Unit 02 : Materials
iii
it in
Meaning classification ofMaterials
AMaterial is any commodity consumed in the processofproduction It is defined as
anything thatcan be stored stacked or stockpiled
It is broadly classified into two types
DirectMaterial directcost
of a material is any costofmaterial that can be directly
allocated to a costobject or cost centre in an economically feasibleway
it includes any components or partsinvolved in production
any
material wholly used in the production process and
anyprimary
packaging material
Eg cotton in tyres in cars etc
tshirts
IndirectMaterial an indirectcostof a material is any costthat cannot be easily identified
with a costobject or a cost centre
Eg oil coal grease etc
Theterm inventory includes stock of raw materials components work in progress and
finishedgoods It can bedefined as the aggregate of those items of tangible personal
property that are held
forsale in the ordinary course of a business undergoing the
production process
forsuch sale or currently consumed in the process ofproducing
goods services to be availableforsuch sale
Material Control
Material control is also referred to as Inventory control It can be defined as the
systematic control and regulation ofthe purchase storage andusage ofmaterials so as t
maintain the evenflow
of production and avoid excessive investment in materials An
efficient material controlsystem helps in cutting losses and avoiding wastage
ofmaterials
AnyCost Accountingsystem is noteffective without a proper and efficient materialcontrol
system Thisis because material is single handedly the largest component ofcost and an
efficient material controlsystem leads to significant economy in totalcost Material is as
muchcash as cash itself and excessive investment would leadto
any theft wastage or
financial damage tothe business
significant
,Agood Material control system should be comprehensive enough to cover purchase system
storagesystem issue to production and inventory levels
Significance or objectives of Material control
NoUnderstocking runningoutofmaterials at a time urgentlyneeded understocking delay
inproduction nonavailability greatercosts loss in profits
NoOverstocking investment inmaterials low as possible production requirements financial
resources
highstoragecosts locks upcapital adverse effects on profit Iondue
to obsolescence
Economy in Purchasing highlyspecializedfunction favourableprices purchaser is able to contribute
to overall reduction incost
Proper Quality whilepurchasing dueconsiderationtowardsquality nothighly superior nothighly
inferior everyproductneeds a certain quality thatquality alonepurchased
Minimum Wastage avoidwastage properstorage deterioration obsolescence evaporation pilferage
theft allroundefforts differenttypes
ofmaterials
Information on Materials available when required system togivecomplete allrounduptodate
info on availability ofmaterials inadequate info new purchases ofmaterials
already instock
Techniques
ofMaterialControl
ABCTechnique
EOGTechnique
Stocklevels
HML Analysis
FNSD Inventory Analysis
I Inventory
VED Analysis
TurnoverRatios
ABCTechnique Selective control
ABCTechnique is a value based system that analysesmaterials according to their value so th
costly valuable materials can greater attention and care Therules regarding the
get
purchase issueand storage ofmaterials are all fined according to the value and
, importance
ofthematerials
also called Always Better ControlTechnique
items are classified according to theirvalue high A medium B low c
selectivecontrol
concentrating effort on those materialswhere attention is needed
unwise togiveequal attention to all items in stock
itemsare ranked in order oftheir descending value importance quantity
category 1ageofvalue ageofqty typeof control
ensures materialmanagementfocuses attention where needed most
Alterns highvalue smallpercentage oftotal qty highlysophisticatedcontrols
responsibility ofmost experienced personnel highcapital investment cost
Bitems mediumvalue items normal or routinecontrolprocedures lesserattention
CItems lowvalue items largepercentage of totalitems simple economical
controls
Advantages of ABCTechnique
Useof highly sophisticated secure techniques where high capital is invested
selective control helps maintain highstock turnover rate
maintaining safety stock of C levelitems
economy in stock carrying costs
investment in inventory is regulated enabling use of funds in best possible
way
Fination ofstock levels
Toguardagainst understocking and overstocking large companies adopt a scientific
approach byfining stock levels
These levels are Maximum level
Minimum level
Reorderlevel
Reorder
Quantity
By adhering to these levels each material is automatically held within appropriate limits of
control Modern inventory management makes use
of operations research statistical
