CHAPTER 03

MATERIALS
CONDUCTED BY:
P. Ayanthi Madumali
Learning Objectives

After studying this topic, you should be able,

• 1. to understand the basic principles of Material Control

• 2. to study the procedures of Purchase, Storing and Issues

• 3. to acquaint with the latest techniques in inventory control

• 4. to understand the pricing of issues

Materials
Materials
• The term ‘material’ generally used in manufacturing concerns,
refers to raw materials used for production & sub-assemblies
parts.

Stores
• Stores in a company comprises many other items besides raw
materials, such as tools, equipment, maintenance repair items,
factory supplies, components, fixtures. Sometimes, finished
goods and partly finished goods are also included within the
scope of this item.
 Material Control
Various aspects of Material Control

1. Purchasing Control
2. Stores Control
3. Issue Control

• Material control basically aims at efficient purchasing of

materials, their efficient storing and efficient use or consumption.
Objectives of Materials Control
• Material of desired quality should be available when needed for
efficient and uninterrupted production.

• Material should be purchased only when it is needed and in

most economic quantities.

• Purchasing of material will be made at the most favorable

prices under the best possible terms.

• materials are protected against loss by fire, theft, animals

• Issues of materials are authorized properly and are accounted

for properly.
Procedures for Purchasing
01.Purchase Requisition
• A form known as ‘Purchase Requisition’ is commonly used as a
format requesting the purchase department to purchase the
required material.

• Normally the purchase requisition is issued by the Stores

Department when the quantity of the concerned material reaches
the minimum level
• 02. Select suitable suppliers
 After the receipt of purchase requisition, the purchase
department places an order with a supplier, offering to buy
certain material at stated price and terms.
 However before issuing the purchase order, quotations may be
invited from various suppliers for arriving at the best deal

• 03. Purchase order

 purchase order is issued to the selected supplier. purchase order
is a legal document and it results into a contract between the
company and the supplier.
• 04.Receiving the Materials
• The receiving department performs the function of unloading
and unpacking materials which are received by an organization.

• 05. Approval of invoice

• Approval of invoice indicates that goods according to the
purchase order have been received and payments can be made
for the same

• 06. Making the Payment

• After the invoice is approved the payment is made to the
supplier
Stores Control
• Material purchased by the purchase department is sent to stores
before it is issued for production.
• A storekeeper is a person who is in charge of the stores
department .The following functions are usually performed by a
storekeeper.

 Protecting the material

 Avoiding overstocking and under stocking
 Keeping proper records of usage, wastages etc.
Aspects of Stores Control
01.Stores Layout
• careful designing and arrangement of storerooms is desirable
for savings in cost. The layout should take care of proper
ventilation, lighting, temperature control and easy handling.

• Types of Stores systems/ Layout

 Centralized stores: A stores is only one in the company which receives
materials for & issued to all who need them.

 Decentralized stores: Stores is that type of stores which receives materials

for & issues them to only one department & not to the whole company.
Decentralized stores may be in many number in the company.
 Sub Stores: Sub stores are managed by & controlled by the centralized
stores it self.

At the beginning of period the CS issues a fixed quantity of materials to sub

stores. At the end of the period sub stores send a filled requisition form to CS
to maintain the stock to predetermine level.

• 02.Classification and Codification of Materials:

• Materials can be classified according to their types. Codification can be

done for simplification of identification.

• Whatever system of codification is used, it should be ensured that the system

is simple to understand and easy to operate.
• E.g.: TC/BMS/LH01/CHA/252
Inventory Control
• One of the important aspects of the overall material
management is the inventory control. It is necessary to avoid the
overstocking as well as under stocking. For ensuring this,
maximum level, minimum level, re-order level are fixed.

• For inventory control, the following methods are used.

I. ABC System
II. Just in Time Inventory
III. Two bin system
IV. Stock level
V. Perpetual Inventory System
01.Perpetual Inventory System
• The main advantage of this system is that it avoids disruptions
in the production caused by periodic stock taking.

Bin Card
• It is the quantitative record of all receipt of materials, issue of
materials and the balance of materials on a particular day. Bin
Card do not record the amount of receipt or issue, it records
only the quantity by store department.

Stock ledger
• Stores ledger is prepared by accounting department ,that ledger
is a record of quantities & values.
02.ABC System
• In this inventory are classified according to the value of usage.
Materials are classified as A, B and C according to their value.

Items in Class % of total items % of total value of

inventory
A 10 % 70%
B 35% 25%
C 55% 5%

• The high value items should be controlled more carefully while items having
small value though large in numbers can be controlled periodically.
03. Just In Time Inventory
• Material purchased from supplier should directly go the
assembly line, i.e. to the production department. There should
not be any need of storing the material.

