Material Cost Final 97 Slides

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MATERIAL COST.




INTRODUCTION:INTRODUCTION:

The term material refers to all commoditiesconsumed in the process of manufacturing.

Material represents an important asset and is thelargest single item of cost in almost everymanufacturing unit.




Classification Of Material:Classification Of Material:

1. Direct materials.

2. Indirect materials.

3. Supplies.4. Finished or component parts.

5. Stores.

6. Inventory.




Inventory Or Material Control:Inventory Or Material Control:

It is defined as ³safe guarding of companies property in the form of materials by a proper systemof recording and also to maintain them at theoptimum level considering operating requirementsand financial resources of the business.´




Objectives:Objectives:

No under stocking.

No overstocking.

Minimum wastage. Economy in purchasing.

Proper quality of materials.

Information about materials. Material report to management.




Essential Requirements Or Principle Of Essential Requirements Or Principle Of

Inventory Control.Inventory Control.

Proper coordination and cooperation.

Competent and expert purchase manager.

Classification and codification of materials. Proper planning.

Inventory system should be updated.

Adequate records should be produced. Internal audit and internal check.




Well planned supervision.

Stock levels should be fixed for each item of materials.

Budget controlled. Reporting.






1.1. ABC TechniqueABC Technique..

ABC technique is a value based system of material control.

In this technique of selective control, materials

are analyzed according to their value so thatcostly and more valuable materials are givengreater attention and care.

All items of materials are classified according totheir value i.e.




i. µA¶ Items :- These are high value items whichmay consist of only in small percentage of thetotal items handled.

ii. µB¶

items:-

these are medium value materialswhich should be under the normal control procedures.

iii. µC¶ items :- these are low value materials which

may represent a very large number of items.These materials should be under the simple andeconomic methods of control.




In the given table it is shown that 10 % of totalquantity accounts for as much as 70% of the totalvalue. These are a category items which need verystrict control because of their high cost significance.

Category % of total value % of total quantity Type of control

A 70 10 Strict control

B 25 30 Moderate control

C 5 60 Loose control

Total 100% 100% 100%




The second type of items represents 30% of thetotal quantity but account for 25% of the totalvalue. These are B items which need routine typeof control.

The items representing 60% of the total quantity

account for 5% of the total value. These C itemsare kept under simple physical controls.




The rules regarding purchasing, storing andissuing of various categories of items should

be framed according to their value andimportance.




2. Stock Levels2. Stock Levels..

One of the major objectives of a system of material control is to ensure that there is no³under stocking and overstocking.´

A scientific approach to achieve these objectivesto adopt a system of stock levels is:

1. maximum level.

2. minimum level.

3. re-order level.

4. danger level.

5. average stock level.




Maximum Level:Maximum Level:

The maximum stock level is the level abovewhich stocks should not normally be allowed torise.

It is the maximum quantity of a material that may be held in store.

The following factors are considered while fixingthis level

1. Rate of consumption of the material.

2. Storage space available.

3. Amount of capital needed and available.




1. Risk of obsolescence and deterioration.

2. Cost of storage.

3

. Insurance costs.4. Bulk purchases of seasonal materials.

5. Re-order quantity for the material.

Formula:-

Maximum level= re-order level + re-order quantity ±(Minimum consumption * minimum re-order period)




MinimumMinimum Level:Level:

Minimum level is that level below which stock should not normally be allowed to fall.

In case any item of material falls below thislevel, there is a danger of stoppage in productionand top priority should be given to the purchaseof new materials.




Factors to be considered:-

1. Rate of consumption of material.

2. Time required to obtain delivery of the newmaterials.

3. Re-order level.

Formula:-

Minimum level= re-order level-(normalconsumption * normal re-order period)




ReRe--order order Level: Level:

This is that level of material at which a new order for material is placed.

It is at this level that purchase requisition is madeout.

This level is above minimum level but belowmaximum level.




Factors to be considered-

1. Rate of consumption of material.

2. Minimum level.3. Lead time or delivery time i.e., the time normally

taken from the time of raising purchaserequisition to receipt of materials.




Formula:-

Re-order level = (maximum consumption *maximum re- order period)




Danger Danger level:level:

This is a level at which normal issues of materialsare stopped and urgent action is taken for purchaseof materials so that production is not interrupted due

to shortage of materials.

Formula:-

Danger level = average or normal consumption *maximum re-order period for emergency purchases.




Average Stock Level:Average Stock Level:

Formula

Average stock level=

minimum level + maximum level2




3. ECONOMIC ORDER QUANTITY .3. ECONOMIC ORDER QUANTITY .

Re-order quantity is the quantity to be orderedwhenever materials are to be purchased.

