Management Notes

Management Notes

Reference Notes for Management
Material Control

Material Control – Material Cost | Introduction to Cost and Management Accounting

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Material Control

Material control provides systematic control and regulation of the purchase, storage, and use of materials so as to maintain an even flow of production and at the same time avoid excessive financial investments in raw materials. Having effective material control reduces the loss and wastage of materials that would otherwise go unnoticed.

The core of materials management is material control. Materials are needed and important depending on the idle time cost of workers and machinery, as well as on the urgency of the requirements. If workers and machinery in the factory could wait, and so could customers, materials would not be in short supply, and no inventories would need to be kept. Man and machines cannot wait for materials to arrive after the need for them arises because it is highly uneconomic to do so, and modern life demands too much speed to wait for materials to arrive. As a result, manufacturers carry materials. 

Proper planning and controlling of inventories is vital since materials are a significant component of the production cost of a product and since these costs are controllable in some way. Material control is a planned method of deciding what to purchase and store at minimum cost without affecting production or sales. Materials that are not controlled may grow beyond their economic utility. Stocks and surplus stores tie up excess funds, production stalls, and the plant’s finances are severely strained. Material control problems also lead to excessive consumption and wastage as operatives are likely to become careless with irrational supply of materials.  

Objectives of Material Control

Objectives of Material Control

Material control should serve the following objectives:

  1. To ensure a continuous flow of materials, components, and parts for efficient and uninterrupted production.
  2. To minimize inventory investments while keeping the needs of operations in mind.
  3. To provide for efficient storage of materials in order to prevent loss of inventory due to fires or thefts as well as to keep handling times and costs to a minimum.
  4. To minimize surplus and obsolete items.

The efficiency of inventory control may seem obvious if materials levels are dropping. Depending on sales requirements and production schedules, the amount and time of materials should increase or decrease. A company’s responsibility for controlling materials lies with the top management, though decisions could be influenced by a combination of the judgments of the production manager, the controller, the sales manager, and the purchasing manager. Due to the financial considerations involved in the problem, as well as the need to coordinate differing kinds of materials and differing views from departments, such coordination is desirable.

For example, the sales manager, purchasing executive, and production manager all favor carrying more stock, though the financial manager prefers to limit the level of investment in material to the lowest level. A large number of organizations, however, assign material control to the purchasing department specifically.

Material Control Techniques

Material Control Techniques

The following are the common techniques of inventory control:

  1. Min-max Plan
  2. The Two-bin System
  3. Order Cycling System
  4. ABC Analysis
  5. Fixation of various levels
  6. Use of Perpetual Inventory System and Continuous Verifications
  7. Use of Control Ratios
  8. Review of Slow and Non-moving Items.

Mix- Max Plan

One of the oldest methods of material control. The analyst uses this plan to set a maximum and minimum level for each stock item based on its usage, requirements, and margin of safety to minimize risks of stock-outs. A reorder point is set based on the minimum level, and an order is placed for the material that will bring it to the maximum level. The method is very straightforward and based on the premise that minimum and maximum quantities for different items can be fairly well defined and established. In this plan, considerations such as economic order quantity and the identification of high value and critical stock items for special management attention are not taken into consideration.

The Two-Bin System

Under this system, two piles, bundles, or bins are maintained for each item of stock. The first bin stocks sufficient material to meet demand during the period between receipt of an order and placing the next order. The second bin contains safety stock as well as the normal amount used from order to delivery date. When the stock contained in the first bin is depleted and the second bin is full, a requisition for new supplies is prepared and submitted to the purchasing department. A perpetual record of materials under this bin cannot be maintained since no bin-tag (quantity record of materials) card is maintained. 
FAQs
In a two-bin inventory system, the amount contained in the second bin is equal to the:
A) ROP
B) EOQ
C) amount in the first bin
D) optimum stocking level
E) safety stock

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The Correct Answer for the given question is Option A) ROP

