CHAPTER II

Material-Purchase Control
Material control-Objectives-Essentials -Advantages-Purchase control---Centra
lised and decentralised--Merits and demerits--Function-Bill o> Materials-Requisi
tion-Selection-Order-Inspection-Material cost--Theoretical Questions

Material Control
he ba_ic.objective of.cost accpunting is-cost control. This .objective is attained by an
ettective control on each element f cost. Out of the three elements-material, labour and
CXpnse--the material element is the biggest or the highest proportion of the total cost
of poduction. The matqrial means and includes raw materials,_spare,. parts, components,
iactory supplies, packing naterials etc.-Thã ttm material controlmeans the regulation of
an organisation relatin to-procurement, _torage, and usage of materials in such a way_as
to naintain an even flow of production witlhout excessive investment in material stock. It
is al so defined "providing the right quantity of material of the right quality at the right
Line and place at the minimum cost". The quality of finished goods is also governed by the.
0mak ty of raw materials, which are used in the production. Hence material control is an
important function of the management.
Material control can be defined as "a systematic control over purchasing, storing and
xonsumption of materil, so as to maintain a regular and timely supply of materials, at the
sanne time avoiding over-stocking". There are mainly three stages where material control is
('xer:ised viz. at the time of purchase of materials, storage of materials.and issue of materials
i0 different jobs.
Objectives of Material Controls
The objectives of material controls are:
(1) To make available all types of materials and stores of right quality without any inter
ruption.
(2) To makepurchases of materials of required quality according to the standard fixed for
finished product.
(3) To make purchases of materials at reasonably low cost or at maximum economy.
Quality should not be lowered for the low cost.
(4) Investment in materials should not tie up huge amount of capital which may be used
Better in other activities. Moreover, over-stocking has itsown limitations. Maxinum
stock level should be fixed.
(5) To avoid abnormal wastage, leakage, etc. of the materials, store-keepers must be
traind tominimise theloss of stores.
(6) To avoid obsolescence of materials by adopting better method of issue of naterials.
(7) Toprovide the management with information of raw materials -cost, availability etc.
(8) To ensure proper storáge and ntilisation of materials.
Essentials of Material Control
Toachieve maximum managerial control on materials:
(1) There should be co-operation and co-ordination among the departments dealing with
materials-purchasing, receiving, testing, storage, production planning of materials.
67
 68
Cost Accou,
(2) Purchasing of naterials should be centralised under expcrt
trained. personnel. who have bC S
(3) All items in the store should be codified,
classified and standardised.
(1) Proper forms should be used for dealings of store items
issue, transfer, returv ol
material etc.
(5) Material storage should be carefully planned to avoid
losses from theft. deterioratioti,
damage, evaporation, pilferage etc.
(6) Store control measures, like ABC analysis and stock
(7) Stock at different levels should be fixed to verifcation, should be introduccd.
ensure that there is no shortage and Over
stocking of materials.
(8) Purchasing quantity should be fixed to reduce the
(9) Materials and supplies should be ordering costs and carry ng COst.
properly
(10) Requisitions and stock must be priced on astored.
suitable basis in order to cnsu e reiable
COsts.
(11) Receiving and inspection procedure must be
(12) Regular reports on materials purchased, issued, chalked out.
be obsolete, spoiled, defective tc. arc to
submitted to the
management.
Advantages of Material Control Malenals
Divet
A good system of material control will
facilitate:
(a) Elimination of waste in the use of
(6) Reduction of risk of loss on
materials,
account of theft, loss, fraud etc.,
(e) Availability of the right quality of material in
(d)
time,
Avoidance of overstocking,
(e)Possibility of economic buying,
) Reviewing and revising of product design and savings in material,
(9) Quick and accurate availability of data relating to stores,
(h) Preventions of production delays.
Purchase Control
An effective material control requires a
good amount of attention to the purchasin
procedure of mnaterials as to its cost., quality, volume, timely delivery etc. Low-cos nateria'
will refect in the finished product causing more
wastage, resulting in high cost and sut
standard articles. Lack of proper purchase interrupts the production.
of the aspects of material control; it generally starts Purchase con:rol is ono
with initiation of purchase r quisitio
and ends with receipt of materials by the stores and
payment of the bill. Gen rallv ;
iollowing procedures are adopted, in most. of the concerns.
Purchase Department
In small concerns, all the purchases of raw materials are done by the owuer
But in large firms, the job of purchasing is entrusted to an hinselt
efficient purchasing department..
headed by a purchase manager or chief buyer. He should possess the following
(1) He must pOssess a good knowledge of the requirements of the firm qualifications:
and know the
quality and grade requircd.
(2) He must know thesource of supply of needed store-items.
(3) He nust possess administrative and oiganisational ability.
(4) He must. have a good knowvledge of market. trends.
(5) He inust be conversant wit.h the Mercantile Law, Contract Act, Sale of
Insurance Act etc.
Gods Act
 69
Material-Purchase Control

integrity and honesty. dejpartnieni.

