1. to understand the basic principles of Material Control 2. to study the procedures of Purchase, Storing and Issues 3. to acquaint with the latest techniques in inventory control 4. to understand the pricing of issues

1. CHAPTER 03
MATERIALS
CONDUCTED BY:
P. Ayanthi Madumali

2. Learning Objectives
After studying this topic, you should be able,
• 1. to understand the basic principles of Material Control
• 2. to study the procedures of Purchase, Storing and Issues
• 3. to acquaint with the latest techniques in inventory control
• 4. to understand the pricing of issues

3. Materials
Materials
• The term ‘material’ generally used in manufacturing concerns,
refers to raw materials used for production & sub-assemblies
parts.
Stores
• Stores in a company comprises many other items besides raw
materials, such as tools, equipment, maintenance repair items,
factory supplies, components, fixtures. Sometimes, finished
goods and partly finished goods are also included within the
scope of this item.

4. Material Control
• Material control basically aims at efficient purchasing of
materials, their efficient storing and efficient use or consumption.
Various aspects of Material Control
1. Purchasing Control
2. Stores Control
3. Issue Control

5. Objectives of Materials Control
• Material of desired quality should be available when needed for
efficient and uninterrupted production.
• Material should be purchased only when it is needed and in
most economic quantities.
• Purchasing of material will be made at the most favorable
prices under the best possible terms.
• materials are protected against loss by fire, theft, animals
• Issues of materials are authorized properly and are accounted
for properly.

6. Procedures for Purchasing
01.Purchase Requisition
• A form known as ‘Purchase Requisition’ is commonly used as a
format requesting the purchase department to purchase the
required material.
• Normally the purchase requisition is issued by the Stores
Department when the quantity of the concerned material reaches
the minimum level

7. • 02. Select suitable suppliers
 After the receipt of purchase requisition, the purchase
department places an order with a supplier, offering to buy
certain material at stated price and terms.
 However before issuing the purchase order, quotations may be
invited from various suppliers for arriving at the best deal
• 03. Purchase order
 purchase order is issued to the selected supplier. purchase order
is a legal document and it results into a contract between the
company and the supplier.

8. • 04.Receiving the Materials
• The receiving department performs the function of unloading
and unpacking materials which are received by an organization.
• 05. Approval of invoice
• Approval of invoice indicates that goods according to the
purchase order have been received and payments can be made
for the same
• 06. Making the Payment
• After the invoice is approved the payment is made to the
supplier

9. Stores Control
• Material purchased by the purchase department is sent to stores
before it is issued for production.
• A storekeeper is a person who is in charge of the stores
department .The following functions are usually performed by a
storekeeper.
 Protecting the material
 Avoiding overstocking and under stocking
 Keeping proper records of usage, wastages etc.

10. Aspects of Stores Control
01.Stores Layout
• careful designing and arrangement of storerooms is desirable
for savings in cost. The layout should take care of proper
ventilation, lighting, temperature control and easy handling.
• Types of Stores systems/ Layout
Centralized stores: A stores is only one in the company which receives
materials for & issued to all who need them.
Decentralized stores: Stores is that type of stores which receives materials
for & issues them to only one department & not to the whole company.
Decentralized stores may be in many number in the company.

11. Sub Stores: Sub stores are managed by & controlled by the centralized
stores it self.
At the beginning of period the CS issues a fixed quantity of materials to sub
stores. At the end of the period sub stores send a filled requisition form to CS
to maintain the stock to predetermine level.
• 02.Classification and Codification of Materials:
• Materials can be classified according to their types. Codification can be
done for simplification of identification.
• Whatever system of codification is used, it should be ensured that the system
is simple to understand and easy to operate.
• E.g.: TC/BMS/LH01/CHA/252

12. Inventory Control
• One of the important aspects of the overall material
management is the inventory control. It is necessary to avoid the
overstocking as well as under stocking. For ensuring this,
maximum level, minimum level, re-order level are fixed.
• For inventory control, the following methods are used.
I. ABC System
II. Just in Time Inventory
III. Two bin system
IV. Stock level
V. Perpetual Inventory System

13. 01.Perpetual Inventory System
• The main advantage of this system is that it avoids disruptions
in the production caused by periodic stock taking.
Bin Card
• It is the quantitative record of all receipt of materials, issue of
materials and the balance of materials on a particular day. Bin
Card do not record the amount of receipt or issue, it records
only the quantity by store department.
Stock ledger
• Stores ledger is prepared by accounting department ,that ledger
is a record of quantities & values.

