MATERIAL CONTROL

Ashim Bhatta ( CA, MBS, ISA)

1. Following item is not included during valuation of inventory
a. Returnable container b. Custom duty c. insurance charge
2. Reorder stock level lies …..
b. Above maximum level b. between minimum and maximum level c.
Between minimum level and danger level
3. Which one of the following items is not included in the annual carrying
cost of inventory?
c. Cost of capital b. Insurance on inventory c. Annual warehouse
depreciation
4. What will be the impact of normal loss on the overall per unit cost?
d. Per unit cost will increase b. Per unit cost will decrease c. Per unit cost
remain unchanged
5. A material loss during production or storage due to evaporation or
shrinkage is called
a. Scrap b. Waste c. Spoilage
 What is material control???

Material control involves the planning, organizing and controlling

the procurement, storage and usage of materials so as to achieve the
objectives of efficiency and economy. A trade-off between Stock-out
and Over-stocking is required

The Chartered Institute of Management Accountants (CIMA) defines

Inventory Control as “The function of ensuring that sufficient goods
are retained in stock to meet all requirements without carrying
unnecessarily large stocks
 Importance of material control
Quality of final product
Price of the final product
Production continuity
Cost of Stock holding and stock-out
Wastage and other losses
Regular information about resources
 Objectives of system of material control
Minimising interruption in production process
Optimisation of Material Cost
Reduction in Wastages
Adequate Information
Completion of order in time
 Techniques of Material (inventory) controls

ABC analysis
Economic order quantity
Stock levels, minimum level, and maximum level, reorder level, reorder
quantity
Inventory turnover ratio and review of slow moving and non moving items
Proper purchase procedure
Proper storage procedure
Proper issue procedure
Two bin system
Use of perpetual inventory system and continuous stock verification
Establishment of a system of budgets
Difference Between:
Difference Between:
 VALUATION OF MATERIAL RECEIPTS

Cost of material includes cost of purchase net of trade discounts,

rebates, duty draw-back, input credit availed, etc. and other costs
incurred in bringing the inventories to their present location and
condition.
Treatment of items associated with purchase of materials is tabulated as
below:
Purchase price (supplier price)
Less: Trade discount (no cash discount)
Less: Subsidy/ Grant/ Incentives
 VALUATION OF MATERIAL RECEIPTS
Add: commission /Brokerage
Add: transportation charge
Add: Custom and excise duty/ Road Tax/ Toll Tax
Add: Transit Insurance charges
Add: Non-returnable containers

Following items should not be included in valuation

Demurrage charge
Penalty
Returnable containers
* VAT credit deducted only if there is sufficient evidence
 VALUATION OF MATERIAL RECEIPTS

Treatment of shortage (Normal & Abnormal)

Good units absorb the cost of shortage due to normal reasons
Losses due to abnormal reasons are debited to costing profit and loss
account
 ILLUSTRATION
At what price per unit would Part No. Z be entered in the Stores Ledger, if the following invoice
was received from a supplier :
Invoice (R s)
200 units Part No. Z @ Rs. 5 1 ,0 0 0 .0 0
Less : 20% discount ( 2 0 0 .0 0 )
8 0 0 .0 0
Add : VAT @ 13% 1 0 4 .0 0
9 0 4 .0 0
Add : Packing charges (5 non-returnable boxes) 5 0 .0 0
9 5 4 .0 0
(i) 2 percent cash discount will be given if payment is made in 30 days.

(ii) Documents substantiating payment of VAT is enclosed for claiming Input

credit.
 Computation of cost per unit
(Rs.)
Net purchase Price 800.00
Add: Packing charges (5 non-returnable boxes) 50.00
850.00
No. of units purchased 200 units
Cost per unit 4.25

Note:
(i) Cash discount is treated as interest and finance charges hence, it is not considered
for valuation of material.

(ii) Input credit is available for VAT paid; hence it will not be added to purchase cost.
 INVENTORY CONTROL

Setting Inventory Levels

 STOCK LEVELS
Re-order level = Maximum re-order period × Maximum Usage (or)

= Minimum level + (Average rate of consumption × Average lead time).

= safety stock + (Average rate of consumption × Average lead time)

Minimum level of inventory = Re-order level – (Average rate of

consumption × average time of inventory delivery)

if Safety stock given in a questions (for eg.5 days consumption)

= Annual demand/365 * (Maximum lead time – average lead time)

Maximum level of inventory = Re-order-level + Reorder quantity −

(Minimum consumption × Minimum re-order period)

OR,
= safety stock + EOQ
 STOCK LEVELS

Average inventory level = Minimum level + 1/2 Re-order quantity

OR
(Maximum Level +Minimum level)/2

Danger level: It is the level at which normal issues of the Normal are
stopped and emergency issues are only made.

