Inventory

(Valuation, Reconciliation
& Records)

MCM311 – Construction Materials Management

Prof. Rajiv Gupta
FIFO Method of Valuation of
Inventories
 FIFO – First In First Out
 Oldest stock is depleted first
 The value of stocks on hand is the money
that has been paid for that amount, this
reflects the true value of inventory
 Becomes unwieldy when too many
changes in price levels occur
 Encounters problem in costing of returns
to store
MCM311- Prof.Rajiv Gupta 2
 FIFO
FIFO
Receipts Issues Stock on Hand
Date
Qty. Rate Value Qty. Rate Value Qty. Rate Value
01-Feb 1000 1 1000 0 0 0 1000 1 1000
14-Feb 2000 1.1 2200 0 0 0
1000 1
2000 1.1 3200
20-Feb 0 0 0 500 1 500
500 1
2000 1.1 2700
28-Feb 0 0 0 1500
1 500
1.1 1100 1000 1.1 1100

MCM311- Prof.Rajiv Gupta 3

LIFO Method of Valuation of
Inventories
 Latest prices are charged to the issues,
thereby leading to lower reported profits
 During wide fluctuations in price levels,
LIFO tends to minimise unrealised gains
or losses in inventory
 Applied in a period of rising price.

MCM311- Prof.Rajiv Gupta 4

 LIFO
LIFO

Receipts Issues Stock on Hand

Date
Qty. Rate Value Qty. Rate Value Qty. Rate Value

01-Feb 1000 1 1000 0 0 0 1000 1 1000

14-Feb 2000 1.1 2200 0 0 0
1000 1

2000 1.1 3200

20-Feb 0 0 0
1000 1

500 1.1 550 1500 1.1 2650

28-Feb 0 0 0 1000 1
1500 1.1 1650 1000

MCM311- Prof.Rajiv Gupta 5

Average Cost Method
 The issues are split into equal batches
from each shipment at stock
 It is a realistic method reflecting the price
levels and stabilizing the cost figures
 As more purchases are made, new
average is computed and this average is
applied to the subsequent issues

MCM311- Prof.Rajiv Gupta 6

 Average Cost

Average cost

Receipts Issues Stock on Hand

Date

Qty. Rate Value Qty. Rate Value Qty. Rate Value

01-Feb 1000 1 1000 0 0 0 1000 1 1000

14-Feb 2000 1.1 2200 0 0 0
3000 1.067 3200
20-Feb 0 0 0
500 1.067 533 2500 1.067 2667
28-Feb 0 0 0 1000 1.067
1500 1.067 1600 1067

MCM311- Prof.Rajiv Gupta 7

Market Value Method
 Also called replacement rate costing
 Materials that are issued are costed at the
market rate prevailing at the time of
issue.
 This method requires continuous
monitoring of the market rates for all
materials, hence it is unwieldy.

MCM311- Prof.Rajiv Gupta 8

Standard Cost Method
 In this method a standard rate is
determined based on detailed analysis of
market price and trends.
 This method of accounting evens out
fluctuations in rates.
 The standard rate is kept fixed for a
considerable time i.e. 6 months or more.
 This method has limited application – in
management control.
MCM311- Prof.Rajiv Gupta 9
Closing Stock Valuation
 As per accounting principles for the
purpose of valuation of stock for balance
sheet purpose the market price or stock
at cost is used, which ever is less.

MCM311- Prof.Rajiv Gupta 10

RECONCILIATION
&
RECORDS

MCM311- Prof.Rajiv Gupta 11

Aspects of material control
 Accounting and procedural
aspect – concerned with laying down
detailed procedures for requisitioning,
ordering, receiving, stocking, issuing
and paying for materials.
 Operational aspect – deals with
maintaining adequate supplies of all
types of materials for smooth conduct
of the construction operations and
dealing with obsolescence, wastage,
spoilage, scrap, empties

MCM311- Prof.Rajiv Gupta 12

Objectives of material control for reconciliation

 Strict quality control – materials should be

tested at the time of receipts and responsibility
fixed for testing.
 Minimum handling cost and time –
materials should be stored at such a place and
in such a manner that i) they can be located
with ease ii) made available to user departments
with least effort iii) time consumed in tracing
the materials and making them reach the user
department should be least.

MCM311- Prof.Rajiv Gupta 13

Contd.
 Control on payments for materials – ensure
that no payment is made for materials not ordered
though received, or for materials not received or
for materials of defective quality.
 Authorized issues – ensure that no issues from
stores take place without proper authorizations.
Store keeper to be held accountable for all issues.
 Control on misappropriations – ensure that
no misappropriation of materials takes place. Once
leakages develop in the system they tend to
become recurring in character.

