Material 50pcs

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MATERIAL

Direct material: These are the materials which can be conveniently identified with and allocated to cost units. Direct materials generally become part of the finished product. For example, cotton used in a textile mill, timber used in furniture, etc.

Indirect materials: these are those materials, which cannot be conveniently identified with individual cost units. These are minor in importance, such as lubricating oil, soap, coal, nuts and bolts, etc.

 

Material or inventory control:

Materials control involves efficient functioning of the following operations:

(i) Purchasing of materials.

(ii)   Receiving of materials

(iii) Inspection of materials.

(iv) Storage of materials

(v) Issuing of materials.

(vi) Maintenance of inventory records.

(vii)   Stock audit.

Control methods

Various methods of material control:

Material control methods

 

 
 

 

 

 

ABC analysis   Stock levels Economic order quantity Perpetual inventory

  system

ABC analysis (selective control)

In this technique, materials are classified according to their value so that costly and more valuable materials are given greater attention.

‘A’ Items: these are high value items, which may consist of only a small percentage of the total items handled. On account of their high cost, these materials should be under the tightest control and the responsibility of the most experienced personnel.

‘B’ Items: These are medium value materials, which should be under the normal control procedures.

‘C’ Items: These are low value materials, which may represent a very large number of items. These materials should be under the simple and economic methods of control.

The point of classifying stock by ABC categories is to ensure that material management focuses on A items where sophisticated controls should be installed. B items may be given less attention and C items given the least attention.

 

STOCK LEVELS

Maximum levels:

Formula:

Maximum level = re-order Level (+) re-order quantity () (minimum consumption

X minimum re-order-period)

Minimum level:  safety stock  + Demand in lead time

Formula:

Minimum level = re-order level () (average/normal consumption

X (average/normal re order period)

Re-order level or ordering level:

Formula:

Re-order level = maximum consumption X maximum re-order period

 

Danger level:

Formula:

  Danger level = normal consumption X maximum re-order period for 

   emergency purchases

 

Average stock level : This is computed by one of the following  two methods.

 

Average stock level = ½ (minimum level + maximum level)

Alternatively = minimum level + ½ (re-order quantity)

 

Economic order quantity (Re-order quantity)

It refers to the size of the order which gives maximum economy in purchasing of material.

It is the quantity for which order is placed when materials are to be purchases. Economic order quantity (EOQ) minimizes the combined annual cost of

(i) Placing orders (ii) holding stocks and (iii) purchase price.

 

Ordering cost: it mainly includes cost of stationery, salaries of those engaged in receiving and inspecting, salaries of those engaged in preparing the purchase orders, etc.

 

Cost of carrying or holding (storage cost) : This includes the cost of storekeeping, interest on capital locked up in stores, the incidence of insurance cost, risk of obsolescence, deterioration and wastage of materials, evaporation, etc.

 

Methods to determine EOQ:

1.   Formula method

2.   Tabular method

Formula method:

  EOQ =   2 x U X P

S

Where EOQ = Economic order quantity

U = Annual  usage, demand, consumption, requirement, needs of material (in Units)

P = Ordering cost per order;

S = Storage, stock holding, carrying cost per unit per annum.

  (% of carrying cost x cost of one unit)

 

No. of orders per year  = Annual consumption

EOQ, ROQ, order size

 

Time between two consecutive orders  = 12 month, 365 days, 360 days

  No. of order per year

 

Purchase cost: Annual demand X purchase price/cost per unit

 

Ordering cost : No. of order X cost per order 

 

Carrying cost:  EOQ/ROQ/Order size X carrying cost per unit per annum

2

CODIFICATION OF MATERIALS

Names and descriptions of materials are often long and vague. In order to avoid length and ambiguity in description and names of materials, a symbol may be assigned to each item of material, which is known as code. Codification is the procedure of systematic assignment of symbols or codes for each item of store, such codes may be either numeric, alphabetic or a combination of numerical and alphabetical symbols.

 

PURCHASE PROCEDURE

Steps:  Assuming there is a separate purchase department, the following are the

important steps in purchase procedure:

1.   Purchase Requisition Note: It is a formal  request to the purchase department to

buy material specified therein.

