Wastage: - The residue which is left behind by a production process is known as a waste.

Wastage is inevitable and is inherent in the technological process.

Scrap: - A scrap refers to the incidental residue derived from certain types of manufacture recoverable without further processing.

DIFFERENCE BETWEEN DIFFERENCE BETWEEN WASTAGE AND SCARPWASTAGE AND SCARP

Spoilage is man made scrap.

They cannot be repaired or reconditioned into a product of suitable quality.

DIFFERENCE BETWEEN DIFFERENCE BETWEEN SPOILAGE AND SCRAPSPOILAGE AND SCRAP

It refers to imperfect products which are transformed into the standard specifications by the application of additional material, labor or both.

DIFFERENCE BETWEEN DIFFERENCE BETWEEN DEFECTIVES AND SPOILAGEDEFECTIVES AND SPOILAGE

DEFECTIVES SPOILAGE

Defectives can be reworked and restored to original condition.

Spoilage cannot be rectified.

Fixation of various inventory levels facilitates initiating of proper action in respect of the movement of various materials in time so that the various materials may be controlled in a proper way.

There are 4 levels Maximum levelMinimum levelRe-order levelDanger level

It indicates the level above which the actual stock should not exceed. If it exceeds, it may involved unnecessary blocking of funds in inventory. While fixing this level, following factors are considered.

  Prices for material Availability of funds.

It indicates the level below which the actual stock not reduces, if it reduces, it may involve the risk of non-availability of material whenever it is required. While fixing this level, following factors are considered

Lead time. Rate of consumption

It indicates that level of material stock at which it is necessary to take the steps for the procurement of further lots of material.

This is the level falling in between the two existences of maximum level and minimum level and is fixed in such a way that the requirements of production are met properly till the new lot of material is received.

This is the level fixed below minimum level. If the stock reaches this level, it indicates

the need to take urgent action in respect of getting the supply.

At this stage, the company may not be able to make the purchases in the systematic manner but may have to make rush purchases which may involve higher purchase cost.

ABC analysis is sometimes called Always better control.

ABC analysis is applied to categorize production inventory into vital few and unimportant many.

Category A items are those high annual usage value items of which manager would like to keep at a low level of stock.

These A items, according to the famous 80:20 principle, are 20% of the items which account for 80% of the blocked capital.

Rest of the 20% items are known as ‘B’ and ‘C’ items, which are about 80% in number but their contribution is less than 20%.

ABC analysis thus tends to segregate all items into three categories: A.B, and C, on the basis of their annual usage value.

Level of control Gradual delivery of material Careful accounting Safety stock Quantity discount factor Lay out of stores Stock taking Value analysis project

The economic order quantity may be defined as that level of inventory order that minimizes the total cost associated with inventory management.

EOQ refers to the level of inventory at which the total cost of inventory comprising gaining/ ordering/set up costs and carrying costs is the minimum.

After various inventory items are classified on the basis of the A, B, C analysis, the management becomes aware of the type of control that would be appropriate for each of the three categories of the inventory items. The A group of items warrant the maximum attention and the most rigorous control.

A key inventory problem particularly in respect of group A items relate to the determination of the size or quantity in which inventory should be acquired.

VED analysis represents classification of items based on critically.

Critically means how a machine is important to production.

If the machine stops, how many machines and workstations will come to a halt? In monetary terms, how much loss to production occurs?

The analysis classifies the items into three groups called vital, essential and desirable.

Vital category encompasses those items which, if not made available, being the production to a halt, causing heavy losses.

Desirable group comprises items which do not cause noticeable loss of production or their stock out entails nominal expenditure and causes minor disruptions.

The purchase of materials is recorded under the perpetual inventory system in Materials Inventory Account rather than in a Purchase of Raw Materials Account.

The opening/ beginning materials inventory, if any, is also shown on the debit side of the raw Materials Inventory Account.

The material Inventory Account is credited for the cost of materials issued, with a corresponding debit to Work-In-Process Inventory Account.

ANNUAL STOCK TAKINGANNUAL STOCK TAKING Annual stock taking is the process of

making a complete count once a year of all materials, finished parts; work in process, finished goods, tools and supplies.

The stock verification is generally undertaken at or near the close of the financial year.

Continuous stock taking, also called perpetual stock taking, is the process of taking physical counts of a few items daily and thus cover each item in the storeroom at least once a year.

More important ones are verified twice, thrice, six times or even twelve times a year.

A more rational approach is to relate the frequency of counts to the usage value classification—ABC analysis—under which items of high usage value are verified more often than those of low usage value.

This is the process of physical verification of an item when its stock falls below the reorder level. The store keeper when with this system has the responsibility of notifying this to the department concerned.