Inventory/Material Control and management : Cost Accounting

This presentation would help understand what is inventory and inventory control and management . It would also help understand various terms necessary for material controlling such as EOQ, Minimum stock , Maximum stock, buffer stock , re order level etc.
After learning about the various terms ..the techniques of material control would be discussed and presented with suitable graphs and point wise explanations

1. Inventory Control
&
Management
ACW - 201
T.Guru Aarat

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• Inventory is stocks of material. It can stored
for future use of production .
•It is tomorrow’s production.
•Semi-finished goods waiting in the line for use
in the next process of for that matter finished
goods waiting for shipment is form of
inventory.
•Inventory includes TOOLS, RAW MATERIAL,WORK IN
PROCESS & FINISHED GOODS.

3. /6a-T5XT5CW C-201TD2C-02GTI What is inventory control ?
•Inventory control is planning , ordering and
scheduling of material used in manufacturing.
•It means right quantity of material is available
in right time.
•It means systematic control over the
purchasing, storing and using of material.so as
to minimize possible cost.

4. 04/16/15 XIDAS, INVENTORY CONTROL 4
Re-ordering level
•It is the point at which if stock of the
material in store approaches, the store
keeper should initiate the purchase
requisition for fresh supply of material.
•This level is fixed some where between
maximum and minimum level.

5. 04/16/15 XIDAS, INVENTORY CONTROL 5
Economic Order Quantity
•It is also known as standard order
quantity , optimum quantity or economic
lot size.
•By definition economic order quantity
that size of order for which the total cost
is minimum.

6. Computation of EOQ
•The widely used formula is
EOQ =√{2RCp/Ch}
Where ,
R= Annual quantity to be used in units.
Cp=Cost of placing an Order.
Ch= cost of holding one unit for one year.

7. 04/16/15 XIDAS, INVENTORY CONTROL 7
Minimum stock level
•This represents the quantity below which
stocks should not be allowed to fall .
•The level is fixed for all items of stores
and the following factors are taken into
account:
1.Lead time-
2. Rate of consumption of the material
during the lead time.

8. Maximum stock level
•Quantity of inventory above which should
not be allowed to be kept. This quantity
is fixed keeping in view the disadvantages
of overstocking;
Factors to be considered:
•Amount of capital available.
•Godown space available.
•Possibility of loss.

9. Techniques of material control

10. Inventories are necessary evil.

11. Main techniques in selective inventory
control
•ABC Analysis
•VED Analysis
•FSDN Analysis
•JIT Analysis
•HML analysis

12. Let us define ABC
•A- significant few,
items few in number contributing high
proportion of value of inventories

B- not few, not too many
neither very cheap nor very costly
C- Insignificant many
relatively large no. of items
normally inexpensive

13. Graphical presentation

14. Advantages of ABC Analysis
1. Strict control is exercised
2.Investment in inventory is
reduced
3. Storage cost is reduced
4. Management time is saved

15. Just in time inventory:
•Because of larger carrying
cost of inventory in the
stores & godowns ,
manufacturers now
interested in Just in time
purchasing.
• JIT purchasing is the
purchase of material or
goods in such a way that
delivery of purchased
items is assured before
their use or demand.

16. Advantages of JIT
1. Investment in inventory is reduced.
2.Carrying cost is reduced.
3. A reduction in number of suppliers to dealt with
is possible.
4. Minimum possible wastage

17. Perpetual Inventory System:
• It is a system of records.
• It reflects the physical movements of
stocks & their current balance.
• Bin cards & the stock ledger help the
management in maintaining this system.
• Records of all issues and balances.

18. Also includes
•Continuous stock taking
•Surprise checks

19. Merits:
•Provides better control
•Acts as an internal check
mechanism
•Assures minimum of
investment at least cost

20. Timely detection of errors &
discrepancies.
Preparation of final accounts at any
time is possible.

21. Demerits:
•Not suitable for small units
•More paper work
•Actual stock taking may not be
possible in true sense

23. VED Analysis:
VED- vital, essential &
desirable- analysis is used
primarily for control of spare
parts. The spare parts can be
divided into 3 categories-
1-Vital
2-Essential
3-Desirable
Depending upon their
criticality for production.

24. Continue….
•Cost of maintaining stores;
•Likely fluctuation in prices;
•Seasonal nature of supply of material;
•Restriction imposed by Govt.;
•Possibility of change in fashion and habit.

25. V - The spares, the stock-out of which even
for a short time will stop production for quite
sometime are vital spares.
E - The spares, the absence of which cannot be
tolerated for more than few hours or a day &
which are essential for the production to
continue, are essential spares.
D - The desirable spares are those spares
which are needed but their absence for even a
week or so will not lead to stoppage of
production.

26. FNSD Analysis:
FNSD analysis divides the items of stores into 4
categories in the descending order of
importance of their usage rate.
‘F’ stands for fast moving items that are
consumed in a short span of time.
‘N’ stands for normal moving items which
are exhausted over a period of a year or so.
‘S’ indicates slow moving items which are
not issued at frequent intervals & are
expected to be exhausted over a period.

27. D’. means dead items & the consumption of such items
is almost nil.

28. HML Classification:
–The HML classification is similar to the ABC classification,
except for the fact that instead of consumption values of
items, their units values are considered.Items are
classified on the basis of their unit value into:

H= High value items
M= Medium value items
L=Low value items

29. XYZ Classification:
•Based on the closing inventory value of different
items.
• Such classification is done every year at the time of
annual stock taking .
•Items having highest inventory valuation are
classified as X, while with low investment are termed
as z. Other items are the y items whose inventory
value is neither too high not too low.

30. Perpetual Inventory system
•Maintenance of records of all physical
movements of stock
•Continuous stock -taking
•Surprise checks

31. Let us recaptualise
•ABC - emphasizes % value of consumption
•JIT - purchase only when demanded
•VED - criticality for production
•FSDN - frequency of use
•HML – unit value of stock
•XYZ – closing value of different items