acma- 5-6

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MATERIALS

Dr. Ratnesh Chaturvedi, ACMA, Session – 5-6

Physical Commodities used to make final end-product

Direct Materials

Important part of the manufacturing cost – 55%

(approx.)

Proper Planning & Control is must

Indirect Materials

Materials specifically required for a

process / production / job

Packing items

Materials having minor importance and

not directly traceable - Soap

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Material Control

Ensuring supply of

material at Proper

time

Quality & Quantity

MATERIALS

Primary

objective is to

minimise

material cost

Inventory Control

Involves

techniques of

maintaining stocks

at minimum cost

Primary

objective is to

minimise

aggregate of

carrying cost,

ordering cost

and stock-out

cost.


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�Eliminates waste

�Reduced risk of fraud & theft

�Perpetual Inventory

�Reduces investment in Inventory

�Reduces the cost of storage

�Prevent production delays

MATERIAL CONTROL - ADVANTAGES


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Purchase Dept

FUNCTIONS OF DIFFERENT DEPARTMENTS RELATED

TO MATERIAL

Rec. & Insp. DeptPurchase Dept is responsible for

efficient purchase of all necessary

goods of proper quality to

produce, without interruption.

-Receive purchase requisitions

-Invite quotations or tenders

- Selection of suppliers

- Issue of PO to Selected supplier

-Follow up

- Approve purchase invoice for

payment

-Receive all incoming materials

-Verify items – count, weight,

etc

- Inspection of material - quality

- Deliver goods to proper point

-Inform to Purchase & Accounts

Dept. all facts


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FUNCTIONS OF DIFFERENT DEPARTMENTS RELATED

TO MATERIAL

Stores Dept.

-Check & Accept materials

from the receiving department

-Identification of the material,

code number and place in the

respective bins.

- Issue of materials

- Record of receipt & Issue

-Ascertainment of different

stock level

Production Dept.

-Make material requisition

timely (Quantity & Quality)

-Check & verify received

material

-Keep proper record of

materials received and charged

to production

- Prepare material return note

for excess material

-Prepare material transfer note

-Prepare reports on scrap


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It is a form used as a formal request

to the purchasing department for

procuring goods or services

Purchase Requisition :

Contents :

-Requisition Number

-Date

-Department

-Code Number

-Description

-Quantity

-Delivery Date

-Types of Requisition

-Signatures

-Qty. in stock & Avg. Consumption – By stores

No. of Copies :Generally three

-Original to Purchase Dept.

-First Copy to Prodn. Ctrl. Dept.

-Last Copy retain in department

Purchase Procedure :


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A Specification of material is a complete

schedule of materials, parts, etc. required

for a particular job/work order issued by

the drawing office together with necessary

drawings & instructions

Bill of Materials :

Contents :

-Requisition Number

-Date

-Department

-Code Number

-Description

-Quantity

-Delivery Date

-Signatures

-Order No.

Advantages of BOM :

Purchase Dept. – As purchase requisition

Stores Dept. – Issue control based on BOM

Production Dept. – Smooth Functioning

Accounts Dept. – Costing is easier



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Selection of Possible Sources of Supply :

-Inquiry and call for tenders on

quotations

-Analysis of tenders called for

-Selection of appropriate source

Schedule of Quotations :

Comparative Statement

Periodic Evaluation of

Supplier(Vendor’s Rating)



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Purchase Order :

Purchase Order : Is a request

made by the purchaser to a

supplier to deliver certain goods

of requisite quality and quantity

at the terms and conditions

agreed upon.

Contents :

-Name of the buying concern, serial number and date of order

-Name & Address of the Supplier

-Description of material & Quantity

-Date & Place of Delivery

-Price, Discount & Terms of Payment

-Packing & DespatchingInstructions

-Signature of Purchase Officer

No. of Copies :Generally

-To Supplier

-To Receiving Dept.

-To Accounts Dept.

- To the dept. which initiate requisition

- Retained in Purchase Dept.



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Receiving & Inspecting Material :

Receiving & Inspecting Material : After inspection and checking

preparation of GRN

Contents :

-The serial no. and date

-Supplier’s name and address

-Description, code and Quantity

-Order no., Invoice no. and date

-Inspection report

-Bin no.

No. of Copies :Generally

-To Purchase Dept.

-To the accounting and stock control dept.

- To the dept. which initiated requisition

- To the store keeper

- Retained in Purchase Dept.


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Checking Inward Invoices and Accounting for Purchase :

-Purchase Requisition

- Purchase Order

- GRN

- Testing Report

- Credit/Debit Note

Debit Note : is issued when materials received are less than the quantity ordered or do not conform to stated specifications.

