of material. Certain materials are available only during specific periods of the year, so these have to be stocked heavily during these periods. 10. Restrictions imposed by the Government or local authority in regard to material in which there are inherent risks e.g. fire and explosion. 11. Possibility of change in fashion and habit which will necessitate change in requirements of materials. The formula for the calculation of maximum stock level given by Wheldon is as follows Maximum Stock Level= Reordering Level + Re-ordering Quantity — (Minimum Consumption x Minimum Re-ordering Period) (d) Danger Level. This means a level at which normal issues of the material are stopped and issues are made only under specific instructions. The purchase officer will make special arrangements to get the materials which reach at their danger levels so that the production may not stop due to shortage of materials. Danger Level = Average consumption x Max. re-order period for emergency purchases (c) Average Stock Level. This level is calculated by the following formula : Average Stock Level = Minimum Stock Level +} of Re-order Quantity or 3 (Minimum Stock Level + Maximum Stock Level)il. Economic Ordering Quantity) ‘The total costs of a material usually consist of : Tgtal acquisition cost + total ordering cost + total carrying cost. Total acquisition cost through buying is usually unaffected irrespective of the quantity of material ordered at one time unless quantity discounts are available. For example whether total annual requirements of a material of 10,000 units are purchased at € 10 per unit in fifty orders of 200 units each or in 10 orders of 1,000 units each, total acquisition cost will be € 1,00,000 (i.e. 10,000 units @ Z 10) under each alternative if no quantity discounts are available. Thus, when acquisition costs of a material remain the same, they are irrelevant and are often excluded while deciding the quantity of a material to be ordered at one time. The only costs to be taken care of are ordering costs and carrying costs.QUES OF MA T— ~*~ CONTROL TECHN n a5 economic orde a oost ot eae terial to bs manner a! 3 plained as under: a ma cost a i uantity of od Ts ch —aaring quantitg erie quantity Ts fixed in 6 nd ordering concept of carryin = fering The StOCK, Tie coneepe oF eras inthe and i = he ma ® Itia the cost eo ve been utilised for some other Purpose hich could ha S storage of materials, T. Gost of storage space W "fed for the storage of ™ to be provi 2. Cost of bins and racks that have arene cratin. 3. Cost of maintaining the materials to ee a ti mnton Amount of interest payable on the money locked UP 1)" 5. \ Cost of spoilage in stores and eae 6. Transportation costs in relation to rit - oe isin bees ybsolescence on account of some of th a 8. Insurance cost. 9. Clerical cost ete. 7 2 bout 20-25 per cent of the in India, amount to somewhere near ab : co ane a ier oe effets should be made to reduce such alarming rate of carrying cost. cost ncludes : ming obsolete after some 's and includes Ordering Cost. It is the cost of placing orders for the purchase of mater 1. Cost of staff posted in the purchasing department, inspection section and payment department. 2. Cost of stationery, postage and telephone charges Thus, this type of cost includes cost of floating tenders, cost of comparative evaluation of quotations, cost of paper work, and postage involved in placing the order, cost of inspection and cost of accounting and making payments. In other words, the cost varies with the number of orders. The quantity to be ordered should be such which minimises the carrying and ordering costs ‘The order for the material to be purchased should be large enough to earn more trade discount and to take advantage of bulk transport, but at the same time it should not be too large to incur too pas parent cn: pases ot aa fest inturance costs. If the price to be paid is ained by the following fe ormula : ‘0 Quy 2co where Q = Quantity to be ordered. e paar eee aadaonial concerned in units during a year. tof placing one order includ ete : getting an item into the firmea meee cost of receiving the goods i.e. costs of = Interest payment incl; For example, a unit of mate cine cost of placing one order including the cost ay wt 8 including variable storage cost is 10% por nn ot Tee placed is num. The variabl ; © cost of storing per unit per year ie holding rial X costs yearly cons umption is i ing the mec: 's 20,000 units. The tial is 2 20 and the interest ‘antity for which order is to be Q=\? To sum up, economic order quanti ity is de carrying costs. With the interaction of ge particular period are equal to carrying eaneg a, the lowest as is made clear in fig. 2.1 MFINg that py termin, ed kee, tWo costs spine in vie 'w the ordering costs and © ordering costs during a al cost to order and carry is Bs toon Mod and tot;TECHNIQUES OF MATERIAL CONTROL W2-7 DIAGRAM IDENTIFYING E.0.Q. | Pigt Pecies for Ordering more than £.0.0 ‘CARRYING COST cost ——> Ordering Cost NO. OF UNITS PER ORDER FIG. 2.1 From the above diagram, it is clear that carrying costs and ordering costs behave in opposite ways. If huge quantity is ordered at one time, ordering costs will be low and carrying costs will be high and vice versa if low quantity is ordered at one time. Assumptions in the Calculation of E.0.Q. 1. There are dynamic conditions of the supply which enable a firm to place as many orders as it needs. 