Cost Control

Dr. B. Janarthanan, DoMS, NITT 1

 Control over Costs
• Materials Cost Control
• Labour Cost Control
• Overhead Cost Control

Dr. B. Janarthanan, DoMS, NITT 2

 Material controls
• 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.

Dr. B. Janarthanan, DoMS, NITT 3

 Functions of Material Cost
(1) Purchasing of Materials
(2) Receiving of Materials
(3) Inspection of Materials
(4) Storage of Materials
(5) Issue of Materials
(6) Maintenance of Stores Records
(7) Stock Audit.

Dr. B. Janarthanan, DoMS, NITT 4

 Objectives of Stores Control (SL)
The following are the objectives of stores control :
(1) To receive materials and store them properly.
(2) To ensure proper production and preservation of materials.
(3) To make sure proper classification and codification of materials.
(4) To provide proper information to the management about stock of materials.
(5) To ensure good housekeeping and effective material handlings.
(6) To assist in verification and provision of supporting information for effective purchase
action.
(7) To minimize obsolescence of materials adopted through effective control measures.
(8) To ensure the optimum investment in materials to avoid overstocking or understocking of
materials.
(9) To maintain proper records about materials, receipts, issues and balances.
(10) To issue materials as per specifications.
(11) To make sure of the availability of all types of materials.
(12) To ensure proper utilization of floor space.

5
Dr. B. Janarthanan, DoMS, NITT
 Essentials of Material Control (SL)
• Effective materials control is required for the following essentials to be
considered:
(1) Systematic planning for requirement of materials.
(2) Essentials for co-ordination and co-operation among different departments.
(3) Fixing of stock level is essential for avoiding overstocking.
(4) Floor space is required for smooth handling of materials.
(5) Proper filing system should be adopted.
(6) Proper codification and classification of materials as per specifications.
(7) Perpetual inventory system should be adopted for verification of materials in
stock.
(8) Proper planned storage control and issue.
(9) Systematic procedure should be adopted for materials, receipts and issues.
(10) Qualified personnel required to manage the materials functions effectively.
(11) Appropriate system of internal auditing should be adopted.

Dr. B. Janarthanan, DoMS, NITT 6

 Advantages of Materials Control (SL)
• The following are the advantages of materials control :
(1) It ensures continuous flow of production.
(2) There is maximum utilization of stores resources.
(3) It facilitates economy of buying.
(4) It ensures optimum investments in inventories.
(5) There is possibility of reduction of loss of theft, leakage,
obsolescence etc.
(6) It minimizes cost of materials during purchase, storage and
issue of materials.
(7) It facilitates effective information system to management.

Dr. B. Janarthanan, DoMS, NITT 7

Dr. B. Janarthanan, DoMS, NITT 8
 Inventory Control

Dr. B. Janarthanan, DoMS, NITT 9

 Materials: Inventory control

(1) Storekeeping helps to examine carefully all goods and

materials on receipts.
(2) It is essential to arrange for a systematic and efficient storing
of materials.
(3) Storekeeping ensure accurate and prompt distribution of
materials to user departments as per
issue requisition note.
(4) It is essential because stores often equated directly with
money, as capital is blocked in inventories.

Dr. B. Janarthanan, DoMS, NITT 10

 Types of Stores
• The types of stores depend on the size, types and policy of the
organization. Organization of stores varies from concern to
concern. As per the requirement of the firm the stores
organization may be classified into :
(a) Centralized Stores.
(b) Decentralized Stores.
(c) Combination of both, i.e., Centralized Stores with Sub Stores.

Dr. B. Janarthanan, DoMS, NITT 11

 Fixation of Stock Level
Level of stock is the important aspect of inventory control.
o Understocking
o Overstocking
The following are the important techniques usually adopted in
different industries :
(a) Maximum Stock Level.
(b) Minimum Stock Level.
(c) Danger Level.
(d) Re-Order Level.
(e) Economic Ordering Quantity (EOQ).
(f) Average of Stock Level.

Dr. B. Janarthanan, DoMS, NITT 12

Dr. B. Janarthanan, DoMS, NITT 13
 Re-Order Level
• Re-order level is also termed as Ordering Level. It indicates
when to order, i.e., orders for its fresh supplies. This is the
stock level between maximum and the minimum stock
• Re-order Level = Minimum Level + Consumption during the
time to get fresh delivery
(or)
• Re-order Level = Maximum Consumption x Maximum Re-
ordering Period levels.

