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Obsolete, Surplus and Scrap Management: Chapter 10 Materials Management & Transportation
Obsolete, Surplus and Scrap Management: Chapter 10 Materials Management & Transportation
Obsolete, Surplus and Scrap Management: Chapter 10 Materials Management & Transportation
Obsolete, Surplus and Scrap
Management
Chapter 10
Materials Management &
Transportation
The disposal of surplus, obsolete and scrap is a selling function and
is taken care by a special section of materials management.
There are 4 basic reason for this.
1. Knowledge of the market
Materials people know more about the buyers and sellers of scrap
Materials people know more about the buyers and sellers of scrap
market and their requirement
2. Disposal of surplus
The purchasing personnel have close relation with suppliers and can
negotiate with them to take back surplus item purchased due to wrong
forecast
3. Alternative use of Surplus
Any surplus for one assembled product can be passed on to an
alternative product made by the firm. The materials department can
solve the problem by discussing with design & production
4. Knowledge of slow moving items
Materials people are more aware of the of the slow‐moving items, and
easily identify and dispose slow‐moving items
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Reasons for Creation Of Surplus
i. Imbalance of economic supply quantity of seller & buyer
If the economic manufacturing quantity of the supplier is
much more than economic buying quantity of the buyer,
surplus may be created per batch purchased
surplus may be created per batch purchased
ii. Design Change
If the market demand for a certain design of product drops
down suddenly, the material purchased for production
becomes surplus.
iii. Error due to Planning/Purchase
If due to error made by planning or purchase department
If due to error made by planning or purchase department
some wrong items are purchased and become surplus
iv. Customized product manufacture
During the manufacturing of a customized product wrong
quality or customer changes may result in surplus
Obsolete Items
Obsolete items are those items which due to
obsolescence of technology or minor change in design or
customer preference become outdated.
Obsolete items should be disposed of before their
salvage value becomes zero.
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Scrap
There are various categories of scarp as listed below
1. Waste
Th
These are the wastages generated during the production
h dd i h d i
process
2. Damaged parts
Damaged parts have to be disposed of as scrap. Some
rejected products that cannot be repaired also goes into
scrap.
3 Containers/Cartons
3. Containers/Cartons
These are the packing materials which bring raw
material/purchased material and need to needs to be
scraped
4. Burnt oils/Lubricants
Disposal of Scrap
Disposal of scrap is done by public auction, annual contract or by
tendering
The procedure of auction is as follows
• A list giving details should be circulated
• Sale should be on the basis of “as is where is”
• Proper advertising should be done
• Supervision of auction will be done by personnel from
stores and purchase as well as from accounts
• Highest bid should be verified
Hi h t bid h ld b ifi d
• The highest bid documents will be signed by the officers
concerned
• Earnest money is collected before closing the sale.
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Stores Accounting and Stock verification
Stock taking also called stock Verification is the process
of ascertaining by counting weighing or measuring
of ascertaining by counting, weighing or measuring
whether the physical stock of materials tallies with the
balances shown in the sock record
Physical stock, in actual situation, usually does not tally
with the book balance. The books are subsequently
adjusted to tally the physical stock
Stock Taking
Stock taking:
• Is required to correct discrepancies between physical stock
and book balance and thereby ensure better material control
• Is the premier requirement for certification of the financial
statements
• Helps early detection of obsolete stocks
• Provides a moral deterrent on stores personnel against fraud,
malpractices and pilferage.
• Lends an opportunity to audit store procedures
• A t
Acts as a form of performance check on stock record and
f f f h k t k d d
stock control system and provides clues or the adjustments
needed
• Is an indicator of overall stores efficiency and management
control. The number and size of stock discrepancies is a good
indicator of stores efficiency.
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Common Causes of Discrepancies
Some of the common causes of discrepancies between physical
stock and book balance are:
• Clerical error
Cl i l
• Incorrect location of parts
• Carelessness in handling of materials
• Shrinkage
• Atmospheric conditions
• Theft, pilferage and malpractices
• Incorrect stock taking
Incorrect stock taking
• Misplacement of papers and vouchers
• Poor storage conditions
Methods of Stocktaking
There are 3 methods of stocktaking
• Annual Stocktaking
• C i
Continuous Stocktaking
S k ki
• Re‐Order point Stocktaking
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Annual Stocktaking
Annual stocktaking is the process of making a complete once a
year count of all materials, finished goods, work‐in‐process, tools
and suppliers. This is generally undertaken at or near the close of
the year.
h
The Advantages of annual stocktaking are
• The method is simple, less costlier
• The figures in the balance sheet are more correct since
verification is carried out at the time of preparation of
verification is carried out at the time of preparation of
balance sheet
• Annual stocktaking does not require permanent staff
Annual Stocktaking
The Disadvantages of annual stocktaking are
• Finalization of account s at times gets delayed if
stocktaking is not completed within the stipulated period
k ki i l d i hi h i l d i d
• Since all movements from and into the stores is
suspended for the period of stocktaking, there is
accumulation of work in the beginning of the financial
year
• Staff called from other department to assist stores
personnel in stocktaking are not conversant with the
personnel in stocktaking are not conversant with the
stocktaking work and are not accountable for
discrepancies which affects accuracy and effectiveness of
stocktaking
• As the activity is conducted only once a year, the
discrepancies can not be effectively minimized
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Continuous Stocktaking
Continuous stocktaking is called perpetual stocktaking and 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 items are verified twice, thrice, six times or even
12 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 higher usage vale are verified more often than those of low
value
Re‐Order point Stocktaking
Re‐Order point stocktaking is the process of physical
verification of an item when its stock falls below the re‐
order level.
The store keeper when working with this system has
the responsibility of notifying the concerned audit
department