2.   Selection of Suppliers: Suppliers is chosen after market investigation and inviting

tenders.

3.   Purchase Order: After selecting supplier, order is placed at agreed price and terms

of purchase.

4.   Receipt of materials: When purchased materials are received, these are subjected

   to inspection and quality  testing. A document known as goods Received Note is

prepared to record materials received, accepted and rejected.

5.   Payment: After comparing purchase order and other documents, payment is made to

the suppliers as per the agreed terms.

 

STORES RECORDS

1.   Bin Card: This is maintained by the storekeeper to record up to date quantity of each material in stock. It does not record the value of material. It is a perpetual inventory record.

2.   Store Ledger:  This record gives the same information regarding stores as bin card and in addition it gives the money values of materials. Separate ledger folios are maintained in it for each item  of material. The stores ledger is maintained in the cost accounting department. Balance quantity of each material as per stores ledger should be the  same as shown by  bin card.

3.   Stores Requisition Note: It is a document  which is used to authorise and record the issue of materials form store. The storekeeper should issue materials on the

presentation duly authorised stores requisition note.

4.   Bill of Materials: It is a master requisition which lists all the materials required for the completion of a job. So , a bill of materials is a special form of stores requisition note which is generally used by departments having standard material requirements or a comparatively fixed list of materials.

5.   Material Transfer Note: Materials may have to be sometimes transferred form one

  job to another. When such transfers are permitted, these should be supported by

  Material Transfer Notes.

 

 

 

 

 

 

INVENTROY SYTEMS

There are mainly two inventory systems viz., Periodic Inventory system and Perpetual Inventory system.

Periodic Inventory System: Under this system, stock-taking is undertaken at the end of the accounting year. As the stock-taking involves verifying the physical quantities of stores in hand.

Perpetual Inventory System: This is a stock recording system which provides an upto date record of the stock balances held at any given time. All movements of materials must be immediately recorded so that ledger and bin card give upto date information about the balance in store. Perpetual inventory system involves the following:

1.   Reconciliation of Bin card and Stores Ledger.

2.   Continuous stock-taking i.e. physical checking of stock items is done regularly. Sufficient items are checked every day so that in the course of a year, all items are checked at least once.

 

MEHODS OF PRICING MATERIAL ISSUES

There are a number of methods of pricing material issues. Some of the common methods are as follows:

1.   First in first out (FIFO): This method assumes that materials received first are issued

  first.

2.   Last in first out (LIFO): This method operates in just reverse order of FIFO method. It

is based on the assumption that the last purchased materials are the materials

issued first.

3.   Simple average price: It is calculate by adding all the different prices of materials in

stock and dividing by the number of prices used in that total. This method does not

  take into account the quantities of materials while calculating the average.

4.   Weighted average price: This method gives due weight to the quantities held at each

  price when  calculating  the average price. The weighted average prices is calculated

  by dividing the total cost of materials in stock by the total quantity of material in that

stock. The simple formula is that weighted average price at any time is the balance

value figure divided by the balance units figure.

Govindam  Business School

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MATERIAL LOSSES

Material losses are classified into two categories - normal and abnormal.

Normal losses: This is that type of loss which has necessarily to be incurred and thus is unavoidable. For example -  loss by evaporation of liquid materials, loss due to loading and unloading of materials, etc. It is a principle of costing that all such losses are borne by good output.

Abnormal loss: This type of loss arises due to abnormal reasons like inefficiency, theft, fire accident, breakage, etc. Abnormal losses are charged to Costing Profit and Loss Account.

 

Forms of Materials Losses

1. Waste: It is defined as “that portion of a basic raw material lost in processing, having no recovery value.”  Waste may be visible or invisible. Visible waste is that which is physically present, e.g. ash, saw dust, etc. Invisible waste, on the other hand, is the disappearance of basic raw material in the form of smoke, evaporation, etc.

 

2. Scrap: This is defined as “the incidental residue from certain types of manufacture, usually of small amount and low value, recoverable without further processing.” The features of scrap are as follows:

(a) Scrap is incidentally produced form the manufacturing process.

(a) Scrap is usually of small value.