Dr. B. Janarthanan, DoMS, NITT 14

 Example
• Steins;gate supermarket is a famous store which primarily
involved in selling SCY Biscuit packets, which is their private
label brand. 80% of their revenue comes from this packet and
their shops 60% of the place is allocated to SCY biscuit
packets. Now you have received an internship project from
steins;gate supermarket. The store manager has asked you to
calculate the re-order stock level for the shop based on the
available data.

Dr. B. Janarthanan, DoMS, NITT 15

 Data points
• It takes 3 to 5 weeks for the manufacturer to deliver the stock
once it is placed
• Your store ledger states that the consumption per week ranges
from 350 to 600 units

Dr. B. Janarthanan, DoMS, NITT 16

 Work space
• It takes 3 to 5 weeks for the manufacturer to deliver the stock once it is
placed
• Your store ledger states that the consumption per week ranges from 350 to
600 units

Dr. B. Janarthanan, DoMS, NITT 17

 Re-Order Stock Level
• Re-Order Stock Level = Maximum Consumption x Maximum Re-ordering Period levels.
a. Maximum Consumption =
b. Maximum Re-ordering Period =

Dr. B. Janarthanan, DoMS, NITT 18

 Workspace

• Re-order Stock Level =

Dr. B. Janarthanan, DoMS, NITT 19

 Maximum Stock Level
• The maximum stock level indicates the maximum quantity of
an item should not be allowed to increase.
• Maximum Stock Level = Re-Order Level + Re-Ordering
Quantity - (Minimum Consumption x Minimum Re-Ordering
Period)

Dr. B. Janarthanan, DoMS, NITT 20

 Example
• Steins;gate supermarket is a famous store which primarily
involved in selling SCY Biscuit packets, which is their private
label brand. 80% of their revenue comes from this packet and
their shops 60% of the place is allocated to SCY biscuit
packets. Now you have received an internship project from
steins;gate supermarket. The store manager has asked you to
calculate the maximum stock level for the shop based on the
available data.

Dr. B. Janarthanan, DoMS, NITT 21

 Data points
• It takes 3 to 5 weeks for the manufacturer to deliver the stock
once it is placed
• Your store ledger states that the consumption per week ranges
from 350 to 600 units
• Reorder Stock Level 3000
• The previous internship report of Ms. Daenerys states that the
idle quantity to be reordered is 2000 units

Dr. B. Janarthanan, DoMS, NITT 22

 Work space
• It takes 3 to 5 weeks for the manufacturer to deliver the stock once it is
placed
• Your store ledger states that the consumption per week ranges from 350 to
600 units
• Reorder Stock Level 3000 units
• The previous internship report of Ms. Daenerys states that the idle quantity
to be reordered is 2000 units

Dr. B. Janarthanan, DoMS, NITT 23

 Maximum Stock Level
• Maximum Stock Level = Re-Order Level + Re-Ordering Quantity -(Minimum Consumption x
Minimum Re-Ordering Period)
a. Maximum Stock Level =
b. Re-order Level =
c. Re-ordering Quantity =
d. Minimum Consumption =
e. Minimum Re-ordering period =

Dr. B. Janarthanan, DoMS, NITT 24

 Workspace

• Maximum Stock Level =

Dr. B. Janarthanan, DoMS, NITT 25

 Minimum Stock Level
• Minimum stock level indicates the minimum quantity of
material to be maintained in stock. The minimum stock is also
known as Safety Stock or Buffer Stock.

• Minimum Stock Level = Re-Order Level - (Normal

Consumption x Normal Re-Order Period)

Dr. B. Janarthanan, DoMS, NITT 26

 Example
• Steins;gate supermarket is a famous store which primarily
involved in selling SCY Biscuit packets, which is their private
label brand. 80% of their revenue comes from this packet and
their shops 60% of the place is allocated to SCY biscuit
packets. Now you have received an internship project from
steins;gate supermarket. The store manager has asked you to
calculate the minimum stock level for the shop based on the
available data.

Dr. B. Janarthanan, DoMS, NITT 27

 Data points
• It takes 3 to 5 weeks for the manufacturer to deliver the stock
once it is placed
• Your store ledger states that the consumption per week ranges
from 350 to 600 units
• Reorder Stock Level 3000
• The previous internship report of Ms. Daenerys states that the
idle quantity to be reordered is 2000 units
• While checking the audit books for the period you found that
the normal consumption is 500 units and the normal re-order
period is 4 weeks

Dr. B. Janarthanan, DoMS, NITT 28

 Work space
• It takes 3 to 5 weeks for the manufacturer to deliver the stock once it is
placed
• Your store ledger states that the consumption per week ranges from 350 to
600 units
• Reorder Stock Level 3000
• The previous internship report of Ms. Daenerys states that the idle quantity
to be reordered is 2000 units
• While checking the audit books for the period you found that the normal
consumption is 500 units and the normal re-order period is 4 weeks