iii
it in
Meaning classification ofMaterials
AMaterial is any commodity consumed in the processofproduction It is defined as
anything thatcan be stored stacked or stockpiled
It is broadly classified into two types
DirectMaterial directcost
of a material is any costofmaterial that can be directly
allocated to a costobject or cost centre in an economically feasibleway
it includes any components or partsinvolved in production
any
material wholly used in the production process and
anyprimary
packaging material
Eg cotton in tyres in cars etc
tshirts
IndirectMaterial an indirectcostof a material is any costthat cannot be easily identified
with a costobject or a cost centre
Eg oil coal grease etc
Theterm inventory includes stock of raw materials components work in progress and
finishedgoods It can bedefined as the aggregate of those items of tangible personal
property that are held
forsale in the ordinary course of a business undergoing the
production process
forsuch sale or currently consumed in the process ofproducing
goods services to be availableforsuch sale
Material Control
Material control is also referred to as Inventory control It can be defined as the
systematic control and regulation ofthe purchase storage andusage ofmaterials so as t
maintain the evenflow
of production and avoid excessive investment in materials An
efficient material controlsystem helps in cutting losses and avoiding wastage
ofmaterials
AnyCost Accountingsystem is noteffective without a proper and efficient materialcontrol
system Thisis because material is single handedly the largest component ofcost and an
efficient material controlsystem leads to significant economy in totalcost Material is as
muchcash as cash itself and excessive investment would leadto
any theft wastage or
financial damage tothe business
significant
,Agood Material control system should be comprehensive enough to cover purchase system
storagesystem issue to production and inventory levels
Significance or objectives of Material control
NoUnderstocking runningoutofmaterials at a time urgentlyneeded understocking delay
inproduction nonavailability greatercosts loss in profits
NoOverstocking investment inmaterials low as possible production requirements financial
resources
highstoragecosts locks upcapital adverse effects on profit Iondue
to obsolescence
Economy in Purchasing highlyspecializedfunction favourableprices purchaser is able to contribute
to overall reduction incost
Proper Quality whilepurchasing dueconsiderationtowardsquality nothighly superior nothighly
inferior everyproductneeds a certain quality thatquality alonepurchased
Minimum Wastage avoidwastage properstorage deterioration obsolescence evaporation pilferage
theft allroundefforts differenttypes
ofmaterials
Information on Materials available when required system togivecomplete allrounduptodate
info on availability ofmaterials inadequate info new purchases ofmaterials
already instock
Techniques
ofMaterialControl
ABCTechnique
EOGTechnique
Stocklevels
HML Analysis
FNSD Inventory Analysis
I Inventory
VED Analysis
TurnoverRatios
ABCTechnique Selective control
ABCTechnique is a value based system that analysesmaterials according to their value so th
costly valuable materials can greater attention and care Therules regarding the
get
purchase issueand storage ofmaterials are all fined according to the value and
, importance
ofthematerials
also called Always Better ControlTechnique
items are classified according to theirvalue high A medium B low c
selectivecontrol
concentrating effort on those materialswhere attention is needed
unwise togiveequal attention to all items in stock
itemsare ranked in order oftheir descending value importance quantity
category 1ageofvalue ageofqty typeof control
ensures materialmanagementfocuses attention where needed most
Alterns highvalue smallpercentage oftotal qty highlysophisticatedcontrols
responsibility ofmost experienced personnel highcapital investment cost
Bitems mediumvalue items normal or routinecontrolprocedures lesserattention
CItems lowvalue items largepercentage of totalitems simple economical
controls
Advantages of ABCTechnique
Useof highly sophisticated secure techniques where high capital is invested
selective control helps maintain highstock turnover rate
maintaining safety stock of C levelitems
economy in stock carrying costs
investment in inventory is regulated enabling use of funds in best possible
way
Fination ofstock levels
Toguardagainst understocking and overstocking large companies adopt a scientific
approach byfining stock levels
These levels are Maximum level
Minimum level
Reorderlevel
Reorder
Quantity
By adhering to these levels each material is automatically held within appropriate limits of
control Modern inventory management makes use
of operations research statistical
