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Mr. Madhav Verma

Unit 2/Material control/Mr.Madhav Verma 1

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— Material/inventory control
— Concepts and techniques
— Classification and codification of materials

Unit 2/Material control/Mr.Madhav Verma 2







— ×t refers to raw materials used for production ,sub-
assemblies and fabricated parts.
— ×t refers to all commodities that are consumed in the
process of manufacture.×t is defined as any thing that
can be stored,Stacked or stockpiled.dz
— ×t can be classified into two

materials

Direct materials ×ndirect materials

Unit 2/Material control/Mr.Madhav Verma 3
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— Mre those materials whose consumption can be identified
with specific production units and which usually become
part of the finished product.
— ×t includes;-
— Component parts used in a product. E.g. Tyres and tubes in
a car, picture tubes in a television etc.
— Mny materials used in the production but wholly consumed
in the production process e.g. fertilizer used in growing
plants.
— Mny primary packing materilas, i.e., any container sold
with the final product,e.g., cans for tinned food and drink,
bottles for beer,etc.
Unit 2/Material control/Mr.Madhav Verma 4
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— Mre those which cannot be conveniently identified
with individual cost units examples are coal, grease
and oil, soap,sandpaper etc.

Unit 2/Material control/Mr.Madhav Verma 5



— Mccording to Mccounting Principles Board- the
aggregate of those items of tangible personal property
which
1. are held for sale in the ordinary course of business,
2. Mre in the process of production for such sales
3. Mre to be currently consumed in the production of
goods or services to be available for sales

Unit 2/Material control/Mr.Madhav Verma 6





— hy we need material control?
— Because it consist of a large portion of the cost. thus a
system has to be in place which ensures efficient
purchasing of materials, their efficient storing and efficient
use or consumption.
— Meaning:-
— Material or inventory control may be defined as Dzsystematic
control and regulation of purchase, storage and usage of
materials in such a way so as to maintain an even flow of
production ,at the same time avoiding excessive investment
in inventories. Efficient material control cuts out losses and
wastes of materials that otherwise pass unnoticed.dz
Unit 2/Material control/Mr.Madhav Verma 7
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— £o under stocking: right thing will be available at the
right time.
— £o over stocking: only required quantity is purchased
— Economy in purchasing:
— Proper quality:
— Minimum wastage: store materials in a safe place.
— ×nformation about materials in terms of authorized
issue, properly charged to various departments
— Refer Jawahar lal or Mrora

Unit 2/Material control/Mr.Madhav Verma 8

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— Various techniques commonly used for inventory control are
listed below:
1. MBC technique.
2. Stock levels- minimum.
3. Economic order quantity (EOQ)
4. Proper purchase procedure.
5. Proper storage of materials.
6. ×nventory turnover ratio to review slow and non-moving
materials.
7. Perpetual inventory system.
8. Fixation of material cost standards (used in standard costing)
9. Preparation of material budgets.

Unit 2/Material control/Mr.Madhav Verma 9

M ڏ 

— MBC technique is value based system of material
control. ×n this technique, materials are analyzed
according to their value so that costly materials are
classified according to their value-high, medium and
low values, which are known Ms M,B,C items
respectively.MBC technique is sometimes called Mlways
better control method.
— M items-these are high value items which may consist
of only a small percentage of the total items handled.
On account of the most experienced personnel.

Unit 2/Material control/Mr.Madhav Verma 10

 — B items-these are medium value materials which
should be under the normal control procedures.
— C items-these are low value materials which may
represent a very large number of items. These
materials should be under simple and economical
methods of control.
— The point of classifying stocks into M,B, and C
categories is to ensure that material management
focuses on M items where sophisticated control.
— Thus, MBC is a technique of selective control
Unit 2/Material control/Mr.Madhav Verma 11
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— Closer and stricter control can be exercised on those
items which represent large amount of capital
invested.
— ×nvestment in inventory is regulated and funds can be
utilized in the best possible way.
— Economy in stock carrying costs.
— ×t helps in maintaining enough safety stock for C
category items
— Selective controls helps in maintaining high stock
turnover rate.
Unit 2/Material control/Mr.Madhav Verma 12
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— ×t a scientific method for calculating optimum order
quantity so that carrying cost and storage cost are
brought to minimum.
r r

— Formula of EOQ
rÚ
— ere,
— U= annual usage /consumption in units
— O= cost of placing order
— ×=percent cost of carrying inventory
— C=Cost per unit of materials

Unit 2/Material control/Mr.Madhav Verma 13

3  
— ×n order to avoid over stoking and under stocking,
most of the large companies adopt a scientific
approach of fixing stocks levels. These levels are:-
1. Maximum level
2. Minimum level/Safety stock
3. Re-0rder level/re-order point
4. Re-order quantity/EOQ
— By adhering to these levels, each items of materials
will automatically be held within appropriate limits
of controls.