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Order Cycling System 

According to the order cycling system, quantities in hand of each item or class of stock are reviewed periodically, such as every 30 days, 60 days, or 90 days. An order is placed to replenish an item’s supply if it is observed during a scheduled periodic review that its stock level won’t be sufficient until the next review, taking into account its probable rate of depletion. The review period will vary from firm to firm as well as between different materials within the same firm. A short review cycle is usually required for critical stock items. A replenishment order is placed so that a given stock item can reach a certain level, which is often expressed in terms of days or weeks’ supply. In the scheduled periodic review plan, differences in rates of usage for different items of stock are not taken into account, so items whose usage has declined will have surplus stock, whereas for some items the rate of depletion may have increased to the point that they are completely depleted before the next scheduled periodic review date. Further, the system tends to make procurement and purchasing activities peak around review dates.

ABC Analysis

Material control lends itself, first and foremost, to a problem of analysis because of the large number of parts and materials that are used in industrial products. This analytical approach is popularly known as ABC analysis (Always Better Control), which originated at General Electric Company of America. ABC analysis involves segregating materials for selection control. Material value represents the money value of each material item based on its relationship with the total cost and material value. It is the logic behind this kind of analysis that the management should examine each item of stock in terms of its usage, lead time, technical or other problems, and its relative value in relation to the total investment in inventories. In order to control inventories, the most critical items, i.e. high value items, should be given special attention, while low value items should be handled with the least expense and effort. Using ABC analysis, different stock items can be ranked based on their average material investment or on the basis of their annual rupee expenditure.

FAQs,

Abc Analysis divides an organization’s on-hand inventory into three classes based upon

A) item quality
B) unit price
C) the number of units on hand
D) annual demand
E) annual dollar volume

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The Correct Answer for the given question is Option E) annual dollar volume

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All except which of the following statements about abc analysis are true?

A) In ABC analysis, inventory may be categorized by measures other than dollar volume.
B) ABC analysis categorizes on-hand inventory into three groups based on annual dollar volume.
C) ABC analysis is an application of the Pareto principle.
D) ABC analysis suggests that all items require the same high degree of control.
E) ABC analysis suggests that there are the critical few and the trivial many inventory items.

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The Correct Answer for the given question is Option D) ABC analysis suggests that all items require the same high degree of control.

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ABC Analysis is based upon the principle that

A) All items in inventory must be monitored very closely
B) There are usually a few critical items, and many items which are less critical
C) An item is critical if its usage is high
D) The safety stock in terms of volume should be higher for A items than for C items

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The Correct Answer for the given question is Option B) There are usually a few critical items, and many items which are less critical

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Perpetual inventory system and continuous stock verification

Material control is intended to be assisted by the perpetual inventory system. The system is used for stock control by the stores department. By using the system, every receipt, issue, and stock balance is always recorded. The Institute of Cost and Management Accountants of England and Wales defines perpetual inventory as “a system of records maintained by the controlling department which reflects the physical movement of stocks as well as current stock balances. As a result, it is a method of determining the current balance after recording every receipt and issue of materials. An important point to remember is that the perpetual inventory is usually verified by a continuous stock-taking program. The perpetual inventory is the system of records, while continuous stock-taking refers to the physical comparison of those records with actual stock.

Review of slow and non-moving items

Business loses money when inventory is locked up. As more money is locked up, less is available for working capital and the cost of carrying inventory also increases. A high stock turnover ratio is ideal. The loss caused by obsolescence should be eliminated or these items should be used in a profitable way. It is important to dispose of slow moving stocks quickly. It is important to move at a faster pace. It is possible to determine the slow moving stocks by analysing the turnover of different items of stock. Due to changes in product, process, design, or method of production, materials become obsolete or useless. Slow-moving stocks have a low turnover ratio. Capital is locked up and carrying costs are incurred. Therefore, management should minimize losses.

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