G He must be a nan of high Inaterial from store to the production
Heimust facilitatecontinuous flow of
alternate supply, if the regular supplier fails to supply.
(3) He nust develop decisions.
(9) He must be quick in takingknowledge of government policies. subordinates.
10) He should have
up-to-date
ground and good relations anmong his
in maintaining to him.
Il) Hc nust be tactíul in the execution of duties entrustedminimise the friction that
dependable
12) He must be co-operate, which is essential, to
ability to
I3) He must have day-io-day workings. him.
arises out of his for every rupee spent by
should be able to obtain maximum value are those which are
identified
11) He indirect. Direct materials weaving,
be direct or furniture, yarn in cloth
T'he materials may wood used in
subsequent process; any
centres or cost units. For instance, process to
of materials are those
WIth COst
construction of houses; finished product Whereas indirect
tncks in particular wYork or job etc. or cost
absorbed by cost centresquantity.
laterials purchased for a apportioned to or small
allocated but can be shoe-making etc. and are in
hich cannot be nail used in
of thread or
Iwits, for instance cost
Purchasing
Centralised Vs. Decentralised decentralised is a matter of policy
after
or
be centralised purchase means that all the purchases are
Whether'purchasing should factors. Centralised purchases are
Consideration of a numnber of Decentralised purchase means that the
departnent. nany advan
i1asle by the specialised departments. The centralised purchasing system has
Lrde by the individual
lapes nd is preferred.
Demerits of Centralised Purchase
Merits and
discount.
(a) Merits
made at a cheaper rate and at a good trade
1. Bulk purchase can be
materials can. be maintained through the specialised knowledge of
2. Quality of the
personnel.
possible.
3. Better layout of stores is made.
reduced, because bulk order is
1. Transport cost can be central place.
). All records can be kept in one
6. It avoids reckless purchases.
reducing obsolete articles.
i. There is the possibility of
is reduced.
8. Capital investment in stock
b) Dennerits
1. It involves high initial cost.
from the store, because many for
2. There may be delay in getting the materials
malities are to be complied with before issue.
issued.
3. It is possible that materials of wrong quality may be
il uay be concluded that centralised purchasing is preferred. But, in some cases,
where
the indivicual
iigi technically precious materials are required, the purchase can be made by
departnients.
Functions of the Purchasing Department
The sole function of the purchase deparment is to buy at reasonable price, materials
C ighH quality and supply thern when required, without interruption. This responsibility
i:volves the following:
70

A. Bill of Materials Cost

(Specification
It is a complete schedule of
of Materials)
materials and components needed for a particular vork wa
The buying department is informed
and other specifications of the through the bill of materials as to the
materials required for a particular work. The quality, quamtity
1. The purchasing
department is able to collect quoations, select advantages are
quick purchase when the indent is
received. suppliers and nake
2. If stock is
exhausted, initiate
3. Cost of a job can be purchase requisition.
fixed in advance.
4. The bill is
prepared in five copies, one for each of the following:
(a) purchasing department
(b) stores
(c) production section
(d) cost office
(e) office copy which is
retained
for reference.
For Job Order No. Specification of Materials Proforma
Drawing No..... Date..
Component Parts
Materials Purchase Department
Quantity
needed
No.
required
Description Reguisition
No.
Code.
No. Code.
No. Description Delivery
Date
S.No. Ramarks Order
No. Remarks

Drawing or Design Officer Store Keeper

sd. Purchasing Officer
Sd
Sd.

B. Purchase Requisition (Indent for

A purchase requisition is a formal Materials)
request, initiated
required to replenish the stock of items. Sometimes, theby the store-keeper, for the materials
purchase requisition is also
forras are used for this purpose. It is a initiated
by other departments. Generally printed
which the purchasing department is to make the basis on
in store; if not, purchase is initiated by the purchase. Regular items are alwavs held
storekeeper.
from the stores; as such the initiation of purchase Special items nay not be available
tion department. It is prepared in thrce copies one for requisition originates from the produc
each of the
department., production control department, and initiating department.following: purchasing
Purchase Requisition Proforma
Date
No.
Regular Date by which materials
Occassional are required
Special Work Order No:.
 71
Material-Purchase Control

For purchase departnent

To be filled by requisitioner
Rernarks
Supplicr Date of
S. No. Code Description Quantity Purchase
delivery
Order No.
No.

Approved by
Checked by Sd.
Requisitioned by Sd.
Sd.

C. Selection of Supplier the source of material supply is

to be selected.
The
purchase requisition, for all needed iterns.
Atter the receipt of department keeps a list of suppliers
concern--lowest price
Generally, the purchasing by keeping in view the benefits to the After re
quotation will be' called for, supplies according to the specifications etc. statement
reliable
better quality, quick delivery, opened at the time prescribed and a comparative
ceiving the quotations, they
are statement are given beloW:
quotation and the comparative
is prepared. Schedule of Schedule of Tenders
Ram Chand Co. Ltd., Jabalpur,
Indent No. Date

To
M/s Ramlal and Sons,
Delhi.
delivered
supplying the following items, to be A.M. on
Dear Sirs,
your competitive price for
Plea_esupply Aug. All the tenders will be opened at 11
.0.R. Jabalpur, on or before 31st Yours sincerely,
Ist Sept. .. for Ram Chand Co., Ltd.
Encl: one
(Purchasing Officer)
Proforma
Price Terms of Remarks
S. No. Description Quality Qty.
delivery
of items
4 5 6 7
2 ·

(1 to 4columns filled by the purchasing department)

Two copies are made out: one for the supplier and
the other to be retained.
Comparative Statement of Tenders Proforma
No.
Date....
Name of materials...:.....
S. No. Name of Rate Quality Time of Terms Remarks
Supplier per unit delivery
1 2 3 4 5 7
 72
Cost Accouiting
NOte: A separate scheduie is prepared for each item for easy verification of the ic
(lowest). Order will be given to thesupplier, whosc price is the lowest.. However, the quality
of items is to be the
main concern.
D. Purchase Order
After selecting the supplier, the purchase department proeeds to place the order for the
materials. It must contain all the particulars mentioned in the proformma. It is
cOpies (1) Original to the supplier (2) Receiving department (3) prepared in 5
Initiating department (5) one copy is retained in the purchasing Accounts departmn. (4)
department for reter1e.
Purchase Order Proforma
Ramlal Sons Limited
Gwalior,
To Dated 1st Sep.
M/s Krishnalal and
Brothers,
Agra.
Dear Sirs,
Your quotation bearing
ply the following materials Nc.......dated
in
16th Aug.............has been
accepted. Ple sc sup
accordance with the termis and conditions mentioned bclow:
S.No.
Description Rate Quantity Value Remaris
per unit required

