Module II- (Materials)

Materials
Material refers to things used for producing an article or providing a services. It is classified into
two direct material and indirect material.
Stores
Stores includes components, tools, patterns, maintenance materials, consumable stores etc.
Inventory
It is the raw material used to produce goods as well as the goods that are available for sale.
Material cost control / Inventory control
It is a systematic control over purchasing, storing and consumption of materials. It maintain a
regular and timely supply of materials and it minimize over and under stocking.
5 R in efficient material control
1. Right quantity
2. Right quality
3. Right price
4. Right time
5. Right source
Objectives/ Importance/ Need of material cost control
● To avoid the situation of under stocking.
● To avoid the situation of over stocking.
● To avoid wastage and losses.
● To minimise the total cost of material.
● To maintain proper and up to date records.
● To provide required information to the management.
● To ensure procurement of material.
● To ensuring optimum utilization of material.
● To ensure proper storage of material.
Essentials/ Requirements/ Principles of sound material control
● Proper coordination among various departments.
● Proper cooperation among various department.
● Purchase should be made by a centralized department.
● Proper classification and codification of materials.
● Separate inspection department.
● Proper system of internal check.
● Standard forms should be used for orders.
● Material should be purchased at the right time.
● Material requirement should be properly planned.
Material control process
● Purchasing
● Receiving
● Storage
● Issuing
Purchase order
It is a legal document by a buyer send to a supplier or vendor to authorise a purchase.
Centralized purchasing
When all the purchases are made by one specialized department,called centralized purchasing.
Advantages of centralized purchase
● Reduces cost of purchases.
● Ensure uniform quality of materials.
● Advantages of bulk purchases.
● Exercise effective control over inventories.
● Involves less clerical works.
Disadvantages of centralized purchase
● It may cause delay in getting materials.
● It is not suitable for plants.
● Huge cost are required.
● It may result in wrong purchase.
● It is not possible to enjoy benefits of local purchase.
Decentralized purchasing
When purchases are made by the individual department separately,it is called DP.
Functions of purchase department
● To prepare purchase budget.
● To formulate purchase policies and procedures.
● To place purchase orders.
● To choose the most favourable source of supply.
● To receive purchase requisition.
● To purchase the right quality of material.
● To verify and pass the invoice for payment.
Basic steps/ Process/ procedure in purchasing materials
● Receiving purchase requisition
● Inviting quotations and tenders
● Selecting the supplier
● Placing purchase order
● Receiving of material
● Inspection of materials
● Checking the invoice
● Making payment
Stores control
It simply means control over storage of materials. The main objective of stores control is to
reduce the material cost.
Types of stores
1. Centralized stores
2. Decentralized stores
3. Central stores with sub stores
Centralized stores
It is the store where all types of material and supplies required for all departments are stored at
one place.
Advantages of centralized stores
● Better control
● Better supervision
● Need less storage space
● Easy stock taking
● Lower clerical costs
● Easy identification of slow moving items
Disadvantages of centralized stores
● Increased transportation costs
● Delay in issue of material
● Increased material handling charges
● Increased risk of loss due to fire, theft.
● Problem in internal transportation.
Functions/ Duties/ Responsibilities of Stores dept. (Storekeeper)
● To issue purchase requisition.
● To receive material.
● To keep material in proper places.
● To make store neat and clean.
● To take stock at periodical intervals.
● To maintain bin card for each material.
● To protect material from theft and damage.
● To prevent the entry of unauthorized persons.
● To report on waste, scrap and obsolete stock.
● To maintain up to date records related to stores.
Perpetual inventory system
It is a system of verification of materials.It is a system of records maintained by the controlling
departments which reflects the physical movements of stock and their current balance.
Advantages of perpetual inventory system
● Quick valuation of closing stock.
● Lesser investment in materials.
● Helpful in formulating proper purchase policies.
● Adequacy of working capital.
● Immediate detection of theft and leakages.
● Beneficial in ascertaining efficiency of stores organisation.
● Overstocking and understocking can be avoided.
● It provide a moral check on the stock keeper.
Bill of materials
A bill of material is centralised source of information used to manufacture a product.
Functions/ Advantages of bill of material
● It reduces clerical works.
● It reduces cost of stationery.
● It avoid problem of overstocking.
● It avoid problems of understocking.
