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Purpose of Storekeeping
(1)
(2)
(3)
Storekeeping ensure accurate and prompt distribution of materials to user departments as per
issue requisition note.
(4)
It is essential because stores often equated directly with money, as capital is blocked in
inventories.
He must receive raw materials, components, tools, equipment and other items and account for
them properly.
(2)
He must provide adequate and proper storage and preservation to the various items.
(3)
(4)
Issue the materials as per material issue requisition duly signed by an authorized person.
(5)
'(6)
333
(7)
(8)
(9)
He must provide adequate informations to the top executives for verifications and effective
decision making.
Stores Layout
In order to achieve the objectives of effective inventory control, well planned layout of stores should be
required. A planned stores layout will facilitate easy movement of materials, good housekeeping, sufficient
space for materials handling. It ensures effective utilization of storage space and judicious use of storage
equipments. The stores department should be equipped with shelves, racks, pallets and proper preservation
from rain. light and other such elements. An ideal location of stores should facilitate the volume and variety
of goods to be handled. In order to bring down the transport cost it should be close to roads or railway stations.
And also as far as possible, a the stores department should be near to the receiving department. In the case of
large organizations usually stores attached to each consuming department, whereas receiving is done centrally.
Types of Stores
The types of stores depend on the size, types and policy of the organization. Organization of stores
varies from concern to concern. As per the requirement of the firm the stores organization may be
classified into :
(a) Centralized Stores.
(b) Decentralized Stores.
(c) Combination of both, i.e., Centralized Stores with Sub Stores.
(a) Centralized Stores: This system is suitable to small-scale industries where it is desirable to
centralize the materials in one department. Under this system, the store room will be most conveniently
situated where it is near to all the departments.
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
334
Disadvantages
(1)
(2)
(3)
(4)
(5)
(b) Decentralized Stores: Under this system each department has its own stores. It is suitable to
large concern where there are several departments each using a different type of material from its own
stores. In this system all the disadvantages of centralized stores can be eliminated.
(c) Combination of Both : This system is also termed as Imprest System or stor~s control.
Centralized Stores with Sub Stores is usually adopted in large factories where departments are situated at a
distance from the central stores. In order to minimize the cost of transportation and materials handling, this
type of organization would be located nearer to the receiving department. Under this system material
receipts are stored in the central stores and issues are made to the sub-stores. Under imprest system of
stores control sub stores which are located nearer to the central stores for the purpose of draw supplies
from central stores and issue the required quantity to production. To maintain the stocks at the
predetermined level, the sub-stores make requisition from the central stores.
Fixation of Stock Level
Material control involves physical control of materials, preservation of stores, minimization of
obsolescence and damages through timely disposal and efficient handling. Effective stock control system
should ensure the minimization of inventory carrying cost and materials holding cost. Level of stock is the
important aspect of inventory control. Stock level may be overstocking or understocking. Overstocking
requires large capital with high cost of holding. In the case of understacking, production and overall
performance of the concern as a whole will affect. Thus, fixation of stock level is essential to maintain
sufficient stock for the smooth flow of production and sales. The following are the important techniques
usually adopted in different industries :
Maximum Stock Level.
Minimum Stock Level.
Danger Level.
Re-Order Level.
Economic Ordering Quantity (EOQ).
(f) Average of Stack Level.
(a)
(b)
(c)
(d)
(e)
(a) Maximum Stock Level: The maximum stock level indicates the maximum quantity of an item
should not be allowed to increase. The maximum quantity of an item can be held in stack at any time. The
following factors can be considered while fixing the maximum stock levels :
(1)
Availability of capital.
(2)
(3)
Cost of storage.
(4)
(5)
Cost of insurance.
(6)
335
(7)
(8)
(9)
(10)
(b) Minimum Stock Level:- Minimum stock level indicates the minimum quantity of material to be
maintained in stock. Accordingly, the minimum quantity of an item should not be allowed to fall. The
minimum stock is also known as Safety Stock or Buffer Stock. The following formula is adopted for
calculation of minimum stock level :
= Re-Order Level -
(c) Danger Level: It is the stock level below the Minimum Level. This level indicates the danger
point to affect the normal production. When materials reach danger level, necessary steps should be taken
to restock the materials. If there is any emergency, special arrangements should be made for fresh issue.
