Material Cost Control-B.V.Raghunandan

Material Control

COST & MANAGEMENT ACCOUNTING

Meaning & Importance

Raw Materials, Chemicals, Components, loose tools, implements, maintenance items etc

Most of the products are material intensive, where material forms a substantial part of total cost of production

Objectives of Material ControlEnsuring non-stop productionLow investment in inventoryPurchase only on proper AuthorisationPurchase at minimum cost and at Economic

Order QuantityProtection of Material & Proper StorageLesser Idle MaterialIssue of Material on Proper AuthorisationFixing Up Responsibility for MaterialEnsuring Proper payment & Maintenance

of Records

Essentials of Material Control-IInter-Departmental Co-ordinationBudgeting & SchedulingUsage of Standard Printed FormsClassification of MaterialInternal CheckInter-departmental CommunicationProper Control on Purchases & Issues

Essentials of Material Control-II

Proper Usage & StorageMaintenance of Proper Store RecordsPerpetual Inventory ControlFixing Up Levels of StockProper Pricing of issue of MaterialAn Efficient Stores ControlRecording Wastage & Shortage

Purchase of Material: Elements of Material Control (Organisation of Purchase Department)

Purchasing Department (Purchase)Receiving & Inspection DepartmentStore-Keeping Department (Storing, Issue

and Accounting for MaterialProduction department (Receipt of

Material)Costing Department (Perpetual Inventory)

Types of Purchasing

Centralised Purchasing

Decentralised Purchasing

Centralised Purchasing: Merits-I

Quantity BuyingUniform Buying PolicyExpert Staff for BuyingQuick Implementation of PurchasesMaintenance of Complete records in

one DepartmentAvoiding Duplication of purchasing

Effort

Merits of Centralised Purchasing- II

Avoiding Excessive StockingRecognising Purchase as a Major FunctionEffective utilisation of trade relationsEconomy in RecordingPrompt Reporting of Scrap, Spoilage etcReducing Material Cost

Demerits of Centralised Buying

Lesser FlexibilityHigh Initial Cost of Setting up a Separate department

Undue Delay in Supply of Material

Difficulty of Maintaining Records of Different Departments

Decentralised Buying: MeritsBenefits of Local PurchaseLesser Transportation CostEasy Local Sales through Contact with

Local SuppliersPrompt Settlement of ComplaintsPersonal Attention by Departmental HeadsReduces Costly Order ProcessingTechnical ExpertiseLess Lead Time

Purchase Procedure

1. Receiving Purchase Requisition

2. Selection of Sources of Supply

3. Placing the Orders

4. Receiving & Inspection of Materials

1.Receiving Purchase Requisition

Received from - Store-Keeper for Regular Items - Production Departments for Special

Material - Maintenance Department for

material needed for repairs & maintenance

- any Departmental Head like Marketing Manager, Finance Manager etc.

Specimen of Purchase Requisition

ABC castings Ltd., ABG Castings Limited MG Road, Mangalore-3No.Date Required: Purchase Order No.

Item No. Code No. Description Qty Remarks

Requisitioned by: Approved by:

2.Selection of Sources of Supply: Steps Involved

a. Inquiry for Tenders & Quotationsb. Receipt of Quotations & Tendersc. Comparison of Tenders Receivedd. Selecting the Best Source

3.Placing the Order

a. Purchase Order : 5 copies to- -supplier - retained by purchase department -department initiating purchase -Receiving Department - Finance Departmentb. Follow-Up

Specimen of Purchase Order

ABG Casting Limited MG Road, Mangalore-3 PURCHASE ORDERNo. Date:Quotation No. Purchase Requisition No.

To Thermax Ltd., Bombay

Dear Sir, Please supply the following as per terms and conditions contained inyour quotation number as mentioned above.

Sl.No.