(c) Unlike waste, scrap is always physically available.

Examples of scrap are trimmings in timber industries; cuttings, pieces, etc.

 

3. Spoiled: Spoiled Work results when products are damaged in manufacturing operations in such a way that they cannot be rectified and brought back to normal specifications.

 

4. Defectives:  Defective work may define as that production which is below standard specification or quality and can be rectified by incurring additional expenditure known as rectification costs. The main difference between spoilage and defective is that whereas the former cannot be rectified and sold as good units, the latter can be rectified by

incurring additional costs and brought back to the level of standard quality.

 

Q. 1- The annual demand of material is 1,600 units. The unit cost is Rs. 6 and inventory-carrying cost is 25% per annum. If the cost of one order is Rs. 75, determine:

(a) Economic order Quantity

(b) No. of order per year

(c) Time between two consecutive orders.   [Ans. a - 400 unit, b – 4 order, c – 3 month]

 

Q. 2 - from the following information, calculates economic order quantity and the number of orders to be placed in one quarter of the year.

(i) Quarterly consumption of material 2000 kg

(ii)   cost of placing one order Rs. 50

(iii) cost per unit Rs.40

(iv) Storage and carrying cost 8% of average inventory.

[Ans. 500 units, 4 order]

Govindam

 

Q.3 – A manufacturer buy certain equipment from outside supplier at Rs. 30 per unit. Total annual needs are 800 units.

The following further data are available;

Annual return on investment 10%

Rent, taxes, insurance per unit, per year   Rs. 1

Cost of placing an order Rs. 100

Determine EOQ & No. order in a year.   [Ans. 200 units, 4 order] 

 

Q. 4- About 50 items are required ever day for a machine. A fixed cost of Rs. 50 per order is incurred for placing an order. The inventory carrying cost per item amounts to Rs. 0.02 per day. The lead period is 32 days. Compute:

  i. Economic Order Quantity  

ii. Re-order Level. [Ans. 500 units; 1,600 units]

Q. 5- Two components X and Y are used as follows:

Normal usage – 600 units per week each

Maximum usage – 900 units per week each

Minimum usage – 300 units per week each

Re-order quantity  – X 4,800 units, Y 7,200 units

Re-order period   – X 4 to 6 weeks, Y 2 to 4 weeks

Calculate for each component:

(a) Re-order level   (b)  Minimum level

(c) Maximum level (c)  Average stock level

 

 

 

Q. 6- In manufacturing its products, a company used three raw materials A, B and C in respect of which the following apply:

Raw materials

Usage /unit of product

Kg.

Re-order quantity

  kg

Price /

kg.

Re.

Delivery period

weekly

Order level

kg

Min. level

 

  kg

A

B

C

10

4

6

10,000

  5,000

10,000

.10

.30

.15

1 TO 3

3 TO 5

2 TO 6

8,000

4,750

-

-

-

2,000

Weekly production varies from 175 to 225 units, averaging 200. What would you expect the quantities of the following to be:

(i) Minimum stock level of A   (ii) Maximum stock level of B

(iii) Re-order level of C   (iv) Average stock level of A

[Ans. 4,000 Kg.; 7,650 Kg.; 5,400 Kg.; 9,000 Kg.]

 

Q. 7- from the details given below calculate:

(i) Re-ordering level (ii) Maximum level

(iii)   Minimum level (iv) Danger level

Re-ordering quantity is to be calculated on the basis of following information:

Cost of placing a purchase order is Rs. 20

Number of units to be purchased during the year is 5,000

Purchase price per unit inclusive of transportation cost is Rs. 50

Annual cost of storage per unit is Rs. 5

Details of lead time: average 10 days, maximum 15 days, minimum 6 days,

for emergency purchase 4 days.

Rate of consumption: average 15 units per day, maximum: 20 units per day.

[Ans. 300; 440; 150; 60units] 

Q. 8- Medical aid co. manufactures a special product “AID”. The following particulars were collected for the year 1998:

(a) Monthly demand of AID 1,000 units

(b) Cost of placing an order Rs. 100

(c) Annual carrying cost per unit Rs 15

(d) Normal usage   50 units per week.

