Cost Accountancy
Chapter
Material Control
MATERIAL CONTROL
Definition:
Any item of things which may used for
production, whether directly or indirectly
is called material.
Material can be:
1. Raw material
2. Spare parts and components
3. Consumable stores
4. Packing material
CLASSIFICATION OF MATERIAL
Direct Material
Indirect Material
CLASSIFICATION OF MATERIAL
Direct Material
Direct Material are materials which
actually form part of the finished
products
Example:
1. Timber in furniture making
2. Cloth in dress making
3. Spirit in varnishing of furniture
CLASSIFICATION OF MATERIAL
Indirect material
Material which do not physically
becomes a part of finished product is
indirect material.
Example:
1. Nails used in furniture
2. Packing expenses used to more
attractive
3. Consumable goods
OBJECTS OF MATERIAL
CONTROL
To ensure about the right quality of
material
To make availability of material as
and when required to ensure un
interrupted flow of material
To minimize wastage, shortage and
losses of material
To derive maximum economy in the
cost of purchasing, storing handling
ESSENTIAL OF MATERIAL
CONTROL
Proper co-ordination of all
departments
Centralisation of purchasing in a
purchase department
Use of standard form
Use of material, supplies, and
equipment budgets
Operation of a system of interal
checks
ESSENTIAL OF MATERIAL
CONTROL
Storage of all materials and supplies in a
designated location
Assignment of minimum quantity of
each item of material
Operation of a system of stores constrol
Development of a system of controlling
accounts and subsidiary records
Regular reports
ORGANIZATION OF MATERIAL
CONTROL
Divided in three stages:
1. Purchase control of material
2. Stock control of materials
3. Issue and consumption constrol of
material
PURCHASE CONTROL OF
MATERIAL
The purchasing function cycle generally
begins with a purchase requisition and
ends the receipts of material in the
stores and the payment of bills
therefore.
The system of purchase is controlled by
purchase department.
An officer, called Purchase Officer,
controls overall activities of this
department.
PURCHASE CONTROL OF
MATERIAL
The purchasing procedure in textile
industry travels through the following
different stages:
1. Purchase requisition
2. Issuing of tenders of suppliers
3. Comparison of various quotations and
placing of purchase order
4. Receiving, inspecting, accepting of material
5. Checking and passing of bill for payment
STOCK CONTROL OF MATERIAL
The function of store department is
proper keeping of stocks, identifying
and classifying them according to
their nature, type and size and price
and proper maintenance of stock
records.
STOCK CONTROL OF MATERIAL
The store keeping and stock control
procedure which adopted in various
industries are:
1. Material records
2. Various stock levels
3. Classification and codification
4. ABC analysis store control
5. Physical verification of stock
MATERIAL RECORDS
The important documents in
connection with material records are:
1. Bin card
2. Kardex card
3. Stores ledger
VARIOUS STOCK LEVELS
1. Recorder level:
The Recorder level is that level of
stock at which purchase order
should be issued for fresh supplies
of the material.
Recorder level = Maximum
consumption in a given period X
Maximum period of supply
VARIOUS STOCK LEVELS
2. Minimum level:
The minimum level stock level is that
level of stock below which the
quantity of stock of any item should
not be allowed to fall.
Minimum stock level = Recorder level
–(Normal consumption x Normal
period of supply)
VARIOUS STOCK LEVELS
3. Maximum stock level:
Maximum level of stock is the upper
limit beyond which the quantity of
any item held in store should not rise.
[Recorder level – (Minimum
consumption x Minimum time of
delivery)] + Reorder quantity
VARIOUS STOCK LEVELS
4. Danger level:
The stock of material falls below the
minimum stock level due to abnormal
reasons.
Danger Level= Normal consumption x
period of supply from nearest local
market
VARIOUS STOCK LEVELS
5. Reorder quantity:
Reorder quantity also named as Economic
order quantity (EOQ).
EOQ is the most economical quantity to be
ordered under normal conditions.
EOQ = √2RO/C
R = Requirement of material for one year
O = ordering cost for placing one order
C = Carrying cost per unit of inventory for
one year
MATERIAL TRANSFER NOTE
The material transfer note is prepared
in four copies. One copy is sent to the
receiving department, one to store
keeping department, one to cost/
accounts department for debiting the
proper department for this cost, and
the last as office copy.
PRICING OF MATERIAL ISSUES
The following are the methods of pricing
the issue of materials which are used in
various industries:
i) First in First out Method
ii) Last in First out Method
iii) Highest in First out Method
iv) Average Pricing Method – Simple and
weighted Average
v) Market Price Method
vi) Standard Price Method
ISSUE (CONSUMPTION)
CONTROL OF MATERIAL
The stores department is responsible
for receiving, safeguarding, handling,
issuing and maintaining appropriate
accounting records for materials
MATERIAL LOSSES
Problems of losses, wastage, damage
arise in almost all manufacturing
industries. These losses can be
divided into two categories i.e.
i) Normal and
ii) Abnormal
MATERIAL LOSSES
Normal Material losses:
1) Loss in quantity due to evaporation,
deterioration, shrinkage
2) Wastage due to receipt in bulk and
issue in small quantities
3) Loss due to other routine and natural
reasons
MATERIAL LOSSES
Abnormal Material losses:
1) Defective storage
2) Careless handling
3) Obsolescence due to irregular issue