By setting this quantity the buyer is saved the task of re-calculating how much he should buy eachtime he orders.

Re-order quantity is sometimes known as

Economic Order Quantity.




Ordering Cost: It mainly includes cost of stationery, salaries of those engaged in receivingand inspecting, salaries of those engaged in

preparing the purchase orders etc... Cost Of Storage Or Cost Of Carrying Inventory:

This includes cost of storekeeping, risk of

obsolescence, deterioration and wastage of materials, evaporation etc...




Formula:-

EOQ = ¥2.A.O/C

A= annual consumption

O= ordering cost per order C= carrying cost of one unit i.e. carrying cost % *cost of one unit




4. PURCHASE OF MATERIALS4. PURCHASE OF MATERIALS..

1. Just In Time (JIT) Purchases:-

2. Centralized And Decentralized Purchasing.

Advantages Of Centralized Purchasing:

i. Concentration in one department.

ii. Initiation of Firm policy.iii. Standardization.

iv. Better control.




Disadvantages:

i. Higher administration costs.

ii. Suitability.Procedure

The procedure of purchasing materials variesfrom one business to another, depending upon itssize, conditions and ideas.






A.A. Purchase RequisitionPurchase Requisition::

Purchase requisition may be received from:

1. Storekeeper.

2. A departmental head.3. Plant engineer.

Purchase requisition should be received onlyfrom certain authorized persons in theorganization. Everybody cannot be allowed torequisition purchases.




Purchase Requisition is used as a formal requestto the purchasing department for the purchase of the material.




B. ElectionB. Election Of Supplier :Of Supplier :

The purchase department analyses each of the purchase requisitions received before makingarrangements for the purpose.

It usually maintains a suitable record of thedifferent sources of supply and of variousquotations.




Factors considered:

1. Terms of payment.

2.D

ates of delivery and reliability of varioussuppliers in the past.

3. Invitation of tenders.




C. PurchaseC. Purchase Order :Order :

Purchase order is a written authorization to thesupplier to supply the specified materials at a

price and terms mentioned therein.

Purchase order is a legal contract between the parties concerned, the authority to sign purchaseorders should be restricted to selected responsible

officers.




PURCHASEORDER

Supplier ««««« Order No

««««««.

Date required««««« Date ««««................

Requisition

No««««..

Quantity Description Code No. Rate Rs.

To be delivered at «« (place) ForABZ

co.ltd

On««««««««. (Date)

««««««

Terms of payment ««««.. Purchase

manager




5 copies of purchase order are prepared by largeconcerns. They are supplied to:

1. The supplier.

2.The receiving department.

3. The accounts department.

4. The department which initiated PurchaseRequisition.

5. Retained in the Purchasing Department for reference purpose..






1. First copy to purchasing department.

2.Second copy accompanying the goods to thedepartment or stores to which goods are sent.

3. Third copy retained in receiving department.






E.E. Inspection of materials:Inspection of materials:

Large manufacturing companies may also haveseparate Inspection and Testing Departments totest the quality of materials purchased.

The results of the tests are intimated to theauthorities by means of Testing Reports.




F.F. Returns To Supplier :Returns To Supplier :

Where goods received are not of the type orderedor are damaged or are not satisfactory, these may

be returned to the supplier immediately.

A debit note is forwarded to the supplier. If thesupplier accepts the claim, he signifies hisacceptance by the issue of a credit note.




G.G. Approval Of Invoices And Payment:Approval Of Invoices And Payment:

The supplier¶s invoice should be checked before payment is made.

The various documents like copies of purchaserequisition, purchase order, GRN , inspectionreport should be checked against each other toensure that the quantity, price, carriage, packing

and discounts have been charged correctly.




If everything in the invoice is found to be correct,a voucher authorizing payment is prepared and

payment is made accordingly.






5. PROPER STOR AGE OF5. PROPER STOR AGE OF

MATERIALSMATERIALS

Store keeping.

Stores records.




Store keeping Store keeping

In large manufacturing companies major part of investment is represented by stocks. Hence it isnecessary for a good store keeping running the

business. Trained and experienced personnel should be in

charge of stores department.

The stores function involves both safeguardingthe materials as well as maintaining up to datestores records.




Objectives:

Economical usage of storage space.

P

rotection of materials against fire and theft. Protection of materials against detritions.

Immediate location of materials required.

U p to date stores records.

Facilitating perpetual inventory.

Speedy receipts and issue of materials.

