MODULE – 3

MATERIALCONTROL/INVENTORY CONTROL

Introduction: Materials form an important part of the cost of a product. More than fifty
percent of the total cost of a product or a job is usually in the form of materials alone. In
almost every industry a huge portion of working capital is invested in the form of
inventories of which material is the major component.
Meaning of Materials: The term materials refer to all commodities supplied to an
undertaking to be used in the process of producing goods or rendering services. It includes
all raw materials and supplies like lubricants, fuel and loose tools.
As per Cost Accounting Standard 6 (CAS-6) Materials include raw materials, process
materials, additives, components, sub-assemblies, accessories and finished goods,
consumable stores, spare and other indirect materials. For costing purposes, materials may
be classified into two broad categories.
a) Direct Material: The materials which can be easily identified and attributable to
the individual units or cost centre being manufactured are known as Direct Material.
Ex: Paper in Books, Cloth in garments etc
b) Indirect Material: Indirect materials are those materials which cannot be easily
identified and attributable to the individual units being manufactured. These are of
small value such as nuts, pins etc.

Meaning of Material Control: Adequate and proper control of materials and other items
of inventory from the time the production is planned until goods are sold and supplied is an
important feature of cost accounting system. Material control is defined as a system
which ensures the provision of the required quantity of material of the right quality at
the required time with the minimum amount of capital. It is concerned with purchase,
storage and issue of materials. They are called Purchase Control, Inventory Control and
Issue Control.
Objectives of material control:
The control of materials must meet two opposing needs, i.e.
a) The maintenance of sufficient inventory for efficient operation
b) Maintenance of inventory at the lowest level of investment.
a. The basic objective of good materials control is to be able to place an order at
the right time from the right source to achieve the right quantity at the right
price and quality. These objectives may be specifically listed as follows:
b. To provide a supply of required materials for efficient and uninterrupted

Material Control P a g e 1 | 20
 operations

c. To maintain the investment in inventories at the lowest level consistent with

operating requirements.
d. Purchase of materials only when authoritative requests are received from the
consumption departments and only when the need arises.
e. To make all purchases at minimum cost as per economic ordering quantity.
f. To purchase at the most favourable places, prices and terms.
g. To store materials with a minimum of handling time and cost and protect them
from loss by fire, theft and damages.
h. To keep inactive, surplus and obsolete items to a minimum by systematic
reporting of product changes which affect material requirements.
i. Issue of materials only on proper authorisation and maintenance of proper
accounts.
j. To fix up the responsibility for materials for some persons and positions.
k. To ensure payment for purchases only on receiving and accepting the
materials.
l. Regular reports of purchases issue, stock etc., to the management. In different
types and sizes of business, quantities and cost of materials and component
parts vary considerably.

Procurement of Materials/Purchase of Materials:

Industrial buying is an important function of management and a significant step in the process of
material control.

Purchase of Material:

A Separate department is set up to handle all purchases. This department has to decide what to
buy, when to buy, from where to buy, how much to buy and at what price to buy the materials. It
is headed by purchase manager or supply manager or chief buyer.

Functions of purchase department: Purchase department always aims at procuring different

materials in the right quantity of the right quality, from the right source, at the right time and to
supply them to different jobs and departments as and when required.

The primary functions of purchasing department are as follows:

1. Ensure continuous supply of materials to encourage continuous production.

2. Buy right type of materials in required quantity, at right price, from the right source.

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3. Maintain adequate stock at minimum investment and cost.
4. Minimize the possibility of wastage, obsolescence, duplication and delay in supply of materials.
5. Select the suitable source of supply and develop alternative source of supply.
6. Maintain the quality of materials bought.

Types of Purchasing: Keeping in view a number of factors, e.g., types of products and raw
materials, suppliers, distances cost etc., the choice is to be made between centralized and
decentralized buying.

Centralized buying: Under centralized purchasing one central department makes all purchases for
the whole organization. One purchase department is responsible to buy on behalf of different
departments of the firm. Individual departments have no right to buy their requirements directly
from the market. This policy is adopted by the medium size and big companies.