Generally this level is fixed above the minimum level but below the reording level. The formula for
determination of danger level is :
Danger Level
(d) Re-order Level: Re-order level is also termed as urdering Level. It indicates when to order, i.e.,
orders for its fresh supplies. This is the stock level between maximum and the minimum stock levels. The
re-order stock level is fixed on the basis of economic order quantity, lead time and average rate of
consumption. Calculation of re-order level is adopted by the following formula :
Re-order Level
Re-order Level
(e) Economic Order Quantity (EOQ): Economic Order Quantity is one of the important techniques
used to determine the optimum quantity or number of orders to be placed from the supp.liers. The main
objectives of economic order quantity is to minimize the cost of ordering, cost of carrying materials and
total cost of production. Ordering costs include cost of stationery, salaries of those engaged in receiving
and inspecting, general office and administrative expenses of purchase departments. Carrying costs are
incurred on stationery, salaries, rent, materials handling cost, interest on capital, insurance cost, risk of
obsolescence, deterioration and wastage of materials and evaporation. Economic Order Quantity can be
calculated by the following formula :
EOQ
Where:
EOQ
A
B
C
=
=
AB
~
CS
336
(f) Average Stock Level: Average stock level is determined on the basis of minimum stock level and
re-order quantity. This is calculated with the help of the following formula:
Illustration: 1
From the following particulars calculate the
(1)
(2)
(3)
(4)
(5)
(6)
Solution:
Re-order Level
=
=
=
=
=
=
=
=
5400 + 15000
2
20400
2
10200 units
337
Illustration: 2
The following information available in respect of a material X :
Re-order Quantity
Maximum Consumption
Minimum Consumption
Normal Consumption
Re-order Period
=
=
=
1800 units
450 units per week
150 units per week
300 units per week
3 to 5 weeks
Re-order Level
Minimum Stock Level
Maximum Stock Level
Solution:
(a) Re-order Level :
=
=
=
=
=
=
=
=
=
=
=
8
2
4 weeks
Illustration: 3
Two components P, Q are used as follows. Normal usage 1000 units per week each. Re-ordering
quantity P - 20,000; Q 8,000. Re-ordering period P - 4 to 6; weeks; Q 2 to 4; minimum usage 2000 units
per week; each maximum usage 3000 units per week each.
You are required to calculate the following each of the components :
(1)
(2)
(3)
(4)
338
Solution:
(1)
Re-ordering Level
Product P
Product Q
(2)
Minimum Level
=
=
=
=
= 18,000 units
4 = 12,000 units
3000 x 6
3000 x
=
=
=
=
=
Product P
Product Q
(3)
Maximum Level
18,000 - (1,000 x 5)
18,000 - 5,000
= 13,000 units
12,000 - (1,000 x 3)
12,000 - 3,000
=9,000 units
=
=
38,000 - 8,000
13,000 +
13,000 + 10,000
=
=
9,000 + ~ (8,000)
Product P
Product Q
(4)
Product
Illustrat~on:
= 30,000 units
(20,000)
23,000 units
From the following information for last twelve months, compute the
(1) Re-order Level
(2) Minimum Level
(3) Maximum Level
(4) Average Stock Level for the components of X and Y
Components
Maximum Consumption in a month
Minimum Consumption in a month
Average Consumption in a month
Re-order period in a month
Re-order quantity in units
X
3,000
2,000
1,000
8 to 12
8,000
3,000
2,000
1,000
4 to 8
12,000
339
Solution:
( 1)
(2)
Product X
Product
24,000 - (1,000 x 6)
Re-order level
Minimum Level
Product X
Product
(3)
Maximum Level
(4)
Product X
Product Y
=
=
36,000 - 8,000
28,000 +
28,000 + ~ (12,000)
28,000
Product Y
=28,000 units
= 28,000 units
(8,000)
8 Months + 12 Months
2
20
=
Produci Y
=
=
= 10 months
4 Months + 8 Months
2
12
= 6 months
Illustration: 5
340
Solution:
Calculation of Economic Order Quantity:
Economic Order Quantity
. [2'AB
\fCS
Where :
A = Annual Consumption
B = Buying Cost per order
C = Cost per unit of material
S
EOQ
A
2C :
----------2 x 16000 x 18
2 x 16000 x 18
1 x 20 %
1700 units
20
100
Illustration: 6
A company uses a particular material in a factory which is 20000 units per year. The cost per unit of
material is Rs. 10. The cost of placing one order is Rs. 100 and the inventory carrying cost 20% on average
inventory. From the above information calculate Economic Order Quantity.
Solution:
..tity
ABCS-
~ 2;:
E OQ
2;S"
2 x 20000 x 100
=
=
___________
10 x 20 %
1414 units
2 x 20000 x 100
10 x
20
100
Illustration: 7
Find out the Economic Order Quantity and order schedule of raw materials and packing materials
with the following data given to you:
(l)
Cost of ordering:
Raw materials = Rs. 1000 per order
Packing materials Rs. 5000 per order
(2)
341
(3)
Production rate :
2,00,000 Units per month
Solution:
Calculation of Economic Order Quantity :
EOQ
Where:
EOQ
A
B
C
S
=
=
=
=
=
.~
\fCS
=
=
2 x 2,00,000 x 1000
0.01
40,00,00,00,000
2,00,000 units
=
=
=
2 x 2,00,000 x 5000
0.05
~ 40,00,00,00,000
2,00,000 units
Illustration: 8
A Ltd. Co. is committed to supply 24000 bearings per annum to B Ltd. on a steady basis. It is
estimated that it costs 10 paise as inventory holding cost per bearing per month and that the set up cost per
run of bearing manufacture is Rs. 324. .
