IUG / PROFESSIONAL BACHELOR DEGREE

SECTION 3: MATERIAL OR (SUPPLIES) BUDGET AND CONTROL

1. Forecasting Supplies
To supply a business is to furnish the business with items and material needed for the
manufacturing of marketable goods and services: this supply should be in the required quantity
and quality. It should come in the appropriate time and at the lowest cost as possible.
The supply schedule is prepared in respect of the various constraints required by the
optimal stock management.
Stock management aim at reconciling two extreme position:
 A very low stock level would lead to risk of stock shortage
 A very high stock level would lead to a very high financial expense

2. Characteristic of Stock Management

Stocks should be managed so as to avoid
A). stock shortage: that can lead to loss of sales and poor image of the business, and over storage
can lead to high storage cost (financial expense and storage expense.
Stock management should be rational and as such the following expense should be mastered.
I. Consumption needs (demand) it is derived from the sales budget for commercial
business, from commercialization budget for manufacturing business.
II. Supply sequence: this are the number of orders, periods generally in a year.
III. Lead time: also called supply delay, it is the of time between the ordering date and
the delivery date
IV. Critical stock: also called alarm stock or alert stock: this is the level of stock s that
enable the business to place an order
V. Security stocks or safety stock: this is the quantity of stocks held in the warehouse
to compensate delay in deliver. ( un-aggregated delivery)
VI. Maximum stock: this is the maximum level of stocks above which a business should
not go
VII. Minimum stock: this is the lowest level of stocks that enables consumption between
the ordering date and the delivery date.
The monthly critical stocks is calculated as follows:
𝐝𝐞𝐥𝐢𝐯𝐞𝐫𝐲 𝐩𝐞𝐫𝐢𝐨𝐝
𝐌𝐂𝐒 = 𝐦𝐨𝐧𝐭𝐡𝐥𝐲 𝐜𝐨𝐧𝐬𝐮𝐦𝐩𝐭𝐢𝐨𝐧 𝐱
𝟑𝟎 𝐝𝐚𝐲𝐬 𝐚 𝐦𝐨𝐧𝐭𝐡
The various stocks level can be illustrated below

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𝐂𝐫𝐢𝐭𝐢𝐜𝐚𝐥 𝐒𝐭𝐨𝐜𝐤 = 𝐌𝐢𝐧𝐢𝐦𝐮𝐦 𝐂𝐫𝐢𝐭𝐢𝐜𝐚𝐥 𝐒𝐭𝐨𝐜𝐤 + 𝐒𝐞𝐜𝐮𝐫𝐢𝐭𝐲 𝐒𝐭𝐨𝐜𝐤

3. Cost Related to Stock

Three costs are very vital in the determination of the economic order quantity
The holding cost
The ordering cost
The stock out cost

3.1- The holding cost: also called caring cost or the storage cost corresponds to cost involve
in holding inventory such as:
- Rent incurred
- Insurance
- Light expense
- Interest on capital tide up ( remuneration of stock)
- Salaries of stock keeper
- Equipment’s for the storage of inventory etc and calculated as follows
𝐄𝐎𝐐
𝐭𝐨𝐭𝐚𝐥 𝐡𝐨𝐥𝐝𝐢𝐧𝐠 𝐜𝐨𝐬𝐭 = × 𝐇𝐂𝐔
𝟐
3.2- Ordering cost: the ordering cost is made up of direct and indirect expenses when
ordering goods such as
- Transport cost
- Telephone call cost
- Reception cost

𝐭𝐨𝐭𝐚𝐥 𝐨𝐫𝐝𝐞𝐫𝐢𝐧𝐠 𝐜𝐨𝐬𝐭 = 𝐍 𝐗 𝐎𝐂𝐮

3.2.1- Determination of average stocks

Let’s consider a business whose variation of stock is presented below

Stock levels

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To keep a stock level that varies from 0- 200 for example

0 15, is to keep permanently a stock of 100 the average stock
Months that a business keep permanently during a period