2. Prices of the item remain stable which keep carrying cost constant. Py ‘The quantity of the item to be consumed during a particular period is totally known i.e., quantity to be consumed is certain. Difference Between E.0.Q. and Re-order Quantity Economic order quantity is different from re-order quantity. Re-order quantity is the quantity for which the purchase or er is actually given. It may be more or less than the economic order quantity, if the firm is noi placing orders according to economic order quantity. In the absence of information of econo ric order quantity, re-order quantity given may be taken as economic order quantity.Scientific Inventory Management for Replenishment Following are the three inventory models which are mostly used for replenishing the items of stores : (a) Fixed Order Quantity System (6) Replenishment System (c) Optional or Modified Replenishment System. Each of the above systems take into account the carrying cost of the inventory, ordering cost of the inventory and cost of stockout. In these models the determination of how much to purchase at one time and how often to purchase are the two basic considerations. In other words, these models are based on the determination of ordering quentity and frequency of ordering. The order factors which are taken into consideration are the lead time and the safety or buffer stock. (a) Fixed Order Quantity System. In this system, material re-order quantity is fixed and a laced for this quantity whenever the stock in hand reaches the re-ordering point. The re-order is p) dering quantity so that cost to order and carry may be the fixed re-order quantity is economic or lowest.TECHNIQUES OF MATERIAL CONTROL W2-15, (6) Replenishment System. In this system, ordering quantity is not fixed but goes on changing at every timo of order. There is a fixed ordering time when stocks are reviewed and jevel orders are placed for a varying quantity which is equal to the maximum level minus stock in hand on the fixed date of review, In this system, maximum stock level is fixed beyond which the stock is not expected to exceed. This system is useful where there are fluctuations in the pattern of consumption, whereas fixed order quantity system i: eful when there is stability in the pattern of consumption. (c) Optional or Modified Replenishment System. This system is modification of the replenishment system. In this system also like replenishment system ordering quantity is variable but a lower limit is placed on its size, ic., ordering quantity should not be below the fixed lower limit when the order is placed at a fixed period of time. Thus, this method combines the main features of the fixed order quantity system and the replenishment system because it takes into consideration a maximum level, a variable order quantity subject to a certain lower limit, re- ordering level and a system to review at a fixed ordering time. Ill, Just-in-Time Inventory System Keeping in view the enormous carrying cost of inventory in the stores and godowns, manufacturers and merchandisers are asking for more frequent deliveries with shorter purchase- order lead times from their suppliers. Now-a-days organisations are becoming more and more interested in getting potential gains from making smaller and more frequent purchase orders. In other words, they are becoming interested in just-in-time purchasing system. Just-in-time (JIT) purchasing is the purchase of materi>l or goods in such a way that delivery of purchased items is assured before their use or demand. Just-in-time purchasing recognises too much carrying costs associated with holding high inventory levels. Therefore, it advocates developing good relations with suppliers and making timely purchases from proven suppliers who can make ready delivery of goods available as and when need arises. EOQ (i.e., Beonomic Order Quantity) model assumes a constant order quantity jereas JIT purchasing policy advocates a different quantity for each order if demand fluctuates. Economic order quantity lays emphasis on ordering and carrying costs but inventory management extends beyond carrying and ordering costs to include purchase costs, quality costs and stockout cost. Just-in-time purchasing takes into consideration all these costs and moves outside the assumptions of the EOQ model. The assumptions of EOQ model are as follows : 1. The quantity of the item to be consumed during a particular period is known i.e., quantity to be consumed is certain. 2. Prices of materials or goods to be purchased remain stable which keep carrying cost constant. 