2. WORKING CAPITAL MANAGEMENT PART 3
Materials constitute a very significant proportion of total cost of finished product in
most of the manufacturing industries. A proper control system is necessary to ensure
that exact quality of input as required for finished product, the price paid for input
should be minimum possible, material should be available in adequate quantity
whenever required, there should be no over-stocking, wastage and losses while
material is in store and in process should be avoided.
Requirements of material control
1. Proper co-ordination of all departments involved viz. finance, purchasing,
receiving, inspection, storage accounting and payment.
2. Purchases are made only after suitable inquiries so that firm gets most
favourable deal.
3. Use of standard forms for placing the order, noting receipt of goods,
authorizing issue of material etc.
4. Preparation of budget concerning material consumption
5. Storage of all material and supplies at well designated place.
6. Continuous stock taking to determine value and quantity of each item of
material at any time.
7. Regular reports of materials purchased, issue from stock, inventory balances,
obsolete stock, goods returned and spoiled or defective unit.
Material Procurement Procedure
If a concern can afford, it should have a separate purchase department for all
purchases to be made on behalf of all other departments. Purchasing should be
centralized i.e. all purchases should be done by purchasing department except for
small purchases which may be done by the user's department. The concerned officer
in the department keeps themselves in constant touch with the markets to have the
latest information. The purchase department follows the following steps.
Receiving purchase requisitions. It is a form used for making request to the
purchasing department to purchase material.
Exploring the sources of materials supply and selecting suitable material
suppliers. Selection of suppliers is based on various factors such as price,
quantity, quality, time of delivery, mode of transportation, terms of payment,
reputation of supplier, past records etc.
Preparation and execution of purchase order. After identifying the suitable
supplier with best quotation the purchase manager issues formal purchase
order. Its copies are sent to The supplier, Store department, Receiving
department, Accounting department and one copy is held in file.
Receipt and inspection of materials to ensure that goods received are of
desired quality and quantity. If they are not according to specification then
goods are not accepted. After receipt of goods the receiving department
prepares Material inward note in quadruplicate. One copy is sent to Purchase
department for verifying supplier's bill for payment, other copy is sent to the
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3. store, third copy is sent to stores ledger clerk in Cost Department and the last
copy is retained for use by receiving department.
Checking and passing bills for payment. The invoice received from the
supplier is sent to the stores accounting section to check authenticity and
mathematical accuracy. The quantity and price are also checked with
reference to goods received note and the purchase order respectively. The
stores accounting section after checking its accuracy finally certifies and
passes the invoice for payment.
Material Issue Procedure
Issue of material must be on the first in first out basis to ensure that the materials
which were entered first don't get deteriorated for having been kept for a long period
Bill of material also known as Material specification list or simply Material list.
Its a schedule of standard quantities of material required for any job or other
unit of production. It is prepared by the Engineering or Planning department in
a standard form. It is prepared in quadruplicate and sent to Stores
department, Cost accounts department, Production control department and
Engineering or Planning department.
Material requisition note is for issue of materials for use in the factory or in any
its department. It is prepared in triplicate and distributed as one copy to Store
keeper, one to Cost department and one is for department requiring it.
Sometimes any of the department has surplus material which returned to
storeroom accompanied by Shop credit note which is prepared in triplicate
and distributed as one copy for Store Room, one for Cost department and one
for department returning surplus material.
Material Storage
Purchasing material of desired quality is not enough their proper storage is also
important. Loss due to poor storage is even more than what might arise from
purchase of bad quality materials.
Store location should be carefully planned. It should be near to the material
department so that transportation charges are minimum. At the same time it should
be easily accessible to all other department of the factory.
Inventory Control
Although there are many inventory control methods the two are quite popular-
Economic Order Quantity and Just in Time (JIT).
Economic Order Quantity (EOQ)
This method tries to keep ordering cost and carrying cost of inventory at minimum.
The formula is
EOQ = â (2*A*S)/C
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4. Where
A = Annual usage units
S = Ordering cost per order
C = Carrying cost per unit per annum
Just in Time (JIT)
According to this technique materials are ordered as and when required. So there is
no carrying cost as material is delivered directly to production floor. For implementing
this system the supplier should be very prompt in delivery and also company's
personnel should inspect the quality and quantity of material at the supplier's
premises itself.
Review of slow and non-moving items
The expensive slow and non-moving items in the inventory block huge sum of
money. For such items no new requisition should be made till the existing stock is
exhausted.
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