On the basis of data available the average stock can be calculated through the following formula
𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐬𝐭𝐨𝐜𝐤+𝐂𝐥𝐬𝐨𝐢𝐧𝐠 𝐬𝐭𝐨𝐜𝐤 𝟐𝟎𝟎+𝟎
𝑨𝐒 = = = 𝟏𝟎𝟎
𝟐 𝟐

From the above,

𝐌𝐚𝐱𝐢𝐦𝐮𝐦 𝐬𝐭𝐨𝐜𝐤 + 𝐌𝐢𝐧𝐢𝐦𝐮𝐦 𝐬𝐭𝐨𝐜𝐤
𝐀𝐒 = When the activities if the business are not regular the
𝟐
formulae below is applied
𝐴𝑆𝐽 + 𝐴𝑆𝐹 + 𝐴𝑆𝑀 + 𝐴𝑆𝐴 + , , , , , , , , , , , , , 𝐴𝑆𝐷
𝐴𝑆 =
12
Example
The annual consumption regularly spread over a year stands at 12 000 units calculate the
average stock:
12 000
Monthly consumption = = 1 000 𝑢𝑛𝑖𝑡𝑠
12
1 000
Monthly average stock = = 500 𝑢𝑛𝑖𝑡𝑠
2

Example:
Consider a business whose annual consumption C regularly spread over a period and Q the
economic order quantity
Assuming that the delivery is done immediately when the stock is zero. Calculate the
average stock when they pass one order in a year, 2 order and 4 orders
Solution

N= 1
C
𝐶+0 𝐶
𝐴𝑆 = =
2 2

0 D

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 IUG / PROFESSIONAL BACHELOR DEGREE

N= 2
C/2
𝐶
+0 𝐶
𝐴𝑆 = 2 =
2 2

C
C/2
N= 2
C/4
𝐶 𝐶
4 +0 +0 𝐶 𝐶
𝐴𝑆 = = 4 = =
2 2 2𝑥4 8

The formula for average stock is therefore

𝑪
𝑨𝑺 =
𝟐𝒙𝑵
It should be noted that there is a relationship between C N and Q that can be established as
follows:
𝑪
𝑸 =
𝑵
From this relationship we can establish another formula for the average stock which is
𝑪
𝑸 = 𝒃𝒖𝒕 𝑪 = 𝑸 𝒙 𝑵
𝑵
𝑸𝒙𝑵 𝑸
𝑨𝑺 = =
𝟐𝒙𝑵 𝟐

3.2.2-Behavior of the holding (carrying) cost:

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 IUG / PROFESSIONAL BACHELOR DEGREE
The holding cost curve is as follows

Holding cost

Numbers of orders

3.3 The Ordering Cost

The ordering cost is made up of direct and indirect expense when ordering. Examples are
administrative cost of purchase reception cost, transportation cost.
Calculation of the ordering cost:
The ordering cost is the cost of obtaining stocks and as such it is proportionate to the number
of orders. (N).
If N = Numbers of Orders
OCu = Ordering Cost per Order
The total ordering cost is calculated as follows
𝑻𝒐𝒕𝒂𝒍 𝒐𝒓𝒅𝒆𝒓𝒊𝒏𝒈 𝒄𝒐𝒔𝒕 = 𝑵 𝒙 𝑶𝑪𝒖

Example:
The annual consumption of a business is 24 000 000F of a given material. The EOQ stands at
4000 units and the purchase price per unit is 10 000F. If the ordering cost per order is 18 000F
calculate the total ordering cost.
Solution
C = 24 000 000F
EOQ = 4000 units
𝐶 24 000 000
EOQ in quantity = 𝐸𝑂𝑄 = = 24 000 𝑢𝑛𝑖𝑡𝑠
10 000
24 000
N= =6
4000

Purchase price = 10 000 units

OCu = 18 000
Total ordering cost = OCu x N = 18 000 x 6 = 108 000F
Application

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 IUG / PROFESSIONAL BACHELOR DEGREE
In relation to the following information provided for the financial year 2016. Calculate the EOQ
and N
The annual consumption of corrugated board 4 000
The cost of placing an order 2 250
The annual holding cost per unit 5 000