3. There are dynamic conditions of the supply which enable a firm to place as many orders as it needs, ‘The above assumptions do not hold true. As such just-in-time purchasing is not based on these assumptions. Costs of quality and timely deliveries have special significance in JIT purchasing and companies following this policy make a right choice of suppliers for getting quick delivery and goods supplied are of good quality. Price is only one consideration in making a choice of suppliers. Advantages of JIT Purchasing 1. Investment in inventory is reduced because more frequent purchase orders of small quantities are made. 2. Carrying cost is reduced as a result of low investment in inventory 3. A reduction in the number of suppliers to be dealt with is possible. Only proven suppliers who can give quick delivery of quality goods are given purchase orders. As a result of this, Teduction in negotiated time is possible. The use of long-run contracts with some suppliers with inimal paper work involved is possible. 4. Quality costs such as inspection cost of incoming materials or goods, seraps and rework costs are reduced because JIT purchasing assures quick and frequent deliveries of small size orders Which results in low level of inventories causing minimum possible wastage. Therefore, JIT Purchasing is frequentl:’ applied by organisations dealing in perishable goods.7” i TECHNIQUES OF MATERIAL o 2-16 OTR 5. JIT helps in reducing waste of time of the work force and the entire production py, _ IIT helps in re as af ducts. “ta ig concentrated on the time spent in actually producing Pros IV. Stock Control through ABC Analysis i ials into three cateyor; Manufacturing organisations find it useful to aiviae are Motes ee orig or the purpose of exercising selective control on materials. An ana F eeaetinite oa ae Tae I hos ‘ a smaller percentage of items of materials inthe stores may contrib 0 Jorge perosntage gt value of consumption and, on the other hand, a large Lene o ectrenis will (08 ‘ent a atmaller percentage ofthe value of items consumed. Between these two extremes wi fll those tems percentage number of which is more or less equal to os pe ae 8 tem of inventory control. It exereises discriminating control over different items of stores sted ong basis of investment involved. Usually they are divided into three categories according tg tye importance, namely, their value and frequency of replenishment ie y ia G ‘A’ category of items consists of only a small percentage te. abou : s a total items handles by the stores but require heavy investment about 70% of inventory value, because of their high rice or heavy requirement or both. ne ae items are relatively less important—20% of the total items of material handle by stores and % of investment required is about 20% of total investment in inventories, ‘C’ category—70% of total items handled and 10% of value. Such an analysis of material is known as ABC analysis. This technique of stock control is alsy known as stock control according to value method or Always Better Cotitrol method or Proportions Parts Value Analysis method. Thus, under this technique of material control, materials are listed in ‘A’, ‘B’ and ‘C’ categories in descending order based on money value of consumption. ABC analysis measures the cost significance of each item of material. It concentrates on important items, so it is also known as ‘Control by Importance and Exception’ ([Link].). It is a scientific method of material control because it lays emphasis on discriminating control over different items of stores classified on the basis of the investment involved. Thus, it is a system of selective inventory control. The report of the Indian Productivity Team on “Stores and Inventory Control in U.S.A., Japan and West Germany” gives the following example of ABC Analysis : Group Percentage of Items Percentage of Costs A 8% TBM B 25% 20% 6 67% 5% For example, a store has 2,000 items of consumption and a monthly consumption of % 10,00,000. In this example, according to the above t report, 160 items will have a consumption of £°7150,000. 500 items will account for ® 2,00,000 and 1,340 items consume material worth 50,000 only. The significance of this analysis is that a very group which account for a high percentage of costs while less stringent control is adequate for category ‘B’ and very little control would suffice for category ‘C’ itera All types of material control ie., purchase, stores and issue are to be strictly applied in case of the items of ‘A’ group. In case of the ‘C’ items an elaborate material control is not exercised because these items represent a very small portion of the material costs. These items can be purchased once a year and various stock levels i.e, minimum level, maximum level, ordering level ote, may not Be adhered to. All the time, efforts and costs saved on the C group items by not having an elaboratll control can be usefully utilised on the A and B group items. Advartages 1. A strict control is exercised on the ite material costs. Managerial time is spent on ‘A’ item, be sandled by clerical staff with least managerial 5 not desirable because it is expensive close control is exercised over the items of ‘A’ ‘ms which represent a high percentage of the 's whereas ‘C’ items and sometimes ‘B’ items ca supervision, Equal attention to all the items of Concentrating on all the items of stores is likelyTECHNIQUES OF MATERIAL CONTROL 2.17 have a defused effect on all the items, irrespective of the value of consumption. Therefore, ABC analysis should be followed to give due attention to the items which they deserve keeping in view their value of consumption. 