Material cost and control

overview of material cost and method of calculation

1. MATERIALS Dr.S.BELLARMIN DIANA ASSISTANT PROFESSOR DEPARTMENT OF MANAGEMENT STUDIES BON SECOURS COLLEGE FOR WOMEN, THANJAVUR.

2. INTRODUCTION Material cost is one of the most important elements of the cost of production. In certain products it constitute 50 to 60 percentage of the total cost. Hence, there should be proper control over materials. An efficient system of material control will lead to a significant reduction in total cost of production.

3. MATERIAL The term material includes Raw materials, spare parts and components, factory supplies, packaging materials and other fabricated material used for production etc., Inventory means the raw materials, work in progress goods and completely finished goods that are considered to be the portion of a business assets that are ready or will be ready for sale

4. Material control A systematic control over purchasing, storage and consumption of material, so as to maintain a regular and timely supply of materials and avoiding at the same time over stocking.

5. OPERATIONS OF MATERIAL CONTROL Material control involves the following operations Purchasing of material Inspection of material Issuance of materials Stock audit Receiving of materials Storage of materials Maintenance of inventory records

6. OBJECTIVES OF MATERIAL CONTROL To make available the right type raw material at the right time To procure appropriate quality of raw materials at reasonable price To facilitate smooth and continuous flow of production To ensure effective utilization of material To prevent over stocking of materials and consequent locking up of working capital To prevent losses during storage of materials To supply information to the management regarding cost of materials an d availability of stocks.

7. MATERIAL CONTROL PROCEDURE Purchasing Agent – employee who does the buying of raw materials. Receiving Clerk – employee who is responsible for the receipt of incoming shipments. Storeroom Keeper – employee who has charge of the materials after they have been received. Production Department Supervisor – employee who is responsible for the operational functions within the department MATERIAL CONTROL PERSONNEL

8. CONTROL DURING PROCUREMENT When the order point is reached the procurement process begins. Supporting documents are essential to maintain control during the procurement process.

9. Documents Common to the Procurement Process Purchase Requisition – the form used to notify the purchasing agent that materials are needed. Purchase Order – the purchase requisition that gives the purchasing agent authority to order the materials. Vendor’s Invoice – the invoice from the vendor that should be compared to the purchase order. Receiving Report – the form that the receiving clerk uses to count and identify the materials received. Debit-Credit Memorandum – the document that is used when the shipment of materials does not match the order and/or the invoice.

10. Control During Storage and Issuance Materials Requisition Prepared by the authorized factory personnel to withdraw materials from the storeroom. Returned Materials Report Describes the materials being returned to the storeroom and the reason for the return. Bin card Card attached to each bin. Quantities of materials received, issued and the balance are recorded in this bin card by the store keeper. Stores ledger It contains accounts for each class of material, maintained in the loose leaf form. The stocks received and issued are recorded both in quantity and value by the stores clerk

11. EOQ – ECONOMIC ORDERING QUANTITY It is an ideal quantity of materials to be purchased at any time. It minimizes the cost ordering as well as cost of holding Ordering costs may include the salaries and wages of purchasing personnel, communication costs, and materials accounting and record keeping. Carrying costs are the costs that a company may incur in storing materials. These costs may include materials storage and handling costs, interest, insurance, and property taxes, loss due to theft, deterioration, or obsolescence, and records and supplies associated with carrying inventory.

12. CALCULATION OF EOQ EOQ = 2AB C A= Annual consumption B = Buying cost or ordering cost C = Annual carrying cost per unit of invent ory

13. STOCK LEVEL This technique of material control is helpful in avoiding overstocking and understocking of material in store room. The stock levels are fixed by the management and it is the duty of store keeper to observe item Re- order Level : Re- Order Level is a level of stock fixed between minimum and maximum stock level will be sufficient to meet requirements of production during lead time i.e. time from placing of order to receiving of order. Formula for computing Re- order Level Reorder level = Maximum Consumption x Maximum Re-order period (or Maximum Lead Time) LEVEL SETTING

14. MINIMUM STOCK LEVEL OR SAFETY LEVEL It represents the minimum which should always be maintained in stores so as to avoid the risk of stoppage of production due to shortage of materials. In other words, this is the level below which stock should not allow to fall except under abnormal conditions or in emergencies. Formula for computing Minimum Level Minimum Level= Reordering Level – (Normal Consumption x Normal Re-order Period )

15. MAXIMUM LEVEL Maximum level represents the maximum quantity of material which can be held in stock at any time. In other words, it is the point beyond which the stock of raw materials should not be allowed to exceed. The main advantage of fixing maximum level is to avoid overstocking which in turn avoids unnecessary blocking up of company’s funds in stores and at the same time the storage space. Formula for computing Maximum Level Re-order Level – (Minimum Consumption x Minimum Reorder Period ) + Re- order quantity Note : In case re-ordering quantity is not given the EOQ (Economic Order Quantity ) is taken as reordering quantity.

16. DANGER LEVEL Danger Level is fixed below the minimum stock level which represents the quantity of stock at which special step must be taken to obtain emergent supply of material in order to carry out production . Formula for computing Danger Level Danger Level = Minimum rate of consumption x Emergency delivery time

17. AVERAGE STOCK LEVEL Average stock level indicates the average quantity of materials held by a firm during the year. Formula for computing Average Stock Level Average Stock Level = Minimum Stock Level + ½ of Reorder Quantity

18. METHODS OF PRICING OF MATERIAL ISSUES First – In, First – Out Method (FIFO) Assumes that materials used in production are valued at the prices paid for the oldest materials and the ending inventory is valued at the prices paid for the most recent purchases. Last – In, Last – Out Method (LIFO) Assumes that materials used in production are valued at the prices paid for the most recently purchased prices, and the ending inventory is valued at prices paid for the earliest purchases. Simple Average Method Simple average is determined by adding different prices of materials in stock and dividing the total by number of prices Weighted average Method This method takes in to account both quantity and price for arriving at the average price. The weighted average is obtained by dividing the total cost of material in the stock by total quantity of materials in stock

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