Advantages: The main advantages of centralized purchasing are:

1. It enables consolidation of orders of materials commonly used by two or more departments. It
enables quantity buying and brings economies in buying.
2. It helps to maintain uniform and firm buying policy.
3. It is the specialized buying by expert staff with the exclusive function of buying.
4. It helps in quick implementation of purchase policy and plan.
5. It facilitates the maintenance of one complete set of records for purchase transactions.
6. It minimizes the possibility of duplication of efforts in purchasing.
7. It helps to avoid excess stocking.
8. It helps to gain recognition to purchasing as a major function of the organization.
9. It facilitates to develop effective utilization of trade relations.
10. It enables economy in recording and accounting the purchase transactions.
11. It leads to prompt reporting on scrap, obsolete stocks and loss in storage.
12. It helps to reduce material cost through economies of large scale buying, (e.g., quantity
discount, cash discount, favourable terms etc.) specialized buying, economy in recording and
avoiding duplication of activities etc.

Disadvantages: The major disadvantages of centralized buying are:

1. The buying procedure is less flexible. Quick adjustments in accordance with the changed
requirements of a particular department cannot be made.
2. It will lead to high initial cost of setting up a new department.
3. It will result in undue delay in supply of material.
4. It is very difficult to maintain up to date record of different departments.

Decentralized buying: Decentralized purchasing is the reverse of centralized purchasing. Each

department makes its own purchases. When different units of an industry are situated far apart it is
desirable to decentralize the purchasing function. The limitations of the centralized buying become

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the advantages of this method of buying. In addition to them the following advantages may also be
enjoyed:
1. It brings in the benefits of local purchases (i.e., low prices, seasonal prices etc.)
2. Transportation costs may be reduced.
3. It enables easy local sales by the contact with local suppliers.
4. Prompt settlement of complaints, rejections, shortages or excess receipts etc, is possible.
5. There is personal attention by the department head to buying problems as he can be held
responsible for the purchases and overall performance of his department.
6. It reduces costly order processing procedures.
7. It helps to cut down lead time.
8. Purchasers generally have intimate familiarity with technical properties and use of materials to be
bought. In centralized buying persons working at distant department are less likely to develop such
knowledge.

Purchase Procedure
Purchasing involves different steps designed to achieve maximum efficiency. These steps
or procedure vary with different business firms. However, the commonly followed
procedure is as follows:
1. Receiving of purchase requisitions
2. Selection of the source of supply
3. Placing the orders
4. Receiving and inspection of materials
5. Approval of invoices

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 a) Receiving Purchase Requisitions (or Indents):Purchase routine starts with the
receipt of purchase requisition by the purchasing department. Purchase requisition
is a request to the purchasing department to purchase materials. It is a written
document of materials to be purchased and it gives description of the material,
quantity and the date by which they are required.
CIMA defines purchase requisition as “an internal instruction to a buying office to
purchase goods or services. It states their quantity and description and elicits a
purchase order.
Purchase requisition should be signed by the person who initiates and should be
countersigned by the official who authorizes it. It may be prepared in as many
copies as particular organization requires. It is prepared in Triplicate. The original is
sent to the purchasing department, the first copy is kept by the department which
has prepared it and the second copy is sent to the costing department for costing and
record purpose.

b) Selection of source of supply: Purchase department must have up-to-date

information of the various sources of supply of different items of materials.
Generally, it maintains these details in the ‘vender’s file’ or ‘suppliers register’.

Steps in selecting source of supply: The purchase department may follow the
following steps in selecting source of supply.
a) Inquiry for tenders and quotations: Purchase department has to keep itself
informed of different sources of supply, their financial strengths, terms and
conditions. It may invite tenders from the prospective suppliers. Tender contains
particulars of price, time of delivery, mode of transport, terms of payment and
other terms and conditions of sale.
b) Selecting the suitable source: After receiving the tenders, purchase department
has to prepare a statement showing the terms and conditions quoted by different
suppliers. The appropriate source is selected after considering price quoted,
terms of payment, time of delivery, terms of discount, financial analysis of
supplier, geographical location of supplier, supplier’s technological
development, labour relations in supplier’s firm.

