MODULE II

Material Cost
By
Mr. Raju D. Gole
Assistant Professor – BBI Dept. & M. COM COORDINATOR
L. S. Raheja College of Arts and Commerce
 Learning Objectives

After studying this unit, you will be able to:

 Learn about types of materials, material cost & material control

 Learn about the advantages of material control.
 Understand the techniques of material control.
 Learn about the solving practical questions based on those techniques.
 Types of Materials
• Raw Materials
• Accessories
• Sub-assemblies
• Consumables stores
• Spares
• Semi finished goods
• Other indirect materials
 What is Material Cost?
• Material cost is the cost of materials used to manufacture a product or
provide a service.
• Material constitute one of the important element of production.
• It is further classified into Direct material & Indirect material.
 Material Control
“Material control is a systematic control over purchasing, storing and
consumption of materials, so as to maintain a regular and timely supply
of materials, at the same time, avoiding overstocking.”
 Advantages of Material Control
• To avoid under stocking.
• To avoid over stocking.
• To minimize the total cost (i.e. ordering & carrying cost).
• To avoid wastages & losses. etc
 PERPETUAL INVENTORY SYSTEM

 It is defines as a system of records maintained by the control department which

reflects the physical movement of stocks and their correct value.
 For maintaining inventory records under perpetual inventory system Stock
Ledger & Bin Cards are prepared.
 Following methods are used for preparation of Stock Ledger :
1. First In First Out [FIFO]
2. Weighted Average Cost [WAC]
 Material Turnover Ratio

MEANING :-
Inventory Turnover Ratio is one of the techniques of inventory
control. It expresses the relationship between the cost of
material consumed and the average stock held.
OBJECTIVE :-
The objective of computing the Inventory Turnover Ratio is to
determine the efficiency with which inventories are
maintained. The objective is to find out -

(a) Fast Moving Stock i.e. stock in great demand

(b) Slow Moving Stock i.e. stock in low demand
(c) Dormant Stock i.e. stock having no demand at present
(d) Obsolete Stock i.e. stock no longer in demand
FORMULA:-
Inventory Turnover Ratio is computed with the help of following formula :

Inventory Turnover Ratio = Cost of materials consumed during the period

Cost of average stock held during the period
= …… times
where,
(i) Cost of Materials Consumed = Opening Stock + Purchases + Direct Exps - Closing Stock
(ii) Average Stock = 1/2 (Opening Stock + Closing Stock)

Note: This ratio is usually expressed as 'X' number of times.

Average No. of days for which an average inventory is held = 365 days
Inventory Turnover
INTERPRETATION:-
 It indicates the speed with which the inventory is consumed.
 In general, a high ratio indicates fast moving stock and a low ratio indicates slow moving
stock.
 However, too high ratio and too low ratio call for further investigation.
 A too high ratio may be the result of a very low inventory levels which may result in
frequent stock-outs.
 On the other hand, a too low ratio may be the result of excessive inventory levels, slow-
moving or dormant or obsolete inventory and thus, the firm may incur high carrying
costs.
 Thus, a firm should have neither a very high nor a very low stock turnover ratio, it
should have a satisfactory level.
 To judge whether the ratio is satisfactory or not, it should be compared with its own past
ratios or with the ratio of similar firms in the same industry or with industry average.
UTILITY:-
On the basis of Inventory Turnover Ratio, the management may take the
necessary corrective action such as -

(a) Decision as to how to prevent the under-stocking of fast moving stock

items.
(b) Decision as to how to prevent the over-stocking of slow moving stock
items.
(c) Decision as to whether to retain or scrap the dormant stock items.
(d) Decision as to scrapping or discard of obsolete stock items.
 Economic Order Quantity
• DEFINITION
The size of the order for which both ordering costs and carrying costs are minimum is known as
Economic Order Quantity.

I. Ordering Cost – It refers to cost incurred for acquiring inputs. It includes cost of placing an
order, cost of transportation, cost of inspecting goods etc.
II. Carrying Cost – It refers to cost incurred in maintaining a given level of inventory. It includes
cost of storage space, cost of Insurance, Cost of handling material, cost of store staff etc.