Material Costing
Introduction:
• Generally, material cost takes a significant portion of the total cost.
• The entire process of manufacture would be disrupted or even stopped if the right type of material is not available in right quantity at the right time.
• Without the availability of required material, other resources like men and machine would remain idle Material control function ensures smooth production process.
• It can be defined as the systematic control over purchasing, storing, and using of material so as to maintain a regular supply of materials as and when they are needed, avoiding at the same time excessive holding of materials.
Scope of Material Control:
• Purchasing of Material
• Receiving and Inspection
• Storing of Materials
• Issue of Material for Use
• Inventory Records
• Inventory Control
• Accounting of Materials
Essentials of Material Control Procedure:
• Coordination between departments particularly production, purchase, inspection, stores and accounts.
• Centralized purchasing organization under the supervision of a competent person.
• Use of standard printed forms for requisitions, order placing, goods receipt, inspection, and issue for consumption and stock records.
• An effective system of internal check at every stage to keep a check over transactions.
• Proper storage of all materials.
• System of perpetual inventory recording of stocks for every transaction.
• Regular report on quantity and value of receipt, issue and stock.
• Reconciling reports with corresponding accounting records.
Scientific Purchase:
• Purchase at right time, at right price, of right quality, in right quantity, and from right supplier is called as good purchase or the scientific purchase.
Functions of Purchase Department:
• Receiving purchase requisition from stores department
• Select right suppliers and to contact them
• Ready record of current prices
• Send the purchase order to supplier
• To follow the order
• Receive the material and issue Purchase Invoice
Procedure of Purchase:
• Receipt of Bill of Material or requisition slip from Stores or user Department
• Placing order with Supplier
• Receipt of Material
• Physical Verification
• Payment
Issue of Materials:
• Bill of Material
– It is a comprehensive list of materials with exact description and specifications, required for a job or other production units
• Bin Card
– The bin card or the stock card is usually attached to each bin, shelf, or other form of containers. The bin cards of the items stored in the open yards like coal are kept at the desk of the storekeeper. They are used as records of the quantities of each type of material received, issued, and on-hand each day.
Pricing of the Receipts:
• The basic price for material charged by the supplier as per the invoice.
• Taxes, Duties, Packing, Freight, Octroi and Transits Insurance paid and charged by the supplier or directly paid by the purchaser.
• In the former case, information is obtained from suppliers’ invoice, and in later case, from financial accounting records.
• Expenses on Purchasing, Receiving, Inspecting, and Storage are added at a predetermined rate.
Pricing of the Issues:
• Several methods of pricing issues are:
– First In First Out (FIFO) method
– Last In First Out (LIFO) method
FIFO method:
• This method assumes that materials are issued for consumption in the same sequence in which it is received. The rate applied to the earliest received material in stock is the basis.
LIFO method:
• It is based on the hypothesis that materials are stored in leaps; and when required, the last receipted material is taken out first. The resulting effect is—the stock is valued at earlier purchased prices.
Material Costing of Job or Product:
• In case of the enterprise manufacturing one product, the aggregate materials issued during the period is the material cost for the period.
• In case of an enterprise manufacturing more than one product, each issue of material is related to a particular product.
• In case of Job Order System, the Material Requirement Note or Bill of Materials issued by the Producing Department itself specifies the particular jobs for which material is required.
Stores Ledger:
• The objective of a stores ledger is to keep a proper record of the respective materials specifying their quantity as well as value.
• It is a record which charges the respective departments or the job the price of the materials issued to them.
• Generally, stores ledger is maintained on a loose-leaf card basis and a separate card is kept for each material item.
Stock Control Techniques:
• The Stock or Inventory Control is one portion/part of material control.
Objectives of stock control:
– To minimize investment in stock; this requires funds or capital.
– To ensure adequate availability of material.
– To protect the material and minimize loss due to pilferage, theft, waste, loss, damage, obsolescence, and unauthorized use.
– To control and minimize accumulation of surplus stock, non-moving and dead stock.
– To maintain timely records and prepare and submit necessary reports for planning.
– To ensure that no activity suffers interruption due to unavailability of material.
– To achieve stock control objectives, several techniques are adopted, which are as follows:
• Selective Control or ABC Analysis
• Set up Stock Control Levels
• Economic Order Quantity
• Perpetual Inventory
ABC Analysis:
Category A
Items are of Low quantity with High Value
Category B
Items are of Medium quantity and Value
Category C
Items are of High quantity and Low Value
• ‘A’ group items should be closely controlled at all stages of material handling.
• ‘B’ group items also need elaborate control.
• ‘C’ group items are not subjected to detailed control procedures.
VED Analysis:
• Vital, Essential, and Desirable (VED) analysis is based on criticality of raw materials.
• According to this analysis, items are divided into three categories in descending order.
– The stock of vital items requires more action; because without it, the production is held up.
– The items that come under ‘V’ should be stored adequately for smooth production.
– V class items are vital for smooth functioning of the production system.
– In the absence of such items, the plant and machinery would stop running and production would come to a halt
– Essential items are necessary for efficient running of production; and without it, the production will be held up; but a reasonable care is taken for E items to ensure they are always in stock.
– Desirable items are useful to increase efficiency, and non-availability of these items do not affect the production immediately.
– D class items do not have an immediate effect upon the production.
– However, their availability reduces tiredness and enhances the efficiency.
Stock Control Levels:
• Maximum Level
Reorder level - (Minimum consumption X Minimum reorder period) + Reorder quantity
• Minimum Level
Reorder level - (Average rate of consumption X Average time of inventory delivery)
• Reorder Level
Average daily usage rate X Lead time in days
Stock Control Level:
• Safety Stock
– It is the minimum stock to be kept, so that the Production doesn’t stops.
• Danger Level
– It indicates the level of stock when the normal issue should be stopped.
– It indicates the need of urgent attention and emergency steps to replenish the stock by procuring materials.
– The quantity of this level is between minimum and nil stock level.
Economic Order Quantity (EOQ):
• This technique supports to determine how much to buy?
• The purchase and storing function involve certain costs.
• When stock is increased, number of purchases can be reduced.
• Thus, the cost of storing would increase, but the cost of placing the order would decrease.
• To decide the EOQ, following information are required:
– Cost of Placing an Order
– Cost of Carrying Stock
– Consumption during the period
ICSI
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