C) Placing the order: After selecting the supplier the purchase department
prepares a purchase order for the supply of materials. Purchase order is a
request by the purchaser to the supplier to deliver the goods stated therein. It is
a written authorization to the approved supplier to supply goods of requisite
quantity and quality at the terms and conditions agreed upon.

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 The purchase order is prepared in 5 copies. The original is sent to the supplier,
one copy is retained by purchase department, one copy is sent to department
which initiated purchase requisition, other copy to accounting department and
the last copy to receiving department.

D) Receiving and Inspection of materials: This task is performed by the store-

keeper in case of small organizations. But in large organizations this work is
assigned to a separate department. The major functions of receiving and
inspection department are receiving, unloading, unpacking the materials
delivered by the supplier, checking the quantity and quality of materials received and
reporting shortage or breakage, if any, to supplier.
Material Inspection Note: After the materials are unloaded the inspection
department thoroughly inspects the quality of the materials and checks whether
the quality is in accordance with the purchase order. It prepares a note called
material inspection note. The copies are sent to the supplier and stores
department.
Goods Received Note: Once the inspection is completed the inspection (/stores)
department prepares a ‘Goods Received Note’. One copy is sent to purchase
department, accounts department and the department which initiated the
requisition.
E) Approval of Invoices: When invoices are received, the correctness of the entries
made in it is to be checked. Such a verification is made with the help of purchase
requisition and purchase order and the goods received note , inspection note, material
returned note(if any). After a careful scrutiny of the invoices, if found correct, it is
approved. Approval indicates that payment can now be made. They are signed by
purchase manager and sent to Accounts Department for payment.

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 Pricing of materials

Problems:
1) A supplier quotes for material 'X' as follows:
Lot price - 200 Kg. @ ₹2.50 per kg.
500 Kg. @ ₹1.75 per kg.
800 Kg. @ ₹1.25 per kg.
He allows a trade discount 25%, and a cash discount 3% if payment is made
within 15 days. One container is required for every 100 kg. of the materials and the
containers are charged at ₹15 each but credited @ ₹10 on return. Buyer decides to buy
800 kg. Transport charges amounting to ₹100 are charged by the supplier. Calculate
the purchase price of 800 kg material 'X'.

2) The following quotation is received in respect of material 'N':

Lot price rate per kg. 100 kg. ₹5.00
500 kg. ₹4.50
1,000 kg. ₹4.00
Trade discount 20%. Cash discount 5% if payment is made within15 days.
One container is required for every 100 kg. of material and containers are charged at
₹10 each, but credited with ₹9 if returned within 3 months.
Transportation charges for any order are ₹50, storage charges ₹15.
Assuming that concern pays up the bill within the due date, calculate the purchase
price of material when it decides to buy 500 kg. of the material.

3) A lorry load of materials of mixed goods was purchased for ₹1,00,000 by Mr. Kishan.
Later on these were sorted out into the following categories:
Category A 1000 units, selling price ₹20 per unit
Category B 2000 units, selling price ₹22.50 per unit
Category C 2400 units, selling price ₹25 per unit
Find the purchase price per unit of each category of material assuming that all
category yield same rate of profit.

4) Parag Engineering Company has received a consignment of materials of various grades

for ₹20,000. These were sorted out into following grades:
Grade A 6000 units, selling price ₹2 per unit

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 Grade B 4000 units, selling price ₹1.50 per unit
Grade C 7000 units, selling price ₹1 per unit
Calculate purchase price of each of the material assuming that percentage of profit is
the same in each case.

