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Material Purchases
Store Keeping
Material Control
Methods of Valuation
Economic Order Quantity
Fixation of Inventory Levels
ABC Analysis
Inventory Control through JIT
Let us know these terms
first……….
• Material cost
• Direct material and indirect
material
• Raw material
• Inventory
• Over stocking and under
stocking
• Inventory control
• Perpetual inventory system
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Wastage:
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Scrap:
Residue material that has a recovery value
– Legitimate scrap
– Administrative scrap
– Defective scrap
Spoilage:
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Factors influencing the purchasing
methods and procedures
• Size of the
organization
• Type and nature of
the product
• Types of raw
materials
• Sources of supply
• Terms and conditions
of purchase
• Availability of funds
• Storage facility
available
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Steps
• Receiving purchase requisition/indent for
materials
• Selecting the suppliers
• Placing the P.O.
• Follow-up of P.O.
• Receiving and inspecting the materials
• Checking and passing invoices for payments
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Stores records
Documents used for inventory control
• Bill of materials
• Purchase Requisition Note
• Purchase order
• Material Inspection Note
• Goods Received Note
• Stores Requisition Note/Indent
• Material Transfer Note
• Material Return Note
• Bin Card
• PSL/SPL/Stores Ledger 8
Bin Card and Stores Ledger
Point of difference Bin Card Stores Ledger
Content Records quantity Records quantity
only and value
Place & person Stores, Store Costing/Accounts
who maintains keeper dept., Accounts
clerk
Why maintained Controlling Value of material
material (Qty.) received, issued
and closing
stock
Periodicity Day-to-day basis May be periodical
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Methods of pricing material issues
$
– FIFO
– LIFO
– Weighted average cost method
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Stock Levels
Re-order level Minimum level + consumption during lead time, or
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EOQ (Re-order quantity):
Objective is to minimize total inventory cost
Carrying cost:
Cost of storage facility
Salary and wages
Losses due to pilferage, deterioration and obsolescence
Insurance cost
Interest
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EOQ (Re-order quantity):
Assumptions of EOQ:
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Illustration on EOQ
Annual usage of a material is 2,000 units
and it costs Rs.15 to handle an order for this
material. The price is Rs.2/- per unit
regardless of quantity purchased and
carrying cost of inventory is 18% p.a.
Calculate EoQ.
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EoQ = 2 x 2,000 x 15 = 408 units
18% of 2
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Illustration on EOQ
Calculate EoQ and state the no. of orders to
be placed in a year.
Consumption of materials p.a. = 10,000 units
Order placing cost per order = Rs.50
Cost per Kg of raw material = Rs.2
Storage cost = 8% on avg. inventory
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EoQ = 2 x 10,000 x 50 = 2,500 Kgs
8% of 2
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A Ltd. Manufactures a product and the following
particulars are collected for the year ended March, 2007:
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Maximum level = Re-ordering level + Re-ordering quantity –
(Minimum rate of consumption x Minimum Re-order period)
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Inventory control techniques
• VED analysis
• FNSD analysis
• ABC analysis
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VED CLASSIFICATION
• VED classification is based on the importance of a
particular item in the production process.
• V – Vital: Critical for production
• E – Essential: Important but not critical
• D – Desirable: Non-essential and do not
influence the production.
• V items need maximum control and investment.
• They may not be the most expensive but critical to
production process.
• ABC classification is based on annual usage value
whereas VED method is based on criticality of the
item in the production process.
FSND CLASSIFICATION
• Goods are classified on the basis of their turnover.
F – Fast moving
S – Slow moving
N – Non-moving items
D – Dead items
• The classification of items as FSND are based on the
number of issues from stores over a period of time.
• This period is decided based on the kind of
inventory a firm is holding.
JUST-IN-TIME AND INVENTORY
MANAGEMENT
• Just-in-time (JIT) production/inventory is a widely
used system by manufacturing companies to plan
and implement production and inventory activities
within their plants.
• JIT refers to acquiring materials and manufacturing
goods only as needed to fill customer orders.
• JIT production, also called lean production, is a
demand-pull manufacturing system because each
component in a production line is produced as soon
as and only when needed by the next step in the
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production line.
BENEFITS OF JIT
• Right quantities are purchased or produced at the right
time.
• Cost-effective production.
• Achievement of higher quality standards and better
levels of customer service both to internal and external
customers.
• Minimization of inventory WIP and waste.
• Systematic identification of operational problems and
the development of technology based tools for
correcting identified problems.
• Production of goods which meet exactly the needs of
customers immediately on demand.
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