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Material cost Control

Meaning of materials
the term material refers to all commodities consumed in the process of manufacturing
. According to CIMA of UK, material cost is ―the cost of commodities supplied to an
undertaking.
Material is an essential element of cost. The entire process of manufacturing would
be disrupted, or even stopped if right type of material is not available in right quantity
at right time.
Classification Of Materials
‘Classification‘ refers to the systematic division, grouping or categorization of
materials or store items with reference to some common characteristics.
(i) Direct Materials: Direct materials are those items of material which can be
identified with a product or a group of products in a manufacturing concern and can
be easily measured and charged directly to the product. Such materials form the part
of the finished product e.g., timber in furniture, cloth in garments, bricks, sand and
cement in building, yarn in cloth etc.
(ii) Indirect Materials: These are the materials which cannot be traced to a specific
product and cannot be charged directly to the various products. These materials do
not form part of the product. Examples of indirect materials are—repair and
maintenance stores, lubricating oils, cleaning materials, cotton rags etc.

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Supplies
Supplies are indirect material;s used in production which do not become part of of the
finished product. Oil and grease used in keeping machine in running condition, sand
papers used in polishing are example of supplies.
 Finished Goods or Finished Products: As the name indicates, finished goods are
the items which have been duly manufactured in the factory and are ready for
shipment or sale to the customers.
Stores .
Material or Inventory control
‘’Materials control may be defined as the systematic control over the procurement,
storage and usage of materials so as to maintain an even flow of materials and at the
same time avoiding excessive investment in inventories.’’ 13 Material control is a
systematic control over the purchasing, storing and using the material to minimizing
the possible cost. In every manufacturing concern materials constitute an important
factor of production. It is an important element of cost and covering 60-70 percent of
the total cost of production.
Objectives of Material control
Material controls basically aims at efficient purchase, storage and consumption of
materials. The following are the major objectives of materials control.
1. To ensure better quality of materials at right quantity at right time for efficient and
uninterrupted production of output.

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2.. To maintain the cost of materials at the minimum level.
3. To purchase materials at a reasonable price.
4. To minimize the handling cost and time in storing and using the materials.
5. To provide information to the management about raw materials, their costs and
availability.
6. To protect materials against loss by fire, theft and leakage.
7. To avoid obsolescence of materials by adopting an appropriate method of materials
issue.
Purchase procedure
The purchase procedure of the company differ from one to the other. The following is the
general purchase procedure. Specific forms and records are used to follow proper
purchase procedure and implement purchase policies.
1. Purchase Requisition
Purchase requisition is the basis for placing the purchase order for materials and supplies.
It is a written request prepared by the foremen or authorized officer or responsible officer
of the user department and hand over to the purchase department. The purchase
requisition includes the details like material code number, type of materials, quality and
quantity of materials etc
. Identify the Sources of Supply
The purchase department or the purchase officer should know the sources of supply of
various raw materials and requirements of the organization. The selection of right sources
of supply gives maximum benefits to the organization. The buying of raw materials on
credit basis but right quality of raw materials is the efficiency of the purchase department
or purchase officer.
3.. Call for Tenders or Quotations
On the basis of the various sources of supply, the purchase department or the
purchasing officer can call for tenders or quotations. Thus, received quotations or
tenders are compared with their catalogues, past records and published statements. 
4. Analysis of Tenders
All the received tenders are opened on a specified date and time. The particulars of
received tenders are summarized and tabulated. This type of presentation helps the
purchase department to select right suppliers with most favorable terms and
conditions.
5. Selection of Right Supplier
The purchase department or the purchase officer has to select the right supplier after
the careful analysis of the received tenders. The following points may be considered
while selecting the supplier.
Price quoted by the supplier.
Time of delivery.
Quantity discount.
Cash discount.
Terms of payment.
Mode of delivery.
Past performance of the supplier.
Good will of the supplier in the market.