5) A firm purchased a raw material 'Z' from Venus Ltd. Quantity purchased 4500 kgs at
₹20 per kg. Company allows a trade discount of 10%, freight charges ₹2 per kg.,
Inspection charges Re. 0.10 per kg, unloading charges 15 paise per kg. Calculate the
purchase price of material Z.

6) For posting in the Stores Ledger, what values would you adopt in respect of the items
in the following purchase invoice?
1000 ks of Materials 'A' @ 25 per kg (one case) 25,000
500 ks of Materials 'B' @ 10 per kg (one case) 5,000
2000 ks of Materials 'C' @ 15 per kg (two cases) 30,000
60,000
(-) Trade discount @ 10% 6,000
54,000
(-) Cash discount @ 2.5% for payment within 15 days 1,350
52,650
(+) Freight 2,000
Not returnable cases @ 10 each 40
Insurance 1430
Sales tax @ 4.5% 2430 5,900
Total 58,550

Storage of Materials
After efficient purchasing, receipt and inspection of materials, the next important step in materials
control system is the storage of materials. It is concerned with the physical storage of materials. It
refers to the art of preserving the goods until required in production. Storekeeping aims at
safeguarding the materials from all kinds of loss and damage and ensuring smooth and continuous
flow of materials into the production activities.
In small industries in India, the investment in material constitutes up to 90% of total capital.
Therefore, heavy losses may be suffered in companies with inefficient stores handing. This calls

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 for an efficient department charged with the responsibility of stores management. In a large
organization it is entrusted to a separate department called stores department. The head of this
department is the store-keeper.

Types of stores
For better control of materials, the organization of stores is also of immense
importance. The stores may be organised as:

(a) Centralised stores

(b) Decentralised Stores
(c) Centralised stores with sub-stores.

(a) Centralised Stores: Centralised storing system is the system of setting up of a

single store-house for the whole organization. All types of materials are stored in this
single store-house. The material required by the different departments must move
from the central store-house.
(b) Decentralised stores: Under this system, a separate store department for each
production department is set up very near to the production department concerned.
The stores are headed by a person called Sub-storekeeper. The store-keeper of each
such department handles the receipts and issue of materials independently to different
jobs.
(c) Centralised stores with sub-stores: Under this system, the above two systems are
combined and the system functions under "Imprest system". All the materials are
stored in the central store-house. Separate sub-stores are set up with each production
department. A limit for each item of materials required by the sub-stores for a period
is fixed by the central store-house. The sub-stores issue materials to the production
departments.
Inventory control
Inventory control means control over different components of the stock. It is defined as
‘Physical control of stock items and implementing the principle and policies relating
thereto’. It aims at the optimum utilization of financial resources of the firm. This
objective is well served where inventory is maintained at the lowest level without
disturbing the continuous flow of materials into the production activities.
Techniques: There are different inventory control techniques or tools applied to meet
different requirements. Some of the important techniques are:
1. Fixation of Stock levels
2. EOQ

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 3. ABC analysis
4. Perpetual inventory system

1. Fixation of stock levels:

Stock levels are fixed to gain better control over the usage of material and material cost.

Maximum Stock Level: The upper limit in stock above which the stock is not
allowed to rise under normal circumstances without the prior sanction of the
management. This level is fixed to avoid the evil consequences of over-stocking. It is
fixed by taking into consideration the flowing factors:

Maximum stock level can be determined by the following formulae:

i)Maximu (Reorder Level + Reorder Qty) – (Minimum
m Level= Consumption X Minimum delivery time)

ii) Maximum (Reorder Level + EOQ) – (Minimum Consumption X Min

Level= Reorder period)

Minimum stock: It is the lower limit of stock below which the actual stock of any item
of material should not normally be allowed to fall. This level is also known as ‘Safety
stock’ or ‘buffer stock’. If the stock falls below this level, there is the danger of stoppage
of production due to shortage of materials.
Minimum level can be determined by the following formula:
Minimum Reorder Level – (Normal Consumption X Normal Delivery
Level= Period

Reorder level: Reorder level or ordering level is that level of stock at which purchase
orders are to be placed for its replenishment (i.e. fresh supplies). It is generally more
than the minimum level to cover consumption during lead time. (i.e., the period between
the date of placing the order and the date of receipt of materials).

