MATERIALS

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Learning Objectives
Explain the definition and classification of
materials

Explain the Materials Control Cycle – purchasing,

receipts, stock keeping and issuance of materials

Discuss the store keeping – Centralized and

Decentralized storage

Explain the procurement – traditional and Just in

time purchasing

Explain stock investment and control – EOQ and

Stock levels

Issuance of stock and methods of stock valuation

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What is Materials?

Are the Are an Need proper

supplies from important Major cost control from
outside factory element of component of time of the
Purchased from
bought to use manufacturing manufacturing materials are
outside sources
in cost used to used in acquired up to
manufacturing manufacture production usage of the
process. products materials

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Classification of Materials

Direct Indirect
Materials All materials that
Materials Are consumables such
as cleaning chemicals,
can be identified disposable tools etc
with a specific that cannot be
product identified with a
specific product or job

It is considered as It is not as raw

direct cost. materials but will make
the production process
Example: Flour and possible and more
butter for efficient. They are
production of cakes termed as indirect cost.

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The Essential of Material Control
Purchase materials that are of appropriate quality and specifications;
purchase only when required and the purchase is appropriately authorized.

Choose suppliers that represent an appropriate balance between quality,

price and delivery

Materials should be properly received and inspected.

Appropriate storage facilities must be available.

Stock levels must be physically checked on regular basis.

Direct and indirect materials used and charged to production are priced at
an appropriate and consistent pricing

Effectively designed documentation, accounting systems and controls must

be established.

Establishment of well-organized stock taking to ensure stock quantities on

hand are available when required.
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Material Control Cycle/Procedure
Procurement/Purchasing

Storage/storekeeping

Stock Control

Issuance of
Materials

Stock Valuation &

pricing of Issues
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 Purchasing/procurement of
materials

Purchasing is an important and highly specialized function.

It is the responsibility of the Purchasing department/function

to ensure balance between price, quality and time of
delivery.

This is because late delivery, substandard material or wrong

specification and unreasonable price will lead the firm to suffer
high and unnecessary cost and reduce company’s profitability

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Documents Involved in Purchasing
N Documents Issue From To Purpose
o
1 Material Production Store To request for materials to be
Requisition Note Dept used in production
(MRN)*

2 Purchase Store Purchasing To request for the purchase to

Requisition Note Dept be made for replenishment
(PRN)
3 Purchase Order Purchasing Supplier Requesting suppliers to supply
(PO) Dept orders of materials

4 Invoice Supplier Purchasing To charged and demand

Dept/ payment from the company
Accounts
Dept
5 Goods Received Receiving Inspection/ To acknowledge that goods are
Notes (GRN) Dept Purchasing received and checked against
Dept PO and suppliers delivery note
6 Inspection Note Inspection Purchasing Inspection made upon
Dept Dept receiving materials for quality
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and other specification
Elements of efficient Materials
Management
Efficient purchasing

Control of material quality

Effective stores control

Determining appropriate issue price

Timely report

Keeping records and systematic accounting

Reducing loss of material

Applying cost management techniques – Just In time or others.

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Storekeeping
Storekeeping is an important function and
can make a substantial contribution to
efficient operations.

Are the activities relating to purchasing,

issuing, protecting, storing and recording
of materials.

Includes the receipts and issue of

materials, their recording, movement and
safety of stock.

The overall objectives of store control is to

minimize the costs associated with stock
(carrying costs, storage costs, etc.)
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 • Efficient and speedy issue of required
material
• All items can be found speedily, that all items
An efficient can be precisely identified and storage space
is used effectively.
storekeeping • Stocks checks can be done on a continuous or
periodic basis so as to be able to provide
is essential accurate stock figures when required.
to ensure: • Items in stores are protected from damage
and deterioration.
• Items are secured from pilfering, theft and
fire.

