MATERIAL CONTROL

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

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, Balance Sheet

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 investment in inventories or M. control is a system which ensure that right quality of M. is available in the right quantity at the right time and right place with the right amount of investment

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.]

Why control materials ?

So that we always know how much material is stored 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 well as 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 of customers Loss of reputation on ability to service customers

Aspects of Material Control

There are three primary aspects in Materials Control: Purchase / Procurement Control Stock / Inventory control [levels] Materials Issue / Valuation

Physical Control of Materials

Limited access to materials storage areas.
Segregation of duties. Accuracy in recording.

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.

A1: Procurement Documents

1. Purchase requisition the form used to notify the

purchasing agent [ store-keeper] that materials are needed for a job. Prepared by the Dpt needing material.

2. Purchase order requisition that gives the purchasing agent authority to order the materials. Usually issued by Finance personnel in Stores Dpt.

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

A2: Goods Receiving from Supplier

4. Goods Received Note [GRV] form that the 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.

A3: Control During Storage and Issuance

6. Materials Requisition Note: Prepared by the authorized factory personnel to withdraw materials from the storeroom. 7. Materials Return Note: Describes the materials being returned to the storeroom and the reason for the return.

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

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. receive material 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 is sent 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 stock levels :

1.

It is impossible to get the right amount of stock at exact time from a supplier. In order to minimise the associated with carrying stock cost

2.

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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 reorder 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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Four Level Settings (Cont)

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 reordering period) OR = ROL - {Min C x Min RP} + RQ
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Four Level Settings (Cont)

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 of inventory 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 a period of time.
Ordering costs may include the salaries and wages of purchasing personnel, communication costs, and materials accounting and record keeping. Carrying costs are the costs that a company may incur in storing materials. These costs may include materials storage and handling costs, interest, insurance, and property taxes, loss due to theft, deterioration, or obsolescence, and records and supplies associated with carrying inventory.
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Formula to Calculate EOQ

EOQ = Economic Order Quantity C = Annual Consumption of EOQ = the material O = Cost of placing one order Cc = The costs of carrying each item of stock per annum i.e., holding costs of Inventory.

2CO Cc

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Alternative Formula
EOQ = 2DCo Hs

Where :

D Co Hs

= Annual demand, = ordering costs = 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 level 5. 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 Minimum stock level: = 1 200 kgs

= 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

Or

= [Min Stock level + Max SL]/2 = [675 +1400]/2 = 1037.5 kgs 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 for the year ended March, 2010. Annual demand (units) Cost of placing an order (P) Annual carrying cost (P. per unit) Normal usage (units per week) Minimum usage (units per week) Maximum usage (units per week) Re-order period (weeks) Required to calculate: 1. Economic Order Quantity 2. Re-order level 3. Minimum stock level 4. Maximum level 5. Average stock level
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12 000 100 15 50 25 75 4-6

Problem 3: Suggested Solution

1. EOQ EOQ =

2x12 000 x P100 P15

= 400 units

2. Re-order quantity Maximum consumption x Maximum re-order period ROL= 75 units x 6 weeks = 450 units
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3.
= = = =

Minimum level
Re-ordering level (Normal consumption x Normal re-ordering 450 units (50 units x 5 wks) 450 250 200 units period)

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 2 or : [ 400 units]

Max SL + Min SL 2

[475 units]

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Problem 2:

Flint Company uses 9 000 units of part AK-4 each year. To get better control over its stock, the company is anxious to determine the economic order quantity (EOQ) for this part. Required: 1. The company has determined that the cost to place an order for the part 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 P1.50 to 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 the EOQ to go up in one case and to go down in the other? Question Adapted from Garrison, 2003.

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Problem 2: Suggested Solution

See Word File

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