(I)
(2)
(3)
342
Solution:
(1)
EOQ
.~
\fCS
Where:
A
B
C
=
=
=
=
Annual Consumptions
Buying Cost or set up cost
Cost per unit
Carrying Cost or Holding Cost per unit
=
Alternative Solution
2 x 324 x 24000
The economic batch size figure can also be obtained by taking monthly figure as follows:
2 x 2000 units x Rs. 324
0.10
3600 units
=
(2) Number of Set Up per Annum
Annual Production
2
times
3
12 x 3
12
20
20
36
= 1.8 months
20
=
=
24,000
3,600
x 324 +
3,600
2
x 1.2
Illustration: 9
A company manufactures a product from a raw material which is purchased at Rs. 60 per kg. The
company incurs a handling cost of Rs. 360 plus freight of Rs.390 per order. The incremental carrying cost
of inventory of raw material is Re. 0.50 per kg. per month. In addition, the cost of working capital finance
on the investment in inventory of raw material is Rs. 9 per kg. per annum. The annual production of the
product is 1,00,000 units and 2.5 units are obtained from one kg. of raw material.
343
Required:
(1)
(2)
(3)
Solution:
( 1)
B
S
Annual Consumption
Buying Cost per order
Storage and Carrying cost
=~
=
(2)
Annual Consumption
Quantity per order
No. of orders
Frequency
(or)
(3)
Quarterly Orders
No. of orders
Total Cost:
Order Placing Cost (4 x 750)
10,000
Carrying Cost =
x 15
0.5 x 4
=
=
=
=
=
=
2.5 units
40000 kg.
(0.5 x 12) + Rs.9
Rs. 15 per unit
Rs.360 = Rs. 390 = Rs. 750
2 x 40000 x 750
15
2000 kgs
40000 kgs
2000 kgs
40,000
2,000
= 20 orders in 12 months
12 months
20 orders
365 months
=0.6 months
= 18 days (approx.)
20 orders
40,000 kgs
4 orders
40,000
=
1 kg x 1,00,000 units
10,000
Rs.
3,000
75,000
78,000
344
2,000
- - - x 15
0.5 x 4
20
Rs.
15,000
15,000
30,000
=
=
Total Cost
Total Cost E 0 Q
Rs.78,OOO
Rs.30,OOO
48,000
48,000
Increase in Cost
Price of discount per unit
40,000 kg
60
x 100
= 2% discount
(2)
(3)
The items, which are of high value and less than 10 per cent of the total consumption or inventory
can be called as 'A' grouped materials. It is required to exercise selective control and focus more attention
because of high value items. Similarly, 70 per cent of materials in total consumption or inventory which
lies 10 per cent of the inventory value can be grouped under 'C' categories. The materials which have
moderate value that lies between the high value materials and low value materials are grouped under 'B'
category. The following table shows more explanation about ABC Analysis :
Category
A
B
C
Less than 10
10 to 20
70 to 80
70 to 80
15 to 25
Less than 10
(2)
(3)
(4)
(5)
345
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Methods of Coding
The following are the three important Methods of Codification :
(1)
Numerical Method.
(2)
Alphabetical Method.
(3)
(1) Numerical Method: Under this method, each number or numerical digit is allotted to each item
or material. Accordingly, each code should uniquely indicate one item. For example, in printing press
following codes may be assigned :
Paper
145
Ink
155
Gum
165
There are various universal decimal classification of codification used in libraries may be indicated
for identification of items.
(2) Alphabetical Method: In this method alphabets or letters are used for codification of each
category of materials. Accordingly each letter or alphabet is allotted for each item or material. For
example, 'C' for copper, 'S' for steel and so on.
(3) Numerical Cum Alphabetical Method: This method is done by a combination of numerical and
alphabetical method. Under this method both numerical along with alphabet is allotted for each item. For
example, IR 5 may indicate Ink Red of Grade 5, Steel wire 6 may be denoted by SW 6 etc.
346
Inventory System
The chief aims of inventory control is as follows :
(1)
(2)
(3)
Accordingly stock verification is an important aspect to ensure and maintain a balanced inventory.
The following are the two systems of stock verification adopted in different industries :
(1)
(2)
(3)
(1) Periodic Inventory System: Under this system, quantity and value of materials are checked and
verified at the end of the accounting period after having a physical verification of the units in hand.
(2) Perpetual Inventory System: The Perpetual Inventory System is also known as Automatic Inventory
System. This is one of the important methods adopted for verification inventories to know the physical balances.