MCM311- Prof.Rajiv Gupta 14

Contd.

 Minimize wastages – at the time of

receipt, issues, usage. Fix norms at each
stage. Higher wastages should be
investigated.
 Control on leakages and pilferages –
especially for those materials prone to
pilferage.
 Minimize spoilage and obsolescence
– fix norm for each item.
 Detect slow and non-moving items

MCM311- Prof.Rajiv Gupta 15

Material accounting and reporting
 Complete records of all purchases, issues,
returns, transfers and losses of materials to be
maintained.
 An efficient system of internal audit of material
records should be maintained.
 All materials should be periodically verified.
 Payments of all suppliers bills should be made
only after comparing the supplier’s bill with the
copy of purchase order and the receiving and
inspection report.
 Method of valuation of stocks should be
followed on consistent basis.

MCM311- Prof.Rajiv Gupta 16

Material accounting and reporting..contd.

 Control accounts and subsidiary

ledgers should be maintained for
obtaining summarized information.
 Special reports should be prepared
regarding spoilage, return to suppliers,
obsolete items, defectives and
abnormal losses.

MCM311- Prof.Rajiv Gupta 17

Pre-requisites for a good inventory system
 Up-to-date records – all issues and
receipts should be immediately recorded in
the bin cards and stores ledger. Balance in
hand should be recorded after each
transaction.
 Continuous stock-taking
 Detailed advance programme – should
be prepared for weekly or monthly stock
taking well in advance. The duties of stock
taking staff as regards counting, weighing,
measuring, reconciling, listing and
preparation of stock verification sheets etc.
should be determined.
MCM311- Prof.Rajiv Gupta 18
Contd.

 Separate recorded and

unrecorded stocks – stores items
which have been received but have not
yet been recorded in bin cards and
stores ledger because their documents
have not yet been received or they
have not yet been inspected, should be
separated from recorded items.

MCM311- Prof.Rajiv Gupta 19

Contd.
 Use inventory tags – to avoid confusion
between the portion of inventory which has been
verified and that to be verified
 Reconcile bin cards and stores ledger –
receipts, issues and quantity in hand should be
same in bin cards and stores ledger. The two
records should be tallied. Discrepancy, if any,
should be located. It can arise due to some
arithmetical error in balancing or wrong posting or
non-posting either in bin card or in store ledger.
Such errors should be rectified by passing a
rectifying entry and initialed.

MCM311- Prof.Rajiv Gupta 20

Contd.
 Regularly reconcile book figures
with physical stocks – In case of any
difference an enquiry should be made,
the difference should be ascertained and
records be rectified.
 Stock verification sheets – should be
prepared to record verification of stocks
in chronological order. They convey how
much verification work has been done
by whom and by what time. These
facilitate future stock-taking
programmes.
MCM311- Prof.Rajiv Gupta 21
Stock Discrepancies
 Discrepancy may be observed between
quantity of stock as shown in stock
ledger and bin cards and that verified by
physical counting of stocks. The causes
can be categorized as:
- i) Avoidable causes
- ii) Unavoidable causes

MCM311- Prof.Rajiv Gupta 22

 Avoidable causes or abnormal losses
 These are causes which can be avoided through
reasonable skill and care in material handling and
recording. These are:
 Improper storage
 Carelessness in counting, weighing and measuring-
resulting in under or over issues.
 Losses due to evaporation, moisture, shrinkage etc.
beyond the expected level.
 Loss due to carelessness and breaking bulk, cutting etc.
 Clerical errors resulting in wrong recording
 Theft and pilferage.

MCM311- Prof.Rajiv Gupta 23

Unavoidable or normal losses
Losses which are inherent in the nature
of materials or material handling .
 Normal losses due to evaporation,
moisture, shrinkage etc.
 Normal pilferage.
 Normal storage losses.
 Normal losses in breaking bulk or cutting
 Normal obsolescence.
 Normal defectives and scraps.
 Losses due to accidents inherent in the
nature of business activity.
MCM311- Prof.Rajiv Gupta 24
Treatment of stock discrepancies

