STOCK/INVENTORY

VALUATION
*MEANING OF MATERIAL CONTROL
*OBJECTIVES OF MATERIAL CONTROL
*TECHNIQUES OF INVENTORY CONTROL
*METHODS OF PRICING MATERIAL ISSUES
MEANING OF MATERIAL CONTROL
 Material isthe first and most important element of cost.
Material simply means any commodity or substance
which is processed in a factory in order to be converted
into finished product. Materials may b raw material,
components, tools, spare parts, consumable stores etc.
Materials include both DIRECT AND INDIRECT materials.
Direct and indirect materials purchased for stock
purposes to be issued to different jobs, work orders or
departments as and when required are known as stores.
It can be defined as a comprehensive framework for
the accounting and control of material cost
designed with the object of maintaining material
supplies at a level so as to ensure uninterrupted
production but at the same time minimising
investment of funds. It is the systematic control over
the purchasing, storing, and using of material so as to
have the minimum possible cost of material. In simple
words, it is a system which ensures that right quality of
material is available in the right quantity at the right
time and right place with the right amount of
investment.
OBJECTIVES OF
MATERIAL CONTROL
1. FOR KEEPING THE STOCK OF RAW MATERIALS WITHIN LIMITS IN THE STORES I.E., TO AVOID
OVERSTOCKING AND UNDERSTOCKING OF RAW MATERIALS, MATERIALS CONTROL IS SIGNIFICANT.
2. IT ENSURES PROPER STORAGE OF MATERIALS. FOR THE PROPER PRESERVATION AND SAFETY OF
MATERIALS, ADEQUATE STORAGE FACILITIES ARE TO BE PROVIDED. WITH THE HELP OF PROPER STORING
OF MATERIALS, QUANTITY OF MATERIALS AS AND WHEN REQUIRED CAN BE ISSUED TO VARIOUS JOBS.
3. FOR KNOWING PROPER COST OF PRODUCTION, CONTROL OVER MATERIALS IS INDISPENSABLE.
4. CERTAIN TECHNIQUES AND METHODS ARE DEVELOPED UNDER THE SYSTEM OF MATERIALS CONTROL
THEREBY ENSURING OPTIMUM UTILISATION OF MATERIALS.
5. IN ORDER TO UNDERTAKE CONTINUOUS CHECKING OF MATERIALS, THE NECESSITY OF A PROPER
SYSTEM OF MATERIALS CONTROL CANNOT BE IGNORED.
6. A WELL MANAGED SYSTEM OF MATERIALS CONTROL ENSURES THE AVAILABILITY OF DIFFERENT KINDS
OF MATERIALS WITHOUT DELAY.
TECHNIQUES OF
INVENTORY CONTROL
1.ABC TECHNIQUE
2.ECONOMIC ORDER QUANTITY
3.MINIMUM ,MAXIMUM AND RE-ORDER
LEVELS
ABC TECHNIQUE
• ABC PLAN IS BASED UPON SEGREGATION OF MATERIALS FOR SELECTION CONTROL.
• IT MEASURES THE MONEY VALUE, I.E., COST SIGNIFICANCE OF EACH MATERIAL ITEM IN RELATION TO
TOTAL COST AND MATERIAL VALUE.
• THE STUDY OF EACH ITEM OF STOCK IN TERMS OF ITS USAGE, LEAD TIME, TECHNICAL OR OTHER
PROBLEMS AND ITS RELATIVE MONEY VALUE IN THE TOTAL INVESTMENT IN INVENTORIES.
• CRITICAL, I.E., HIGH VALUE ITEMS DESERVE VERY CLOSE ATTENTION, AND LOW VALUE ITEMS NEED TO BE
DEVOTED MINIMUM EXPENSE AND EFFORT IN THE TASK OF CONTROLLING INVENTORIES.
CLASSIFICATION
• IN THIS TECHNIQUE, THE ITEMS OF INVENTORY ARE CLASSIFIED ACCORDING TO THE VALUE OF USAGE.
• MATERIALS ARE CLASSIFIED AS A, B AND C ACCORDING TO THEIR VALUE.
• ITEMS IN CLASS ‘A’ CONSTITUTE THE MOST IMPORTANT CLASS OF INVENTORIES SO FAR AS THE
PROPORTION IN THE TOTAL VALUE OF INVENTORY IS CONCERNED. THE ‘A’ ITEMS CONSTITUTE ROUGHLY
ABOUT 5-10% OF THE TOTAL ITEMS WHILE ITS VALUE MAY BE ABOUT 80% OF THE TOTAL VALUE OF THE
INVENTORY.