Avoiding overstocking and under stocking.




Functions and duties of store keeper :

Maintaining materials.

Record maintenance.

Counter checking the deliveries.

Issuing against authorized store requisitions.

Prohibiting unauthorized persons.

Advising management.




Stores organizationStores organization

T here are two types ±

1. Central stores ± ideal to receive and issue allmaterials.

2. Departmental sub stores ± in large factories andorganizations there are various departmentswhere central stores do not play a role.




Codification of material Codification of material

In order to avoid length and ambiguity indescription and names of materials, a symbol may

be assigned to each item of material which is known

as code. The codes can be either numerical or alphabetical symbols.




Advantages:

Ambiguity in description is avoided.

Clerical effort is reduced.

Secrecy is maintained.

Coding is essential.

Each item is identified.




They are of 2 typesThey are of 2 types

1. Perpetual inventory records ± these recordsshow movement of stores that is receipt of materials, issue of materials to production

department and also current balance in stock.Bin card and stores ledgers are two types of

inventory records.




2. Documents ± they are used to authorizemovement of materials into and out of stores.

These documents include received note, billof materials, materials requisition note, materialsreturn note etc.






A bin card is attached to the bin, drawer or another container in which material is stored.

An entry is made at the time of each receipt or issue and the new balance in the stock iscalculated.

All these entries of receipts and issues are

supported by documents such as goods receivednote, materials received note etc.




A bincard is a quantitative record of receipts,issues and closing balances of material items instore but it does not contain information about the

prices of the material.






ABZ co. Ltd

BIN CARD

Bin no.. Minimum level

Description.. Re- order level

Code no .. Re- order quantity

Stores ledger folio .

Date Receipts Issues Balance Stock

verification

Ref. NO Quantity Ref. NO Quantity Quantity Date Initials




TwoTwo bin bin systemsystem

In this system two bins are maintained for eachitem of store.

One bin constitutes the main or the regular bin

form which materials are issued and the other bincontains the maximum stock from which issuesare made in stock in the regular bin is exhausted.

The idea of two bin system is to provide

automatic information about reaching minimumstock level so that issue materials for regular

production are stopped.




Stores ledger Stores ledger

This ledger is maintained in the cost accountingdepartment.

The stores ledger records all receipts and issue

transactions in respect of materials. Separate ledger folios are maintained in the stores

ledger for each item of material.




Date Receipts Issues Balance

Ref Qty Rate amt Ref Qty Rate amt Ref Qty Rate amt

STOR ES LEDGER

ACCOUNT

6 DOCUMENTSAUTHORISING6 DOCUMENTSAUTHORISING




6. DOCUMENTSAUTHORISING 6. DOCUMENTSAUTHORISING

MOVEMENT OF MATERIALSMOVEMENT OF MATERIALS

Goods received note

The store keeper uses this document for postingon the receipt side of the bincard.

Stores requisition note

It is a document which is used to authorize andrecord the issue of materials from stores.

The store keeper should issue materials on the presentation of duly authorized stores requisitionnote.




It should be appreciated that this is a keydocument. It is used for the purpose of ±

a) Authorizing the store keeper to issue the

material. b) Providing a written record of usage of materials.




A separate requisition may be prepared for eachitem of material or a single requisition may be prepared to cover the issuance of a number of items.

The stores requisition note may be prepared induplicate or triplicate.

The original copy is passed to the stores

department while the duplicate is retained by thedepartment requisitioning materials.

The stores requisition note is used for makingentries in bincard, stores ledgers etc...




STOR ES R EQUISITION NOTE

Materials required for job No«««.. No««««

Department««««.. Date«««..

Quantity Description Code No. Cost office

Rate AmountRs Rs

Bin No«««««««. Issued by«««..

Stores ledger folio«««««. Received by«««..

Priced by««««..




Bill of material

It is a special form of stores requisition note whichis generally used by departments having standard

material requirements or a comparatively fixed listof materials




BILLS OF MATERIAL

No««««

Job orders No«««« Date«««««.

Item No QuantityD

escription Code No. For Cost officeRate

Rs

Amount

Rs

Prepared by««««.. Date Issued «««..

Checked by«««««. Storekeeper«««.






Material return note

When materials issued are in excess of requirements, the unused materials are returned to

stores together with a material return note. When materials are received back in the store,

these should be placed in appropriate bins and

entries made in the bincard.




MATERIALS RETURN NOTE

Department No

Credit Job No Date.

Quantity Unit Description Code For Cost office

Rate

Rs

Amount

Rs

Bin No Date Issued ..