14. 02.ABC System
• In this inventory are classified according to the value of usage.
Materials are classified as A, B and C according to their value.
• The high value items should be controlled more carefully while items having
small value though large in numbers can be controlled periodically.
Items in Class % of total items % of total value of
inventory
A 10 % 70%
B 35% 25%
C 55% 5%

15. 03. Just In Time Inventory
• Material purchased from supplier should directly go the
assembly line, i.e. to the production department. There should
not be any need of storing the material.
• The benefits of Just in time system are as follows,
Right quantities are purchased or produced at right time.
 Cost effective production
Inventory carrying costs are eliminated totally.
saving in the stores cost.
 Losses due to breakage, wastage, pilferage etc. are avoided

16. 04. Two bin system
• The two bin inventory control method is mainly used for small
or low value items. When items in the first bin have finished ,
an order is placed to refill or replace these items.
• The second bin contains enough quantity of the item until the
ordered quantity arrives.
1st Bin
2nd Bin

17. 05.Stock Level
Minimum
level
Re order
level
Maximum
level
Time (Days)
Stock level
(Units)

18. 01.Re-order Level
• This level is fixed for deciding the time of placing an order. If the stock of
materials reaches this level, fresh order is placed
Re-order Level = Maximum consumption * Maximum supply Period
• 02. Maximum Level
• This is the highest level of material beyond which the inventory of material
is not allowed to rise. Obviously this level is fixed with the objective of
avoiding overstocking
• Maximum Level = Re-order Level + Re-order Quantity – [Minimum
Consumption * Minimum supply period]

19. • 03.Minimum Level
• This level is fixed with the objective of avoiding shortage of material. Care is
taken that the stock do not fall below this level.
Minimum Level = Re Ordering Level – [Average consumption * Average
supply period]
04.Average Level
• This level is the average of the maximum and minimum level
Average Level = Maximum Level + Minimum Level
2

20. EOQ (Economic Order Quantity )
• EOQ is the order quantity that minimizes the total holding costs
and ordering costs.
• This concept is based on some assumptions. These assumptions
are as follows.
The concerned material will be available all the time without
any difficulty.
The price of the material will remain constant.
Ordering cost and carrying costs are variable.
Impact of quantity discounts on the prices is negligible.

21. The formula
EOQ = 2*D*Co
CH
Where EOQ = Economic Order Quantity
Co= order cost per order
D = Annual quantity required in units
CH =Stock holding cost per unit per annum

22. Example
• The annual consumption of a part “X” is 8000 units. The
procurement cost per order is $40 and the cost per unit is $0.5.
The storage and carrying cost is 50% of the material unit cost.
Required:
Calculate the EOQ by ,01. Formula Method
02. Tabular Method

23. Solution
• Co= $40 D= 8000, CH= $0.5*50%
EOQ = 2*D*Co
CH
EOQ = 2 * 8000 *40
0.5*50%
= 1600 units

24. • No of order = D/Q
= 8000/1600
= 05
• Order Cost = D/Q * Co
=05 * 40
= 200
• Stock holding Cost = ½ * Q * CH
= ½ * 1600 * 0.25
= 200

25. No of
order
No of units in one
order
Ordering
Cost
Holding Cost Total
inventory
cost
1 8000/1 = 8000 1* 40 = 40 ½* 8000*0.25=1000 1040
2 8000/2 =4000 2 * 40 =80 500 580
3 8000/3 = 2667 3 * 40 =120 334 484
4 8000/4 = 2000 4 * 40 =160 250 410
5 8000/5 = 1600 5 * 40 =200 200 400
6 8000/6 = 1334 6 * 40 =240 240 407
Table to calculate EOQ
In EOQ, Co=CH

26. Cost $
Units per order
Ordering cost
Carrying cost
Total cost
100
200
300
800 1600 2000
Minimum cost
EOQ=1600 units

27. Cost $
No of order
Carrying cost
Ordering cost
Total cost
100
200
300
2 4 6
Minimum cost
EOQ=5 order

28. Issuing Control
• Another important aspect of material control is the issue control. Material is
issued to production and utmost care is to be taken while issuing the
material. The first thing is that without authorization material should not be
issued to any department
Pricing of Issues
• Material is issued to production and it is necessary to find out the
consumption value of the material. The various methods of pricing of
issues are,
I. FIFO
II. LIFO
III. WAC
IV. SAP

29. • FIFO: As per this method, material received first is issued first. Thus the
material in stock at the beginning of a period is issued firstly and then the
issues are made according to the dates of purchases made
• LIFO: under this method is that the material which is purchased last is
issued first to the production. Therefore the issue should be charged at the
latest prices
• Simple Average Cost Method Under this method, the issues are
charged at the average price of the material purchased without taking into
consideration the quantities involved in the same
• Weighted Average Method: This method takes into consideration the prices
as well as the quantities of materials purchased. Thus weighted average is
computed after each receipt by dividing the total amount by the total quantity

30. Inventory Turnover
• Inventory turnover ration enables the management to avoid capital
being locked up in undesirable stocks. This ratio indicates the
efficiency or inefficiency with which inventories are maintained.
Inventory turnover ratio = Cost of materials consumed
Cost of average stock held during the period
Stock turnover = Days during the period
Inventory turnover ration
Average opening & closing stock
No.of days for inventory
held

31. Thank You…..