ACC201 Material Control 2011

8/4/2019 ACC201 Material Control 2011

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MATERIAL CONTROL

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MATERIALS

The study of materials control procedures for

all broad categories of materials in an

organisation [ raw materials, equipment,

supplies such as pens etc.]

The main study focus is STORES PROCEDURES

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MATERIAL CONTROL

Main Learning Objectives:

Recognizes why we need to control material

Study documents used in materials control Calculation of order quantities and stock levels

Issuing materials to production [FIFO, LIFO ETC]

and impact on profit and P&L account, BalanceSheet

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Definition of Materials Control

The Systematic control over the procurement,storage and usage of material so as to maintain an

even flow of material and at the same time

minimise excessive investmentin inventories

or

M. control is a system which ensure that right

quality of M. is available in the right quantity at theright time and right place with the right amount of

investment


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Objectives Of Material Control:

Availability Of Materials

No Excessive Investment In Materials

Reasonable Price Minimum Wastage

Risks Of Spoilage And Obsolescence

Information about Availability of Materials[stock take etc.]


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Why control materials ?

So that we always know how much material isstored and if it is adequate.

Risks if too much material /stock is being carried[costs of carrying material]:

Some are perishable, spillages may occur, as wellas other damages [breakages]

Leads to temptations of theft It can become obsolete [out-dated] and at

different dates

Takes up space [at a cost], and ties up capital

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Risks if too little material / stock is carried:

May lead to production stoppages

Lost sales [inadequate stock for sale], loss ofcustomers

Loss of reputation on ability to service customers

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Aspects of Material Control

There are three primary aspects in Materials

Control:

Purchase / Procurement Control

Stock / Inventory control [levels]

Materials Issue / Valuation

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Physical Control of Materials

Limited access to materials storage areas.

Segregation of duties.

Accuracy in recording.


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A: Control During Procurement and Issue

When the order point is reached the procurement

process begins.

Supporting documents are essential to control

material procurement and issue processes.


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A1: Procurement Documents

1. Purchase requisition the form used to notify the

purchasing agent [ store-keeper] that materials areneeded for a job.

Prepared by the Dpt needing material.

2. Purchase order requisition that gives thepurchasing agent authority to order the materials.

Usually issued by Finance personnel in Stores Dpt.

3. Suppliers invoice Invoice from the supplier thatshould be compared to the purchase order.


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A2: Goods Receiving from Supplier

4. Goods Received Note [GRV] form thatthe receiving clerk uses to count and

identify the materials received.

5. Debit-Credit memorandum document

that is used when the shipment of materials

does not match the order and the invoice.


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A3: Control During Storage and

Issuance

6. Materials Requisition Note:

Prepared by the authorized factory

personnel to withdraw materials from thestoreroom.

7. Materials Return Note:

Describes the materials being returned to

the storeroom and the reason for the

return.


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A4: Other Stores Procedures Documents

8. Bin Card:

A record of quantities only for each material item

and is kept in stores with material

Maintained by the storekeeper

Balance of material is updated when material is

purchased and when it is issued


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A4: Other Stores Procedures Documents

9. Stores Ledger Card:

This is a separate record kept for each type /item of stock and shows the movement of

that item in and out of stores i.e. receivematerial XY, Dr XY Account, Issue material XY,Cr XY Account on the ledger card

Kept by the cost accountant Used to be manual, now mainly

computerized

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Note that:

multiple copies of these documents are prepared

and routed to various departments [e.g. GRN 1 issent to the requisitioning dept, Accounts,

Purchasing etc so that they know that the

material they require has been delivered].

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2. Stock / Inventory Levels

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Primary Reasons for determining stocklevels :

1. It is impossible to get the right

amount of stock at exact time from a

supplier.

2. In order to minimise the costassociated with carrying stock

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Techniques of Material Control

Setting Stock Levels

Economic Ordering Quantity

Just-in-Time Inventory System

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SETTING STOCK LEVELS

Each individual item will have its own levels [min.

level, re-order level , EOQ ] etc depending on:

Demand for the item

Its cost / value [investment risk]

Cost of storing the item, storing conditions

Lead-time [delivery time] etc

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Four Level Settings

1. Re-ordering level :

It is the point at which it is necessary to

initiate the supply of fresh materials[purchase requisition].

= Maximum consumption x Maximum re-order period


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Four Level Settings (Cont)

2. Minimum (or safety stock) level:

This represents the minimum quantity of the

material, which must be maintained in hand

at all time.

Stock levels should not be allowed to fall

below this level, risk of stock out

= Re-ordering level (Normal consumption x

Normal re-ordering period)

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3. Maximum level:

Maximum quantity of an item of material,which can be held in stock at any time. Stock

should not exceed this quantity. = Re-ordering level + Re-ordering quantity

(Minimum consumption x minimum re-

ordering period)OR

= ROL - {Min C x Min RP} + RQ

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4. Average stock level:

= Minimum stock level + of re-order quantity(or) (Minimum stock level+ Maximum stock

level)OR

= Min SL + RQ

2

= Max SL + Min SL

2

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Order Point (cont.)