Credit Note: is issued material received is in excess of quantity ordered and it is expected.


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Stores Routine:

Stores Keeping Stores Location & Layout

Stock Levels

-Ensures adequate supply

- Prevents under stocking and over stocking

- Identifications and locations of items without delay

- Prompt issue of material

- Protection from loss and wastage

- Protection against pilferage, theft and fire

- Minimise the storage cost

-Should be near to transportation facility

- Easily accessible to all depts.

- Situated at place to reduce internal transport cost

- Space into racks & racks into bin

- Proper numbering of bins

- Layout as per future expansion plan

- Similar type of products at same place & bulky material at near to user dept.


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Stores Routine: Stores Keeping

Stores Location & LayoutStock Levels

Maximum Stock LevelReordering Level +

Reordering Quantity – Min.

Consumption

-Rate of consumption of material

- Storage space available

- Lead time from the date of placing the order

- Nature of material

- Working capital required

- Inventory carrying cost

- Market Trends

- Govt. Restrictions

- EOQ

- Risk factor – Fire, evaporation, obsolescence

Min. Consumption

= (Min. Cons. Per

Period x Min.

Reordering Period)


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Stock Levels

Minimum Stock LevelReordering Level – (Normal

Usage per period x Avg.

Delivery Time)-Avg. Rate of Consumption

- Lead Time

- Reorder level

Reorder LevelMaximum consumption

during the period x

Maximum period required

for deliverySlightly more than minimum stock level to guard against :

- Abnormal Usage

- Abnormal delay in supply

Danger Level

Below the minimum stock

level Avg. cons. X

Emergency delivery time


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From the following figures relating to two components X & Y compute

reorder level, minimum level, maximum level and average stock level :

Comp. X Comp. Y

Maximum Consumption for Week 75 units 75 units

Avg. Consumption for Week 50 units 50 units

Minimum Consumption for Week 25 units 25 units

Reorder Period 4-6 Weeks 2-4 Weeks

Reorder Quantity 400 units 600 units

1. Reorder Level 75x6=450 units 75x4=300units

2. Minimum Level 450-(50x5)=200 300-(50x3)=150

3. Maximum Level 450-(25x4)+400 300-(25x2)+600

=750 units =850 units

4. Average Level (750+200)/2 (850+150)2

475 units 500 units


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Other Functions of Stores-Receipt of Material

- Issue of Material

- Return to Stores

Stores Records-Bin Card

- Stores Ledger

-Maintained by Storekeeper

- Quantitative details only

- Entries at the time of trans.

- Inter dept. transfers do not appear

-Maintain by costing dept.

- Quantity & Value both

- Posted after transaction

- Inter dept. transfers appear for costing purpose

Bin Card Stores Ledger

Quantity balances of both Bin Card & Stores Ledger should tally


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Inventory Models for Replenishment of Stores

1. Fixed Order Quantity System – whenever the stock

reaches at reorder level order of fixed quantity i.e. EOQ

2. Replenishment System – where reorder time is fixed but

order quantity is the difference between maximum stock

level and stock in hand on the date of review.

3. Modified replenishment system – where reordering

quantity is variable but it should not be below the fixed

lower limit, when the order is placed at a fixed period of

time. i.e. combination of above with lower limit.

4. JIT Purchasing – Purchasing just before use. Close

relationship with supplier. The main aim is to reduce stock

level.


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Inventory Control Techniques

Physical Inventory Verification ABC Analysis

By Counting, Weighing,

Measuring or Estimating

Perpetual Inventory System

Periodic Inventory System

EOQ

Inventory

Turnover

Input – Output

Ratio

Inventory Turnover = RM Consumed / Avg. Inventory

Input & Output Ratio = Input of RM / Output


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Inventory Control Techniques

ABC Analysis

-Very Strict Control

- V. Low Safety Stock

- Maximum Follow-up

- Rigorous Value Analysis

- Must be handled by Sr. Officer

A Items – High Consumption Value

B Items – Moderate Consumption Value

C Items – Low Consumption Value

- Moderate Control

-Low Safety Stock

- Periodic Follow-up

- Moderate Value Analysis

- Can be handled by middle management

- Loose Control

-High Safety Stocks

- Follow-up in exceptional cases

- Minimum Value Analysis

- Can be fully delegated

% of Items - 10

% of Value - 70

% of Items - 20

% of Value - 20

% of Items - 70

% of Value - 10


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Illustration: Plan of ABC Selective Control :

The following information is obtained from the accounts of XY company ltd.:

