COLLEGE OF

MANAGEMENT

STUDIES1

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“COST ACCOUNTING”

TOPIC:-

MATERIAL MANAGEMENT

TEACHER:

PROF.POONAM

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GROUP MEMBERS

1.JAISHREE2.RUPAL3.MONIK4..5..6.NISHIT7..

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INDEX:-1. WASTE , SCRAP, SPOILAGE,

AND DEFECTIVE. 5

2. INVENTORY CONTROL TECHNIQUES

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3. FIXATION OF STOCK LEVEL

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4. ECONOMIC ORDER QUANTITY(EOQ)

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5. ABC ANALYSIS

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6. VED ANALYSIS

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7. PERPETUAL INVENTORY CONTROL

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8. STOCK TAKING 15

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Sr. no. Page no.

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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 ScrapThe degree of inherence of waste is more

The degree of inherence is less as compared to waste.

The chance of re using waste is less as compared to scrap

The chance of re using scrap in the 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 ScrapSpoilage occurs more towards the finishing stage with higher loss of added value.

Scraps occur in the beginning and middle stage of production with less added value.

Spoilage arises because of some defects in production process or materials which may or may not be inherent in the production process.

Scrap arises as a result of inherent 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 SpoilageDefectives can be reworked and restored to original condition.

Spoilage cannot be rectified.

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“INVENTORY CONTROL TECHNIQUES”

FIXATION OF STOCK LEVELSFixation 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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(P – R)R

2. GRADUAL DELIVERY OF MATERIAL:

Staggering of delivery lowers the inventory level and blocked capital as is indicated in the figure.

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TIME

QUANTITY

DELIVERY PERIOD

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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