Unit 2/Material control/Mr.Madhav Verma 14



 
— Stock should not be held more then this levelǥ
formula:
maximum level=re-order level+ re-order quantity Ȃ
(min rate of consumption × min re-order period)

Unit 2/Material control/Mr.Madhav Verma 15



  

— ×t is that level below which stock should not normally
be allowed to fallǥ
minimum level = reorder Ȃ( normal consumption ×
. normal reorder period)

Unit 2/Material control/Mr.Madhav Verma 16

    

— This is that level of material at which purchase
requisition is initiated for fresh supplies.
— Or if you reach this level new purchase is made.
— Reorder level =Max con × Max re-order period

Unit 2/Material control/Mr.Madhav Verma 17

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— Danger level is a level at which normal issues are
stopped and materials are issued for important jobs
only.
— This level is fixed below min stock level.
— Danger= normal consumption × max.re-order period .
. under emergency conditions.

Unit 2/Material control/Mr.Madhav Verma 18

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— Mverage stock = ( minimum level + maximum level)
— 2
— Or,
— Mverage stock level =minimum level + reorder quantity
— 2

Unit 2/Material control/Mr.Madhav Verma 19

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— ×ndicates the speed with which inventory is consumed
— M high ratio indicates fast moving stock, low ratio indicates slow moving stock
— ×
   

   

 
—       ! "#  

— 
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— '(×
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— Can be computed for stock categories to determine fast moving, slow moving,
dormant or obsolete stock
— ×deal level is determined with reference to level of other firms or the industry
average or with the budgeted inventory level.

Unit 2/Material control/Mr.Madhav Verma 20

 — Can be computed for stock categories to determine fast moving, slow
moving, dormant or obsolete stock
— ×deal level is determined with reference to level of other firms or the
industry average
— Slow, non-moving, and obsolete and obsolete material
— Slow moving is that material which have a low turnover.
— Dormant/ non-moving are those material which have no demand at
present ,say due to seasonal; demand.these material may be required in
future.
— Obsolete material
— Represent those which have become useless with the passage of time.
— Detection of slow and non moving material find or set a standard rate
— = budgeted consumption
— Mverage stock level
— Compare this level with the actual stock turn over ratio.
Unit 2/Material control/Mr.Madhav Verma 21
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— ×t is the function of buying materials, generally
supplies, tools .office stationery and other items. The
essential of efficient purchasing are right quantity,
right quality ,right time ,right place, right sources and
delivery at the right place.
— Various methods of purchase are.
— º   " %º×&
— ×s a method of purchasing materials immediately
before they are required for use in production.
— Purpose is to reduce stock levels.
Unit 2/Material control/Mr.Madhav Verma 22
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— Centralized purchasing :- here purchase are made by one
single purchase department.
— Decentralized purchasing:- here purchase is done by each
branch or department.
— 
 
— Specialization and expert purchasing staff can be
concentrated in one department
— Higher traded count ,easy payment etc
— Standardization of quality of raw materilas is faciliated
— Better control over purchasing.

Unit 2/Material control/Mr.Madhav Verma 23

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— Separate department has to be maintained.
— £ot suitable for branch located in far of distance.

Unit 2/Material control/Mr.Madhav Verma 24

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— Procedure may differ from firm to firm.
— Purchase are initiated through  ",  .
— Purchase requisition is a form used as a formal request to
purchase department to order goods or services.
— ×nviting tenders and selecting suppliers.
— Preparation and execution of purchase order.
— Receipt of materilas
— ×nspection and testing of materials
— Debit note are issued upon the supplier in the respect of
rejected materilas
— Passing invoices for payments.
Unit 2/Material control/Mr.Madhav Verma 25
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hy classify and codify..
Because the name and description of materials are often
long and vague. in order to avoid length and ambiguity
in description and names of materials, a symbol may
be assigned to each items of materials which is known
as a code. Codification is the procedure of systematic
assignment of symbols for each items of store. Such
codes may be either numeric, alphabetic or a
combination of both.
These are short names of materials.
Unit 2/Material control/Mr.Madhav Verma 26
 — Classification of materilas refers to grouping of materilas
according to their nature in suitable categories .e.g.
copper, iron , aluminimum may be classified as .
— 
 
— Duplication in description is avoided as each code refers to
only one type of items.
— Clerical effort is reduced as length in description is
minimized.
— Secrecy of material used in production is maintained
— Coding is essential in mechanized accounting.

Unit 2/Material control/Mr.Madhav Verma 27








— Each codes should be unique.
— Codes must be clear and identify materials.
— Codes should be brief.
— Elastic.
— Mnemonic..that is easy to remember.