Qty Description Price/Unit

Total Remarks

Purchase Manager

4.Receiving & Inspection of Material

Unloading the materialUnpackingChecking the number of units, weight,

measure, quality as per Purchase OrderReporting the Shortage and BreakagePreparing Material Inspection Note and

Goods Received NoteSending MIN to Supplier & Stores DeptSending GRN to Purchase Dept, Accounts

Dept, and the Dept requiring the Material

Material Inspection Note ABG Casting Limited,

M.G. Road,Mangalore-3

Material Inspection NotePurchase Order No. Date:Inspection Note No. Date:

Sl.No

Description

Qty Quantity Remarks

Inspected

Accepted

Rejected

Inspected by:

Goods Received NoteABG Castings Limited,

MG Road, Mangalore-3

Goods Received Note No: Purchase Order NoDate: Date:

Received from M/s Thermax Limited, Bombay under their Invoice No. TH 567230 dt……. The following:

Sl.No

Description

Stock Code No.

Quantity Rate Amount

Condition of Goods:……………………. Posted in Stores Ledger:……………..Posted in Bin Card:……………………… Remarks…………………………………...

Stores Control: Functions of Stores Department

Preparing Purchase RequisitionsReceiving Goods into StoresProper Storage of GoodsAvoiding Damage & DeteriorationClassification and Coding of MaterialIssue of MaterialMaintaining Stock recordsMaintaining Different levels of StockStock Verification at Regular Intervals

Types of Stores

Centralised Stores: One centrally located Stores department Supplying for the requirements of all the Production and service departments

Departmental Stores: each Department has a small stores department of its own

Centralised Stores with Sub-stores

Centralised Stores: BenefitsEconomy of Large Scale BuyingBetter Use of StaffQualified StaffBetter Use of SpacePrompt ServiceMinimum Investment in StockBetter maintenance of Levels

Inventory Control

i. Setting Levels of Stock

ii. Determining Economic Order Quantity

iii. ABC Analysis of Inventory Control

iv. Perpetual Inventory System

v. Establishment of Budgets

i. Setting Levels of Stock: Factors Considered

1. Rate of Consumption2. Lead Time3. Availability of Working Capital4. Economic Order Quantity5. Availability of Storage Space6. Cost of Carrying Stock7. Perishability of Material8. Seasonality in Availability of Material9. Loss by Deterioration10. Nature of Demand

ii. Economic Order Quantity A quantity at which the sum of ordering

cost and carrying cost is minimum i.e., less than the total cost of ordering and carrying of any other quantity

Ordering CostsCost of Placing an orderLoading and Unloading of GoodsTransportation CostInsurance for Goods in TransitCost of Receiving & InspectionAdministrative Cost

Costs of CarryingWarehouse ChargesInsurance LightingHeatingCold Storage & RefrigerationPilferageBreakagePreservativesSupervision Costs

iii. ABC AnalysisCategory A : 5-10% of Quantity and 70-

85% of Value

Category B: 20-30% 0f Quantity and 25-30% of Value

Category C: 70 – 80% of Quantity and 5-10% of Value

Merits of ABC ControlClose & Strict Control on Expensive items

Ensuring sufficient stock

Leading to Efficient Inventory Management

Saving the time of the Management

Perpetual Inventory System

Bin Card

Stores Ledger

Specimen of Bin Card Bin Card Description Bin No. Stores Folio No. Code No. Location Code. Unit: Maximum Level : Minimum Level: Reordering Level: Reordering Quantity:

DateReceipts Issues Balance

RemarksGR No. QTY MR No.

Qty Quantity

Entered by: Authorised by:

Specimen of Stores Ledger

STORES LEDGER Description… Code No….. Maximum Level…Location Code No…….. Unit…. Minimum Level……..Re-order Quantity….. Re-order Level….

Date

Receipts Issues Balance

GR No Qty Rate Amt MR No

Qty Rate

Amt

Qty Rate

Amt

Advantages of Perpetual Inventory System

1. Early Discovery of Errors2. No Disruption in Production for Stock

Taking3. Value of Stock on Any Day4. Excessive Stock is Avoided5. Prompt Inventory Information to the Mgt6. System of Internal Check7. Control over issue & Usage of Material8. Qualified Personnel to the Stores

Physical Stock VerificationPeriodic Inventory System: Stock

Verification once in a year by a team of people by stopping production-less time consuming and less expensive-but the system is defective

Continuous Stock Verification: Benefits of Perpetual Inventory System

THANK YOUEnd of Chapter 4