COLLEGE OF
MANAGEMENT
STUDIES
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“COST ACCOUNTING”
TOPIC:-
MATERIAL
MANAGEMENT
TEACHER:
PROF.POONAM
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GROUP MEMBERS
1. JAISHREE
2. RUPAL
3. MONIK
4. .
5. .
6. NISHIT
7. .
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Sr. no. INDEX:- Page no.
1. WASTE , SCRAP, SPOILAGE,
AND DEFECTIVE. 5
2. INVENTORY CONTROL TECHNIQUES 7
3. FIXATION OF STOCK LEVEL 7
4. ECONOMIC ORDER QUANTITY(EOQ) 9
5. ABC ANALYSIS 10
6. VED ANALYSIS 13
7. PERPETUAL INVENTORY CONTROL 14
8. STOCK TAKING 15
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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.
The main feature of scrap is it has some disposable value and it arises from
normal production process. Scrap arises form faulty operation, bad supervision,
wrong tool setting, defective process and use of defective raw material.
Difference between waste and scrap.
Waste Scrap
The degree of inherence of waste is The degree of inherence is less as
more compared to waste.
The chance of re using waste is less as The chance of re using scrap in the
compared to scrap same production process is high.
Waste has less saleable value Scrap has higher saleable value.
Spoilage: - Spoilage is man made scrap. It results when raw materials are so
damaged in manufacturing operations that they are taken out of process and
disposed of in some manner without further processing. They cannot be
repaired or reconditioned into a product of acceptable quality.
Difference between spoilage and scrap.
Spoilage Scrap
Spoilage occurs more towards the Scraps occur in the beginning and
finishing stage with higher loss of middle stage of production with less
added value. added value.
Spoilage arises because of some Scrap arises as a result of inherent
defects in production process or production process.
materials which may or may not be
inherent in the production process.
Spoilage is evitable in some cases Scrap is inevitable.
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Defectives: - It refers to imperfect products which are transformed into the
standard specifications by the application of additional material, labor or both.
Defectives Spoilage
Defectives can be reworked and Spoilage cannot be rectified.
restored to original condition.
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“INVENTORY CONTROL
TECHNIQUES”
FIXATION OF STOCK LEVELS
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. However, the following propositions should be
remembered.
(i) Only the fixation of inventory levels does not facilitate the inventory control.
These have to be a constant watch on the actual stock level of various kinds of
materials so that proper action can be taken in time.
(ii) The various levels fixed are not fixed on a permanent basis and are subject to
revision regularly.
The various levels which can be fixed are as below.
1) Maximum 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.
i) Maximum usage.
ii) Lead time.
iii) Storage facilities available cost of storage and insurance etc.
iv) Prices for material
v) Availability of funds.
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vi) Nature of material e.g. If a certain type of material is subject to government
regulation in respect of import of goods etc maximum level may be fixed at a
higher level.
vii) Economic order Quantity.
2) Minimum Level: 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
i) Lead time.
ii) Rate of consumption
3). Re-order level
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.
4). DANGER LEVEL:
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.
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ECONOMIC ORDER QUANTITY (EOQ): ORDER
QUANTITY PROBLEM
The optimum level of inventory is popularly referred to as the ECONOMIC
ORDER QUANTITY (EOQ). It is also known as the ECONOMIC LOT SIZE.
Definition:-
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
acquisition/ 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. In
other words, while purchasing raw materials or finished goods, the questions to be
answered are:
1. How much inventory should be bought in one lot under one order on each
replenishment?
2. Should the quantity to be purchased be large or small?
3. Or should the requirements of materials during a given period be acquired in
one lot or should it be acquired in installments or in several small lots?
Such inventory problems are called “ORDER QUANTITY PROBLEMS”
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ABC ANALYSIS:-
ABC analysis is sometimes called Always better control. ABC analysis is
applied to categorize production inventory into vital few and trivial many.
Category A items are those high annual usage value items of which manager
would like to keep at a low level of inventory. 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. The categorization so made enables one to
pay the required attention to the items. It may be emphasized that the statement
80:20 is general and may vary from 70:30 or even 60:40.
Benefits of ACB classification:-
1. LEVEL OF CONTROL:
A item account about 80% of the annual usage value and merit maximum
attention. A manager should be entrusted with taking good care of A items.
Good record-keeping and the application of scientific methods of inventory
control such as EOQ formula application, staggered deliveries are needed for
category A items.
C items do not demand any control, except avoidance of their pilferage.
They can be suitably placed in stock rooms.
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2. GRADUAL DELIVERY OF MATERIAL:
Staggering of delivery lowers the inventory level and blocked capital as is
indicated in the figure.
DELIVERY PERIOD
Q
U
A
N
R
TI
(P – R)
T
Y
TIME
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3. CAREFUL ACCOUNTING:
Detailed records of goods ordered, received, issued and goods on hand
should be maintained for A category of items. Tight control and accurate
records are also required for scrap, loss and rejection of such items. No such
detailed records are necessary for C items.
4. SAFETY STOCK:
Safety stock is kept by inventory controllers to take care of variation in
demand, particularly during lead time. This is a must for A as well as B and
C category items used in producing an assembled product. The purpose of
keeping safety stock is to increase inventory level of items of A, B and C.
From the economy point of view, the safety stock for A and B category
items should be kept low. Thus forecast of demand of A and B items should
be done. For category C items of which annual usage values are low, such
care is not called for.
5. QUANTITY DISCOUNT FACTOR:
Shrewd suppliers offer quantity discount on the purchase of category A
items. The inventory controlled should verify through calculation if there is
really some pecuniary gain or that the discount is just as eyewash.
6. LAY OUT OF STORES:
Ready accessibility of fast moving items is a virtue of a good lay out. A
category items are high cost items, with a fast consumption and categorized
under F (fast) as well as H (high) category. A good layout enables tracking
and avoids misplacement of such items. Architect and designer adept at
factory building design see to it the lay out is strategically designed and
deployed.
7. STOCK TAKING:
Management by exception should be applied to stock taking also. A item
may be checked more often and C items. One of the decisions could be to
check A items every month, B items every two months and C items every
four months.
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8. VALUE ANALYSIS PROJECT:
It is futile to carry out value analysis for B and C category items. Value
analysis is a cost reduction project. To secure maximum benefits, it is
essential to select those items for value analysis which offer the highest
scope for cost reduction.
VED ANALYSIS:-
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. Spares stock out cost is
very high because it reduces production. And desirable group comprises items
which do not cause noticeable loss of production or their stock out entails
nominal expenditure and causes minor disruptions.
VED analysis is carried out to identify critical items, usually of maintenance spares
and capital machines. An item of which the usage belongs to C category may be
critical from the production point of view if its stock out can cause heavy
production loss.
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PERPETUAL INVENTORY SYSTEM:-
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. The effect is
that the cost of materials issued is charged to production at the time when
materials are issued and the balance in the Material Inventory Account shows
the cost of materials still available for use/issue. Therefore, both the cost of
materials issued and the ending materials inventory can be directly
ascertained after each transaction.
The perpetual inventory system is superior to the periodic inventory system. It
provides better inventory/materials control and more information than the
periodic inventory system.
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STOCK TAKING:-
ANNUAL 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:-
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.
REORDER POINT STOCK TAKING:-
This is the process of physical verification of an item when its store falls
below the reorder level. The store keeper when with this system has the
responsibility of notifying this to the department concerned.
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