Material Control

Cost Accountancy

Chapter Material Control

MATERIAL CONTROL

Definition:

Any item of things which may used for production, whether directly or indirectly is called material.

Material can be:1. Raw material2. Spare parts and components3. Consumable stores4. Packing material

CLASSIFICATION OF MATERIAL

Direct Material

Indirect Material


Direct MaterialDirect Material are materials which actually form part of the finished products

Example:1. Timber in furniture making2. Cloth in dress making3. Spirit in varnishing of furniture


Indirect materialMaterial which do not physically becomes a part of finished product is indirect material.

Example:1. Nails used in furniture2. Packing expenses used to more

attractive3. Consumable goods

OBJECTS OF MATERIAL CONTROL

To ensure about the right quality of material

To make availability of material as and when required to ensure un interrupted flow of material

To minimize wastage, shortage and losses of material

To derive maximum economy in the cost of purchasing, storing handling

ESSENTIAL OF MATERIAL CONTROL

Proper co-ordination of all departments

Centralisation of purchasing in a purchase department

Use of standard form Use of material, supplies, and

equipment budgets Operation of a system of interal

checks

ESSENTIAL OF MATERIAL CONTROL

Storage of all materials and supplies in a designated location

Assignment of minimum quantity of each item of material

Operation of a system of stores constrol Development of a system of controlling

accounts and subsidiary records Regular reports

ORGANIZATION OF MATERIAL CONTROL

Divided in three stages:

1. Purchase control of material2. Stock control of materials3. Issue and consumption constrol of

material

PURCHASE CONTROL OF MATERIAL

The purchasing function cycle generally begins with a purchase requisition and ends the receipts of material in the stores and the payment of bills therefore.

The system of purchase is controlled by purchase department.

An officer, called Purchase Officer, controls overall activities of this department.

PURCHASE CONTROL OF MATERIAL

The purchasing procedure in textile industry travels through the following different stages:

1. Purchase requisition2. Issuing of tenders of suppliers3. Comparison of various quotations and

placing of purchase order4. Receiving, inspecting, accepting of material5. Checking and passing of bill for payment

STOCK CONTROL OF MATERIAL

The function of store department is proper keeping of stocks, identifying and classifying them according to their nature, type and size and price and proper maintenance of stock records.

STOCK CONTROL OF MATERIAL

The store keeping and stock control procedure which adopted in various industries are:

1. Material records2. Various stock levels3. Classification and codification4. ABC analysis store control5. Physical verification of stock

MATERIAL RECORDS

The important documents in connection with material records are:

1. Bin card2. Kardex card3. Stores ledger

VARIOUS STOCK LEVELS

1. Recorder level: The Recorder level is that level of stock at which purchase order should be issued for fresh supplies of the material.Recorder level = Maximum consumption in a given period X Maximum period of supply


2. Minimum level: The minimum level stock level is that level of stock below which the quantity of stock of any item should not be allowed to fall.

Minimum stock level = Recorder level –(Normal consumption x Normal period of supply)


3. Maximum stock level:Maximum level of stock is the upper limit beyond which the quantity of any item held in store should not rise.

[Recorder level – (Minimum consumption x Minimum time of delivery)] + Reorder quantity


4. Danger level:The stock of material falls below the minimum stock level due to abnormal reasons.

Danger Level= Normal consumption x period of supply from nearest local market

VARIOUS STOCK LEVELS5. Reorder quantity:

Reorder quantity also named as Economic order quantity (EOQ).

EOQ is the most economical quantity to be ordered under normal conditions. EOQ = √2RO/CR = Requirement of material for one yearO = ordering cost for placing one orderC = Carrying cost per unit of inventory for

one year

MATERIAL TRANSFER NOTE

The material transfer note is prepared in four copies. One copy is sent to the receiving department, one to store keeping department, one to cost/ accounts department for debiting the proper department for this cost, and the last as office copy.

PRICING OF MATERIAL ISSUES

The following are the methods of pricing the issue of materials which are used in various industries:

i) First in First out Methodii) Last in First out Methodiii) Highest in First out Methodiv) Average Pricing Method – Simple and

weighted Averagev) Market Price Methodvi) Standard Price Method

ISSUE (CONSUMPTION) CONTROL OF MATERIAL

The stores department is responsible

for receiving, safeguarding, handling, issuing and maintaining appropriate accounting records for materials

MATERIAL LOSSES

Problems of losses, wastage, damage arise in almost all manufacturing industries. These losses can be divided into two categories i.e.

i) Normal and ii) Abnormal

MATERIAL LOSSES

Normal Material losses:

1) Loss in quantity due to evaporation, deterioration, shrinkage

2) Wastage due to receipt in bulk and issue in small quantities

3) Loss due to other routine and natural reasons

MATERIAL LOSSES

Abnormal Material losses:1) Defective storage2) Careless handling3) Obsolescence due to irregular issue

Documents

Material Control