• The benefits of Just in time system are as follows,

 Right quantities are purchased or produced at right time.
 Cost effective production
 Inventory carrying costs are eliminated totally.
 saving in the stores cost.
 Losses due to breakage, wastage, pilferage etc. are avoided
04. Two bin system
• The two bin inventory control method is mainly used for small
or low value items. When items in the first bin have finished ,
an order is placed to refill or replace these items.
• The second bin contains enough quantity of the item until the
ordered quantity arrives.

1st Bin
2nd Bin
05.Stock Level
Stock level
(Units)
Maximum
level

Re order
level

Minimum
level

Time (Days)
01.Re-order Level
• This level is fixed for deciding the time of placing an order. If the stock of
materials reaches this level, fresh order is placed

Re-order Level = Maximum consumption * Maximum supply Period

• 02. Maximum Level

• This is the highest level of material beyond which the inventory of material
is not allowed to rise. Obviously this level is fixed with the objective of
avoiding overstocking

• Maximum Level = Re-order Level + Re-order Quantity – [Minimum

Consumption * Minimum supply period]
• 03.Minimum Level
• This level is fixed with the objective of avoiding shortage of material. Care is
taken that the stock do not fall below this level.

Minimum Level = Re Ordering Level – [Average consumption * Average

supply period]

04.Average Level
• This level is the average of the maximum and minimum level

Average Level = Maximum Level + Minimum Level

2
EOQ (Economic Order Quantity )
• EOQ is the order quantity that minimizes the total holding costs
and ordering costs.

• This concept is based on some assumptions. These assumptions

are as follows.

The concerned material will be available all the time without

any difficulty.
The price of the material will remain constant.
Ordering cost and carrying costs are variable.
Impact of quantity discounts on the prices is negligible.
The formula

EOQ = 2*D*Co
CH

Where EOQ = Economic Order Quantity

Co= order cost per order
D = Annual quantity required in units
CH =Stock holding cost per unit per annum
Example
• The annual consumption of a part “X” is 8000 units. The
procurement cost per order is $40 and the cost per unit is $0.5.
The storage and carrying cost is 50% of the material unit cost.
Required:
Calculate the EOQ by ,01. Formula Method
02. Tabular Method
Solution

• Co= $40 D= 8000, CH= $0.5*50%

EOQ = 2*D*Co
CH

EOQ = 2 * 8000 *40

0.5*50%
= 1600 units
• No of order = D/Q
= 8000/1600
= 05

• Order Cost = D/Q * Co

=05 * 40
= 200

• Stock holding Cost = ½ * Q * CH

= ½ * 1600 * 0.25
= 200
 Table to calculate EOQ

No of No of units in one Ordering Holding Cost Total

order order Cost inventory
cost
1 8000/1 = 8000 1* 40 = 40 ½* 8000*0.25=1000 1040
2 8000/2 =4000 2 * 40 =80 500 580
3 8000/3 = 2667 3 * 40 =120 334 484
4 8000/4 = 2000 4 * 40 =160 250 410
5 8000/5 = 1600 5 * 40 =200 200 400
6 8000/6 = 1334 6 * 40 =240 240 407

In EOQ, Co=CH
Cost $

300

Total cost
Minimum cost
200
Carrying cost

100

Ordering cost
EOQ=1600 units Units per order
800 1600 2000
Cost $

300

Total cost
Minimum cost
200
Ordering cost

100 Carrying cost

EOQ=5 order No of order

2 4 6
Issuing Control
• Another important aspect of material control is the issue control. Material is
issued to production and utmost care is to be taken while issuing the
material. The first thing is that without authorization material should not be
issued to any department

Pricing of Issues
• Material is issued to production and it is necessary to find out the
consumption value of the material. The various methods of pricing of
issues are,
I. FIFO
II. LIFO
III. WAC
IV. SAP
• FIFO: As per this method, material received first is issued first. Thus the
material in stock at the beginning of a period is issued firstly and then the
issues are made according to the dates of purchases made

• LIFO: under this method is that the material which is purchased last is
issued first to the production. Therefore the issue should be charged at the
latest prices

• Simple Average Cost Method Under this method, the issues are
charged at the average price of the material purchased without taking into
consideration the quantities involved in the same

• Weighted Average Method: This method takes into consideration the prices
as well as the quantities of materials purchased. Thus weighted average is
computed after each receipt by dividing the total amount by the total quantity
 Inventory Turnover
• Inventory turnover ration enables the management to avoid capital
being locked up in undesirable stocks. This ratio indicates the
efficiency or inefficiency with which inventories are maintained.

Inventory turnover ratio = Cost of materials consumed

Cost of average stock held during the period
Average opening & closing stock

Stock turnover = Days during the period

Inventory turnover ration
No.of days for inventory
held
Thank You…..