Packing and despatching instructions

Terms of payment
Place of delivery
Discount allowed
Condition regarding empties
Freight
Special instructions
Receipt of this order may please be acknowiedged.
Yours sincerely.
for Ramlal Sons Lid.
E. Goods
Purchasing Offico
Received Note and Inspection of Materials
When the
ordered goods arrive at the
gOods with the help of the Delivery Note andfactory door, the clerk concerned verifios the
the copy of the purchase order. The pirsic:al
quantity and the quality of materials are
The Delivery slip, in duplicate, is supplied carefuily
by the
checked before passing them to the stor:.
the Delivery Challan is signed by the receiving supplier alongwith the materials. opyof
department
keeps it as a proof against the supply of goods; signing a and returned to the supplie, who
the acceptance of goods. In big concerns, an delivery note docs not constitute
and makes out a material inspection inspector is there who inspects all the natepriais
report.
 73
Material-Purchase Control.

Material Recejved Report Proforma

Date
G.R. No. Supplier's name
Purchase order no.
Rate Rernarks
. No. Code No. Description Quantity required

Inspected by
Received by Prepared by
Store-keeper
and one
Store L. F.
department, one to the accounts department
purchase
Three copies -one to the
Lo the intiating depårtment. Proforma
Material Inspection Report
Goods Received Note No.
No. Date
Purchase Order No.
From: (Supplicr)
Reasons
Code Quantity
S. No. Description for
No. rejection
Received Accepted Rejected

inspected by
Date of inspection
(Sd.)
purchase, receipt, stores, O/C)
(Four copies, one each to thedepart1nents of
Passing the Bill
received note, the bill of supply
With the help of the G.R. Note, Purchase order, Goods
verified. The items like invoice price,
oi materials is checked. Arithmetical accuracy is also
to be checked carefully.
fieight, sales tax, excise duty, cost of containers, discount etc., are accounts section, which
Having checked all these items, the bill is passed and sent to the
niakes the payment by accepting a stamped receipt.
Costing of Incoming Materials
From the point of view of proper cost accounting, expenses incurred in purchasing:
receiving and storing the materials should be treated as cost,of the materials purchased: This
Mill ensure that the jobs or products which use aparticular materials will be charged with the
Lotal ainount spent upon purchasing, receiving and storing that particular materials. In brief,
the cost of materials received at the store is decided by taking the following consideration:
(a) Invoice Price: Invoice price of the materials purchased is the net price after deducting
Lrade discount. The trade discount is an allowance made by the supplier.
(6) Freight: Materials are to be brought to the store. The freight charges paid for bringing
Lhe maverials to the store should a be addcd to the cost of materials.
74 Cost Account
(c) Tazes: It is usual that the supplier charges sales tax, Cxcise duty, customs duty cle.,
supplier should be added to the rost,
in the invoice. In such cases. taxes charped by the
Materials.
(d) Containers: The cost of the containers may be of three types:
(3) Returnable at a reduced rate. In
() Non-returnable (2) Returmable at the same rate
the case of:
(1) the cost of the containers is added to the cost of the materials;
and
(2) the cost of the containers should not be added to the cost of the materials;
the
(3) the difference between the full value and the reduced value should be adde io
cost of the materials.
(e) Discounts: Discounts may be trade discount, cash discount and quantity discouit.
(a) Trade discount is allowed when a supplirsells the materials to a retailer who. in
turn, resells the materials. Trade discount is deducted fom the purchase price to deternine
the cost of materials purchased.
(b) Cash discount is also known as purchase discount. Cash discount arises after the
materials have been purchased and is offered by the supplier to -his customer providel
payment is made at once or within an agreed stipulated time. There are two met.hods ot
reating such cash discounts:
) The cash discount received while purchasing materials should be deducted fron the
invoice price of the materials. Thus the materials cost price will be relatively reduced.
(ii) Alternatively, it may be treated as an item of financial nature, as an additional income,
and therefore be kept outsidethe purview of cost accounting.
(c) Quantity discount is areduction in price given by a supplier to all large users oe
his product. This discount is deducted from the purchase price in arriving at the mat erial:
cost price.
Illustration 1.
A consignment consisted of two chemicals A and B. The invoice gave the following data
ChemicalA-4,000 lbs @Rs. 2.50 per lb. Rs. 10,000
-do-B3,200lbs @Rs. 3.25 per lb. Rs. 10,400
Sales Tax 816
Railway Freight 384

21,600

A shortage of 200 lbs in Aand 128 lbs in B was noticed due to breakages. What is the
stock rate you would adopt for pricing issue assuming a provision of 5% towards further
deterioration. (B. Com. Mysore, Madurai, M. Com. Rajasthan)
Solution: Statement of Cost of Materials
A B

Rs. Rs.

Invoice value (given) 10,000 10,400

400 416
Sales Tax @4% (given)
213 17)
Railway Freight (Ratio: Weight) i.e. 5: 4
(A) Total: 10,613 10,98
Continued..
iMaterial-Purchase Control
75
Weight in lbs. 4,000 3, 200
Less: Shortage 200 128

3, 800 3,072
Less: Further deterioration 5% 190 153.6

(B) Net Weight: 3,610 2,918.4

Rate for issues (A) ÷ (B) 2.94 3.76
(per lb.)

