CHAPTER 2

MATERIAL & LABOUR COST CONTROL

BY

SUKU THOMAS SAMUEL

DEPARTMENT OF MANAGEMENT
 MATERIAL
Material or material cost is the cost of materials used to manufacture a
product or provide a service.
Definition
“Cost of commodities supplied to an undertaking”
- CIMA, UK

– Forms a major part of the product cost.

– Raw materials and consumables used as a part of production.
– Material can be raw material, work in progress and finished goods.
– Raw material can be direct material or indirect material.
 MATERIAL CONTROL
Definition
“Safeguarding of company's property in the form of material by a proper
system and maintain them at the optimum level considering operating
requirements and financial resources of the business.”

Scope and need of Material Control:

• Systematic control over purchasing, storing and consumption of
materials.
• Helps to maintain a regular and timely supply of materials by ensuring
right quantity.
 MATERIAL CONTROL
• Ensures that the right quality and quantity of materials is available to
the company at the right time
• Helps to reduce the losses and wastage of materials.
• Maintains efficient purchase, storage and use or consumption in the
factory.
• Helps in reducing the cost of production and increasing the
profitability of the company.
 MATERIAL CONTROL
The objectives of Material Control:

1. Economy of purchase
• Effective in negotiating of purchase price.
• Economy of scale

2. Maintaining appropriate stocks

• Understocking and overstocking a concern
• Maintain EOQ of material
 MATERIAL CONTROL
The objectives of Material Control:
3. Minimized wastage
• Better techniques and arrangements for storage

4. Minimize associated costs

• Reduction is costs linked with material – transportation,
security etc.

5. Reporting on material management

• Maintain records and reporting is easier.
TECHNIQUES OF MATERIAL CONTROL
 Techniques Of Material Control
Material Control techniques helps in:
– Scientific management of materials.
– Helps in eliminating and minimizing all kinds of wastes and losses.
– Helps in effectively managing material during purchase, storing,
handling, issued or consumption.

Some techniques used for material management:

• ABC Technique
• VED Analysis
• Minimum, maximum and reorder levels
• Economic Order Quantity (EOQ)
 ABC TECHNIQUE
ABC Technique is a technique used for control of materials.
– Technique is value-based system of material control.
– Materials are analyzed or evaluated for its value.
– Items are classified into 3 based on the value:
• ‘A’ item : high value, smaller in percentage of total value. Highest
responsibility and control procedures.
• ‘B’ item : medium value, normal control techniques.
• ‘C’ item : low value, large quantities. Simple techniques.
– Selectively attention and control given based on the value of material.
 VED ANALYSIS
VED Analysis is a technique like ABC Analysis.
– VED is based on the criticality of the material.
– Materials are analyzed and priority or criticality is assigned based on
component.
– Classified into 3 as Vital, Essential and Desirable.
– Items are classified into 3 based on the value:
• ‘V’ item : cannot function without the item.
• ‘E’ item : can function but may affect the quality.
• ‘D’ item : does not interfere the routine functioning.
 MINIMUM, MAXIMUM AND REORDER LEVELS
Material control needs certain inventory levels to be maintained.

– Helps in overcoming problems of overstocking and understocking.

– Actions are taken by the management based on these levels.
– Levels maybe modified from time to time based on review.
– Some important levels set are:
• Maximum level
• Minimum level
• Re-order level
• Danger level
• Safety stock
 MINIMUM, MAXIMUM AND REORDER LEVELS
Maximum Level:
– Refers to the maximum capacity of the firm.
– Measure of the maximum quantity that can be accommodated by the
management.
– Increase in levels may lead to problems relating to storage, logistics
etc.
Maximum level = Reorder level + Reorder quantity – ( Minimum
consumption period * minimum reordering period)
 MINIMUM, MAXIMUM AND REORDER LEVELS
Minimum Level:
– Refers to the least stock capacity of the firm.
– Management should not allow the stock levels to fall below minimum
level.
– Drop in stock level beyond this would stop the production process.