Reorder level can be determined by the following formulae:

Reorder level = Maximum Reorder period X Maximum usage
= Minimum Stock + (Average consumption X Average /Normal
Delivery
Time

Danger level: It is a level below minimum level where quick measures are to be taken

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 for getting fresh supplies. It indicates the danger of shortage of materials if emergency
steps are not taken to replenish the stock.

Danger level can be determined by applying the following formulae:

Danger Level = Average Consumption X Emergency Delivery Period

Average Stock level: Average stock level is calculated as follows:

Average Stock Level= (Maximum Level + Minimum Level) /2

OR (Minimum level + ½ Reorder Qty)

2. EOQ (Economic Ordering Quantity):

The basic objective of inventory control is to carry sufficient stock of different items
of inventory at the least cost. This involves a basic problem, namely, what quantity of
each item of inventory should be ordered at a time? While answering this question the
factors to be considered are inventory carrying costs and ordering costs.

Inventory carrying costs (or inventory holdings costs) include warehouse charges,
insurance, heat, light, loss due to pilferage, breakage, spoilage, cost of the capital,
watch and ward costs, preservatives and maintenance, deterioration, obsolescence etc.
These costs change in proportion to the quantity of inventory stocked (i.e. larger the stock
more will be the carrying cost and smaller the stock less will be the carrying cost).

Inventory ordering costs refer to the cost of preparing and placing orders frequently,
handling of transportation cost, higher prices due to small scale purchases, frequent
shortage of materials disturbing continuous flow of production and selling activities,
cost of purchasing , receiving, inspections, accounting, cost of personnel in purchasing
department and payment department, cost of stationery, telephones etc.

Ordering costs depend on the number of orders placed. These costs decrease as the size
of the order increases because bigger the size of the order, fewer the number of orders to be
placed to cover the requirements of a given period.
The inventory carrying cost is the minimum where minimum amount of inventory is
held in stock. But in such cases, ordering costs increases because small quantities are
bought at each order and therefore more orders are to be placed. Thus, the ideal quantity to
be ordered must be such that it keeps both carrying costs and ordering costs at the
minimum.

EOQ is the optimum or the most favourable quantity to be bought at each order. It
sets equilibrium between carrying costs and ordering costs. At this point cost of
carrying and cost of ordering are equal and the total cost is the lowest. This can be
presented graphically as under:

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 The formula for determining EOQ is given below:

EOQ= 2UO
IC

U= Annual consumption of materials

0= Ordering Cost per Order
I= Cost of carrying inventory (or % cost of carrying
inventory or interest per unit per annum)
C= Cost per unit of material

3. ABC analysis of stock(also known as Always Better Control Technique)

In large manufacturing concerns inventory consists of thousands of items. It is very difficult

to control each of these items individually. Therefore, these items are divided in to
minimum groups of the purpose of inventory control. This classification is based on
different considerations. Value of the stock is one of the considerations.

ABC analysis of stock classifies stock items on the basis of value or importance. Under this
method materials are divided into three groups. A, Band C. A class consists of high priced
and large value items, B class consists of medium priced and intermediate value items and
the last category, consists of low priced and lowest value items.

‘A’ category represents 5% to 10% of the total items in the stores and 70% to 85% of
the total inventory value. ‘B” category constitutes 20% to 30% of the inventory
items and 25% to 30% of the stores value and the ‘C’ category constitutes 70% to
80% of the total items representing 5% to 10% of the stores value.

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 These ‘A’ Category items are controlled by the perpetual inventory method lead-time can
be analyzed to the fullest extent and minimize; usage handling and consumption of such
materials can be subjected to the most rigorous and sophisticated forms of control.

The ‘B’ category items can be given average treatment for accounting control and usage,
but no great analysis or attention may be called for.