Illústration 2.
The following quotation is received from Mr. Ain respect of a material item:
Lot price 2,000 units@Rs. 5.00 each, 4,000 units @Rs. 4.75 each, 6,000 units, @Rs. 4.00
cach
Trade Discount 25%, Cash Discount 5% (if payment is made within a fortnight), Freight
charges per order Rs. 200, Containers charged at Rs. 0.50 each.
One container is required for every 100units, and if the containers are returned within
two months, credit would be received at Rs.0.30 each. Calculate the material cost for 6,000
units, assurming that the purchaser is to purchase this lot.
Solution:
Statement of.Cost of Materials
Lot price 6,000 units @
Rs. 4.00 Rs. 24,000
Less: Trade discount 25% 6,000

18,000
Add: Freight 200

18,200
Add: Cost of returnable containers
60 containers @ paise 50 = 30
Less: Credit on return (60 × Rs.0.30) =18
12

Cost of Materials 18,212

Illustration 3.
A timber merchant purchased 1.000 c.ft. of timber logs on lst April @Rs. 100 per c.ft.
and stored them in his timber yard for six months for seasoning. In the timber yard the
following items of expenses were incurred during the period of seasoning:
1. Rent Rs. 1,250 p.m.
!. Salaries of 4 guards @ Rs. 250 p.m.
3. Incidental expenditure for maintenance, lights etc. 750p.mn.
4. Annual share of administration overheads Rs. 10,000
50% of the floor area of the godown and other connected operations were incurred for
sOcking the seasoned timber. Loss in volume of the logs due to seasoning should be taken
at 10%
76
Cost ACcou,
Calculate the selling price of the seasoned timber per
the profit margin on cost was c.ft. on lst October assuning th:
15%.
Solution: (1CWA)
Statement of Selling Price of
Seasoned Timber
Amount
Rs.
Cost of timber
Rent: (Rs. 1,250 x 6 x ) 1,00,000
Salaries of guards (Rs. 250 x 4 × 6 x ) 3,750
Incidental expenditure (Rs. 750 x 6 x ) 3,000
Administration Overheads (Rs. 10,000 x x )
2,250
2,500
Total cost (for 1,000 10% loss =
Add: Profit @ 15% on cost 900) 1;11,500
16,725
Total selling price
1,28.225
Selling price per c.ft. 1,28,225 + 900
142.47
(approx.)
Illustration 4.
Amanufacturer of Jabalpur
invoice gave the following details:purchased three Chemicals A, B and C from Bombay. The
Chemical A: 3,000 Kg. @ Rs. 4.20 per Kg.
Chemical B: 5,000 Kg. Rs. 12,600
@ Rs. 3.80 per Kg.
Chemical C: 2,000 Kg. @Rs. 4.75 per Kg. Rs. 19,000
Sales Tax Rs. 9,500
Railway Freight Rs. 2,055
Rs. 1,000
Total
Rs. 44.155
Ashortage of 200 Kg. in Chemical A, of 280 Kg. in
Chemical C was noticed due to breakage. At Jabalpur, the Chemical B and of 100 Ke. in
Rs. 220 for Chemical manufacturer
@ Rs. l0 per Kg. He also paid paid Octroi duty
cartage
Rs. 318 for Chemical C. Calculate the stock A, Rs. 630 for Chemic:l B and
rate that you would suggest for pricing issue of
chemicals assuming a provision of 5% towards further
deterioration. (CA)
Solution:
Quantity Available for Iss1ue (in Kg.)
Chemicals A B

Quantity Purchased 3,000 5,000 2.000

Less: Shortage 200 280 100
Quantity Received 2,800 4,720 1.900
Less: Further deterioration 140 236 95

Quantity available for issue 2,660 4,484 1.805

 77
Material-Purchase Control

Statement of Cost of Materials

A B
Details Pasis ILs.
Rs. Rs.

19,000 9,500
Given 12,600
Purchase price 950 475
Given 5% 630
.idd: Sales Tax 500 200
3: 5: 2 300
Railway Freight 472 190
@Rs. 0.10 per Kg. 280
Octroi Duty 630 318
220
Given
Cartage 10,683
14,030 21,552
Tot.al: 10, 683
14, 030 21, 552
4, 484 1,805
Rate of issue 2, 660 Rs. 5.92
= Rs. 5.27 = Rs. 4,80

ilustration 5.
containing two important materials X and Y
received one consignmeat information:
A factory has the some discloses the following
pertaining to 2,000
ind the invoice
Material X 1,000 Kgs. @ Rs. 2 per Kg. 1,920
Kg.
Materials Y 1,200 Kgs. @ Rs. 1.60 per 98
Insurance 110
Freight etc. 196
Sales Tax and 12 Kgs. cf
factory store, loss of 20 kgs. of Materials X
Due tÍ mishandling in
the
would adopt for issuing these materials to jcbs? If
rate you new
Alateriais Y' was recorded. What probable risk of obsolescence, what would be the
jprovision of 20% is to be
made for (B. Comn. Madurai, MS)
tae?
Materials
Solution: Statement of Cost of
Material I'
Material X
Rs.
Basis Kg. Rs. Kg.
1.920
2,000 1,200
1,000 48
Price as per invoice 50
Add: Insurance 200: 192 60
50
10: 12 96
Add: Preight 100
Add: Sale's Tax 200: 192
2,200 1,200 2,124
Total
1,000
12
20
Less: Loss of weight 1,188 2,124
980 2,200
980 = Rs. 2.24 2,124 1,188 == Rs. 1.79
Rate of Issuc
2,200
1ates will e:
20% is to be made •or the risk of obsolcscence, then new
fa provision of Materials X
Materials Y
Rs. 2.24 Rs. 1:79
0.45 0.36
: Add: 2G%
2.15
2.69
New Rate
78
Cost Account1r
Illustration 6.
Amual demand for a particnlar item of iventory is 10,000 units. Invetory caine
cOst per unit per year is 20% and ordering cost is Rs. 40 per order. The price quoted by the
supplier is Rs. 4 per nit. However, the supplier is willing to give discount of 5% fot ordes
of 1,500) units or more. ls it worthwhile to avail of the discpunt offer?
Solution:
Total Cost
Details With Disco un t Without Discount.
Selling price per unit Rs. 3.80 Rs. 4.00
(Rs. 4 - 5% of Rs. 4)
Carrying cost per unit Rs. 0.76 Rs. 0.80
per year - 20% (20% of Rs. 3.80) (20% of Rs. 4.00)
EOQ 2 x10. 000 x 40
V20% of Rs. 4
V10, 000
Minimum order quantity 1,500 units = 1,000 units
Purchase cost 10,000 x Rs. 3.80 10,000 x Rs. 4 = 40.00)
= Rs. 38,000
10, 000
Ordering cost =7 orders
1,500
7x Rs. 40 = 280 10, 000
X Rs. 40 = Rs. 00
1,000
1.500 1,000
Carrying cost x Rs. 0.76 x Rs. 0.80 = 400
2
= Rs. 570
Total cost Rs. 38,850 Rs. 40,800
Savings on discount Rs. 1,950
(Rs. 40,800 Rs. 38,850)
It is worthwhile to avail discount.