2, Investment in inventory is reduced to the minimum possible level because a reasonable quantity of ‘A’ items representing a significant portion of the material costs is purchased. To reduce investment in materials, close control of ‘A’ items contributes much more than close control of ‘C’ items. 8. Storage cost is reduced as a reasonable quantity of materials, which account for high percentage of value of consumption will be maintained in the stores. 4. With the introduction of the ABC analysis, management time is saved because attention is required to be paid only to some of the items rather than on all the items. To sum up, a table showing the salient features of ABC analysis is presented below Salient Features of ABC Analysis Name A-items having high| B-items having moderate C-items having low consumption value consumption value consumption value 1. Extent of control] Very strict control Moderate control Loose control ; no need of constant control 2. Frequency of Frequent ordering Once in 3 months Once in 6 months or once in order ayear 3. Lead time Maximum efforts to | Moderate efforts to | Minimum clerical efforts to reduce lead time reduce lead time reduce lead time 4, Level of man- Must be taken care | Can be supervised by | Can be supervised by the agement of by senior officers | middle management clerical staff 5. Period of review | Review after a| Review after every 3 | Annual review over obsolete month or every 15 | months of waste, ob- | and surplus items days of waste, | solete and surplus obsolete and | items surplus items 6. Source of sup- | As many sources | Three or more reliable | Three reliable sources for plies as possible for | sources each item each item 7. Follow-up Maximum follow up | Periodic follow up Follow up only in ex- ceptional cases 8. Safety stocks Very low safety | Low safety stocks High safety stock stocks 9. Centralisation Centralised Centralised and de- | Decentralised purchasing purchasing centralised purchasing 10. Value analysis | Rigorous value | Moderate value anal- | Minimum value analysis analysis ysisw ‘ ; ; ee ber of varie! inventory items shot umbel 2) 110 num cons per of varietios of inventory items handled a num of inventory holding. 2 sel following er, (i) They comprise 2.75% of ti ee via al pg coms mora erate ption of 10% of inventory usage. consumption i8 7 en conaum| o classified as . + items should b y items #tems «nd require investment of 20% of a al inventory Tt is total 5% of te ‘ appeal fre least important out of three eroupe oft of Bae a mode ) Thei es f inventor jes of inven! ri : sumption is also tems because the +@ category items those items as ‘CC sed primarily for control of spare v. VED Analysis ids 1 and desirable—analysis i8 YED—vital, essential and de ee categories "S ital, essential or desirable—keeping in view ck-out of which even for a short time wil] the ‘an be divided into thr ares, spare parts ¢ i e the stoc e criticality to production. The spi k-out tout ia very iter i time and where the c production for quite som ee of which cannot be tolerated for more than a few hours ‘spares. The spares, the absence of W for more es ae cre ‘ is hi ich are essentia “tof lost production is high and whicl 1 Pea os st OF tial spares The desirable spares are those spares which are needed but thee wen a week or so will not lead to stoppage of production. Some spares, abeencpre in monetary value, may be vital for the production to continue and require attention. Such spares may not receive the attention they deserve if they are maintained a neat t ABC analysis because their value of consumption is small. So, in their cases, VED analysis made to get the effective results. As VED analysis analyses items based on their criticality to production, it can also be used for those items of materials which are difficult to procure, VI. Perpetual Inventory System The Chartered Institute of Management Accountants, Lond as “a eystem of records maintained by the controlling department, which reflects the physica ae ements of stocks and their current balance”. Bin cards and the stores ledger help the management in maintaining this system as they make a record of the physical movements of the stock on the receipts and issues of the materials and also reflect the balance in the stores. Thus, it is a system of ascertaining balance after every receipt and issue of materials through stock to facilitate regular checking and to avoid closing down the firm for stocktaking. To ensure the pe ipereinal inventory records (i.e. bin card and stores ledger), physical verification of the pear Pep ayoranns of continuous stocktaking. It is possible that the balanee at Began bin ean PF stores ledger may differ from the actual balance of stock as ascertal phy: rification. It may be due to the following avoidable and unavoidable causes. on, defines the perpetual inventary Avoidable Causes 1. Cleri i ‘ ae ca ee es posting, non-posting of entries, wrong casting ete. ‘Such errors ee carve ledser can agree with book balance by making the requi™ et 2, Pilferage and thefts. 