𝒄𝒐𝒏𝒔𝒖𝒎𝒑𝒕𝒊𝒐𝒏 𝒗𝒂𝒍𝒖𝒆 𝑪 24 000 000

𝑵 = = = 6 orders
𝑬𝑶𝑸 𝒗𝒂𝒍𝒖𝒆 𝑬𝑶𝑸 400 x10 000

Behavior of the ordering cost curve:

The ordering cost (OC) can be represented as follows
OC = N x OCu meaning that the higher the number of orders the higher will be the ordering
cost. When the number of orders decrease the ordering cost will also decrease. The ordering
cost curve is as follows

Ordering
Cost

0 N

4. The stock out cost: also called stock rupture cost, the stock out cost represent exceptional
expense cost by stock shortage or exceptional expense incurred in other to avoid stock
shortage. They include:
- expense incurred to inform the customers
- additional expense incurred to produce exceptional goods in other to avoid stock
shortage that can tarnish the image of the business
- commercial cost related to communication, market or any other action which
would be taken to bring back those customers who have abandoned the business
due to stock shortage

4.1 The total cost in cost management:

In principles, the total cost here is

TC = carrying cost + ordering cost + stock out cost

Due to the fact that it is difficult to estimate the stock out cost in monetary terms it is
not included in the calculation of the total cost
Total cost = ordering cost + holding cost

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𝐄𝐎𝐐
𝐓𝐂 = 𝐇𝐂𝐔 + 𝐍 𝐗 𝐎𝐂𝐔
𝟐

I- determination of the optimal number of order N to pass and the economic order
quantity (Q):
The optimum number of orders N is that which the total cost is minimize. When this optimum
number of orders is known it is possible to determine the EOQ
Determination of N and Q through Calculation
1st method holding cost = ordering cost
HC = OC
𝐶
𝐻𝐶𝑢 = 𝑁𝑥𝑂𝐶𝑈
2𝑁
2𝑁 𝑥 𝑁𝑥 𝑂𝐶𝑢 = 𝐶 𝑥 𝐻𝐶𝑢

𝐂 𝐱 𝐇𝐂𝐮 𝐂 𝐱 𝐇𝐂𝐮
𝐍𝟐 = 𝐍 == √
𝟐 𝐱 𝐎𝐂𝐮 𝟐 𝐱 𝐎𝐂𝐮

Determination of Q
consumption C C
Q = = N N = Q if you take the square of both side, We have
optimal orders

𝐶 2 𝐶2 𝐶 𝑥 2 𝑥 𝑂𝐶𝑢 2 𝑥 𝐶 𝑥 𝑂𝐶𝑈
𝑄 2 = [𝑁 ] = 𝑄 2 = = 𝑄2 =
𝐶 𝐶 𝑥 𝐻𝐶𝑈 𝐻𝐶𝑈
√2 𝑥 𝑂𝐶 𝑥 𝐻𝐶𝑈
𝑢

𝟐 𝒙 𝒄 𝒙 𝑶𝑪𝑼
𝑄= √
𝑯𝑪𝑼

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 IUG / PROFESSIONAL BACHELOR DEGREE
The technical optimum:

By graph

Cost

Holding Cost
0 Numbers of Orders
EOQ

Application
Find the economic order quantity Q where the forecasted demand is 1 000 articles per month,
the ordering cost = 350F per order and the purchase price = 8F per article and carrying out rate
is 15% per article.
Solution
C = 1 000 units x 12 = 12 000 units
OCu = 350F
CCu = 15% x 8 = 1.2

2𝑥 12 000 𝑥 350
𝑄= √ = 2 646 𝑜𝑟𝑑𝑒𝑟𝑠
1.2

Application
ABC is a PLC based in Bamenda and specialized in the manufacturing of a product with a new
material M. consumption forecast for the next month are as follows.
Months Jan Fe Marc Apri Ma Jun Jul Aug Sep Oct No De
b h l y e y . t v c
Consumptio 14 13 110 140 150 105 160 156 160 15 170 139
n 0 0 6

Additional information reveals that:

 Ordering cost per order = 64 500F
 Holding cost = 1 FRS per article per month
Required:
Determine the following as a function of N
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 the ordering cost
 the carrying cost
 The total cost.

