MATERIALS

Manisha Ketkar 2013

Elements of Cost - Materials

1.

MATERIALS Average 50-60% of total cost even

up-to 90% if production is material intensive Material Purchase Modern purchasing is not only
responsible for right price but the total cost and quality. What, When, Where, How much and at what price to purchase

Right Quantity :
- Over-stocking will result into

Blocking of working capital Deterioration / obsolescence Extra stprage / additional insurance / up-keeping Risk of breakage / pilferage

- Under-stocking will result into

- Production hold ups, last minute purchases, idle time payment to workers

Purchase

Right Price
Discounts, Taxes, FOR works / FOR destination, free containers / non returnable / returnable containers, etc.

Right Source
Centralise v/s decentralise purchase circumstances, special problems, etc.

Right Time Right Quality

Purchase Process

Placement of requisition to purchase dept. Indication to purchase dept. about what, when & how much to purchase Tapping resources internally and potential Quotations comparisons Total cost basis since Lowest quotes are always not the best quotes Processing of purchase order Contractual obligation between a buyer and a seller. Necessary follow-up of purchase order Receiving the material Quantity GRN Inspection of the material Quality checking Inspection note Checking the invoice and recommending payment Invoice with purchase order, GRN, Inspection note Necessary verification, bill passing and payment (by accounts department)

H.W. for students Draw formats of these documents

Purchase Requisition Purchase Order Goods received note Goods return note Material requisition note Materials returned note Material transfer note Bin card Stock ledger

Storage
2.

Stores Routine and Control :

Location centralised v/s decentralised circumstances Material utilisation, proper upkeep of materials, proper inventory control system, material record Reconciliation Turnover of stores materials, slow-moving, nonmoving, dormant, surplus and obsolete stocks

Inventory Control
3.

Inventory Control - Proper upkeep physical

control stock taking and checking inventory periodic / perpetual physical count, reconciliation between book & physical

A.

Techniques of Inventory Control : Economic Order Quantity (EOQ) Qty is fixed in such a way that the total variable cost of inventory mgmt. is minimized. Total cost =

Ordering cost preparation of purchase requisition, enquiries, raising Pos, cost of processing invoices, etc. Holding cost go-down rent, handling, insurance, opportunity cost of capital blocked, etc.

EOQ

EOQ
2DS EOQ = -----hC D = Annual demand of the product S = Fixed cost incurred per order C = Cost per unit h = Holding cost per year as a fraction of product cost

EOQ - Illustration

Demand for product A is 1000 units per month. Fixed cost of replacement, transportation and receiving cost is Rs. 4000/- each time an order is placed. Cost of product A is Rs. 500/- and the holding cost is 20%. Evaluate the replenishment lot. - Annual Demand = D = 1000 x 12 = 12000 units - Fixed cost per order = S = 4000 - Cost per unit = C = 500 - Holding cost per year = h = 0.2
2 x 12000 x 4000 --------------------- = 980 units 0.2 x 500

EOQ =

Cycle Inventory = 980 / 2 = 490 Average Flow time = 490 / 12000 = 0.41 year = 0.49 months = 14.7 days

Cycle Inventory

Cycle Inventory = Lot size / 2 = Q/2

Lot size of 1000 units, cycle inventory = 500 units Larger the lot size, more the cycle inventory.

Average Flow Time = Cycle Inventory / Demand = Q/2D

Lot size is 1000 units and daily demand is 100 units, Average flow time is 1000/200 = 5 days

Cycle inventory is the average inventory in SC due to either production or purchase lot sizes that are larger than those demanded / required

Inventory control - continued

B. Fixation of inventory levels : To control

movement of goods but this need to be monitor and revise regularly.

Maximum Level Lead time, available storage facility, availability of funds, nature of material, etc.

Max. Level = Reorder level + reorder qty (Minimum usage x minimum lead time) Or Safety Stock + EOQ

Minimum Level / Safety Stock lead time, rate of consumption

Min. level = Reorder level (normal usage x normal lead time) or can be equal to EOQ

Inventory control - continued

Re-order level Maximum Lead time x Maximum usage

Or Safety Stock + (Normal Usage x Normal Lead time )

Danger level Fixed below minimum level.

Danger Level = Normal usage x lead-time for emergency purchases Average Level = Maximum Level + Minimum Level 2 Or Safety Stock + EOQ 2

Inventory control - continued

C. Inventory Turnover : Value of material consumed Average inventory held
Value of material consumed = Opening stock + Purchases Closing Stock Average Inventory Held = Opening Stock + Closing Stock 2
D.

ABC Analysis (Always Better Control) Analytical method 80-20 principle

Amount of investment in inventory Value of material consumption Critical nature of inventory items

Inventory control - continued

VED Classification for Spares

V- Vital, E- Essential, D- Desirable

STOCK VERIFICATION - Perpetual Inventory System : Bin cards quantitative perpetual, Stores ledger quantity and value perpetual, continuous verification of stock physical perpetual
Helps in locating slow and non moving items Available of real time data But more effective if implemented along-with ABC analysis.

Accounting
4.
-

Accounting aspects related to materials :

Record of each material opening, receipts, issues and closing Valuing closing stock Charging issues to respective job / process LIFO (apparel industry), FIFO, Simple average, weighted average method, Highest In First Out, Market price, Specific price, standard price