3, Carelessness in material handling. 4. Short or over-issue of materials. Unavoidable Causes 1. Actual balance may be less d. ‘3 due to shrinka ge and evaporation. iTECHNIQUES OF MATERIAL CON? ROL W219 2, Actual balance may be more due to absorption of moisture. 3, Actual balance may be less due to breakdown of fire, riots ete. 4. Material may be lost due to breaking up bulk material example, some iron is lost due to breaking up big iron rods into smaller parts. to smaller parts for issue. For ‘Adjustment of Discrepancies sues of materials are prepared periodically from the stores ledger Ledger) Control Account by a debit and a credit respectively. A Stock Adjustment Account is opened for adjusting the discrepancies between the physical or ground balance and the book balance. If the physical verification reveals that actual balance of Stock is more than the balance shown by bin card or stores ledger, a debit, note is prepared and stock records are adjusted accordingly ; Stock Adjustment Account is credited and Material Control Aecount is debited. Entry should also be made in the receipt column of the Material ‘Account in the Stores ledger which is found is excess and the balance column should also be increased by the quantity found in excess. Similarly, if there is a shortage of stock, a credit note is prepared and Mock records are adjusted accordingly by passing reverse of entires recorded on excess of materials st that book balance may reconcile with actual balance. At the end of the accounting period, the Folance in Stock Adjustment Account is analysed to ascertain the reasons for_a discrepancy. If the discrepancy is found to be due to unavoidable causes, the balance is transferred to the Costing Profit and Loss Account and if the discrepancy is due to avoidable causes the balance is transferred to Stores Overhead Account or Factory Overhead Account if no Stores Overhead Account is maintained. ‘Continuous stocktaking is an essential feature of the perpetual inventory system But the two terms, perpetual inventory and continuous stocktaking, should not be taken as one ; perpetual inventory means the system of stock records and continuous stocktaking, whereas continuous stocktaking means only the physical verification of the stock records with actual stocks. ‘After all what is done in continuous stocktaking ? In continuous checking, physical verification is spread throughout the year. Every day 10 to 15 items are taken at random by rotation and vhelked so that surprise element in stock verification may be maintained and each item may be Checked for a number of times during the year. On the other hand, surprise element is missing in face of periodical checking because checking is usually done at the end of the year. Moreover, case sus for the discrepancies cannot be located because of the long interval between two periodical verifications. Operatio! Summaries of receipts and and posted to a Material (or Stor: be outlined as follows : n of the perpetual inventory system may of transactions is made therein so 1. The stock records are maintained and up-to-date posting that current balance may be known at any time. 2 Palforent sections of the stores are taken up by rotation for physical checking. Every day some items are checked so that every item may be ‘checked for a number of items during the year. 3, Stores received but awaiting inspection are not mixed Up with regular stores at the time of physical verification because entries relating to ‘such stores have not yet been made in the stock records. 4. Notice of the particular items to be verified each day is given to the storekeeper only on the pate of actual verification so that surprise element if stock verification may be maintained. ‘er counting, Weighing, measuring or listing, as The physical stock available in the store, afl The physicay be, is properly recorded in bin cards or inventory tage or stock verification sheets. From the above discussion of the conclusion that this system is comprise 1 Bin cards (ie. Quantitative perpetual inventory), 2 Stores ledger (i.e. Quantitative cum valued perpetual inventory). 3, Continuous stocktaking (i.e. Physical perpetual inventory). Advantages of the Perpetual Inventory System . Following are the advantages of the perpetual inventory system : the physical checking of all items of stores at the end of the 1. It obviates the necessity for # year and thereby avoids dislocation of production. a perpetual inventory system, we can draw the .d of the following three :TECHNIQUES OF MATERIAL coy ROL 1V2.20 t and Loss Account and Balance Sheet 1 1 the closing stock can be taken gil“haut periodical Profi om the 2. It is possible to prepare ipyeteat rae patie taken because figure fo bin cards or the stores ledger. ! . Adetailed and more reliable check on the store is obtained. 4. As the work of recording and continuous stocktaking is carried out systematical, svithout undue haste, the figures are more reliable. ly and 5. Continuous stocktaking will make the storekeeper and the stores accountant more vigi fa their work and they will try to keep their records accurate and up-to-date nt storekeeper will try to see that there is no leakage of the stores, . 