Material control by Barkha Makheja

1. Welcome to
Online lectures for
SY BBA
Subject: 3.2 Corporate
Accounting and Costing

5. Part II - COSTING
5.Material Control

8. Different levels of
Material
1. Raw material. 2. Finished goods.
3. Semi finished goods
1. Direct Material 2. Indirect Material

13. Next Question for you all to solve
Annual consumption: 1600 units
Cost of material: Rs 40 per unit
Ordering cost: Rs 50
Carrying cost : 10%

18. Practice sum for Reorder
level.
Given
Minimum usage 100 units per week
Normal usage 200 units per week
Maximum usage 300 units per week
Re-order period 4 to 6 weeks
Calculate Reorder level:
Ans: RoL= Maximum usage*maximum time
= 300*6 = 1800 units

19. Next question for you to solve
The following information is available in respect of component DP 5:
Budgeted consumption- maximum 1,500 units per month
Budgeted consumption- minimum 800 units per month
Estimated delivery period Maximum 4 months and minimum 2 months
You are required to calculate Re-order level

20. ReOrdering level= Maximum consumption *
Lead Time [maximum]
Ordering level= 1,500 * 4
Ordering level= 6,000 Units per week

22. Problem sum on Minimum level
 From the following calculate (i) Re-ordering Level and (ii) Minimum Level
 Minimum usage 100 units per week Normal usage 200 units per week
 Maximum usage 300 units per week Re-order period 4 to 6 weeks

 Solution:
 (i) Re-ordering Level
 Re-ordering level= Maximum consumption * Lead Time [maximum]
 Re-ordering level= 300 * 6
 Re-ordering level= 1,800 Units per week
 Minimum Level
 Minimum level= Reorder level – (Average consumption x lead time [Average])
 Minimum level= 1,800 – (200 x 5)
 Minimum level= 1,000 Units per week

23. Next sum to solve
 Maximum consumption 400 units per week Average consumption 300 units
per week
 Minimum consumption 250 units per week

24.  Solution:
 (i) Ordering Level
 Ordering level= Maximum consumption * Lead Time [maximum]
 Ordering level= 400 * 6
 Ordering level= 2,400 Units per week

 (ii) Minimum Level
 Minimum level= Reorder level – (Average consumption x lead time [Average])
 Minimum level= 2,400 – (300 x 5)
 Minimum level= 900 Units per week

26.  Maximum demand: 200 per week
 Average demand: 160 per week
 Minimum demand: 145 per week
 Maximum lead time: 2 weeks
 Average lead time: 1.5 weeks
 Minimum lead time: 1.35 weeks
 Re-order quantity per order: 500 dinner sets
 Safety stock: 184 dinner sets
 Required: Compute maximum level of stock
 Solution
 *Reorder level = (Maximum usage × Maximum lead time) + Safety stock
= (200 units × 2 days) + 184 units
= 400 units + 184 units
= 584 units
 Maximum Level of Stock = Reorder level + Reorder quantity – (Minimum usage × Minimum lead time)
= Reorder quantity – (Minimum usage × Minimum lead time)
= *584 units + 500 units – (145 units × 1.35 days)
= 584 units + 500 units – 196 units
= 1,084 units – 196 units
= 888 units

27. Next Question for you to solve.
 Minimum consumption per week = 3,000 units
 Maximum consumption per week = 4,500 units
 Economic order quantity (EOQ) = 14,000 units
 Normally, 3,500 units of threads are consumed on a weekly basis and it takes
around 20 - 25 days of ordering period to get the new supply of threads from the
supplier.

28. Solution:
 Re-order level = Maximum weekly consumption x Maximum re-order period = 4,500 x
25 = 112,500
 Maximum level = Re-ordering level + EOQ – (Minimum consumption x Minimum re-
order period) = 112,500 + 14,000 – (3,000 x 20) = 126,500 – 60,000 = 66,500 Units
 From the calculation done above, it is clear that the maximum level of stock that can
be kept in the store department is 66,500 units.

30.  Daily Consumption = 100 to 200 units
Maximum re-order period for emergency purchase = 5 days
Danger Level = ?
Solution,
 Normal consumption: 100+200/2 = 300/2 = 150 units
Danger Level = Normal consumption x Maximum re-order period for emergency
purchase
= 150 x 5
750 units.

31.  In a factory component A is used as follows:
 Normal usage – 50 kg per week
 Minimum usage – 25 kg per week
 Maximum usage – 75 kg per week
 Re-order quantity 300 kg.
 Re-order period 4 to 6 weeks.
 Calculate for component A:
 (i) Re-order level,
 (ii) Maximum level.
 (iii) Minimum level; and
 (iv) Average stock level.

32.  (i) Re-order level = Maximum usage × Maximum period
 = 75 × 6 = 450 kg
 (ii) Maximum level = Re-order level + Re-order quantity – (Minimum usage ×
Minimum time)
 = 450 + 300 – (25 × 4) = 650 kg.
 (iii) Minimum level = Reorder level – (Normal usage × Average time)
 = 450 – (50 × 5) = 200 kg.
 (iv) Average stock level = Maximum level + Minimum level/2
 = (650 + 200/2)kg = 425 kg.

33. Any Questions?
Extra Problem sums will be provided in short
time.