MATERIAL COST- LEVEL SETTINGS
TOPIC: MATERIAL
COSTING
Sub Topic: INVENTORY CONTROL
Meaning of material control
Inventory control, also known as stock control, refers to the
process of managing a company’s warehouse inventory levels. The inventory
control process involves managing items from the moment they're ordered;
throughout their storage, movement, and usage; and to their final destination
or disposal. Many systems, processes, and technologies have been developed over
the years to help companies streamline the supply chain processes involved in
inventory control systems.
Objectives of Inventory
Control System
1.
Availability
of materials
2.
No excessive
investment in materials
3.
Reasonable
price
4.
Minimum
wastages
5.
Risk of
spoilage and obsolescence
6.
Information
about availability of materials
7.
Prevention
of misappropriation of materials by employees
Techniques of Material
Control
1.
Level
Setting
2.
Economic
Order Quantity
3.
Just-In-Time
Inventory System
4.
VED
Analysis(Vital, Essential and Desirable)
5.
Perpetual
Inventory System
6.
ABC
analysis
7.
Material
Turnover Ratio
8.
FNSD
Analysis(Fast moving items,Normal moving items,Slow moving itmes & Dead
Items)
9.
Material
Cost Report
I .Level Setting – Stock Levels
In order to have a proper control of material, the following levels are set:
1. 1.Re-Order
Level
2. 2.Minimum
Level
3.
3.Maximum
Level
4. 4.Danger
Level
5.
5.Average
Stock Level
1. Re-ordering level
This level normally lies
between the maximum and minimum stock level. This level will usually be higher
than the minimum stock level to cover for emergencies as abnormal usage of
material or unexpected delay in delivery of fresh supplies. The fixation of
this level normally takes into consideration the lead 'time (period of supply
or re-order period), rate of consumption and the economic ordering quantity.
2. Minimum level or Safety
level
Minimum Stock level Minimum
stock level points to the level of an .item of material below which the stock
in hand is not normally allowed to fall. In other words, it refers to the
minimum quantity of a particular item of materials which must be kept in stores
at all times.
This limit is fixed so as to avoid the
possibility of suspension of production due to . shortage of material. In
fixing this level the following important factors, among others are taken into
consideration: i) . Lead tirne i.e., time lag between indenting and receiving
of material .ii) Rate of consumption of material during the lead tirne iii)
Re-order level.
Minimum Stock Level -Formula
3. Maximum Stock Level
It is that quantity of material above which the
stock of any item should not be allowed to exceed. The main object of fixing
the maximum stock level is to avoid undue investment in stock and to use the
working capital in a proper way.
Maximum stock level is fixed
by taking into consideration the following factors:
I) Amount of working capital available
2) Normal rate of consumption of materials
during the lead time
3) Time necessary to obtain deliveries
4) Availability of storage space
5) Economic ordering quantity
6) Cost of carrying the inventory I a
7) Possibility of loss due to evaporation,
deterioration etc.
8) Extent to which price fluctuations may b,e
important.
9) Possibility of change in fashion, habit
etc., which may necessitate the change in
the specification of materials
10) Incidence of insurance costs which may be
important for some materials.
Maximum Stock Level
4.Average stock level
Average stock level is
usually calculated with the help of the following formula: 1(~inimum stock
level + ~-um stock level) 2 Depending upon the availability ;f information
Average stock level- Formula
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