6. Planning of production can be done according to the availability of the material in the stores because the management is constantly kept informed of the stores position, ‘A system of internal check remains in operation all the time because bin cards and the ” “Stores ledger act as a cross check on each other. Errors and shortage of stock are readily discovered and efforts are made to avoid the shortage of stock in future. The capital investment in stores can be kept under control because actual stock can be compared with the maximum and minimum levels. Tt makes available correct stock figures for claim to be lodged with the insurance company 10. for loss on account of stock destroyed by fire. Perpetual inventory system has become an integral part of material control due to the following facts : () The stock records are properly maintained and written up from day-to-day basis so that current balances may be known at any time. (ii) A number of items are systematically and by rotation are physically checked every day iv hence it serves as a moral check and acts as a deterrent to dishonesty. iii) Suitable adjustments or rectification can be made if any discrepancies have been found. (iv) Remedial action can be taken for removing the causes of discrepancies, if any. 9.VII. Double Bin System ‘This system is followed in small organisations which cannot afford expensive techniques of control. The method is also suitable for materials of comparatively less value. The materials bins which are divided into two compartments. (there can be two racks, two shelves or *ame shelf can be divided into two). Materials are issued for production from the first compartment ‘and the materials from the second compartment are not touched in regular course. When the materials in the first compartment are fully consumed, an order is placed. The second compartment of materials takes care of the consumption requirement during the time required to get fresh delivery. The store-kceper has to divide the materials in the two bins in such a manner that production does not hamper for the want of material. This system has practical usage and is simple to understand and operate. VIIL. Input-Output Ratio This ratio is sed to judge the efficiency in the usage of material. The ratio indicates the relation between the units of material put in for production and the units of finished product. Input-Output Ratio = Bee one x 100 tor are stored i For example, if 1080 units are introduced into a process and final output is 900 units, then 1080, ‘909 * 100 = 120%. __, This input-output ratio is compared with standard input-output ratio. If the actual ratio is higher than standard ratio, then there is inefficiency in the manufacturing process and vice-versa. 1X. Material (or Inventory) Turnover Ratio Inventory turnover ratio is also i o one method of exercising material c Than ver ee eee ‘od of exercising material control. The stock turno input-output ratio i Cont of materials consumed du Cost of average stock hy 1g the period id during the periodee i TECHNIQUES OF MATERIAL CONTROL 1v2-23 verage stock is the average of the opening stock and closing stock. The stock turnover ratio can also be determined in days as follow: { oe _. _ Days during the period Paventory Ternover in Daye = 7, estory Turnover Ratio * It is essential to compare the turnover of different kinds of material to find out the items which are slow moving thus helping management to avoid keeping capital locked up in such items. A low ratio is an indicator of slow moving stock, accumulation of obsolete stock and carrying of too much stock. On the other hand, a high turnover ratio is an indication of fast moving stock and less investment in stock. A low turnover ratio will lead to the disadvantages arising out of over- stocking. If the stock turnover ratio for a particular item is zero, it means that the item had not been used at all during the period and should be immediately disposed of, otherwise the quality of the item will be deteriorated. An exception to this is spare parts for machinery in use which can be required at any time when the machinery goes out of order. Thus, spare parts should be keptin stock for the period machinery is in use. In this connection, it will be worthwhile to have a discussion on slow moving, dormant and obsolete stocks of stores items. Slow Moving Stocks. Slow moving stocks are those items of stores which are not issued at frequent intervals, The issues of such items are irregular and are not made at normal intervals. Dormant Stocks. Dormant stocks are those items of stores which are rarely issued from the store. Consumption of such items is almost nil. These items are stored in case of need, such as spare parts may be needed when the machinery goes out of order. Obsolete Stocks. Obsolete stocks are those items of stores which have become out moded and have no further use for the purpose they were purchased. Stocks may become obsolete because of changes in product design or methods of production, use of substitute materials, discontinuation of a product ete. Slow moving and obsolete items stock can be detected by scanning the stores