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6. Placing of Purchase Order
After selecting the right supplier, the purchase department or the purchase officer can
prepare the purchase order and send the same to the supplier without any further delay. A
purchase order is the commitment by a buyer to pay for goods ordered. Similarly, it is the
seller’s authority to charge the buyer for supplies made. It becomes a legal contract.
7. Follow Up of Purchase Order
The time, date and mode of delivery are mentioned in the purchase order. If the order is
not executed as per the specifications of the purchase order, the purchase department or
the purchase officer should take follow up action. A remainder may be sent to the supplier
for the execution of order as early as possible. Oral communication may also be followed.
8. Receiving of Materials
The purchase department while receiving the materials performs the following functions.
Prepare the statement of goods received.
Indicate the identification mark for each type of materials separately.
Checking the quantity and quality of materials.
9. Inspection of Materials
The receipt of materials is compared with purchase order and delivery note issued by the
suppliers. If the materials are not received as per the specification of the purchase order
and delivery note, the materials may be rejected. Thereafter, an inspection report is
prepared in a specified form and the same is sent to the supplier for proper execution of
an order.

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. Checking of Invoices
The purchase manager or the purchase officer should check the invoices for early
settlement. If the materials are received in good condition as per the specification of
the purchase order, the delivery note may be issued by the seller. Terms and prices
are checked against the purchase order.
11. Passing the Invoice for Payment
If an invoice is correct in all respects, the purchase manager or the purchase officer
will pass the invoice and send the same to accounts department and finance
department for payment. The invoice may be impressed with the rubber stamp as Bill
Passed for Payment.

Techniques of Inventory or Material Control

1.ABC Analysis
2.VED Analysis
3.Minimum, maximum and re order level
4.Economic Order Quantity
5.Just in time
6.Perpetual inventory system

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ABC TECHNIQUE: ABC technique is a value based system of material control.
 ―A” items - these are high value items which may consist of only small
percentages of the total items handled. On account of their cost, these materials
should be under the tightest control and the responsibility of the most experienced
personnel.
 “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 the simple and economic
methods of control.
The purpose of classifying stock into A, B, and C categories is to ensure that
material management focuses on A items where sophisticated controls should be
installed. B items may be given less attention and C items least attention.
VED ANALYSIS In addition to the conventional ABC analysis, VED analysis also
plays an important role in material management. In VED analysis materials are
classified as follows:
(a)V stands for vital material items in the sense that when these are out of stock or
when not readily available, the production activity comes to a complete halt or is
drastically affected.
(b) E stands for Essential items without which temporary losses of production or
dislocation of production work occurs. Their stock -out cost is very high.

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c) D stands for Desirable items i.e. all other items of materials which are necessary
but do not cause any immediate effect on production.
This classification is usually applied for spare parts to be stocked for maintenance of
machines and equipment based on the critically of the spare parts. However, VED
analysis can be applied to any industry.
Stock levels: One of the major objectives of material control is to ensure that there is
no understocking and overstocking. A scientific approach to achieve this objective is
to adopt a system of stock levels. These levels are maximum levels, minimum levels
and reorder quantity.
A.Maximum level: The maximum stock level is the level above which stocks should
not normally be allowed to rise. It is the maximum quantity of a material that may be
held in store.
Formula:
Maximum level = Reorder level +Reorder quantity- (Minimum X Minimum
Consumption reorders period)
B. Minimum level: Minimum level is that level below which stock should not normally
be allowed to fall. In case any item of material falls below this level, there is a danger
of stoppage in production and top priority should be given to the purchase of new
material.
Minimum level = Reorder level- (NormalX Normal reorder period) Consumption
C. Reorder level: This is that level of material at which a new order for material is
placed. This level is above minimum level and below maximum level.
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. Economic Order Quantity (EOQ)
The economic order quantity, known as EOQ, represents the most favorable quantity
to be ordered each time fresh orders are placed.
The quantity to be ordered is called economic order quantity because the purchase
of this size of material is most economical. It is helpful to determine in advance as to
how much should one buy when the stock level reaches the re-order level. If large
quantities arc purchased, the carrying costs would be large.
On the other hand, if small quantities are purchased at frequent intervals the ordering
costs would be high. The economic order quantity is fixed at such a level as to
minimise the cost of ordering and carrying the stock. It is the size of the order which
produces the lowest cost of material ordered.
While determining the economic order quantity, the following three cost factors are
taken into consideration:
(i) The cost of the material
(ii) The inventory carrying cost
(iii) The ordering cost Carrying costs are the costs of holding

Documents used in Material Accounting

1.Purchase Requisition Note or Form: It is a document issued by the stores
department or a user department to the purchasing department authorising the
department to order new stocks.