 Normal material losses must be

charged to output. This must be done in
two ways.
a) By suitably inflating the rate of issue of
material so that normal loss is
distributed over normal output.
b) The normal loss of materials may be
debited to construction overheads and
credited in stores ledger so as to bring
stores ledger balance in agreement with
the actual physical balance in stores.
MCM311- Prof.Rajiv Gupta 25
 Checks for Receipt Function


a) Check valid documentation for material & carrier entry.

b) Monitor arrival of material at Warehouse.
c) Verify PO, identify material and tally the order and acknowledge
the delivery,
d) Report to buyer all deliveries without valid Purchase Order in SAP.
e) Verify Third Party Inspection documents or Arrange for Incoming
Inspection & Confirm QM acceptance.
f) Usage decision, Prepare GRN and Post to Inventory.
g) Lodging claim on supplier for shortages, discrepancies, wrong or
substandard supplies. Intimate buyer and commercial.
h) Intimate Insurance group for claims of transit damage or losses or
pilferage if any. Arrange for insurance survey, lodge preliminary claim
on insurance.

MCM311- Prof.Rajiv Gupta 26

 Checks for Material Storage.

a) Review the warehouse functions including facilities

planning, layout and material handling equipment.
b) Ensure insurance cover for all material in stock at
warehouses, in transit and on sites.
c) Follow statutory guidelines and licensing requirements
for specialty material such as HSD, LDO, Explosives,
corrosive chemicals etc.
d) Ensure Store hygiene through routine activities such as
sweeping, cleaning, dusting.

MCM311- Prof.Rajiv Gupta 27

 Checks Inventory Accounting & Control

 a) Review the construction program, stock availability and

consumption pattern.
b) Ensure proper documentation in SAP for material receipt, Issue
and return receipts of usable, used and scrap material.
c) Draw up annual stock verification and audit program and arrange
for material audit including spot checks.
d) Implement Inventory control & Analysis methods – ABC, XYZ
and VED, Max/Min Inventory.
e) Review non-moving, slow moving and life expiring stock and
initiate action, for return to vendor or disposal in consultation with
user group.
f) Investigate binning errors, audit discrepancies and advice
corrective action.

MCM311- Prof.Rajiv Gupta 28

 Material Issue.
a)Ensure compliance of Standard Operating procedure.
b) Ensure proper authority and statutory approvals
(custom/excise) for material movement to other warehouses
or to outside agencies.
c) In case of Block-to-Block transfer (including issue on loan)
ensure necessary Govt.approvals and Essentiality certificate is
in place.
d) Ensure compliance of Sales Tax, Entry tax, Octroi and other
statutory regulations in force time to time.
e) Regulate gate passes and vehicle authorizations at out-
bound gate.
f) Post all Stock Transfer Orders and Sale Orders for material
issued.
g) Report and reconcile any discrepancy in material
receipt/issue during transit.
MCM311- Prof.Rajiv Gupta 29
 Some typical results due to effective control
(basis: an audit report)
 The estimated requirement of material in Depots is based
on Anticipated Annual Consumption (AAC).
 Any irregular issues i.e. materials shown as issued but not
physically lifted, could lead to computation of incorrect
AAC and thus, estimation of excess quantity.
 In 4,274 cases, material worth Rs.20.67 crore was
fictitiously shown as issued but not actually removed
from the depots.
 Based on these inflated issues, the requirement estimated
for the next year also got inflated. 383 items were found
in excess of the requirement assessed with reference to
Anticipated Annual Consumption (AAC).

MCM311- Prof.Rajiv Gupta 30

 The material received in the Receipt Section should be
got inspected promptly. A test check of 819 receipt
challans in 33 depots revealed that in 322 cases, the
inspection was not completed even after a period of 3
months of receipt. In 47 cases, the inspection was kept
pending deliberately to avoid inflation of inventory.
 Audit Review of rejected material cases in 32 depots
disclosed that out of 2826 pending rejection cases, 758
cases valued at Rs.2.79 crore were more than 3 years
old. In 1231 cases, the entire consignment were
rejected by the consignee due to non-conformity of
the material to the specification. This indicates poor
quality of inspection by Inspecting Agencies.

MCM311- Prof.Rajiv Gupta 31

 The efficiency of Inventory Control is
judged by Turn Over Ratio (TOR) which
is expressed in percentage of value of
closing balance at end of financial year to
the value of issues during the year. The
TOR was manipulated by delaying
accounting of receipts and showing
materials as issued without lifting these
in the same year. A review of 29 depots
disclosed that in respect of 12598 cases,
material worth Rs.43.50 crore was
shown as issued but material was not
lifted in the same years. This
tantamounted to manipulation of TOR.
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