Minimum level = Reorder level – (Normal consumption * Reorder period)

 MINIMUM, MAXIMUM AND REORDER LEVELS
Reorder Level:
• Refers to level of inventory at which new order of purchase/
procurement needs to be made.
• It is in-between max and min level
• Reorder level is fixed based on following parameters:
1. Nature of material
2. Rate of consumption
3. Lead time

Reorder level = Maximum consumption * Maximum reorder period

 MINIMUM, MAXIMUM AND REORDER LEVELS
Danger Level:
• Refers to level of inventory at which production will be halted.
• Needs immediate attention of management.

Danger level = Normal consumption * Maximum reorder period

 MINIMUM, MAXIMUM AND REORDER LEVELS
Average Stock Level:
• Gives an average level of the inventory.
• Helps in managerial decisions.

Minimum level+Maximum level

Average stock level = 2
 MINIMUM, MAXIMUM AND REORDER LEVELS
Safety Stock Level:
• Additional quantity of an item held by a company in inventory.
• Helps in reducing the risk of the item running out of stock.

Safety Stock = (Maximum Demand – Average Demand) × Maximum Lead Time

 EOQ (ECONOMIC ORDER QUANTITY)
EOQ refers to the ideal quantity to be purchasing material.

– Ideal order quantity a company should purchase.

– Helps in minimizing the Ordering cost and Holding cost.
– Ordering cost - cost of ordering material (example: carriage, handling,
packaging)
– Holding cost- cost of storing the material
– Helps to achieve on economies of scale.
– Scientific measure that helps to save the cost.
EOQ (ECONOMIC ORDER QUANTITY)
ISSUE OF MATERIAL
MATERIAL CONTROL PROCESS
 ISSUE OF MATERIAL
Issue of Material refers to the process followed for the release of the
material from storage to the point of consumption.

• Materials purchased stored in inventory.

• Needs to be issued based on the need.
• Requisition process needs to followed for the issue.

Store manager responsible for:

– Pricing of material
– Preparation and treatment of requisite form.
 ISSUE OF MATERIAL
The some of the methods followed for the material issue are as follows:
• LIFO
• FIFO
• Average method
• Replacement cost method
• NIFO
• Base stock method
 FIFO
First in, first out (FIFO) is a method used to account for inventory.

The feature of FIFO are as follows:

• Method of pricing the issue of material using, the purchase price of
the oldest unit in the stock.
• Materials are issued out of stock in the order in which they were first
received into stock
• Easy to understand and simple to price the issues of material.
• Material leave the stores in a chronological order based on age.
• Inventory is valued at the most recent market prices.
 LIFO
Last in, first out (LIFO) is a method used to account for inventory.

The feature of LIFO are as follows:

• Most recent purchase will be the first to be issued.
• Issues are priced out at the most recent batch received.
• Stocks issued at more recent price represent the current market
price.
 AVERAGE METHOD
Under the ‘Average Cost Method', the cost of inventory is based on the
average cost of the goods available

The feature of Average Method are as follows:

• Based on the assumption material purchased at different intervals are
stored together.
• Hence should be charged at average price.
• Two types: Simple Average & Weighted Average
 SIMPLE AVERAGE METHOD
Simple Average Method is a technique of Issue of Material under the
Average Method:

The features are as follows:

• Taking average of the prices at which materials were purchased.
• Does not consider the quantities.
• Easy to prepare.
• Simple to understand.
 WEIGHTED AVERAGE METHOD
Weighted Average Method is a technique of Issue of Material under the
Average Method:

The features are as follows:

• Based on weighted average price of the material.
• Considers the quantity and the price of the material.
• Evens out the price variation at different intervals of purchase.
 STORES LEDGER ACCOUNT
Stores Ledger Account is a document prepared to maintain the issue of
material.