‘C’ category items are of small value and are less attractive. Detailed accounting records are
not maintained for such items. Bulk issues are made to the production departments.

Because of this selective managerial policies and control, ABC analysis is also known as
‘Stock control according to value method’ and ‘Selective value approach’.

‘A’ items are high priced and require very strict control. They are bought in small quantities
after careful analysis of stock, price and rate of consumption. ‘B’ items are bought and
stored in accordance with the levels of stock fixed. Since ‘C’ items value is negligible,
liberal stock policies are adopted.

4) Perpetual inventory system:

The most important tool of inventory control is the perpetual inventory system. ICMA
London has defined this system as ‘a system of record maintained by controlling
department, which reflects the physical movement of stock and their current
balances’. It is a method of recording stores balances after each receipt and issue to
facilitate regular checking and to obviate closing down of work for stock taking.
Features of perpetual inventory system: The two important features of perpetual
inventory system are (a) continuous inventory recording and (b) continuous stock
verification.

(a) Stock records: One of the important duties of the store keeper is to maintain the
stores records properly. It includes making entries in appropriate records for every
receipt and issue of all materials. Bin card is an important record maintained at the
stores department to record receipts, issues and balance of materials.

i) Bin Card: A ‘bin’ is a place where the goods are stored in the storeroom. A bin
may be a shelf, rack, container, drawer, almirah, bags or open space etc.
Separate bin cards are maintained for each item and are attached to the bins
where the materials are stored in the godown.

The quantity of every receipt and issue of materials are entered in bin card
immediately. The main feature of the bin card is that after each receipt and issue the balance
quantity is recorded in the balance column. Thus, a bin card is a continuous quantitative
record of receipts, issues and balances of a particular material. It is to be noted that values
of receipts, issues and the balance of stock are not entered in the bin card.

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 A bin card has three columns to record receipts, issues and the balance on hand. It contains
information of various levels of stock, ordering quantity and material code etc. A specimen
bin card is given below.

BIN CARD

Description …………… Bin No………… Unit …………..

Code No. ………………. Location code……….. Ordering quantity ………
Maximum level ……….. Minimum level……… Ordering level…………

RECEIPTS ISSUES BALANCE

DATE GR No. Quantity MR No. Quantity Quantity REMARK
S

Advantages of bin card: Bin card acts like a ready reference of physical movement of a
particular material and the closing balance. It facilitates physical stock verification. It
assists in maintaining stock levels and placing orders in right times.

ii) Stores Ledger:

It is another record of stock maintained by the costing department. It contains both
quantities and values of every receipt and issues of a particular item of material. A balance
is also recorded after each receipt and issue. This ledger may be in the form of loose-leaf
ledgers or cards or bound books.

Store ledger contains columns to record receipts, issues and stock on hand in items of
quantity, price and values. It may also carry information about stock levels, bin no, etc.
A specimen of stores ledger is given below:

STORES LEDGER

Description………… Code No……… Maximum Level……………

Location Code No……. Unit ……………. Minimum Level…………….
Re Order Quantity…….. Reorder Level……………….

ORDERED RECEIPTS ISSUES BALANCE

DATE PO Qty Date GR Qty Rate Amt MR Qty Rate Amt Qty Rate Amt
No. Expected No. No.

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 Stores ledger is an important record of materials representing the movement of materials
and value of the closing stock. It is the main record for the stock control. The store keeper
has no access to the stores ledger. Therefore, it provides a good measure of internal check
on accuracy of stock record maintained by two departments viz., stores department and the
cost accounting department.

The differences between bin card and stores ledger are as under:

BIN CARD STORES LEDGER

1. Maintained by Stores Dept. Maintained by Cost Accounting Dept.
2. Attached to the Bin Kept in the cost office
3. Records quantities only Records both quantities & values
4. Transactions are posted continuously Sometimes posted periodically.
5. Each Transaction is entered individually Transactions may be posted summarily
6. Inter department/job transfers are not Inter job/department transfers are also
entered entered for costing purpose.

b)Stock verification or Stock taking: Another important duty of the store keeper is verifying the
physical quantity of stock with the bin card balances. Stock verification is to ensure that book
balances must agree with the physical balances and also for the preparation of balance sheets and
stock reports etc. There are two methods of stock verification, viz., (1) periodic and (2) perpetual
or continuous.