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2.Quotation
. or Tender Document: This is a document issued to prospective
suppliers to obtain their terms of supply, such as; price, delivery, quantity and quality.
Reliability of supply is also an important factor that needs to be considered when
selecting a supplier.
3.Purchase Order: It is a document prepared by the purchasing department and sent
to a supplier for goods to be supplied.
4.Delivery Note: It is a document which accompanies goods received from a
supplier. This document is signed by the store keeper to confirm that goods have
been delivered.
5.Goods received note: It is a document prepared to acknowledge the acceptability
of goods delivered by a supplier.
6.Materials or stores requisition note: It is a document issued by a production or
user department to request for materials from the stores department.
7.Materials Return Note: It is used with materials being returned to store. The details
on this document are similar to materials Requisition Note (since material return is the
reverse of material requisition).
8.Materials Transfer Note: It is issued with materials transferred from on job or cost
centre to another, without first being returned to store. Note that stock control
documents are issued in duplicates or triplicates and copies sent to all relevant
departments.

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The following are the two main documents used for recording the receipt, issue
and balance of stocks held:
Bin Card: It is used to record the movements of stocks in a particular bin or location.
It records receipts and issues of materials by the storekeeper as well as stock
balances.
Stores Ledger Account: It is a subsidiary Ledger maintained by the stores
department to record the movement of stocks both in quantity and value.
Storekeeping
Meaning:
After the completion of purchase procedure, the next important aspect Of materials
management is storekeeping.
A storehouse is a building provided for preserving materials, stores and finished
goods. The in-charge of store is called storekeeper or stores manager. The
organisation of the stores department depends upon the size and layout of the
factory, nature of the materials stored and frequency of purchases and issue of
materials.
According to Alford and Beatty “storekeeping is that aspect of material control
concerned with the physical storage of goods.” In other words, storekeeping relates to
art of preserving raw materials, work-in-progress and finished goods in the stores.
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Objectives of storekeeping:
Following are the main objectives of an efficient system of storekeeping:
1. To ensure uninterrupted supply of materials and stores without delay to various
production and service departments of the organisation.
2. To prevent overstocking and understocking of materials,
3. To protect materials from pilferage, theft fire and other risks.
4. To minimise the storage costs.
5. To ensure proper and continuous control over materials.
6. To ensure most effective utilisation of available storage space and workers
engaged in the process of storekeeping.
Functions of Storekeeping:
1. Issuing purchase requisitions to Purchase Department as and when necessity for
materials in stores arises.
2. Receiving purchased materials from the purchase department and to confirm their
quality and quantity with the purchase order.
3. Storing and preserving materials at proper and convenient places so that items
could be easily located.
4. Storing the materials in such a manner so as to minimise the occurrence of risks
and to prevent losses due to defective storage handling.
5. Issuing materials to various departments against material requisition slips duly
authorized by the respective departmental heads.
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 . Undertaking a proper system of inventory control, taking up physical inventory of all
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stores at periodical intervals and also to maintain proper records of inventory.
7. Providing full information about the availability of materials and goods etc.,
whenever so necessary by maintaining proper stores records with the help of bin
cards and stores ledger etc.
METHODS OF PRICING MATERIAL ISSUES:
1. First in First out Method (FIFO)
Under this method materials are used in the order in which they are received. In other
words, materials received first are issued first. This process is repeated throughout.
The price of the earliest consignment is taken first and when that is exhausted, the
price of the next consignment is adopted. This method is most suitable when the
material is slow moving and has comparatively high unit cost.This method is also
useful in times of falling prices because the issue price of material to the job will be
high while the replacement cost of material will be below.
2. Last in First Out Method: (LIFO)
This method is exactly the opposite of FIFO method. Under this materials received
last are issued first. The price of the material to be issued would the cost price of the
last lot of materials purchased.
This method is useful during the period of rising prices because materials will be
issued from the latest consignment at a price which is closely related to the current
price levels. Under this method product' cost is calculated on a basis which
approximates to replacement cost.
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3. Simple Average Price Method
Under this method, materials issued are valued at average price. This is calculated by
dividing the total of the price of the materials on the stock from which the material to
be priced could be drawn by the number of prices used in that total
4. Weighted AverageMethod:
Under the weighted average approach, both inventory and the cost of goods sold are
based upon the average cost of all units currently in stock at the time of reporting.
This approach will more closely resemble FIFO.

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