Solution
 Determination of the ordering cost
OC = N x OCu
OC = 64 500N

 Determination of the holding cost

C 172 000 1 023 000
HC = x HCU = x 1 x12 =
2N 2xN N
 Determination of the total cost
EOQ 1 032 000
TC = HCU + N X OCU ⇛ 64 500𝑁 +
2 𝑁

Determination of N through a table

N 64 500N 1 023 000 1 023 000
oc = 64 500N +
N N
1 64 500 1 023 000 1 096 000
2 129 000 516 000 645 000
3 193 000 344 000 537 500
4 258 000 258 000 516 000
5 322 000 206 000 528 900
6 387 000 172 000 559 000
7 451 500 147 429 598 929
8 516 400 129 000 645 000
9 580 500 114 667 695 167
10 645 000 103 200 748 200
11 709 500 93 818 803 318
12 774 000 86 000 860 00

The optimal number of orders to pass is 4 at order 4 the ordering cost is equal to the average
cost and the total cost is at its minimum.
The optimal orders can also be verified using the formula for N as follows

𝐂 𝐱 𝐇𝐂𝐮 𝟏𝟕𝟓 𝟎𝟎𝟎 𝒙 𝟏 𝒙 𝟏𝟐

𝐍 == √ = √ = 𝟒 𝒐𝒓𝒅𝒆𝒓
𝟐 𝐱 𝐎𝐂𝐮 𝟐 𝒙 𝟔𝟒 𝟓𝟎𝟎

SECTION II- BUDGETARY SUPPLIES

I- BUDGETING OF SUPPLIES
Once the Economic Ordered Quantity (Q) and the Optimal Supply Cadence (N) are known, the budgeting
of supplies can be done. This consists of preparing a calendar of Orders and Deliveries in function of the
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 IUG / PROFESSIONAL BACHELOR DEGREE
consumptions or issues of supplies forecasted. Two methods exist for the budgeting of supplies as follows: The
Constant Quantity Method and the Constant Period Method.

4.1- The Constant Quantity Method;

The Constant Quantity Method entails that the quantity to orders each time is the same throughout the
year why the ordering period is irregular and depends on the need. The quantity to order is the economic ordered
quantity or it is determined by dividing the annual consumption in quantity by the optimal supply cadence. The
supply budget or supply program prepared enables the determination of the ordering date and the delivery date
based on the forecasted consumption in order to avoid the risk of stock rupture or consume the security stock. The
budget or program is presented in tabular form as follows:

Elements J F M A M J J A S O N D
Needs
Stock B4 delivery
Delivery
Stock after
delivery
Consumption
Final Stock
Ordering Date
Delivery Date

Example:
An Industrial Enterprise uses a single raw material for the production of its main product. The stock of the
raw material as at 31/12/2014 was 480 units.
 The information provided by the supply service of the enterprise is as follows:
 The Cost of placing an order is 5,760f,
 The Cost of holding average stock is 5F per unit and per month,
 The Security stock corresponds to one of consumption,
 The delivery lead time is one month,
 Orders are placed and deliveries are done at the beginning of the month,
 The method of Constant Quantity is used for the budgeting of supplies,
 The Forecasted consumption for the year 2015 is as follows:

Months J F M A M J J A S O N D
Consumption 120 360 420 432 150 540 328 522 688 604 432 204
Task:
1- Determine the Optimal Supply Cadence (N) and the Economic Ordered Quantity (Q),
2- Present the supply budget using the Constant Quantity Method,

Once the optimal orders N and the economic order quantity Q has been known the supply
budget can be prepared. The supply budget contains the calendar of orders and delivery taken
into account forecasted consumption.