• ITEMS IN CLASS ‘B’ CONSTITUTE INTERMEDIATE POSITION. THESE ITEMS MAY BE ABOUT 20-25% OF THE
TOTAL ITEMS WHILE THE USAGE VALUE MAY BE ABOUT 15% OF THE TOTAL VALUE. • ITEMS IN CLASS ‘C’
ARE THE MOST NEGLIGIBLE IN VALUE, ABOUT 65-75% OF THE TOTAL QUANTITY BUT THE VALUE MAY BE
ABOUT 5% OF THE TOTAL USAGE VALUE OF THE INVENTORY.
ECONOMIC ORDER
QUANTITY
ECONOMIC ORDER QUANTITY (EOQ) IS THE IDEAL ORDER
QUANTITY A COMPANY SHOULD PURCHASE TO MINIMIZE
INVENTORY COSTS SUCH AS HOLDING COSTS, SHORTAGE
COSTS, AND ORDER COSTS. THIS PRODUCTION-SCHEDULING
MODEL WAS DEVELOPED IN 1913 BY FORD W. HARRIS AND
HAS BEEN REFINED OVER TIME.1 THE FORMULA ASSUMES THAT
DEMAND, ORDERING, AND HOLDING COSTS ALL REMAIN
CONSTANT.
KEY TAKEAWAYS
The EOQ is a company's optimal order
quantity that minimizes its total costs related
to ordering, receiving, and holding inventory.
The EOQ formula is best applied in situations
where demand, ordering, and holding costs
remain constant over time.
One of the important limitations of the
economic order quantity is that it assumes the
demand for the company’s products is
constant over time.
Formula and Calculation of Economic Order
Quantity
Ques.Calculate the EOQ for
material X . The following details
are furnished
Annual
usage……………………………………
90,000 units
Ordering cost per order……Rs. 10
Holding cost per unit…………. Rs.5
Cost per unit…………………..Rs. 50
MAXIMUM LEVEL
IT IS THE QUANTITY OF MATERIALS BEYOND WHICH A FIRM
SHOULD NOT EXCEED ITS STOCKS. IF THE QUANTITY EXCEEDS
MAXIMUM LEVEL LIMIT THEN IT WILL BE TERMED AS
OVERSTOCKING. A FIRM AVOIDS OVERSTOCKING BECAUSE
IT WILL RESULT IN HIGH MATERIAL COSTS. OVERSTOCKING
WILL LEAD TO THE REQUIREMENT OF MORE CAPITAL, MORE
SPACE FOR STORING THE MATERIALS, AND MORE CHARGES
OF LOSSES FROM OBSOLESCENCE.
MAXIMUM STOCK LEVEL = REORDERING LEVEL +
REORDERING QUANTITY – (MINIMUM CONSUMPTION X
MINIMUM REORDERING PERIOD)
MINIMUM LEVEL
THIS REPRESENTS THE QUANTITY WHICH MUST BE
MAINTAINED IN HAND AT ALL TIMES. IF STOCKS
ARE LESS THAN THE MINIMUM LEVEL, THEN THE
WORK WILL STOP DUE TO SHORTAGE OF
MATERIALS.
MINIMUM LEVEL= RE-ORDER LEVEL – ( NORMAL
CONSUMPTION X NORMAL RE-ORDER PERIOD)
RE-ORDER LEVEL
REORDER LEVEL (OR REORDER POINT) IS THE
INVENTORY LEVEL AT WHICH A COMPANY WOULD
PLACE A NEW ORDER OR START A NEW
MANUFACTURING RUN. REORDER LEVEL DEPENDS ON
A COMPANY'S WORK-ORDER LEAD TIME AND ITS
DEMAND DURING THAT TIME AND WHETHER THE
COMPANY MAINTAIN A SAFETY STOCK.
RE-ORDER LEVEL = MAXIMUM CONSUMPTION X
MAXIMUM RE- ORDER PERIOD
METHODS OF PRICING
MATERIAL ISSUES
LAST IN FIRST OUT (L.I.F.O)
FIRST IN FIRST OUT (F.I.F.O)
NEXT IN FIRST OUT(N.I.F.O)
HIGHEST IN FIRST OUT (H.I.F.O)
SIMPLE AVERAGE METHOD
WEIGHTED AVERAGE METHOD
MARKET OR COST PRICE WHICH EVER IS LOWER