● It ascertain material cost of job.
Material abstract
It is a document which classify the records of issue of material, material return or transfer. It is a
material issue analysis sheet.
Material requisition
It is a document authorizing the store keeper to issue material stated therein to consuming
department.
Store requisition
A store requisition is a formal request made by an individual or department within an
organization to obtain specific items or materials from the inventory or stores.
Machine cost
Machine cost refers to the expenses incurred in acquiring, operating, and maintaining
machinery or equipment used in production processes within a business.
Material inspection note
It is a report prepared by the inspection department after inspecting the material received.
Periodic stock taking
It refers to physical verification of entire stock once in a specific period preferably annually and
generally on the last day of an accounting year.
Continuous stock taking
It means stock taking is conducted on regular basis.
Advantages of continuous stock taking
● Improved stock management
● Prevent unnecessary wastage and losses.
● Improved stock management.
● No need to shut down operations.
● Eliminate delay in production and delivery.
Prime cost
Prime cost is the total direct cost of production including raw materials and labour.
Bin Card (Stock card)
It is the record maintained under the perpetual inventory system by the stores department and
shows the quantities of the materials received, issued and balance. It is also known as stock
card.
Advantages of bin card
● It shows the stock position at any time.
● It helps storekeeper to prepare purchase requisition.
● It helps in implementing perpetual inventory system.
● It enable to prepare financial statements without delay.
● It helps in effective stores control.
Stores Ledger
It is a ledger which provides information for the pricing of material issued and the money value
at any time of each items of stores.
Techniques/ Methods of inventory control (Material/ store control)
● Classification and codification of material
● Double bin system
● Stores stock levels
● Economic order quantity
● Material turnover ratio
● Stock verification system
● Imprest system
● ABC analysis
● VED analysis
● JIT techniques
Economic order quantity (EOQ)
The quantity of material to be ordered at one time is known as economic order quantity. It is the
ideal order quantity a company should purchase to minimize inventory costs.
ABC analysis
It is an inventory management technique that determine value of inventory items based on their
importance to business.
VED analysis
It is an inventory management technique that classifies inventory based on its functional
importance.
JIT (Just In Time)
It is an inventory management method whereby labour, material and goods are scheduled to
arrive exactly when needed in the manufacturing process.
Reordering level
It is that point of level of stock of a material where the storekeeper starts the process of initiating
purchase requisition for fresh supplies of that materials.
Safety lock level
It is also known as minimum level. It is the minimum quantity of material which must be
maintained in hand at all times.
Maximum level
It is the maximum of stock which should be held in stock at any period of year
Danger level
It is a level of stock at which normal issue of materials are stopped and issues are made only
under specific instructions.
FIFO (Fist in First Out)
Under this method, material received first are issued first.
Applicability of FIFO
● Increased warehouse space.
● Keeps stock handling to a minimum.
● Enhanced quality control.
● Warranty control.
● Warehouse operations are more streamlined.
Advantages of FIFO method
● It is simple and easy to operate
● Materials are issue at actual costs.
● Closing stock is valued at market price.
● In condition of falling prices, this method give better results.

Disadvantages of FIFO method

● This method increases the possibility of clerical errors.
● This method is unsuitable in terms of rising prices.
● Issue price does not reflect the current market conditions.
LIFO (Last in First Out)
This method is a just reverse of FIFO method. Under this method, material received last are
issued first.
Advantages of LIFO method
● It is simple to operate.
● It is easy to understand.
● It is more suitable in time of rising prices.
● It is useful when transactions are not too many.
● It provides tax benefits to the business.
● Materials are issued at actual price.
Disadvantages of LIFO method
● This method involve considerable amount of clerical work.
● It is difficult to control the cost of jobs.
● The value of closing stock does not reflect the current market conditions.

Difference between bin card and stores ledger

Bin card Stores ledger

It is attached to the bin. It is kept in the cost office.

It is maintained by storekeeper. It is maintained by cost clerk.

It is a record of quantity only. It is a record of quantity and value.

It is a recording document. It is an accounting record.

Transactions are recorded individually. Summarized transactions are recorded.