THEORETICAL QUESTIONS
1. What is meant by Bill of Materials? When will you recommend drawal of
stores uider Bill
of Materials as opposed to individual requisition? (CWA
2. Describe briefly: (a) Purchase Requisition (b) Purchase Order (c) Goods Received Note
(d) Goòds Inspection Report (e) Supplier's Invoice (1CHA
3. Give a specimen form of purchase order. What main points, clauses and instructions must
appear prominently on the face of a purchase order?
4. What is Goods Received Note? Give a specimen form and state
what purpose it serves,
5. What type of costs are normally included in material costs? Give example.
6. Distinguish between Bill of Materials and Material Requisition. Give specimens
7. What is meant by centralisation of purchasing? Explain its advantages brielly and pont our
the disadvantages.
8. Describe fully the procedure in purchase and stors department necessary for the ticent
purchasing of materials up to the stage of receipt inio store.
(ICWA., M. Com., Sagar, al utte'
9. One parcel containing two important malerials was received by a factory and the iuvoxce
discloses the following information:
Material-Purchase Control 79

Materials I 1,000 Kg. @Rs. 3 per Kg. 3,000

Materials II 600 Kg. @Rs. 2.50 per Kg. 1,500
90
Insurance 180
Sales Tax
225
Freight etc.
Material Iand 9 Kg. of Material li
Due to mishandling in the factory store a Joss of 10kg. of these naterials to jobs ? And also
issue of
1s to be allowed. What rate would you adopt for probable risk of obsolescence.
calculate the rate, if provision of 10% is made towards
(ICWA, P. Cotn. Keralaj
(Ans: Rs. 3.35 and Rs. 2.83 per Kg.
Rs. 3.73 and Rs. 3.15 per Kg. after provision)
 Material

depart11
CHAPTER IV A plau1
stores I

Material Inventory Control a. centr

racks, a
Store-keeping--Functions of store-keeper-- Store layout--Types of stores-Centra are knc
lised-decentralised--Central store with suustores-inimum level-Maximum slhelves,
level--Reorder level-Danger level-Economic order quantity--ABC Analysis Proper
Classification and codification-Inventory systems- periodC and perpetual-Bin card evapora
Store ledger-Distinguishment-List of formula-Theoretical. Questions-Practical
Problems. Types
The
there a
Store-Keeping combim:
When the naterials have been received by the goods clerk according to the purchase 1. C
order, it is passed on to the store, along with the goods inspection report. The store is a issued {
service department, headed by the stores manager or store-keeper, who receives the thaterials
and issues them. The duty of the store-keeper is not only io receive and issuc of materials (a) B
but also many other functions to be complied with as his position is that of managerial (b) B
level. Astore-keeper must be a man of integrity, honesty and punctuality. The store-keeper, (c) Li
who is comparable to the cashier of a bank or an organisation, takes initiative in locating (d) M
the differences in stock if any. (e) B
(f) E
Functions of the Store-Keeper (9) A
The cost. of raw material is the largest element of cost. Therefore it is imperative that pi
utmost importance should be given to storekeeping. The mä n functions of the store-keeper (h) T
are given below: (2) C
(1) He must receive the materials, store them properly ar.ording to the goods inspection () Ir
report or the vöice. (K) P
(2) Materials are classified according to the nature, size, t hape, price etc. He must place (1) B
them in definite places (racks or bins) and number tiem for easy identification. (r) M
(3) He must initiate the purchase requisition, when the iaterial reaches ordering level. (n) Si
(4) He should no: allow unauthorised persons to enter i"othe store-room. Disad
(5) He must maintain thestock registers, entering therein all reçeipts,issues and balances. (a) C
(6) He should make issue of materials only upon written material requisition, duly signed (5) D
by anauthorised person. (c) T
(7) All items must be entered in the bin cards andthis mv tally with the ledger balances. (d) o
(8) The loss due to cvaporation, leakage, theft, etc., must be kept at minimum. (e) B
(9) He must arrange for physical verification of store iterrs, periodically.
(10) He must keep the stores always neat and tidy. 2. I
(11) Hemust readily supply information of materials,stock position etc., whenever needed. The pu
(12) If there is any shortage or deficiency, he has to try to ird out the cause; if not possible. In shor
it must be reported to the managenent. 3. (
Store Layout Stores (
place f:
To facilitate prompt reccipt and issue of materials they .st he arranged through a well: the pro
planned system, assigning a definite place for each and ery iem. As far as possible the to the
store should be placed near to the material receiving depar nen: in order to have economy requisit
in transportation charges, and at the same time as far as Ossi ble near to the production similar
80 The
 1m
t inim:
nise

lo
t f fee r

ers

Tel

3 .