The supply budget is done either by the constant quantity or the constant period method.

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1. The constant quantity method:
Here the quantity to order in the month is calculated using the formula
𝑪
𝑸=
𝑵
This method consist of filling the supply budget format that can be as follows.

period Consumption Closing Supply or Adjusted orders

stock delivery closing stock date quantity

Application

An industrial business uses material M to manufacture her main product. The stock of this
material as at the 31/12/2013 is 450 units
Additional information below are given
- Ordering cost per order = 5 760F
- Carrying cost = 5F per unit per order
- The security stock corresponds to a monthly consumption
- Orders are passed and delivery are done at the start of the period
- Constant quantity method is used to budget supply
- The lead time is one month
- Consumption forecast for 2014 is as follows
Months Jan Feb March April May June July Aug. Sept Oct Nov Dec Total
consumption 120 360 420 432 150 540 328 522 688 604 423 204 4 500

Required:
1. Determine N and Q
2. Prepare the supply budget for the year 2014
3. On a single format prepare the ordering, supply, consumption and stock budget for the
year.
Solution
C = 4 500 units
OCu = 5 760
HCu = 5 x12 = 60F
𝟐 𝒙 𝒄 𝒙 𝑶𝑪𝑼 2 𝑥 4 500 𝑥 5 760 𝐶 4 500
𝑄= √ ⇒√ = 𝑄 = 929.5 𝑁 = = = 5 𝑜𝑟𝑑𝑒𝑟𝑠
𝑯𝑪𝑼 60 𝑄 929.5

Supply budget of the month

period Consumption Closing stock Supply or Adjusted orders
delivery closing stock date quantity

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Dec 13 - 480 - - - -
Jan 120 360 - - - -
Feb 360 0 960 960 1/1/14 960
March 420 540 - - - -
April 432 108 960 1068 1/2/14 960
May 150 918 -- - - -
June 540 378 - - - -
July 328 50 960 1010 1/6/14 960
Aug 522 488 - 1 488 1/7/14 960
September 688 760 960 - - -
oct 604 156 960 1116 1/9/14 960
Nov 432 684 - - - -
Dec 204 480 - - - -

Supplies budget showing detail element

period Orders Supply or consumption closing Security needs Supplies
delivery stock stock date
Dec: 13 - - - 480 120 -
Jan 960 - 120 360 360 480 -
Feb - 960 360 0 420 780 1/2/14
March 960 - 420 540 432 852 -
April - 960 432 108 150 582 1/4/14
May - - 150 918 540 690 -
June 960 - 540 378 328 868 -
July 960 960 328 50 522 850 1/7/14
Aug - 960 522 488 688 1210 1/8/14
September 960 - 688 760 604 1292 -
oct - 960 604 156 432 1039 1/10/14
Nov - - 432 684 204 636 -
Dec - - 204 480 - 480 -

4.2- BUDGETING OF SUPPLIES USING THE CONSTANT PERIOD METHOD

When the Optimal Supply Cadence is known, the constant delivery period is obtained by dividing the 12
12
months of the year by the Optimal Supply Cadence ( ). The quantity to order is irregular but depends on the
𝑁
need of the month.

Example:
The Management of DATA Enterprise thinks that during the forthcoming year, they will need 24,000
Units of Material M for production. The stock as at 31/12/2014 was 2,800 Units.
 The Cost of placing an Order is 600F,
 The Rate of holding average stock is 9% per annum,
 The unit purchase price of material M is 20F,
 The delivery lead time is one month of consumption,
 The security stock equally corresponds to one month of consumption,
 The orders and deliveries are done at the beginning of the month,
 The rate or rhythm of consumption forecasted for the period 2015 is as follows:

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Months J F M A M J J A S O N D
Consumptio 1,00 1,80 2,18 2,16 2,28 2,70 2,64 60 2,94 2,52 2,16 1,02
n 0 0 0 0 0 0 0 0 0 0 0 0

