Material Control

Materials
• The term ‘Materials’ refers to all the
commodities or components which are
consumed in the process of production.
• It constitutes a substantial proportion of total
cost of production.
 Material control
• Material control basically aims at efficient purchasing of
materials, their efficient storing and efficient use or
consumption.
Proper procedures for -
• Purchasing,
• Storing,
• Issuing
• Minimizing material losses by identifying slow moving,
obsolete, dormant material and also by minimizing scrap,
wastages, defectives and spoilages.
 [Link] and receipt of materials

Purcha Receipt
Purcha Approv Making
se of
se al of Payme
Reques Materia
Order Invoice nt
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 Storage of Materials
• Location of the store: Centralised store,
Decentralised Store
Centralised with sub stores
Classification and Coding of materials:
Alphabetic method
Numerical method
Alpha- Numerical method
 Setting of Stock levels

• Ordering level
• Maximum stock level
• Minimum stock level
• Average stock level
• Ordering quantity
• Danger level
 Setting
Stock Levels

• Reorder level : Level of inventory at which purchase

requisition is initiated for fresh supplies. It is fixed close to
minimum level.
• Fixed in a manner such that purchased items will be received just
before minimum level is reached.

Reorder level = (Max. Consumption*Max.

Reorder period)
 Stock Levels

• Maximum level : Level above which the stocks should not

normally be allowed to rise.

Maximum level = Reorder level + Reorder

Quantity- (Min.
Consumption*Min. Reorder period)
 Stock Levels

Minimum level :Level below which the stocks should not normally
be allowed to fall. If it falls beyond this level there may be stoppage
in production

Minimum level =
Reorder level - (Normal Consumption*Normal
Reorder period)
 Stock Levels

• Danger level : Fixed below the minimum level.

• At danger level normal issues are stopped and materials are
issued for important jobs only.
• At this level urgent action is needed to purchase materials on
urgent basis to avoid stoppage in production.

Danger Level = (Normal Consumption*Max. Reorder

period under emergency conditions)
 Stock Levels

Average Stock level =

(Minimum level + Maximum level ) / 2
Or
Minimum level + ½ (Reorder quantity)
 Illustration – Stock Levels

Two materials A and 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
Reorder quantity: A – 600 units, B – 1000 units
Delivery period : A – 4 to 6 weeks
B – 2 to 4 weeks
How the stock can be controlled ?
 Important Issues in Material
Procurement: Economic Order
Quantity
• Ordering cost include costs like handling and transportation costs,
stationery costs, costs incurred for inviting quotations and tenders
etc.
• The more is the frequency of order, the more are these costs.
• The cost of carrying the inventory is the real out of pocket cost
associated with having inventory on hand, such as
• warehouse charges, insurance, lighting
• losses due to handling, spoilage, breakage etc., and
• amount of interest lost due to the investment in the inventory
• Carrying costs will go on increasing if the quantity of material in
inventory goes on increasing.
Graphical representation of EOQ
 Economic Order Quantity

• the most desirable quantity to be ordered is that quantity at

which both, the ordering costs and carrying costs will be
minimum. This quantity is called as ‘Economic Order
Quantity’.
 Illustration - EOQ
From the following particulars,
1) calculate the Economic Ordering Quantity:
Annual requirement : 1,600 units
Cost of Material per unit : Rs 40.
Cost of placing and receiving one order : Rs 50
Annual carrying cost of inventory : 10% of inventory value.
2) Also find the number of orders to be placed every year.
 Solution :
• A = annual consumption = 1600 units
• O= order cost per order = Rs 50
• C = carrying cost per unit p.a. = 10% of Rs 40 = Rs 4

• EOQ = 200 units.

• Orders to be placed per year =
annual requirement/ordering quantity
1600/200 = 8 orders
 Storing of Materials

• Function of receiving materials , storing them and issuing

these to the workshop or departments.
Functions performed by a storekeeper-
• Avoiding overstocking and under stocking.
• Establishing a proper system for ensuring control over usage,
through streamlining issues and receipts.
• Keeping proper records of usage, wastages etc.
• Minimizing material losses occurring due to mishandling,
evaporation, breakage etc.
• Preparing proper documentation regarding the receipts and
issues and acting as a buffer or protection against the
consequences of non-availability of materials.
Just in time purchasing
• Purchasing materials immediately before these are required for
use in the production.
• According to CIMA, London JIT purchasing is ‘matching receipts of
materials closely with usage so that raw material inventory is
reduced to near zero level’.
• Right quantities are purchased or produced at right time.
• Cost effective production
• Inventory carrying costs are eliminated totally.
• The stores function is eliminated and hence there is a
considerable saving in the stores cost.
• Losses due to breakage, wastage, pilferage etc., are avoided.
 Material Control:
ABC Technique
• Materials in inventory are analyzed based on their value.
• Costly and high value items are given more care and attention
• Classification of Material into 3 Categories :
• A Items : Consist of only small number of items due to
their high value. They should be under the tightest
control.
• B Items : Medium value materials which should be
under normal control procedures.
• C Items : Low value items but represent large number
of items. Simple and economic methods of control to
be adopted.
 Example : ABC Technique
Category % of total value % of total Type of Control
quantity
A 70 10 Strict
B 25 30 Moderate
C 5 60 Loose
TOTAL 100 100
 Important Issues in Material Control:

• Perpetual Inventory System vs Periodical inventory system

• VED Analysis: This analysis divides

items into three categories in the • FNSD Analysis: This analysis divides
descending order of their criticality as the items of inventory into four
follows: categories in the descending order of
• ‘V’ stands for vital items and their their usage rate as follows
stock analysis requires more • ‘F’ stands for fast moving items
attention.
• ‘N’ means normal moving items
• ‘E’ means essential items. Such items
are considered essential for efficient • ‘S’ indicates slow moving items
running but without these items, the • ‘D’ stands for dead stock
system will not fail.
• ‘D’ stands for desirable items, which
do not affect production immediately
but availability of these items will lead
to more efficiency and less fatigue.
 Pricing of Issues
• Material is issued to production and it is necessary to find out
the consumption value of the material.
• However the question is that at what price the issue is to be
charged?
• First In First Out
• Last In First Out
• Average Cost Method
From the following information, prepare Store Ledger using First In
First Out [FIFO]and Weighted Average Method of pricing the issues
• December 1st: Balance in hand 1000 units @ Rs.1 each.
• December 15th: Received 3000 units costing Rs.3,300
• January 12th: Received 2000 units costing Rs.2400
• January 30th: Issued 2000 units
• February 17th: Issued 3400 units.