81
Material lnventory Cor 'rol
uses the::
departnnent. Bulky iiems of stores .::ay be placed near to the department, which
necessary, sul
A planned location of storc will facilitate easy movement of materials. II
is purely
stores may be created an leavy or bulky materials 1nay be kept Lhere. If the store
a centralised one, all the .tems should be kept there only. The store should be divided into
racks, and further divide:.. nto small ones. All these places, where materials have been kept
-Centra are known as bins. One'em of storcs is to be kept in one bin. Bin is a place---racks,
Maximum
inalysis - shelves, boxes etc., whe the materials have been kept. All bins are serially nunberei.
-Bin card Proper attention must be paid to the storage of materials whiclh are liable to be affectod by
-Practical evaporation or leakage.
Types of Stores
The size, type and -olicy of the industry will decide the types of stores. Generally,
there are three types of stores: (1) Centralised stores (2) Decei:tralised stores and (3) A
the purchase combination of the two i;., centralised stores with sub-stores:
The store is a 1. Centralised Stor s. This is a system of store, where na arials are rcceived by a:
the materials issued from, one-store der:rtment. The advantages are:
e of materials
(a) Better supervision : stores is possible.
of managerial (b) Better layout of st cs and control are possibi.
store-keeper,
ve in lorating
(c) LeSs space is requi. d, as storcs are kept at mininum.
(d) Minimum inve:stmi: in stores is facilitated.
(e) Better forecasting .irequiremcnts of materials is possible.
() Economy in staff ai.l stationery, means, economy in cost.
a) Ahighly specilise:: purchaser can be appointed for securing maximum
perative that advantage in
! store-kceper putchasing.
(h) Timtly flow of ma. rial is facili ated.
(i) Constant and asy. ock-taking is possible.
!s inspection ) Improved techniquu can be adopted.
(k) Possible to ob..erv uniform code system andspecificatio. s.
e must place (1) Better safety nd .uriy of stock.
cation. (m) Mininum wastage.
ering level. (n) Sin1plifed procedu:s for issue. y

Lnd balances.
Disadvantages
(a) Cost of materials :.ndling nay increase.
duly signed (b) Delay is generally und.
(c) The risk of loss by ire is grcater.
ger balances. (d) Overcrowding of m:ierials wili affect storing and control.
Im. (e) Breakdown of tian:9ort will adversely affect
() Speciic needs of iividual de)partments tendproduction.
to incur loss.
2. Decentralised Sores. This is a system
where cach dep:lment has its own stores.
ever nccded. The purchasing and han. ing of materials are undertaken by the
In short all the disadval ges of the buyer of eachlepartment.
n0t possible, centralisèd purchase are av. led, under this systenn.
3 Central Stores ith
sub-stores. This system is also k:iJwn as Inprest System .f
Stores Control. In big fa ories, in case the production
place from the stores, in rder to minimise the handlingdepartmets
are situated at a dista:.
ough a weil clharges, a sub-store is fornled ne .r
the production dep..rtm at. A fixed quaitity of materials is iss d by the
possible the to the sub-stores, at b ming of tlhe period. At tlie end of Central Stor s
"e LCOnomy he periodl, sub-stores make
requisition fron the ce. l stores to bring the stock to
prcduct ion sinilar to petty caslh sy. n.
pre-determied level. In brief it is
The chief advan.age:: re:
 Cost AcCounting Material Inve
1. It minimises the demerits of centralised store. 2. Maxi
2. It offers services to mect the special needs of incividual depäztments. to rise. Thi:
3. It relieves the central stores of the burden of sundry issucs. stock. If it
4. Many sub-stores allow room for improved store nanageme:. (1) Capiti
5. It facilitates easier location of discrepancies in stores. (2) More
6. It avoids delay in issuing materials. (3) Deteri
Fixation of Stock Level (4) Therc
(5) There
As a planning function, the management decides well in advance what quantities of The ma:
raw materials should be m¡intained, when re-order should be pls ced and what should be held in stoc
pörchased. Decisions with regard to the quantity of materials to be stocked are reached after does not ex
considering the following points :
1. Time lag (lead time) The na
2. Consumption rate (1) Avail:
3. Investment in inventories (2) Space
4. Store capacity (3) Rate
5. Nature of materials (4) Reorc
6. Cost of storage (3) Deliv
7. Market conditions (6) Chan
8. Changes in prices (7) Cost
9. Economic.order quantity (3) Possi
10. Loss due to deterioration, obsolesceFce, theft etc. (9) Seasc
By lead-time, we mean that the time that lapses between the raising of the indent by
(10) Restr
the store-keeper and the receipt of malerials by him. It is of fundamental importance in
(11) Econ
(dotermining inventory levels. The level of inventory of a: iten: wiii depend upon the length
oi lead-time. The longer the time, the higher will be the level cf inentory holdings. If Formula:
tie procurement time is of short period, the stock level is likely. «o be fixed'at moderate Maxim
quantities since there is nc problem of replenishment of materials. in ca.se lead-time is long,
tlhe quantities to be maintained will be at a higher level.
The purpose of material control is to maintain the stock of aw materials as low as 3. Rec

)
psssible, and at the same time they may be made available as and when required by the store-keepe
production depatment. There may be ovetstocking or understocking, if there is no chalked maxinum
out planning. Overstofk means blocking up the capital and it leads to deterioration or obso the minim:
lccence. On the other hand, understocking will hold up the production and cause idleness. reordering
Customers may turn away on account of failure of timely supply. 1refore, the store-keeper supply. TE
must fix the inventory level iwhich is also kmown as the demand Aud supply method of in: quantity.
ventory control. The diffe. ent stock levels are: (1) Minimum stoc} level (safety stock), (2) Orderir
Maximum stock level, (3) Reorder level, (4) Danger level and (5) Reordet quantity. delivery, ((
1. Minimum Stock Level (Safety stock). It is the level below which stock of materials The fol
is never tofall. If the stock ytoes below this level, there is every possibility that the production 1. The
may be hcld up for want oimaterials. Minimum stock is a safety eek or bufer stock. 2. The
The exact quantity wl,ich the minimum level represents is determined by the rate at 3. The
which an item is used, its importance in the process, the normal procurement time, whether. the c
substitutes are available and by other similar factors. It is advisable to carry a reserve 4. Mini
or safety stock to prcvent stock out. The safety stock should b used only in abnormal 5. Cost
circumstances.
1. Dai
Minimum Stock Level : Reordering Level (Normal consun:r.tion x Normal Reorder at which r
period) .When the