5) Periodic Inventory System

Under this system, physical stock checking is done at the end of accounting period, generally
one year and hence, it is also known as annual stock-taking. Stock is verified by an actual count
of closing stock on hand. A team of people taken from different departments is
formed for this purpose. This stock taking team (committee) counts every item of stock and
prepares stock verification sheet. In some cases all production operations are stopped to conduct
stock checking.
This system helps to minimize manipulations in stores accounting. The task of stock
verification is completed within a few days. However, the practical limitations of this system
are: it disturbs the daily activities of different departments, stock taking task is to be completed
within the shortest possible period and the reasons for discrepancies cannot be traced easily.
This method provides for recording purchases, purchase returns on a daily basis but does not
provide for a continuous inventory.

Perpetual Inventory or Continuous stock verification: Stock verification is conducted

throughout the year by a group of regular staff, appointed for that purpose. They are assigned
with the work of stock verification only. Therefore, normal functions of the production
departments are not disturbed by stock verification activities. Every item of stock is checked at
least a few times a year. This team picks up 10 to 15 items every day for verification. The team
maintains the secrecy of items to be verified on each day.

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 Advantages of perpetual Inventory system:
1. Disagreement, discrepancies and errors are quickly discovered. More frequent checks
avoid the repetition of errors. Remedial actions can be taken immediately.
2. It is not necessary to stop production for annual stock – taking.
3. It is easy to decide the value of stock at any date as per the stores ledger for the purpose
of preparing interim account and balance sheet. There is no need of taking physical
inventory for this purpose.
4. It has a moral effect on the employees. It helps to create cost-consciousness among
them.
5. The disadvantages of excessive stock are avoided
6. It provides up-to-date, factual and prompt inventory information to the
management.
7. It provides system of internal check on the activities of different departments connected
with inventory.
8. It ensures an efficient control over storing, issuing and using of materials.
9. Experienced and qualified persons are appointed to check the stock

Just in Time (JIT) Inventory Technique

JIT is a system of inventory management with an approach to have a zero inventories in

stores. According to this approach material should only be purchased when it is actually
required for production.

In short, the Just-in-Time inventory system focuses on "the right material, at the right
time, at the right place, and in the exact amount" without the safety net of inventory.

JIT is based on two principles:

i. Produce goods only when it is required and

ii. The products should be delivered to customers at the time only when they want

Just-in-time purchasing recognizes too much carrying costs associated with holding high
inventory levels. Therefore, it advocates developing good relations with suppliers and
making timely purchases from proven suppliers who can make ready delivery of goods
available as and when need arises.

It is also known as 'Demand pull' or 'Pull through' system of production. In this system,
production process actually starts after the order for the products is received. Based on
the demand, production process starts and the requirement materials is sent to the
purchase department for purchase.

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 Advantages of JIT

The advantages of Just-in-Time system are as follows:

1. Investment in inventory is reduced because more frequent purchase orders of small

quantities are made.
2. Carrying cost is reduced as a result of low investment in inventory.
3. It helps to reduces the chance of inventory obsolescence or damage.
4. It minimizes the storage as it orders for materials as and when demand is required for
production.
5. It helps to establish the good relationship with the suppliers.
6. Reduction in negotiated time is possible as it deals with proven suppliers who can give
quick delivery of quality goods are given purchase orders.
7. JIT helps in reducing waste of time of the work force and the entire production process
is concentrated on the time spent in actually producing products.