The following items need to be taken into

consideration when ordering:

Usage anticipated rate at which the material will

be used.

Lead time estimated time interval between the

placement of an order and the receipt of material.

Safety stock estimated minimum level ofinventory needed to protect against stock outs.

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Economic Order Quantity (EOQ)

The optimal quantity to order at one time.

Minimizes the total order and carrying costs over aperiod of time.

Ordering costs may include the salaries and wages ofpurchasing personnel, communication costs, and materialsaccounting and record keeping.

Carrying costs are the costs that a company may incur instoring materials. These costs may include materials

storage and handling costs, interest, insurance, andproperty taxes, loss due to theft, deterioration, orobsolescence, and records and supplies associated withcarrying inventory.

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Formula to Calculate EOQ

EOQ = Economic OrderQuantity

C = Annual Consumption ofthe material

O = Cost of placing oneorder

Cc = The costs of carryingeach item of stock perannum i.e., holdingcosts of Inventory.

EOQ =

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2CO

Cc


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Alternative Formula2DCo

EOQ = Hs

Where : D = Annual demand,

Co = ordering costs

Hs = Annual Carrying costs per unit

Solve : Drury 24.14 and 24.15

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READ THE FOLLOWING:

1. LUCEY 7th

ED. SEC.5 PGS. 46-54

2. DRUEY 7th ED. CHAP.24 PGS. 619-634

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Problem 1.

The following information is available in respect to a certain component of material, Jax 2 .Lead time : minimum of 2 months, maximum of 4 months

Material usage : 50 kilograms to 300 kilograms per month

Annual usage of material: 1 800 kilograms

Other information:

Storage costs [carrying] cost of materials are 25 % of stock value

Stock value is P P0.32 per kilogram

Ordering costs are P 2.00 per order

Required:

Determine the following:

1. The minimum stock level

2. The maximum stock level

3. The re-order level

4. The average stock level5. The Economic Order level

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Problem 1: Suggested Solution

EOQ = square root of 2 x 1800 x 2 = Sq root of 90 000 = 300 kgs

0.32 x 0.25

ROL : Max use x Max reorder period = 300 x 4 = 1 200 kgs

Minimum stock level: = ROL [Av . use x Av. ROP]= 1 200 [175 x 3] = 675 kgs.

Max. SL = ROL [Min C x Min RP] + RQ

= 1 200 - [50 x 2] + 300 = 1 400 kgs

Average stock level = [Min Stock level + Max SL]/2

= [675 +1400]/2 = 1037.5 kgs

Or Min. SL + RQ/2 = 675 + [300 /2] = 825 kgs

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Problem 3:

Modise (Pty) Ltd. manufactures a product and the following particulars are collected forthe year ended March, 2010.

Annual demand (units) 12 000

Cost of placing an order (P) 100

Annual carrying cost (P. per unit) 15

Normal usage (units per week) 50Minimum usage (units per week) 25

Maximum usage (units per week) 75

Re-order period (weeks) 4-6

Required to calculate:

1. Economic Order Quantity2. Re-order level

3. Minimum stock level

4. Maximum level

5. Average stock level

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1. EOQ2x12 000 x P100

EOQ = P15

= 400 units

2. Re-order quantityMaximum consumption x Maximum re-orderperiod

ROL= 75 units x 6 weeks = 450 units

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3. Minimum level

= Re-ordering level

(Normal consumption x Normal re-ordering period)

= 450 units (50 units x 5 wks)

= 450 250

= 200 units

4. Maximum stock level

= ROL [Min C x Min RP] + RQ

= 450 units (25 units x 4 wks) + RQ

= 450 (100) + 400

= 750 units

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5. Average Stock level

ASL = Min SL + RQ [ 400 units]

2

or :

Max SL + Min SL [475 units]

2

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Problem 2:

Flint Company uses 9 000 units of part AK-4 each year. To get better controlover its stock, the company is anxious to determine the economic orderquantity (EOQ) for this part.

Required:

1. The company has determined that the cost to place an order for thepart is P30, and it has determined that the cost to carry one part in

stock for one year is P1.50. Compute the EOQ for the part.2. Assume the cost for placing an order increases from P30 to P40 per

order. What will be the effect on the EOQ? Show computations.

3. Assume that the cost to carry a part in stock increases from P1.50to P2.00 per part. (Ordering costs remain unchanged at P30 per order.)What will be the effect on the EOQ? Show computations.

4. In question 2 and 3 above, why does an increase in cost cause theEOQ to go up in one case and to go down in the other?

Question Adapted from Garrison, 2003.

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