Danger level = Average consumption × Lead time for emergency

purchases

*Some time minimum consumption is also used

Buffer Stock: Some quantity of stock may be kept for contingency to be

used in case of sudden order, such stock is known as buffer stock.
 MCQ TEST
1. Management should maintain the inventory turnover ratio at:
a. high level b. low level c. average level

2. If the actual input - output ratio is above the standard input output ratio,
the performance of production department is ….
b. Favourable b. Unfavourable c. at standard level

3. Below cost indifference point……………

c. option with lower fixed cost should be selected b. option having lower
variable cost should be selected c. Option with higher fixed cost
should be selected

4. The statement prepared to show the value of materials consumed in

manufacturing each product is known as:
d. Material requisition sheet b. Material Abstract c. Bill of Material

5. In formula for calculation of economic order quantity, A stands for:

a. Annual Purchase b. Annual Usage c. Annual production
STOCK LEVELS
 STOCK LEVELS
Answers:
i) 34,176
ii) 144,000
iii) 122,176
iv) 48,000
v) 85,088
 Economic Order Quantity

Ordering cost: It is the cost for placing the orders for purchase of
materials and includes:
Cost of staff posted in the purchasing department, inspection section and
payment department
Cost of stationary, postage and telephone charges.
Tender invitation
Inspection cost
Transportation costs in relation to stock
 Economic Order Quantity
Carrying cost: It is the cost of holding the materials in the store and
includes:
Cost of storage space which could space which could have been utilized for
some other purpose
Cost of bins and racks that have been provided for the storage of materials
Cost of maintaining the materials to avoid deterioration
Amount of interest payable on the money locked up in the material
Cost of spoilage in stores and handling
Cost of obsolescence on account of some materials becoming obsolete after
some time of storage either due to change in the process or product.
Insurance cost
Clerical cost.
Economic Order Quantity
Economic Order Quantity
Economic Order Quantity
Economic Order Quantity
Economic Order Quantity
Economic Order Quantity
Economic Order Quantity
Economic Order Quantity
Economic Order Quantity
 Inventory Stock- Out

Stock out said to be occurred when an inventory item could not be supplied
due to insufficient stock in the store. The stock- out situation costs to the
entity not only in financial terms but in non-financial terms also.

While deciding on the level of inventory, a trade-off between the stock out
cost and carrying cost is made so that overall inventory cost can be
minimized
Illustration - Inventory Stock- Out
Illustration - Inventory Stock- Out
 Just in Time (JIT) Inventory Management

JIT is a system of inventory management with an approach to have a zero

inventories in stores
It is also known as ‘Demand pull’ or ‘Pull through’ system of production
JIT is based on two principles
(i) Produce goods only when it is required and
(ii) the products should be delivered to customers at the time only when
they want
Classification
 Cost Indifference Point
Level of purchased quantity where cost of purchase under two options are
equal.

Formula: (Difference in fixed cost) / (difference in variable cost)

Significance of Indifference point

Below indifference – option with low fixed
At indifference – Either of the option
Above indifference – option with low variable cost
 ABC Analysis
It exercises discriminating control over different items of stores classified on the
basis of investment involved.
‘A’ category of items consists of only a small %age i.e. approximately 10% of
total items handled by stores but requires heavy investment, about 70% of
inventory value, because of their high prices or heavy requirement or both.
‘B’ category of items are relatively less important. They may be approximately
20% of the total items of materials handled by stores. The %age of investment
required is approximately 20% of total investment in inventories.
‘C’ category of items do not require much investment. It may be about 10% of
total inventory value but they are nearly 70% of the total items handled by store.
 Input Output Ratio
Input-output ratio is the ratio of the quantity of input of material to production
and the standard material content of the actual output
This type of ratio analysis enables comparison of actual consumption and
standard consumption, thus indicating whether the usage of material is
favourable or adverse
Inventory Turnover Ratio
 Material Losses

a) Wastage: Portion of basic raw material lost in processing having no

recoverable value

b) Scrap: The incidental material residue coming out of certain

manufacturing operations having low recoverable value.

c) Spoilage: Goods damaged beyond rectification to be sold without

further processing.

d) Defectives: Goods which can be rectified and turned out as good units
by the application of additional labour or other services.
 Accounting Treatment of Material Losses

a) Abnormal losses to be Charged to costing profit and loss account

b) waste: Treated as a part of cost of production i.e. cost of such waste

is borne by good units.
c) Scrap:
Value is negligible: Net proceeds of scrap is credited to costing profit
and loss account.

Value is significant and not identifiable with particular job: Net sales
proceeds of scrap is deducted from material cost or factory overhead.

Value is significant and identifiable with particular job: Net proceeds

is credited to that job/ process
 Accounting Treatment of Material Losses
Spoilage: Treated as part of cost of production and realized value if any
of spoilage is credited to the account to which cost of spoilage is
charged.

Defectives
 Are identifiable with particular job or process: rectification cost are
charged to that job or process
 Are not identifiable to particular job or process: charged to
production overhead
 Are due to the fault of particular department: charged to that
department
 Are due to the wrong instruction of the customer: charged to that
particular job and recovered from customer.
Illustration - Treatment of spoilage
Illustration – Material losses
Illustration – Material losses
 Frequently asked in Exams
 Techniques of inventory control
 Direct and indirect Material
 Objective and Advantage of Material control
 Store Records used in Material
 Store ledger and Bin card
 Different methods of pricing material issues
 Material Requirement Planning (MRP)
 Loss due to Obsolete stores
 Waste, scrap, spoilage and defectives
 Bill of material & Material requisition note
 Just in time inventory system
 Continuous stock taking and Perpetual inventory