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Types of Store
Centralized Decentralized
Store
A single store which
receives materials for and
issues them to all
departments, divisions
and production
All materials required for
all departments and
branches are stored and
issued by only one store
Store
A store which receives
materials for and issues
them to only one
department and not to the
whole company
more convenient to have a
Decentralized Store if the
organization has many
branches to avoid delay
and to lower
transportation cost
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Advantages and Disadvantages
Centralized
Store
Advantages
• Smaller stocks are required on
average
• Better supervision is possible
• can employ quality staff
• can have better control-wastage
can be minimized
• reduce paperwork
• easier to conduct stocktaking
Disadvantages
• Delay in sending materials to the
required depts and branches
• Increase in materials handling
cost
• Greater risk of loss by fire
• Not suitable for large company
Decentralized
Store
Advantages
• Controlling and storing function
can be accomplished easily
• Delay in material handling can be
minimized
• Minimizes chances of loss by fire
• No internal transportation cost
• Saving in material handling cost
Disadvantages
• Higher cost of supervision
• More space is required to
individual departments
• Higher amount of investment in
inventory
• More time for stock taking
• Higher cost of staffing
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Store Records
• to record essential data of
materials in a bin.
Bin • The bin card will be kept in the
store usually attached to the bin.
• The bin card is used for
Card recording receipts and issues of
material and also to assist the
storekeeper to control the stock.

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 • kept in the cost department and
Store is almost identical with the bin
card except that the money
Ledger values are shown.
• The store ledger card is an
Card accounting record for recording
the movement of stock.

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Differences between Bin Card and
Store Ledger Card
Store Ledger Bin Card
1.An accounting record Not an accounting record

2. Kept in the cost department Kept in the store usually attached to

the respective bins

3. Recording made by the cost Recording made by the storekeeper

department

4. Recording of quantities and money Recording of quantities only

value

5. Recording into the store ledger card Recording into the bin card is made
is made after the transaction has just before the transaction occurred.
occurred

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Stock Control (Inventory Control)
Stock control begins from the moment materials are received by the storekeeper.

It can be defined as the system used in a firm to control the firm’s investment in stock, including:

• Recording and monitoring of stock levels

• Forecasting future demands
• Deciding when and how many to order

The investment in stock is important in most business.

Therefore it is necessary to monitor stocks, to keep them at the optimal level.

Objective of stock control system is to discover and maintain the optimum level of investment in all types of raw material to
supplies of finished goods, also control firms investment in stocks and to minimize cost that is associated with the stocks.

These costs comprises of:

• Carrying Cost – cost to keep stock

• Ordering Cost – cost to obtain stock
• Stockout Cost – cost of being without stock
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Carrying Cost
Carrying cost/holding cost includes:

• Interest on capital invested in stocks

• Storage charges – rent, lighting, heating, refrigerating and
air conditioning
• Stores staffing, equipment, maintenance and running
costs
• Materials handling costs
• Stocktaking, audit and stock recording costs
• Insurance and security
• Deterioration, obsolescence and shrinkage of stocks

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Ordering Cost
Ordering cost (cost of obtaining
stock) includes:
•Clerical and administrative costs of
purchasing, accounting and goods
reception
•Transportation cost
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Stock out cost
Stock out cost (cost of being without stock)
includes:
• Loss contribution through loss of sale caused
by stockout
• Loss of future sales due to loss of customers
• Cost of production stoppages due to stockouts
• Extra cost on urgent usage – buying on small
quantities with higher price

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Elements of Stock Control
Storekeeping

Stores Stocktaking/
turnover Elements stock count

of Stock
Control
Economic
Order
Quantity Monitoring
(optimal stock levels
reorder
quantity)

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Stocktaking
Stocktaking is a procedure done to count stock physically
one by one to ensure that the physical quantities (actual
stock held) are in agreement with the balance on the clerical
records and any losses or discrepancies are adjusted.

Stocktaking are done by an independent staff, other than

the storekeeper or accounts staff.

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Perpetual Inventory System
This may be defined as a method of
recording store balances after every
receipt and issue to facilitate regular
checking on the balance of stock.

The balance of any account in the

store ledger should agree with the
balance shown on the bin card for the
same item of materials, and a
frequent checking of those dual
records should be made, as well as the
actual quantity in stock,

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 2 types of Periodic
stocktaking: Stocktaking
Usually carried out at
one point of time (at
Periodic Stocktaking a specific date) or
periodically usually
once a year

The objective is to
Continuous find out the physical
Stocktaking quantity of materials
at a given date

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 Steps in periodic stocktaking:

• All staff involved should be issued with stocktaking instructions well before
the date of the actual count. Often non-store staff will be involved in the
count
• A cut-off time should be set, after which no movement of stocks is allowed
until the count has been completed
• A team of stock-checkers should be allocated to count all stocks in one
area, to ensure that all stock is counted once, and no duplication or
omission occur
• Stock checkers should enter amount counted on the stock sheets
• In the office, completed stock sheets should be collated and totaled and
quantities checked against store records
• Any discrepancies should be counted, if not resolved should be reported
• Senior staff or auditors should perform sample check on a number of items

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 Continuous Stocktaking (under perpetual inventory system)

Under this system a number of items are counted daily or at frequent intervals
and compared with the bin card and store ledger by a store audit clerk.

