Material Cost

Material Purchases

Store Keeping

Material Control

Methods of Valuation

Economic Order Quantity

Fixation of Inventory Levels

ABC Analysis

Inventory Control through JIT
Let us know these terms
first……….
• Material cost
• Direct material and indirect
material
• Raw material
• Inventory
• Over stocking and under
stocking
• Inventory control
• Perpetual inventory system
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Wastage:

Material loss during production or storage

due to evaporation, chemical reaction,
shrinkage etc.

– May be visible or invisible

– May be normal or abnormal
– Absorbed by good units
– No recovery value

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Scrap:
Residue material that has a recovery value
– Legitimate scrap
– Administrative scrap
– Defective scrap

Spoilage:

Production that fails to meet quality

requirement, not capable of rectification and
taken out of the process and disposed of without
further processing.
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Defectives:

Production that fails to meet quality

specifications, can be reconditioned and made it
into salable condition

Ex.: Discount shops/factory outlet

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Factors influencing the purchasing
methods and procedures
• Size of the
organization
• Type and nature of
the product
• Types of raw
materials
• Sources of supply
• Terms and conditions
of purchase
• Availability of funds
• Storage facility
available
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 Steps
• Receiving purchase requisition/indent for
materials
• Selecting the suppliers
• Placing the P.O.
• Follow-up of P.O.
• Receiving and inspecting the materials
• Checking and passing invoices for payments

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 Stores records
Documents used for inventory control

• Bill of materials
• Purchase Requisition Note
• Purchase order
• Material Inspection Note
• Goods Received Note
• Stores Requisition Note/Indent
• Material Transfer Note
• Material Return Note
• Bin Card
• PSL/SPL/Stores Ledger 8
 Bin Card and Stores Ledger
Point of difference Bin Card Stores Ledger
Content Records quantity Records quantity
only and value
Place & person Stores, Store Costing/Accounts
who maintains keeper dept., Accounts
clerk
Why maintained Controlling Value of material
material (Qty.) received, issued
and closing
stock
Periodicity Day-to-day basis May be periodical

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Methods of pricing material issues

$
– FIFO
– LIFO
– Weighted average cost method

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 Stock Levels
Re-order level Minimum level + consumption during lead time, or

Maximum consumption x Maximum Re-order period

Minimum level Re-ordering level – (Normal rate of consumption x Normal

delivery period)
Maximum level Re-ordering level + Re-ordering quantity – (Minimum rate
of consumption x Minimum Re-order period)

Average level Max. level + Min. level

2
Minimum level + ½ of Re-ordering quantity
Danger level Avg. consumption x Max. Re-order period for emergency
purchase

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EOQ (Re-order quantity):
Objective is to minimize total inventory cost
Carrying cost:

Cost of storage facility

Salary and wages

Losses due to pilferage, deterioration and obsolescence

Insurance cost

Interest

Carrying cost is generally expressed as a percentage of

average inventory value or Rs. Per unit per year.

Total inventory carrying cost = carrying cost per unit x Avg.

inventory.

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EOQ (Re-order quantity):

Ordering cost or Buying cost:

• Incurred each time an order is placed.

• Includes salary of staff in purchase deptt, office and admn.
Expenses

Assumptions of EOQ:

1. The annual demand/consumption is known with certainty

2. The rate of consumption of material is constant and uniform
throughout the year.
3. Lead-time is constant/known with certainty.
4. Unit cost of purchase of an item is constant.
5. Shortages are not allowed
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6. Quantity discounts are not allowed.
Methods of computation:
1. Graphic Method
2. Mathematical Formula
3. Tabular Method

EOQ = 2 x Annual consumption x Ordering cost per order

in units

Carrying cost per unit of average inventory

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 Illustration on EOQ
Annual usage of a material is 2,000 units
and it costs Rs.15 to handle an order for this
material. The price is Rs.2/- per unit
regardless of quantity purchased and
carrying cost of inventory is 18% p.a.
Calculate EoQ.

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EoQ = 2 x 2,000 x 15 = 408 units
18% of 2

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 Illustration on EOQ
Calculate EoQ and state the no. of orders to
be placed in a year.
Consumption of materials p.a. = 10,000 units
Order placing cost per order = Rs.50
Cost per Kg of raw material = Rs.2
Storage cost = 8% on avg. inventory

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EoQ = 2 x 10,000 x 50 = 2,500 Kgs
8% of 2

No. of orders to be placed in a year = 4

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A Ltd. Manufactures a product and the following
particulars are collected for the year ended March, 2007:

Monthly demand = 1,000 units

Cost of placing an order = Rs.100
Annual carrying cost = Rs.15 per unit
Normal usage = 50 units per week
Minimum usage = 25 units per week
Maximum usage = 75 units per week
Re-order period = 4 to 6 weeks

Calculate – (a) Re-order quantity (b) Re-order level (c)

Minimum level (iv) Maximum level (v) Average stock
level 19
Re-order quantity = 2AO/C = 2*2600*100 = 186
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Re-order level = Maximum consumption x Maximum Re-order

period

= 75 units x 6 weeks = 450 units

Minimum Stock level = Re-order level – (Normal usage x

Normal Re-order period)

= 450 units – (50 units x 5 weeks) = 200 units

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Maximum level = Re-ordering level + Re-ordering quantity –
(Minimum rate of consumption x Minimum Re-order period)

= (450+186) – (25x4) = 536 units

Average stock level = (536+200)/2 = 368 unit

= Minimum level + ½ of Re-ordering quantity

= 200 + ½ of 186 = 293 units

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 Inventory control techniques
• VED analysis
• FNSD analysis
• ABC analysis

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 VED CLASSIFICATION
• VED classification is based on the importance of a
particular item in the production process.
• V – Vital: Critical for production
• E – Essential: Important but not critical
• D – Desirable: Non-essential and do not
influence the production.
• V items need maximum control and investment.
• They may not be the most expensive but critical to
production process.
• ABC classification is based on annual usage value
whereas VED method is based on criticality of the
item in the production process.
 FSND CLASSIFICATION
• Goods are classified on the basis of their turnover.
F – Fast moving
S – Slow moving
N – Non-moving items
D – Dead items
• The classification of items as FSND are based on the
number of issues from stores over a period of time.
• This period is decided based on the kind of
inventory a firm is holding.
 JUST-IN-TIME AND INVENTORY
MANAGEMENT
• Just-in-time (JIT) production/inventory is a widely
used system by manufacturing companies to plan
and implement production and inventory activities
within their plants.
• JIT refers to acquiring materials and manufacturing
goods only as needed to fill customer orders.
• JIT production, also called lean production, is a
demand-pull manufacturing system because each
component in a production line is produced as soon
as and only when needed by the next step in the
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production line.
 BENEFITS OF JIT
• Right quantities are purchased or produced at the right
time.
• Cost-effective production.
• Achievement of higher quality standards and better
levels of customer service both to internal and external
customers.
• Minimization of inventory WIP and waste.
• Systematic identification of operational problems and
the development of technology based tools for
correcting identified problems.
• Production of goods which meet exactly the needs of
customers immediately on demand.
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