records (ledger) and by inventory turnover ratio. Following steps may be taken to reduce slow moving and obsolete items stock : (i) Diversify production to use up such materials. (ii) Use as substitute in place of other materials. (iii) Dispose them off before it further deteriorates in value. All these stocks are a cause of anxiety because they increase the cost of materials by increasing the carrying cost and losses of materials. Losses and costs arising from slow moving stocks can be reduced by reducing their quantity in the store. Smaller quantity of such materials should be Purchased keeping in view their consumption rate and lead period. To reduce the quantity of such stocks, efforts should be made to increase their consumption by finding out their alternative uses and increasing the production by creating more demand in the market. > Losses and costs arising from dormant stocks can be reduced by purel which are absolutely necessary for the production. Surplus dormant items, if an: should be disposed of as carly as possible so that their value may not deteriorate further. ss Obsolete items are not to be further used, so they should be disposed of imme the carrying cost and losses due to deterioration in quality. A systematic purchasing procedure should be followed to reduce losses on ace, Stocks. Purchases should he made according to the material se a baapSe a Unauthorised purchases may be made. A periodical review of stores items chould be nedene ee management to reduce the quantum of such stocks, be made by the asing only those items diately to reduceNN OOOm™—‘“_Ow TECHNIQUES OF MATERIAL CONTROL W/2-25 X. FNSD Analysis FNSD analysis divides the items of stores into four categories in the descending order ¢ importance of their usage rate, ‘F’ stands for fast mov 1" of time. ‘N’ stands for normal moving items which are exho indicates slow moving items which are not issued at freq exhausted over a period of two years or more. ‘D’ means dead items items is almost nil. D items can also be taken as obsolete items which ecome outmoded and have no further use for the purpose they were purchased, Stocks of fast moving items should be taken care of continuously and replenishment orders should be placed in time to avoid stock-out of such items. Normal moving items should be reviewed at a regular span of time and orders for their replenishment should be given at a regular period of time. Stock of slow moving items of stores should be reviewed very carefully before any replenishment orders are placed to avoid over stocking of such items. Alternative uses should be found for dead stock items. Otherwise, they should be disposed of as early as possible so that their value may not deteriorate further XI. Material (Inventory) Cost Reports The objective of material cost reporting is to help the management in exercising effective material control and taking appropriate decisions. Material cost reports serve as means of communications usually in the written form of facts relating to mate Is which should be brought to the attention of the various levels of management who can use them to take suitable action for the purpose of material control. ‘Material control’ is divided into three aspects, viz. purchase control, stores control and consumption control. Purchase control is to ensure the efficiency of the purchasing department ; stores control, the efficiency of the stores department and consumption fontrol, the efficiency of the departmental foremen. Proper design of material cost reports is ‘essential to achieve these purposes of material control. It is difficult to give the design of materials reports which will be suitable for all organisations. The design should be according to the individual requirements of the organisation. However, a few types of reports that should be prepared are given below. ¥y items that are consumed in a short s) ted over 4 period of a year or 80 ent intervals and are expected to be nd the consumption of such Title of Frequency Sent to Contents Purpose of Report a E ss ei __the Report _ Material Usage | Weekly Works Manager ‘Actual quantity of] Controlling use of and Wastage materials used materials and elimina- Report against standard|tion of excessive quantity specified |wastage, scrap, spoilage and defec- tives Material Price | Monthly Purchase Committee | Comparison of actual | Watching efficiency of Nariance prices of materials |the purchase depart- Report with standard prices | ment and trend of price of materials for quan- | movements tities purchased Purchasing Monthly Purchase Committee | Comparison of actual | Determining the result Report purchase, _ con- |of the policies decided sumption and stocks | upon figures Inventory Special Top Management |A study of slow| Controlling Baron moving stocks, Jinvestments in dormant stocks and | materials obsolete stocks Physical Veri- | Special Storekeeper Discrepancy between | Controlling storage of fication Report physical and book | materials balance Material Special Top Management — | Cost of idleness due | Avoiding stoppage of Shortage to stoppage of pro-| production due to Report, duction for want of | shortage of materials, materials