Cost accountingACM- 402

Presented By:Hina Varshney

B.Com (IV Sem)

12D012

Topic: Techniques of Material Control

Techniques of material control

Material control aims at eliminating & minimizing all kinds of wastes & losses while the materials are being purchased, stored, handled, issued, or consumed. Such techniques are discussed below:

i. Level setting

ii. Economic order quantity

iii. ABC Analysis

iv. FNSD Analysis

v. VED Analysis

1. Level setting

In order to have proper control on materials, the following levels are set:

• Reorder level

• Minimum level

• Maximum level

• Average stock level

Types of levelReorder level: Reorder level (or reorder point) is the inventory level at which a company would place a new order or start a new manufacturing run.

Reorder level= lead time in days x daily average usage

Minimum level: The minimum level or minimum stock is that level of stock below which stock should not be allowed to fall. In case of any item falling below this level, there is danger of stopping of production and, therefore, the management should give top priority to the acquisition of new supplies.

Minimum level = Re-order level – Average usage × Normal re-order period

Types of level• Maximum level: the maximum stock level is

that quantity of material above which the stock of any item should not normally be allowed to go. This level is fixed after taking into account such factors as: capital, rate of consumption of materials, storage space etc.

Maximum level = Re-order level – Minimum usage × Minimum re-order period + EOQ

Average stock level: the stock level indicates the average stock held by the concern.

Average stock level=minimum stock level+1/2(reordering quantity)

2. Economic Order QuantityThere are three types of cost in respect of inventories. These are:

Material cost: this is the purchase price paid to the supplier against the purchase of materials. It also includes the freight & transit insurance paid on purchase.

Material purchase cost = annual demand x purchase price

Ordering cost: it is cost of placing a purchase to order supplier. It includes the cost of purchase order, follow up cost, tender analysis cost etc. these cost are basically fixed.

Ordering cost= [Annual demand/ ordering quantity per order]x cost of placing order

2. Economic Order Quantity cont.….

Holding cost: it is cost of holding units in stock. It is basically based as percentage on investment in the stock. It is directly positive related to purchase order size.

Holding cost= [ordering quantity per order/2] x holding cost per unit per annum

3.ABC AnalysisThis is the selective control technique which recommends that all type of materials should not be controlled directly by the top management. As per the analysis, only a small portion of material generally occupies a high value of total materials. It should be controlled by the top management & other materials may be handed over to the lower management. Following parameters can be followed:Category % of weight % of value Controlled by

A 5%-10% 70%-75% Top management

B 20%-25% 20%-25% Middle management

C 70%-75% 70%-75% Lower management

4. FNSD Analysis

FNSD analysis divides the items of stores into four categories in the descending order of importance of their usage rate. ‘F’ stands for fast moving items that are consumed in short span of time ‘N’ stands for normal moving items which are exhausted over a period of a year. ‘S’ indicates slow moving item which are not frequently issued & exhausted over a period of two years or more. ‘D’ stands for dead items which are outmoded & which are not frequently used in future.

5. VED Analysis

• VED analysis is used primarily for control of spare parts can be divided into three categories- vital, essential & desirable. The spares, the stock out of which even for a short time will stop production for some time & where the cost of stock out is very high, are known as vital spares. The spares , the absence of which cannot be tolerated for more than a few hours & the cost of lost production is high, are known as essential spares. The desirable spares are those spares which are needed but their absence for even a week or so will not lead to stoppage of production

Reference

• http://www.accounting4management.com/minimum_level_or_minimum_limit.htm

• http://accountingexplained.com/managerial/inventory-management/reorder-level

• http://www.accounting4management.com/maximum_limit_or_maximum_level.htm

• http://wiki.answers.com/Q/What_is_average_stock_level?#slide=4

• Cost accounting: principles & practices pg. no. II/2.18, 2.25