Costing and Control of Material

Mohsina Akter
Assistant Professor
Department of A&IS
Jahangirnagar University

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 Material Control

Material Control :
Material control means the regulation of the
functions of an organization relating to the
procurement, storage and usage of materials in
such a way as to maintain an even flow of
production without excessive investment in
material stock.

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 Objectives of Material Control
The main objectives of material control are:
1. To maintain an even flow of production
2. To prevent excessive investment in material
stock.
The other objectives are-
3. To effect purchases of materials of the right
quality consistent with the standard prescribed
in respect of finished goods.

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2. To obtain materials on most favorable way with a
view to effecting maximum economy in the cost of
buying.
3.To make available and assume supply of materials
so as to give the cycle of production going without
any interruption.
4. To prevent overstock of materials.
5. To prevent losses during storage of materials.
6. To provide information to management regarding
cost of material and availability of stock.
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 Essentials of Material Control
 Materials control eliminates wastage in use of
raw materials and supplies in course of purchase,
storage, handling and use.
 It ensures uninterrupted flow of right quality and
quantity of materials to the production
department.
 It reduces the risk of fraud and theft.
 It facilitates the preparation of various monthly
financial statements.
 The valuation of materials is very easy.
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 It requires minimum amount of capital to buy

materials.
 It fixes the responsibility on the part of the
employers who are handling the materials at
the maximum.

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 Purchase Control

• This is the most important part of material

control. In small concerns purchases are done
usually by the proprietor or his manager, but
in big concern there is a purchase department.
The chief of the department is responsible for
all purchases.

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 Purchasing Department
• Purchase of all materials.
• Headed by General Purchasing Agent

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 Function of Purchasing Department
 Receive purchase requisition for materials, supplies
and equipment.
 Keep informed concerning sources of supply,
prices, shipping and delivery schedules.
 Prepare and place purchase orders.
 Arrange systematic reports between the
purchasing, receiving and accounting department.
 Verify and approve for payments all invoices
received.
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Centralized and Decentralized Purchasing
• The issue of centralization versus
decentralization of purchase function is
basically concerned with decision about the
purchasing policies, defining the purchasing
authorities and the resultant responsibilities.
• It depends on different situations
such as a single plant
with diversified production, geographically
scattered multi-plant with
diversified production, geographically scattere
d multi-plant with single product etc.
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 Centralized Purchasing
When there is one purchase department to
purchase it is referred to as centralized purchasing.
In centralized purchasing, buying and managing
process is performed from one location to all
locations within an organization. Generally, it is
suitable where:

 there is one plant or several plants closely

related.
One basic raw material is used by the plant or
plants for production of standard products.
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 Decentralized Purchasing
In large organizations there are many branches,
sections or departments. If each branch
or department buys its own materials and
equipment, it is known as decentralized
purchasing.
Decentralized purchase is usually suitable where,
Several plants distantly situated
Different raw materials are used by the plants.

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 Inventory Control
 Inventory generally refers to the materials in
stock. Inventory constitutes raw materials, work-
in- Process goods, finished goods. Inventories are
processed to add values further in to it.
 Inventory control is the process of controlling
investment in inventory. It involves inventory
planning and decision making with regard to the
quantity and time of purchase, fixation of stock
level and maintenance of stock records.

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Objectives of inventory control:
1) To maintain a balanced inventory.
2) To keep the amount invested in inventories
as low as possible without hampering either
the even flow of production or the delivery of
finished goods

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 Need of Inventory Management

• Avoid loss of sales

• Gaining quantity discounts
• Reducing order costs
• Reducing risk of production shortages
• Gaining from seasonal reduction in price

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 Cost associated with the inventories
• Carrying/Holding cost
• Ordering cost

1. Carrying cost:
This cost consists of interest on capital, storage
charges such as rent, insurance, heating and
lighting, expense of stores staff, store
equipment and maintenance, material
handling cost, stores recording , audit cost,
damage etc.
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• These charges increase as inventory levels rise. To
minimize carrying costs, management makes frequent
orders of small quantities.

2. Ordering cost: The costs associated with placing orders

to replenish inventory stocks. The cost of placing an order
does not depend upon the quantity ordered. Ordering
cost depends upon the number of orders placed in a year.
This cost consists of clerical & administrative cost of
purchasing and receiving, inspection and accounting,
transportation cost , set up and control cost.
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 Ordering cost
• Ordering cost may include:
1) Purchase order Costs :
 Supplier selection, follow-up, expediting and
other contacts.
 Receiving, inspecting, and handling
 Preparation and handling of an order /
authorization document

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 Ordering cost
2) Production Order Costs :
 Lost capacity cost due to re-setup of
equipment or assembly-line changeover.
 Preparation of production paperwork
 Tracking and reporting work orders in the
plant.

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 Methods of inventory control:
Economic order Quantity (EOQ):
The EOQ refers to that order quantity, within the
range of possible order quantities, which
minimize total costs per annum (and thus
average cost per unit) for the items purchased.
This cost consists of two parts- i) Ordering costs
ii) Carrying costs.

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 Assumptions underlying EOQ
1. Ordering and carrying costs are known and
they are fixed per unit.
2. Anticipated usage is known.
3. Cost per unit is known and it is constant.
4. The quantity ordered is delivered
immediately.

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 Stores Ledger
• Stores ledger is a document kept by the cost
department for each item of material. The
ledger usually kept in loose-leaf or card type
form.
• In stores ledger every movement of the
material, either inward or outward, is recorded
in quantity, rate and value and the balance of
the material, after each movement, is
simultaneously struck out in quantity , rate and
value.
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• It is therefore, a duplicate of bin card so far as
the quantity is concerned.
• In bin card, different levels such as maximum
level, minimum level and ordering level are
mentioned. In addition to the name and code
of material, information regarding the location
of the material, normal source, lead time etc is
often mentioned.

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 Distinction between Bin Card and Stores
Ledger
Bin card
Record kept by store-keeper
Inward and outward movement only in
quantity
Entries made in respect of purchase,
return and issue.
In true sense bin card is stock record
Can’t supply inventory value for
preparation of financial statements
Posting made for each transactions.
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Stores ledger
Record kept by cost department.
Inward and outward movement both in
quantity and value.
Entries made after recording in bin card.
Stock Control.
Supply inventory value.
Posting may be made on the basis of
summery of several transactions.
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 Levels of Stock

 Re-Ordering level
 Minimum Level
 Maximum Level

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1. Re-ordering level:
Level at which fresh order should be placed for
replacement of stock. This level is fixed between
minimum and maximum level. This is fixed in such a
manner that the excess of ordering level over the
minimum level is sufficient to meet the requirement
during the lead time.

Re-ordering level= Maximum re order period*

Maximum usage
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2. Minimum Level: Factors need to be considered:
 Nature of the material
 Lead time
 Rate of consumption of material
 Reordering point.

Minimum level= Reorder level-(normal usage*

normal reorder period)

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3. Maximum Level:
 Rate of consumption of material.
Lead time.
Maximum requirement of the material.
Nature of the material
Storage space.
Price economy.
Cost of storage and insurance.
Inventory turnover.
Nature of supply.
Maximum level= Reorder level+ reorder quantity-
(minimum usage*minimum order period)
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