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Unit 2 - Material Cost Theory Anwers

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47 views4 pages

Unit 2 - Material Cost Theory Anwers

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hcuncsanthosh
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I.

Material Control

Meaning of Material Control

 Material Control is defined as "A systematic control of purchasing, storing, and


consumption of materials.
 To maintain a regular and timely supply of material at the same time, avoiding
Overstocking and Under-Stocking.
 Material control implies taking care of materials and their cost from the
procurement stage to their ultimate consumption.
 The various activities under material control include procuring, storing, and
supplying the material required for production, at the lowest cost per unit,
consistent with the required quality, and with the most minor investment in
inventory.
 Material control function ensures uninterrupted flow of materials to production
without carrying unnecessarily large stocks.

Objectives of Material Control


The following are the main objectives of a proper system of material control:

1. To ensure a regular and uninterrupted supply of materials.


2. To purchase materials of the right quality under favorable terms.
3. To minimize the wastage of materials.
4. To ensure optimum use of tools, equipment, and machines.
5. To introduce the system of production control and ensure the timely production of
goods of the required quality.
6. To check over-stocking and under-stocking of materials thereby reducing the
amount of investment to a minimum and
7. To ensure proper storage and handling of materials.

Advantages of Material Control


The main advantages derived from a good system of material control are
enumerated as under:

1. It facilitates the maintenance of stocks at appropriate levels so that production is


not stopped for want of materials. Thus, it prevents production delays.
2. It helps to eliminate or minimize waste through control of purchase, storage, and
issue of materials.
3. It enables the division of work, assignment of duties, and responsibilities to all the
persons concerned with materials.
4. It facilitates the detection and elimination of fraud, pilferage (திருட்டு), etc. by
enforcing stock control measures.
5. It helps in keeping perpetual inventory and other records to facilitate the
preparation of accurate material reports to the management.
6. It ensures up-to-date maintenance of stock records. It furnishes data relating to
stores quickly and accurately.
7. It aids the management in initiating and formulating proper purchase policies
regarding materials.
8. It ensures the purchase of materials at reasonable prices.

Scope of Material Control


The main activities included in material control are as follows:

1. Purchase of materials
2. Storing of materials
3. Issue of materials
4. Verification of materials

II. Determination of Material Levels or Stock Levels

Proper maintenance of stock items of each type of material is the main function of
the store department. Maintenance of large quantities of stock leads to huge investments in
materials, large space usage, and dangers of deterioration (சீரழிவு) in the quality and
obsolescence of materials. On the other hand, less stock may result in frequent purchases,
higher costs, work stoppages, loss in production, etc. In order to avoid overstocking and
understocking of materials in the storeroom, different levels of stock are fixed. They are:

1. Re-order level
2. Maximum level
3. Minimum level
4. Average level
5. Danger level

Re-order level: It is the level of stock at which new purchase order is placed for fresh
supplies of the material. It is fixed somewhere between the maximum and minimum levels
to avoid unnecessary storage or shortage.

[Re-order level = Maximum consumption x Maximum re-order period]


(or)
[Re-order level = Minimum level + (Average rate of consumption ×
Average time to obtain fresh supplies)

Note: The choice of the formula depends on the information available in a given problem.

Maximum level: It represents the level of stock above which the stock should not be
allowed to rise. It is to be fixed keeping in mind unnecessary blocking of capital in stores.
[Maximum level = Re-order level + Re-order quantity -
(Minimum consumption x Minimum re-order period)]

Minimum level: It is that level below which the inventory of any item should not be
allowed to fall. It is also known as safety or buffer stock. The main object of fixing this level
is to avoid unnecessary delay or hampering (தடைபடுகிறது) of production due to a
shortage of materials.

Minimum level = [Re-order level - (Normal consumption x Normal re-order period)]

Average level: This level of stock may be determined by using the following formula:

[Average level = Maximum level + Minimum level ➗2]


(or)
= Minimum level + ½ (Re-order quantity)]

Danger level: This level is generally determined below the minimum level and represents
the level where immediate steps are taken for getting stock refilled. In some cases, the
danger level of stock is fixed above the minimum level, but below the re-ordering level.

[Danger level = Average consumption x Lead time for emergency purchases]

III. Determination of Re-order Quantity (Economic Ordering Quantity)

The re-order quantity represents the quantity to be ordered whenever materials are to be
purchased. By fixing this quantity, the purchaser is saved from the task of re-calculating
how much he should buy each time he orders. The re-order quantity is also known as
Economic Ordering Quantity (EOQ) because it is the quantity, which is most economical to
order. While determining the EOQ, two types of costs are taken into consideration, i.e.
ordering cost and carrying cost.

Ordering cost: It refers to the cost of placing an order and securing the supplies. It depends
on the number of orders placed and the number of items ordered each time. Whenever
orders increase in number and fewer quantities are purchased on each order, the ordering
cost would begin to rise. Cost of stationery, salaries of those engaged in receiving and
inspecting, salaries of those engaged in preparing the purchase orders, etc. are some
examples of ordering cost.

Carrying cost: It is the cost incurred to carry/maintain the inventory of materials. It is also
known as possession cost. It is incurred on mainte- nance of materials in stores. It includes
the cost of store keeping (stationery, salaries, rent, material handling cost, etc.), interest on
capital locked up in stores, the incidence of insurance cost, risk of obsolescence,
deterioration and wastage of materials, evaporation, etc.
Economic Ordering Quantity can be calculated with the help of the following formula:

EOQ = 2ABCS
Where,
A-Annual consumption or usage of materials in units
B- Buying cost per order
C-Cost per unit
S-Storage and Carrying Cost per annum

Sometimes, the consumption of material may not be given in units but only in value. In such
a case, the formula for EOQ is slightly changed.

EOQ = 2ABS

A - Annual consumption of materials in rupees


B- Buying cost per order
S-Storage and carrying cost percentage

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