Stores ledger folio Storekeeper.

Authorized by




Materials transfer note

Materials may have to be sometimes transferredfrom one job to another.

This may be either because excess materials wereissued to a job or surplus materials are directlytransferred to another job or because materials

issued to a less urgent job are transferred to amore urgent job.






MATERIALS TR ANSFER NOTE

From job No««««. No««««

To Job No«««« Date«««««.

From department To Department«««

Quantity Unit Description Code For Cost officeRate

Rs

Amount

Rs

Bin No«««««« Date Issued «««..

Stores ledger folio««« Storekeeper«««.

Authorized by««««




Materials abstract (materials issued analysis sheet)

All material requisitions, material written notes andmaterial transfer notes are analyzed periodically by

the cost accounting department to ascertain thematerial cost of each job. This is done on adocument known as material abstract.




MATERIALS ABSTRACT

Month or week ending

Stores requisition No. Job No. Total

for

jobs

Indirect

overheads

Total




7. INVENTORY SYSTEM7. INVENTORY SYSTEM

There are mainly 2 inventory systems ±

1. Periodic inventory system

Under this system stocking is undertaken atthe end of the accounting year.

As the stock taking involves verifying the physical quantities of stores in hand, some stores

temporarily suspend plant operations when thisis done.




This is because it is rarely feasible to take stockswhile production continues.

Thus the annual stock taking should be

organized well in advance to minimize production holdups.






Steps in perpetual inventory system1. Reconciliation of bincard and stores ledger

account

2. Continuous stock takingAdvantages of perpetual inventory system

Avoids long and costly work

Avoids dislocation and production. Profit and loss account and balance sheet can be

easily prepared.




Moral check on staff.

Continuous internal check.

Early detection of errors.

Manages working capital.

Detailed and reliable.




Material losses

Losses are classified into 2 categories:

1. Normal loss

Loss by evaporation in case of liquid materials.

Loss due to breaking the bulk.

Loss due to loading and unloading of materials.




2. Abnormal loss

Theft or pilferage.

Breakage.

Fire accident, flood etc.

Use of inaccurate weighing instruments.

Improper storage of materials.






STOCK TURNOVER RATIO

STR= cost of materials consumed during the period

Average stock of materials during the period

STR is an indicator of the rate of consumption. Ahigh STR indicates fast moving materials and lowratio indicates slow moving materials.

This will enable the management to avoid keepingcapital locked up in undesirable items of materials.

8. METHODS OF PRICING




8. METHODS OF PRICING

MATERIAL ISSUES

Important methods of pricing material

FIFO

This method is based on the assumption thatmaterials which are purchased first are used first. Ituses the price of the first batch of materials

purchased for all units from this batch have been

issued. After the first batch is fully issued, the priceof the next batch received becomes the issued price.U pon this batch also fully used, the price of the stillnext batch is used for pricing and so on.




Advantages:

Realistic assumption

Actual cost

Closing stock valuation Simple and easy

Disadvantages:

Materials are not charged at the current market prices.

Unfair results

Increased possibility of errors




L IFO:

This method is just reverse of FIFO. It is based onthe assumption that last purchases of materials areissued first and earlier receipts are issued last. LIFOmethod uses the price of the last batch received for all issues until all units from this batch have beenissued.




Advantages:

Materials are charged at current market prices.

Actual cost

Income-tax savingDisadvantages:

Stock value does not represent its current value.

Not realistic Complicated calculations and increase of clerical

errors




Simple average price

It is calculated by adding all the different prices anddividing by the number of such prices. It does not

take into account quantities of materials whilecomputing average price.

Advantages:

Simple to understand Easy to operate.




Disadvantages:

Materials are not charged out at actual cost.

Unscientific method and unsatisfactory results.




W eighted average price

This method gives due weight to the qualities heldat each price when calculating the average price.

The weighted average price is calculated bydividing the total cost of material in stock fromwhich the material to be priced could have beendrawn by that total quantity of material in that stock.




Advantages:

Evens out the effect of widely varying prices of different purchases.

Reduces the work of making calculations. No unrealized profit or loss arises




Disadvantages:

More calculation is required when the receipts arenumerous

Materials are not issued at the current market prices

Issue prices generally run to a number of decimal

points.

PRESENTED BYPRESENTED BY




PRESENTED BYPRESENTED BY

MAHAVEER 08D0208

SACHIN 08D0212

FAIZAN 08D0236

GHOUSE 08D0237

MIRZA 08D0242

PONNANNA 08D0263

LIKHITHA 08D0272

NANDA 08D0281



THANK YOU