According to I C M A London defines Perpetual Inventory System as a method of recording stores balances
after every receipt and issue to facilitate regular checking and to obviate closing down for stock taking.
(2)
(3)
(4)
(5)
(6)
Bin Cards
(b)
Stores Ledger
A constant comparison of the quantity balances of these two set of records is made and the balances
are reconciled.
(a) Bin Cards: Bin Card is only quantitative record of stores receipt, issue and balance and is kept by
the Storekeeper for each item of stores.
(b) Stores Ledger: Stores ledger is both quantitative and monetary value record of stores receipt,
issue and balance and is prepared by the Cost Accounting Department.
347
Bin Card
(1)
(2)
(3)
(4)
(5)
(1)
(2)
(3)
(4)
(5)
(3) Continuous Stock Verification: Since Verification of physical inventory is an essential feature of
a sound system of material control, a system of continuous stock taking is introduced. Continuous stock taking
ensures that the balances of all items of stocks are checked at least three to four times in a year by physical
verification. It avoids long and costly procedure of closing down the stores for stock taking on periodical
basis. Stock discrepancies are detected on timely basis and preventive measures can be taken. The correctness
of the physical stocks as reflected in the books is ensured and thus the monthly accounts represent a true and
fair view of the business. Continuous Stock Verification not only serves as an essential tool of material control
but also will help in proper presentation of accounting information to the management.
Continuous Stock Taking Vs Periodic Stock Taking
The differences between Continuous Stock Taking and Periodic Stock Taking can be summarized as
follows:
Periodic Stock Taking
(3)
(4)
(5)
(6)
(1)
(2)
(3)
(4)
(5)
(6)
Normal Loss
(2)
Abnormal Loss
(1) Normal Loss: Normal Losses arise during the storage of materials due to the avoidable reasons of
pilferage, theft, careless of materials handling, clerical errors, improper storage, wrong entries etc.
(2) Abnormal Loss: Abnormal Losses arise during the storage of materials due to unavoidable causes
of evaporation, shrinkage, bulk losses due to accident, fire, etc.
348
(2)
Abnormal Loss: Abnormal losses are directly charged to Costing Profit and Loss Account.
(3) If the loss is due to error in documentation it should be corrected through adjustment entries.
Inventory Thrnover Ratio
Inventory Turnover Ratio may be defined as "a ratio which measures the number of times a firm's
average inventory is sold during a year." It is a ratio which is useful to measure the firm's inventory
performance. High rate of inventory turnover ratio denotes that materials are fast moving stock. A low
turnover rate indicates the locking up of working capital in undesirable items. The Inventory turnover ratio
is calculated by the following formula :
Material Turnover Ratio
=
=
Illustration: 10
Calculate the Inventory Turnover Ratio for the year 2003 from the following details :
Material X
Rs.
50,000
30,000
3,80,000
Opening Stock
Closing Stock
Purchases
Material Y
Rs.
1,75,000
1,25,000
2,50,000
Solution:
X Rs.
50,000
3,80,000
4,30,000
30,000
4,00,000
Opening Stock
Add : Purchases
Less: Closing Stock
Materials Consumed
Average Inventory
=
=
=
Y Rs.
1,75,000
2,50,000
4,25,000
1,25,000
3,00,000
50,000 + 30,000
1.75,000 + 1,25,000
80,000
3,00,000
349
Materials Consumed
Material Turnover Ratio
Material X
Material X
4,00,000
Average Inventory
= 10 times
40,000
3,00,000
1,50,000
= 2 times
The turnover ratio of Material X being higher than that of Material Y, the former is a fast moving material.
QUESTIONS
1.
2.
3.
4.
5.
6.
7.
S.
.9.
10.
11.
12.
13.
14.
15.
16.
17.
IS.
19.
20.
Calculate (a) Maximum Level, (b) Minimum Level, and (c) Re-order Level.
Re-order Quantity = 1500 units.
Re-order Period = 4 to 6 weeks.
Maximum Consumption = 400 units per week.
Normal Consumption = 300 units per week.
Maximum consumption = 250 units per week.
[Ans : Re order Level = 2400 units.
Maximum Level = 2900 units.
Minimum Level = 900 units.
Normal Re order Period = 5 weeks].
350
A manufacturing company purchases 2000 units of a particular material per year at a unit cost of Rs.20, the ordering
cost per order is Rs.50 and the inventory carrying cost is 25%. Find out the Economic Order Quantity and number of
orders to be placed in a year.
[Ans : EO Q 200 units each in 10 orders].
22.
23.
24.
25.
26.
27.
28.
Find out the Economic Order Quantity and the number of orders per year from the following information:
Annual consumption 36,000 units
Cost per unit Rs. 54
Ordering cost Rs. ISO per order
35/
000