(e) Minimum usage     25 units per weed

(f) maximum usage     75 units per week

(g) re-order usage 4 to 6 week

compute from the above :

(1) re-order quantity (2) re-order level (3) minimum level (4) maximum level

(5) average stock level.      [Ans. 186; 450; 200; 536; 368 units]

 

Q. 9- The purchase department of your organization has received an offer of quantity discounts on its order of materials as under:

Price per tonne (Rs.) Tonnes

1,400 less than 500

1,380 500 and less than 1,000

1,360 1,000 and less than 2,000

1,340 2,000 and less than 3,000

1,320 3,000 and above

The annual requirement for the material is 5,000 tonnes. The delivery cost per order is Rs. 12,00 and the stockholding cost is estimated at 20% of material cost per annum.

You are required to advise the purchase department the most economical purchase level.

The purchase quantity options to be considered are 400 tonnes, 500 tonnes, 1,000 tonnes, 2,000 tonnes and 3,000 tonnes

(b) what will be the answer to the above question if there are no discounts offered and price per tonne is Rs. 1,500?   [Ans. 1,000 units ; 200 units]  

 

Q. 10- Following information relating to a type of raw material is available:

Annual demand   2,400 units

Unit price Rs. 2.40

Ordering cost per order   Rs. 4.00

Storage cost 2% per annum

Interest rate   10% per annum

Lead time   Half month

Calculate EOQ, and total annual inventory cost in respect of the particular raw material.

[Ans. EOQ – 258 units; Inventory cost – 5,834]

 

Q. 11 - A firm is able to obtain quantity discounts on its orders of material as follows:

Price per tonne(Rs.) Tonnes

6.00   less than 250

5.90   250 and less than 800

5.80   800and less than 2,000

5.70   2,000 and less than 4,000

5.60 4,000 and over.

The annual demand for the material is 4,000 tonnes. Stock holding costs are 20% of material cost per annum. The delivery cost per order is Rs. 6. You are required to calculate the best quantity to order. [Ans. 800 tonnes]

 

Q. 12 - Zee is a product manufactured out of three raw materials M.N and O. Each unit of Zee requires 10 kg., 8 kg and 6 kg  of M, N and O respectively. The re-order levels of M and N are 15,000 kg and 10,000 kg respectively while minimum level of O is 2,500 kg. The weekly production of Zee varies from 300 to 500 units while weekly average production is 400 units. You are requires to compute

(i) Minimum stock level of M.

(ii)   Maximum stock level of N; and

(iii) Reorder level of O.

 

The following additional data is given

M   N O

Re-order quantity (in kg) 20,000 15,000   20,000

Delivery (in weeks)

Minimum 2 4   3

Average   3 5   4

Maximum   4 6   5

[Ans. 3,000 kg, 15,400 kg and 15,000 kg]

 

 

 

Q.13 - Two components, A and B are used as follows:

Normal usage

Minimum usage

Maximum usage

Re-order quantity

Re-order period

50 units per week each

25 units per week each

75 units per week each

A:300 units; B: 500 units

A: 4 to 6 weeks; B: 2 to 4 weeks.

 

Calculate for each component: (a) Re-order level, (b) Minimum level, (c) Maximum level, and

(d) Average stock level.

Q.14 - Calculate the Minimum stock level, Maximum stock level and Re-ordering level from the following information:

(a) Minimum consumption   = 100 units per day

(b) Maximum consumption = 150 units per day

(c) Normal consumption   = 120 units per day

(d) Re-order period = 10 to 15 days

(e) Re-order quantity = 1,500 units

(f)   Normal re-order period   = 12 days. [Ans. 810, 2,750 and 2,250 units]

A Ltd. produces a product, which has a monthly demand of 4,000 units. The product requires a component X which is purchased at Rs. 20. For every finished product, one unit of component is required. The ordering cost is Rs. 120 per order and the holding cost is 10% p.a. You are required to calculate:

• EOQ.

• If the minimum lot size to be supplied is 4,000 units, what is the extra cost, the company has to incur?

• What is the minimum carrying cost, the company has to incur?

Govindam Business School

 

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