Item No. Units Cost/unit Item Units Cost

1 7000 5.00 7 60000 0.20

2 24000 3.00 8 3000 3.50

3 1500 10.00 9 300 8.00

4 600 22.00 10 29000 0.40

5 38000 1.50 11 11500 7.10

6 40000 0.50 12 4100 6.20

A-Rs.50000 & above, B-Rs.15000-Rs.50000, C-Below Rs.15000


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Statement of Total Cost & Ranking :

Item No. Unit Cost/unit TC % of Ranking

Rs. Rs. TC

1 7000 5.00 35000 9.84 4

2 24000 3.00 72000 20.24 2

3 1500 10.00 15000 4.22 7

4 600 22.00 13200 3.71 8

5 38000 1.50 57000 16.02 3

6 40000 0.50 20000 5.62 6

7 60000 0.20 12000 3.37 9

8 3000 3.50 10500 2.95 11

9 300 8.00 2400 0.67 12

10 29000 0.40 11600 3.26 10

11 11500 7.10 81650 22.95 1

12 4100 6.20 25420 7.15 5

355770 100.00

Statement Showing % of total items and of total cost:

Category Item no. Total % of tot Cost % of tot

Items Items Rs. Cost

A 11 81650

2 72000

5 3 25 57000

210650 59.21

B 1 35000

12 25420

6 20000

3 4 33.33 15000

95420 26.82

C 4 13200

7 12000

10 11600

8 10500

9 5 41.67 2400

49700 13.97

355770 100.00

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Economic Ordering Quantity – A technique of Inventory Control

An EOQ is the number of units per order to be purchased which

will minimise both carrying cost and ordering cost.

Carrying Costs : are costs which are incurred on the

maintenance of materials in the stores and include clerical,

handling and transportation costs in relation to stock, interest

on capital blocked in stores, obsolescence, pilferage, loss on

holding stocks, rent, insurance,etc.

Ordering Cost: are the costs of getting a material into the

stores and are incurred each time an order is placed for the

purchase of the item.

E = 2UO/C


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Economic Ordering Quantity – Illustration

In Value :

Annual Consumption = Rs.810000, Ordering Cost : Rs. 10/order, Annual

Carrying cost = 20% of consumption

E = 2UO/C = 2x810000x10/0.2 = Rs.9000

In Units :

A Refrigerator manufacturer purchases 800 units of a certain component @

Rs. 30/unit from outside supplier. The annual usage is 800 units, order

placing and receiving cost is Rs.100 and cost of carrying one unit for one

year is Rs.4. Calculate EOQ.

E = 2UO/C = 2x800x100/4 = 200 units i.e. 4 orders

per annum


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Economic Ordering Quantity – Illustration

Tabular Method :

Computation of Economic Order Quantity:

Annual No. of Units/ Avg. Carrying Ordering Total

Usage Orders Order Inventory cost @ Rs.4 Cost Rs.100 Annual

per Units per unit on per order Costs

annum Avg. Inventory

Rs. Rs. Rs.

800 1 800 400 1600 100 1700

2 400 200 800 200 1000

3 267 133 533 300 833

4 200 100 400 400 800

5 160 80 320 500 820

6 133 67 267 600 867

7 114 57 229 700 929

10 80 40 160 1000 1160

Here Rate of material is constant i.e. Rs.30/unit. In total cost it will be added. But if

the rates are variable then one column for rate and after that EOQ will be determined.


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Illustration: Material X Material Y

Rs. Rs.

Opening Stock 1000 1200

Purchases 5200 4600

Closing Stock 600 1600Inventory Turnover :

Mtrl. X Mtrl. Y

Rs. Rs.

1 Materials Consumed:

Opening Stock 1000 1200

Add: Purchases 5200 4600

Total 6200 5800

Less: Clsg. Stock 600 1600

RM Consumed : 5600 4200

2 Avg. Inventory Held 800 1400

3 Inventory Turnover = 1/2 7 3

Inventory Turnover 52 122

Period (Days) = 365 / 3

INVENTORY TURNOVER


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Illustration:

Input of Raw Cotton - 100Kg

Finished Cloth - 90Kg

Cost / Kg. Of Raw Cotton - Rs. 4.50

Input Output Ratio = 100 Kg. / 90 Kg. = 1.11/ Kg.

RM Cost of Finished Output/Kg = Rs. 4.50 x 1.11 = Rs. 5/kg

Input Output Ratio


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Material Cost

Basic Price of Materials &

Adjustments for :

Discounts

Charges for transport

Cost of Containers

Sales Tax, excise duty, Insurance, etc.

Valuation of Inventory :

Actual Cost

Lower of the Cost / Market Price

Replacement Cost

Valuation of Issue :

FIFO

LIFO

Avg. Price Method


acma- 5-6

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