Rederny levt
 Pec
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84 TOr
wan
mak

ost Accounting Material lnventory, Control 83

2. Maximum Stoci Level,It is the stock lvel above which stock should not be allow: d
to rise. This is the mnax:num quantity of stok of raw materials which can be had in the
stock. If it goes above, it will be ovGastockin¾ The demerits gre.
(1) Capital is blocked
(2) More space is neeed.
(3) Deterioration of stocks is possible.
(4) There will be loss eto obsolescence.
quantities of (5) There is the iangerof depreciation in value.
at should be The maximum level badicates khe maximum quantity of an item of material that can ie
reached after held in stock at any time The stock in hand is regulated in such a manner that normaly, it
does not exceed this lev &
The maximum level fixed by considering the following:.
(1) Availabiity of cajsfal.
(2) Space available in' Stores.
(3) Rate of consumption.
Re rdHmy
(4) Reorder level.
(5) Delivery time to obtain fresh stock.
(6) Changes of price.
(7) Cost of maintaini ag the stock.
(8) Possibility of change in fashion.
(9) Seasonal nature of supply.
- ne indent by
(10) Restrictions impo: ed by governments.
iportance in ns mphm
(11) Economic order yutantity.
n the lerngth Formula: :

holdings. If Maximum Stock L:el =

PeroÁ
(Reorder Level + Reordering Quantjt) e 6 e lavel
at moderate
time is long, (Minimum Consumption x Minimum Delivery Period)
ls as low as 3. Reorder Leve Ordering level) (= when to order.It is th point at which the
lired by the
store-keeper shoul inqte purchase requisition for fresh _apply. Thi_level lies between the
S no chalked
maximum level and the minimum level. The reordering point :s fixed slightly higher ti ani
ion or obso the minimum stock infuch a way hat the/difference between the ninimum level and the
use idleness. reordering level is sufhcient to meet the emand for production up to the time of fresh
supply. The level depends upon the lead time, rate of consu:nption and economic order
store-keeper quartity.
cthod of in
i stock), (2) Ordering level = i. nimum lrel + Consumption during the time requird to get frush
Itity. delivery, (or) = Maximum consumption x Maximum reordering period.
of naterials The following facter: are to be taken into arcount:
:production 1. The margin of safoty
r Stock. 2. The consumption fate
the rate at 3. The normal delivery time i.e., the time that would lapst between the date of placing
me, whether the order and of tne arrival of supplies.
y a reserve 4. Minimum Stock level
n abnormal 5. Cost of storage

nal Reorder 4. Danger Leveli|angcr point). This level isbelow the minimun quantity. It is a level
at which normal issues of the materials are stopped, but issueu under special instructions.
When the materials reah below the minimun level, i.e., dang levd, the store-keeper must
84 Cost Accounting Materi

make special arrangements to get fresh issues, so that the roduction may not be held up Ave
for want of materiaus.
An
Danger level = Average rate of consunption x E"ergency supply time
Avc
5. Economicorder quantity (EOQ). (Reordering qu atity). It is not a stock levcl. It Illust
is a quantity to be ordered when the stock reaches the miinum level. Rcord: quantity is
Cal
such that when it i added to the minimum stock, it should not exceed the yaximum level.
A
It is the quantity_of inventory which can be reesonably o.dered at a time and purchased
economically. It also known as standard order quantity. ptimum quantity or ccononic
lot size. It means that the total cost is. at mivinum. Th problem is, how much to buy Pi
Ct
at a ime. In qse, : rge quantities are to be purchased th cost of carrying the inyentory
is high. This iuclud *interest on investment, obsolescence, werst.ocking, losses, space, eost s Sol
elc. On tlhe other ha fd, for frequent purchases, in smallqua. tics, the cost is high--short of
materials, loss of sales, inçreasgd buying expenscs such as st: ionery, postage tc. Therefore,
the quantity to be Gdered depends upon two factors, i.e., he acquisition cost and the cost
of possessing naterials. When forder for material is placcu. ituust facilitate more trade
discount, economny in transporf etc., and at the same time i shoul not incur heavy charges
on account of storage, insuraçe etc.
2AB
Formula EOQ VCs
E.0.Q. Econ Tmic order ant ty
A Annual consuinj: 1on (or
Buying cost per der
C Cost er unit
Storage and carring cost. (or
The
eEyQ s lixed insuch a man1ier as to minimise the cest of ordering ard ca1ying the Ilust
stock. is, ordeing cost and inventory carrying cost.
Th
Ordering costs: These arise out of the foll:wing facto.s: Decen1
(o) Rent for the spaçe used by purchasing departnent.
(b) The salaries a:.d wages of staff in the depart1ment.
(c) The deprrciatton on the equipnent and furniture by 4he department.
(d) Postage and tlephone bills. Ca
(e) The stationery and other consumables neecled by the staff. invent1
) Travelling expenses, if any. So
Inventory carrying cost: These aise out of the follo: ng factors:
(a) Loss of intere: on the capital inýested in taaterials.
() Rent for t.he torage space.
(c) Salaries of tlhe store keeping department.
(d) Any loss lue to pilferage and deterioratioL
(e) Storcs insurane charges.
() Stationcry etc. used by the stores. (i
(g) Taxes on inve::tories.
Average Stock
The level indicat.2s the average stock held by the firn. is calculated by the following
formula:

.
 F rt
ohm
L ea
vne

85
Cost Accounting Material Inventory ControB
1
not be held up
Average Stock Level = Maxinum Level + Minimum Level x
A more refined method of measuring average stock level is give:: below:
time
Average Stock Level = Minimum Stock Level t;2 (Reorder Quantity)
a stock level. It Illustration 1.
rder quantity is
Calculate Economic Order Quantity from the fcllowing information:
maximun level.
Annual usage 600 units
and purcihased
ty or econoic Cost of placing an order Rs. 12
V much to buy Price of material per unit Rs. 20
Cost of storage 20% (B. Com. MS, Madurai)
3 the nyentory
Ses, space coSts Solution: 2AB
high--slhort of EO0 =
etc. Therefore, V CS
st and the cost Annual consumption = 600 units
ite more trade = Buying cost per order = Rs. 12
heavy charges Cot per unit = Rs. 20
Inventory carrying cost = 20%

2x 600 x 12 |2x 600 ×12

(1) = 60 units
20 x 20% 4

2 × 600 × 12
(or) (2) 60 units
20
20 ×
100
|2 x 600 × 12 x 100
(or) (3) = 60 units
20 × 20

Icarrving the Illustration 2.

The following data are available in respect of a material X lor the year ended 31st
December:
Opening Stock Rs. 90,000
Purchases during the year Rs. 2,70,000
Closing Stock Rs. 1,10,000
Calculate () Tnventory Turnover Ratio, and (i) Number of days for which average
inventory is held. (CA, B. Con. Kerala, MS Agra)
Solution: Rs. 90,000 + Rs. 1,10,000
Average Inventory 2
Rs. 1,00,000
Cost of materials consumed
(i) Inventory Turnover Ratio Average value of stock
Rs. 2.50,000
2.5
1,00,000
(iü) Number of days fo: which Days during the period
average inventory is hld
Inventory Turnover Ratio
360
= 144 days
2e following 2.5
Material consumed Opening stock + Purchases - Closing stock
90, 000 + 2, 70, 000- 1, 10, 000= Rs. 2,50,000
 Cost Accounting Material Inventc
(llustration 3.
Cor
From the following info:mation, you are required to calculate Ord
Level and Ordering Level for Materials X and Y: iaximum Level, Minimum Cos
X Sto:
Y
Normal usage per week 150 200 Solution:
Reordering Quantity 900 1,500
Maximum usage per week 205 250
Minimum usage per week 75 100
Reorder period (weeks) 12 to 18 6 to 12

(ICWA, B. om. Chennai, Calcutla)

Solution:
(1) Ordering Level Maximum Consumption x Maxinn.n Reorder Period
Material X 225 x 18 wecks= 4,050 units
Material Y 250 x 12 weeks = 3,000 units
(2) Maximum Level Reorder Level+ Reordering Quan ity
(Minimum usage x Minimum deliry time)
MaterialX = 4, 050 + 900 (75 x 12 weeks) =4J50 units
Material Y 3, 000 + 1,500 (100 x 6 weeks) =* 3,900 units Number o:
(3) Minimum Level = Reorder Level - (Normal Consun1rtion x
Normal Reorder Period)
Material X 4, 050- (150x 15 weeks) = 1,800 units
Material Y = 3,000 (200 x 9 weeks) = 1,200 inits
Ilustratio
Illustration 4.
A compan
A factory requires 1,500 units of an item per month, each corting Rs. 27. The cost per
a purchase or
order is Rs. 150 and the inventory carrying charges work out to 2u per cent of the average value of the i!
inventory. Find out the Eonomic Order Quantity and the numbe of orders per year. order to I:ini
(ICWA) Solution:
Solution:
Anncal consumption = 1,500 x 12 = 18,00
/2AB
EOQ VCS
2 x 18, 000 x :0
20
27 x
100

V10, 00, 000

1,000 units Illustratio
18, 000 units A firm is
No. of orders per year
1,000 units
18 orders per year

Illustration 5.
Caleulate the Economic Order Quantity from the following inf rmation. Also state the
number of orders to be placd in. a year.
 annu

Th
anen u a l
per
Y o
aur
reeq

cost

terial
Sol

Cost Accounting Material Inventory Control

Consumption materials per annum 10,000 kg.

Order placing costs per order Rs. 50
Level, Minimum Rs. 2
Cost per kg. o! raw materials
Y
Storage costs 8% on average in inventory (B. Com., Madurui)
200 Solution:
,500
2AB
EOQ = V. CS
250
100 A Units consumed in a year
o12 B = Order placing costs per order
nnai, Calcutta) S Inventory carrying costs
Cost per unit
er Period 2x 10,000 x 50
2 x 8
100
/2 x 10, 000 × 50 x 100
16
V62, 50, 000
ts
2,500 kg.
Number of orde:s to e placed in a year:
Total qantity required per year 10, 000
Ecc.amic order quantity 2, 500
4 orders per year.

Illustration 6.
A company uses 10,00 unitsper year of an item costing Rs. 5each. The cost of processing
The cost per a purchase order is Rs. :00 and the stock holding cost amounts to 20% per year of the money
f the average value of the inventory. How much should the company buy at à time (in a single order) in
Der year. order to minimise the inventory costs? (I.C. W.A. Fina)
(1CWA) Solution: 2AB
EOQ = 1 CS
2x 10, 000 x 100
20
x 5
100
= /20, 00, 000
1,414 units (appróx.}
Illustration 7.
A firm is able o ohiain quantity di_counts on its orders of naterial as follows:
Price pE" tonne Tonnes
Es. 6.00 Less than 250
5.90 250 and less than 800
5.80 800 and less than 2,000
SO state the 5.70 2,000 and less than 4,000
5.60 4.000 and over