Task:
1- Determine the Optimal Supply Cadence (N),
2- Present the supply budget using the Constant Period Method,

2. The Constant Period Method:

When the delivery period are constant and the supply sequence is known, the determination of
the 1st delivery is used to determine other delivery.
The main problem here is to determine the various quantities to order. To overcome this
problem the supply program should be establish in such a way that the delivery should bring up
the opening stock at the level of needed consumption.
Application:
Consumption forecast of material N for 2014 of a given manufacturing business stands at 24
000 000F. The stock at 31/12/13 is 2 800 units.
The following information were provided:
- The caring cost rate is 9%
- The ordering cost is 600F per order
- The security stock is a month consumption
- The orders are passed and delivery done at the start of the month
- The lead time is a month of consumption
- The supply budget is prepared following the constant period
- The purchase price of material N is 20F
- The consumption for 2014 is as follows
Months Jan Feb March April May June July Aug. Sept Oct Nov Dec Total
consumption 1 000 1 800 2 180 2 160 2 280 2 700 2 640 600 2 940 2 520 2 160 1 026 24 000

Required:
1. Determine the supply sequence N and the number of constant period
2. Prepare the supply budget
3. On a single table prepare the orders, deliveries, consumption and stock budget for the
2014 year
Solution
OCu = 20% x 9% = 1.8
HCu = 600F
C = 24 000
C x HCu 24 000 𝑥 1.8
N== √ → √ = 6 𝑜𝑟𝑑𝑒𝑟𝑠
2 x OCu 2 x 600

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Calculation of the constant period:
12 12
𝑐. 𝑝 = = = 2 𝑚𝑜𝑛𝑡ℎ𝑠
𝑁 6
period Consumption Closing Supply or Adjusted Orders
stock delivery closing stock date quantity
Dec 13 - 2 800 - - -
Jan 1 000 1 800 - - - -
Feb 1 800 0 4 340 4 340 1/1/14 4 340
March 2 180 2 160 - - - -
April 2 160 0 4 980 4 980 1/3/14 4 980
May 2 280 2 700 -- - - --
June 2 700 0 3 420 3 240 1/5/14 3 420
July 2 640 600 - - - -
Aug 600 0 5 480 5 480 1/7/14 5 480
September 2 940 2 540 - - -
oct. 2 540 0 3 180 3 180 1/9/14 3 180
Nov 2 160 1 020 - - - -
Dec 1 020 0 - - - -

Application exercise
KOKORIKO enterprise produce a product N form raw material M. a unit of N is produce by
using 5Kg of raw material M. the table below give the projected production of N for 2011:
Moths J F M A M J J A S O N D
Consumption 1 605 1 605 1 605 2 200 2 200 2 200 1 670 470 1 670 1 325 1 325 1 325

Additional information:
- The unit purchase price of raw material M is 6F per Kg
- The holding cost is 10% of the value of average stock
- The cost per order is 800F
- The lead time is one month
- The security stock is one month consumption
- Delivery are received at the start of the month
- The stock of raw material “M” at 31/12/2010 is 2 000Kg
- The purchasing department uses the model of Wilson
Required:
1. Calculate the total consumption of raw material M
2. Calculate the economic order Quantity
3. Calculate the optimal number of orders

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HND 2016 data responds
Study the graph and answer the question that follows

Cost

Holding Cost
0 Numbers of Orders
EOQ

Required:
i. State a formula for the determination of the point label X
ii. Determine in function of N the equation of the
 the holding cost
 the ordering cost
iii. State two characteristics of differential costing
iv. What is the use of a flexible budget?

Cours : BUDGET CONTROL/ Niveau : ACY 3 PBD

Par : Mr TCHIENGANG PEGUY
Page 15 sur 16
 IUG / PROFESSIONAL BACHELOR DEGREE

Cours : BUDGET CONTROL/ Niveau : ACY 3 PBD

Par : Mr TCHIENGANG PEGUY
Page 16 sur 16