The features are as follows:

• Used for recording raw materials and production supplies.
• Helps in systematic maintenance of record.
• Maintained by the stores personnel.
• Helpful for auditors to carry out stock keeping of company's
inventory records.
 STORES LEDGER ACCOUNT
Format of Stores Ledger Account
RECEIPTS ISSUES BALANCE
DATE
Quantity Rate Amount Quantity Rate Amount Quantity Rate Amount
 QUESTION 1 Date Particulars
The following transactions 2020
have taken place in the 2 Jan Purchased 4,000 units @ Rs 4 per unit
purchase and issue of 20 Jan Purchased 500 units @ Rs 5 per unit
material A in company 5 Feb Issued 2,000 units
XYZ. 10 Feb Purchased 6,000 units @ Rs 6 per unit
12 Feb Issued 4,000 units
From the above, prepare 2 Mar Issued 1,000 units
the stores ledger account 5 Mar Issued 2,000 units
15 Mar Purchased 4,500 units @ Rs 5.5 per unit
using LIFO
20 Mar Issued 3,000 units
 QUESTION 2 Date Particulars
2020
1 Jan Opening stock of 200 units @ Rs 2 per unit
From the following 2 Jan Issued 150 units
transactions prepare the 5 Jan Purchased 100 units @ Rs 2.2 per unit
stores ledger account for 7 Jan Issued 100 units
10 Jan Purchased 150 units @ Rs 2.4 per unit
material X at company ABC
12 Jan Issued 100 units
according to LIFO 20 Jan Purchased 180 units @ Rs 2.5 per unit
28 Jan Issued 200 units
PREPARATION OF STORE LEDGER ACCOUNT
LIFO - QUESTION 3
 QUESTION 3
Date Particulars
2020
The following is the 1 April Opening balance 50 tonnes @ Rs 10/ ton
record of the receipt’s
2 April 30 tonnes
ad issues of material X
3 April Received balance 60 tonnes @ Rs 10.20/ ton
at factory PQRS for a
4 April Issued 25 tonnes and 1 ton was damaged
week. Prepare the
5 April Received 10 tonnes @ Rs 9.15/ ton
stores ledger account
using FIFO & LIFO 6 April Issued 40 tonnes
method. 7 April Received 22 tonnes @ Rs 10.30/ ton
8 April Issued 38 tonnes
PREPARATION OF STORE LEDGER ACCOUNT
AVERAGE METHOD - QUESTION 5
 QUESTION 5 Date Particulars
Prepare the stores 2020
ledger account for 2 Jan Purchased 4,000 units @ Rs 4 per unit
20 Jan Purchased 500 units @ Rs 5 per unit
PQRS Ltd for Material A
5 Feb Issued 2,000 units
from the following 10 Feb Purchased 6,000 units @ Rs 6 per unit
transactions according 12 Feb Issued 4,000 units
to Simple Average 2 Mar Issued 1,000 units
Method and Weighted 5 Mar Issued 2,000 units
Average Method: 15 Mar Purchased 4,500 units @ Rs 5.5 per unit
20 Mar Issued 3,000 units
PREPARATION OF STORE LEDGER ACCOUNT
AVERAGE METHOD - QUESTION 6
 QUESTION 6
Prepare the stores Date Particulars
2020
ledger account for ABC
July 1 Opening stock of 500 units @ Rs 20 per unit
Ltd for Material X from July 4 Purchased 400 units @ Rs 21 per unit
the following July 6 Issued 600 units
transactions according July 8 Purchased 800 units @ Rs 24 per unit
to Simple Average July 9 Issued 500 units
Method and Weighted July 13 Issued 300 units
Average Method: July 24 Purchased 500 units @ Rs 25 per unit
July 28 Issued 400 units
PREPARATION OF STORE LEDGER ACCOUNT
AVERAGE METHOD - QUESTION 7
 Date Particulars
QUESTION 7 1 Feb Opening balance of 500 kg @ Rs 200/ kg
Prepare the stores 3 Feb Issued 70 kg
4 Feb Issued 100 kg
ledger account for XYZ
8 Feb Issued 80 kg
Ltd for Material A from
13 Feb Received 200 kg @ 190/ kg
the following 14 Feb Returned from department 15 kg
transactions according 16 Feb Issued 180 kg
to Simple Average 20 Feb Received 240 kg @ of Rs 190 / kg
Method and Weighted 24 Feb Issued 300 kg
Average Method: 25 Feb Received 320 kg @ Rs 190/ kg
26 Feb Issued 115 kg
27 Feb Returned from department 35 kg
28 Feb Received 100 kg @ 190/ kg