Problems on Levels of Stock

1. The following information is available in respect of materials ‘MT’

Maximum Stock level 8400 units

Budgeted Consumption Max 1500 units per month

Minimum 800 units per month

Estimated Delivery period Max 4 months, Min 2 months

You are required to calculate i) Reorder level and ii) Reorder quantity

2. Material X and Y are used as follows:

Minimum usage- 50 units each per week
Maximum usage- 150 units each per week
Normal usage- 100 units each per week
Ordering Quantities 600 units- X
1000 units- Y
Delivery period 4 to 6 weeks-
X
2 to 4 weeks-
Y
Calculate for each material minimum level, maximum level and re-order level.

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 3. In manufacturing a product, Benola Ltd., use two components ‘XL’ and ‘XM’.
The
following particulars are supplied to you.
Normal usage 50 kg per week, each
Minimum 25 kg per week, each
usage
Maximum 75 kg per week, each
usage
Reorder Qty ‘XL’ 400 kg
‘XM’ 600 kg
Reorder period ‘XL’- 4 to 6 weeks
‘XM’- 2 to 4 weeks

Calculate for each component of the following:

i) Re-order Level
ii) Minimum Level
iii) Maximum Level
iv) Average Stock Level

4. Two component A1 and A2 are used as follows:

Average usage – 300 units per week each
Maximum usage- 450 units per week each
Minimum usage- 150 units per week each
Reorder quantity – A1: 2400 units, A2: 3600 units
Re-order period – A1: 4-6 weeks, A2: 2 to 4
weeks Calculate for each component,
a) Re-order level
b) Minimum level
c) Maximum level
d) Average Stock level

5. Information relating to 3 materials is available.

Particulars A B C
ROQ (units) 10000 5000 1000
Minimum Delivery period 1 3 2
(weeks)
Average Delivery period (weeks) 2 4 3
Maximum level (units) - - 2000

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 The weekly usage of these materials varies from 175 to 225 units
Calculate:
1. Minimum level of A
2. Maximum level of B
3. Reorder level of level of C
4. Average Stock of level of A

Problems on Economic Order Quantity

1. Calculate Economic Ordering Quantity from the following data.

Monthly usage: 250 units
Cost of material per unit: Rs. 50
Cost of placing and receiving one order: Rs. 30
Annual Carrying cost of inventory: 5% of inventory value

2. A manufacturer buys certain material from outside suppliers at Rs. 30 per

units. Total annual needs are 800 units. The following data are also available:
Annual return on investment: 10%
Rent, insurance, taxes per unit per year: Rs. 1
Cost of placing an order: Rs. 100
Calculate the EOQ.
3. Medical Aids Co. manufactured a special product. The following
particulars were collected for the year 2014.
Cost of placing an order Rs. 60
Annual carrying cost per unit 10% of the inventory Annual
usage 6000 units
Cost of material per unit Rs. 20
Find the Economic Ordering Quantity.

4. From the following information, find out economic ordering quantity

Yearly Consumption 800 units
Cost per unit Rs. 0.30
Buying cost per order Rs. 7.00
Warehouse charges of inventory 15%

5. Medical Aids Co. manufactured a special product. The following particulars

were collected for the year 2006
Cost of placing an order Rs. 100
Annual Carrying cost per unit: Rs. 3.25

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 Usage of material per week:
Minimum 25 units
Maximum 75 units
Re-order period 4 to 6 weeks
Calculate:
a) Re-order quantity
b) Re-order level
c) Minimum level
d) Maximum Level

Questions: 4 Marks
1. What is EOQ? (or problems on EOQ)
2. Problems on bin card.
3. Distinguish between stores ledger and bin card.
4. What is a bill of materials?
5. What is centralised purchasing and decentralised purchasing?
6. What is a purchase order?
7. What is ABC analysis?
8. What is maximum level and reorder level?
9. State any two objectives of material control.

Questions: 8 Marks
1. Problems on purchase of materials.
2. Problems on fixation of stock levels.
3. Explain briefly the purchase procedure.
4. State the differences between periodic and perpetual inventory systems.
5. Explain the functions and importance of the purchase department in an organisation.

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