Unit 2/Material control/Mr.Madhav Verma 28

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— £umerical and decimal.
— Herr number are allotted to each items. Mnd subgroup
are indicated by decimal.
— E.g.    -   -
 ( - 
 
Coal 31 Copper sheets 33.1 copper bar grade 1 33.21

ood 32 Copper bras 33.2 copper bar grade 2 33.22

Copper 33 Copper wire 33.3 copper bar grade 3 33.23

Unit 2/Material control/Mr.Madhav Verma 29

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— ×tems are denoted by combination of alphabets
£( 
Mild copper bar MCB
Cast iron sheet C×S
Stainless steel wire SS

Unit 2/Material control/Mr.Madhav Verma 30

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— Here items are denoted with the use of alphabets and
numbers.

 
Mild copper bars of 6ǯǯ MCB6
length
Toughened steel tubes of ¾ TST34
diameter
Brass strips of ¼ǯǯ thickness BS14

Unit 2/Material control/Mr.Madhav Verma 31

 — Codes of materials should appear on all documents
relating to the movement and use and should be
marked against appropriate bins..

Unit 2/Material control/Mr.Madhav Verma 32

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— Perpetual ×nventory Records. This records show the
movement of inventory. That is receipt of materials,
issues of materilas to the production department and
also balance in stock.
— Documents. The documents are used to authorize
movement of materilas into and out of stores.

Unit 2/Material control/Mr.Madhav Verma 33





— M bin is a container in which material is kept. separate
bin cards are maintained by the storekeeper for each
items of materials in store. The bin cards shows the
details of receipt and issues of materilas and the
balance in stock at any time.
— This card is attached to the bin, drawer or any
container in which materilas is stored.
— ×t contains quantitative records of receipt, issues and
closing balances of material items in store.

Unit 2/Material control/Mr.Madhav Verma 34

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— ×n this system two bins are maintained for each of
materials. One bin constitute the minimum stock from
which materilas are issued and the other bin constitute
the minimum stock from which issues are made only
when stock in the regular bin is exhausted.
— The idea of two bin system is to provide automatic
stock bin is already known. the idea of two bin system
is to provide automatic information about reaching
minimum stock level.

Unit 2/Material control/Mr.Madhav Verma 35

3 
— ×s the ledger maintained in the cost accounting
department and is one of the basic records for material
accounting in a cost system. it give the same
information as the bin cards in addition, it gives
monetary values of materials. M separate ledger folios
are maintained in it for each items of materials.
— ×t mainly has three section. i.e. receipt, issues and
balance.
— Sometimes an additional two section are added on-
order and material reserved column.
Unit 2/Material control/Mr.Madhav Verma 36
×
— There are mainly two inventory system.
— !
 
— ! 
 
— !
 :-here stock taking is
done at the end of the year. production is generally
suspended when this is done.
— Perpetual inventory system

Unit 2/Material control/Mr.Madhav Verma 37

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— ×t is the method of recording stores balance after each
receipt and issues to facilitate  " and
obviate closing down from stock-taking.
— Perpetual inventory system is operated by taking the
following steps:
— Reconciliation of bin cards and stores ledger accounts.
— Continuous stock-taking
— perpetual inventory system is a system of keeping up-
to-date records, the continuous stock-taking is
physical checking of records with actual stock.
Unit 2/Material control/Mr.Madhav Verma 38
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— Helps avoid the long and costly work of physical
checking.
— Ms stocks figures are readily available at all times, the
profit and loss accounts and balance sheet can be
easily prepared at interim periods.
— M detailed and reliable check on stores in obtained.
— ×t helps to keep the stock with in limits.
— M system of internal check remains in operation all
the times

Unit 2/Material control/Mr.Madhav Verma 39

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— Two Bin System Ȃ Bin has two parts, the smaller one for reorder stock level and
the other for the remaining material
— ×ssues are made from the larger bin, fresh order placed when it become empty,
material used from smaller bin till replacement received and filled
— Periodic ×nventory System Ȃ Physical stock taking done periodically, requiring
shut down
— Records then physically reconciled
— Perpetual ×nventory System Ȃ Records updated at every receipt and issue
— Done using bin cards and stores ledger
— Continuous stock taking done by random checks of the bin cards and stores
ledger

Unit 2/Material control/Mr.Madhav Verma 40

 






— hen materials are issued from stores to production
department, a question arises regarding the price at
which materials issued are to be charged. this is
because the same type of materials may have been
purchased in different lots at different lots at different
times at several different prices. this means that actual
cost can take on several different values and some
method of pricing the issue of materilas must be
selected .this basic problem of pricing the issues of
materilas is illustrated in the following stores ledger
account.

Unit 2/Material control/Mr.Madhav Verma 41

Unit 2/Material control/Mr.Madhav Verma 42