A proportion of stock is checked daily – so that over the year all stock is checked
at least once.

For major value stock or fast moving items, it will be checked several times

Discrepancies are investigated

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 Actual stock amount vs Recorded
stock amount
Reasons for discrepancies may be due to:

• Clerical errors on the record card.

• Storekeepers errors, clerical and physical
• Unrecorded losses due to evaporation and breakage
• Shrinkage, pilferage and falsification of documents.

Continuous stocktaking is an essential feature of the

perpetual inventory system

The objective of continuous stocktaking is to confirm that

the perpetual inventory system is functioning properly.

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Advantages of Continuous Stocktaking
Continuous stocktaking has several advantages over periodic stocktaking:

• Regular skilled stock-takers may be employed. This improves the quality of

stocktaking
• There is much more time to take stock. Besides improving the quality of
the stocktaking, it also allows discrepancies to be more fully investigated
• Competence and accuracy of storekeepers and store clerks are appraised
• Storekeepers are induced to maintain high work standards, as they never
know just when a particular material will be checked
• Stock deficiencies and losses are revealed sooner
• Production hold-ups, a common features of periodic stocktaking is
eliminated.
• The moral effect on the staff tends to produce greater care and serve as a
deterrent to dishonesty
• Control over stock can be improved, less likelihood of overstocking.

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Stock Levels
One of the purposes of stores control is to
ensure that there is no risk of overstocking or
understocking.

To avoid such situations, organizations employ

a system of stock levels to determine the
reorder level, the maximum and the minimum
stock level
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Stock Level What and why important Formulae
Maximum stock level The highest level that stock ROL+EOQ-Min
should be kept. Stock should Usage x Min lead time
not exceed this limit. It is an
indicator to mgmt to avoid
overstocking cost
Minimum stock level The lowest level that stock ROL-Av. Usage x Average
should be allowed to fall. At lead time
any time stock should not be
less than this level. It is an
indicator to mgmt to avoid
stockout cost. It is also an
allowance made for any wrong
forecasting made on lead time.
Also called Buffer stock or
Safety stock

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Stock Level What and why Formulae
important
Reorder Level A level that shows to the Maximum usage x
mgmt that a new order maximum lead time
should be placed to
replenish stock

Average Stock Level An ideal or desirable level Max level +Min level
at all time 2
Or
Min SL + ½ RQ

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Economic Order Quantity (EOQ)
EOQ is a calculated reorder quantity which is economic
and the optimum order size.

At this order size the total inventory cost is the minimum.

The minimum cost is where the total carrying/holding

cost and the total ordering cost are equal. At this point
the two costs are balanced

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Methods to determine EOQ

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⚫ Formula
EOQ = √ 2DO
C
⚫ D = total demand for the material during a given
period or the annual quantity used
⚫ O = costs of placing and receiving orders
⚫ C = the annual cost of carrying one unit of material

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⚫ EOQ model is based on the following assumptions:
⚫ Demand is constant
⚫ Carrying and ordering costs are constant
⚫ Unit price is constant
⚫ Quick delivery

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 TABULATION METHOD
⚫ The EOQ can also be determined by tabulating the
carrying cost, the ordering cost and the total cost for
the various order quantities. The EOQ will be the
order quantity with the minimum total costs.

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EOQ Table
Order Size (Q)

Average Stock (Q/2)

No of Order (N)

Carrying cost (TCC)

(Carrying cost per unit
x Q/2)
Ordering cost (TOC)
(Cost per order x N)

Total costs (TCC +

TOC)

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Example (Stock level)
Calculation of stock levels:
Reorder quantity (EOQ) 2,000 units
Re order period (lead time) 3 to 5 weeks
Maximum usage of material 500 units per week
Minimum usage of material 300 units per week
Normal usage of material 400 units per week
Calculate:
i. Reorder level
ii. Min Stock level
iii. Maximum Stock level
iv. Average stock level

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Example (EOQ)
⚫ A company purchases a raw material from an outsider at a
cost of RM9 per unit. The total annual demand for this
material is 40,000 units and the following additional
information is available:
RM
Required annual return
on investment in stocks (10% x RM9) 0.90
Other holding cost per unit 0.10
Cost per order 2.00
Determine EOQ using formula, tabulation and graphical
method

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