Dr. B. Janarthanan, DoMS, NITT 29

 Minimum Stock Level
• Minimum Stock Level = Re-Order Level - (Normal Consumption x Normal Re-Order
Period)
a. Minimum Stock Level =
b. Re-order Level =
c. Normal Consumption
d. Normal Re order Period =

Dr. B. Janarthanan, DoMS, NITT 30

 Workspace

• Minimum Stock Level =

Dr. B. Janarthanan, DoMS, NITT 31

 Average Stock Level
• Average stock level is determined on the basis of minimum
stock level and re-order quantity.

• Minimum Stock Level + 1\2 (Re-order Quantity)

• (Minimum Level + Maximum Level)/2

Dr. B. Janarthanan, DoMS, NITT 32

 Example
• Steins;gate supermarket is a famous store which primarily
involved in selling SCY Biscuit packets, which is their private
label brand. 80% of their revenue comes from this packet and
their shops 60% of the place is allocated to SCY biscuit
packets. Now you have received an internship project from
steins;gate supermarket. The store manager has asked you to
calculate the average stock level for the shop based on the
available data.

Dr. B. Janarthanan, DoMS, NITT 33

 Data points
• It takes 3 to 5 weeks for the manufacturer to deliver the stock
once it is placed
• Your store ledger states that the consumption per week ranges
from 350 to 600 units
• Reorder Stock Level 3000
• The previous internship report of Ms. Daenerys states that the
idle quantity to be reordered is 2000 units
• While checking the audit books for the period you found that
the normal consumption is 500 units and the normal re-order
period is 4 weeks

Dr. B. Janarthanan, DoMS, NITT 34

 Work space
• It takes 3 to 5 weeks for the manufacturer to deliver the stock once it is
placed
• Your store ledger states that the consumption per week ranges from 350 to
600 units
• Reorder Stock Level 3000
• The previous internship report of Ms. Daenerys states that the idle quantity
to be reordered is 2000 units
• While checking the audit books for the period you found that the normal
consumption is 500 units and the normal re-order period is 4 weeks

Dr. B. Janarthanan, DoMS, NITT 35

 Average Stock Level
• Average Stock Level = Minimum Stock Level + 1\2 (Re-order Quantity)
a. Minimum Stock Level =
b. Re-order Quantity =

Dr. B. Janarthanan, DoMS, NITT 36

 Workspace

• Average Stock Level =

Dr. B. Janarthanan, DoMS, NITT 37

 Exercise 1
• From the following particulars calculate the
(a) Maximum Stock Level.
(b) Minimum Stock Level.
(c) Re-ordering Level.
(d) Average Stock Level.

(1) Normal consumption = 600 units per week.

(2) Maximum consumption = 840 units per week.
(3) Minimum consumption = 480 unit per week.
(4) Re-order quantity = 7200 units.
(5) Re-order period = 10 to 15 weeks.
(6) Normal reorder period = 12 weeks.

Dr. B. Janarthanan, DoMS, NITT 38

 Exercise 2
• The following information available in respect of a material X :
Re-order Quantity = 1800 units
Maximum Consumption = 450 units per week
Minimum Consumption = 150 units per week
Normal Consumption = 300 units per week
Re-order Period = 3 to 5 weeks
Calculate the following :
(a) Re-order Level
(b) Minimum Stock Level
(c) Maximum Stock Level

Dr. B. Janarthanan, DoMS, NITT 39

 Exercise 3
• Two components P, Q are used as follows. Normal usage 1000
units per week each. Re-ordering quantity P - 20,000; Q 8,000.
Re-ordering period P - 4 to 6; weeks; Q 2 to 4; minimum
usage 2000 units per week; each maximum usage 3000 units
per week each.
• You are required to calculate the following each of the
components :
(1) Minimum Stock Level
(2) Maximum Stock Level
(3) Average Stock Level
(4) Re-ordering Level

Dr. B. Janarthanan, DoMS, NITT 40

 Exercise 4
• From the following information for last twelve months, compute the
(1) Re-order Level
(2) Minimum Level
(3) Maximum Level
(4) Average Stock Level for the components of S and T

S T
Maximum Consumption/month 3000 3000
Minimum Consumption in a month 2000 2000
Average Consumption in a month 1,000 1000
Re-order period in a month 8 to 12 4 to 8
Re-order quantity in units 8,000 12,000

Dr. B. Janarthanan, DoMS, NITT 41