2. Learning Objectives
You should be able to:
• Understand the need for a proper material control system.
• Describe the material control procedure.
• Explain the difference between direct and indirect material costs and
examples.
• Calculate the stock level control i.e. minimum stock level, maximum
stock level, reorder level and reorder quantity.
• Determine the Economic Order Quantity (EOQ)
• Prepare store ledger accounts using the three methods.
3. INTRODUCTION
• Raw materials are the basic materials and parts
that are used in the manufacturing process
• Direct material is raw materials that can be
physically and directly identified to the finished
product during the manufacturing process
Example: in production of furniture, wood is
direct material
• Indirect Material is raw materials that cannot be
directly traced to a product. It will be included as
an overhead. Example: in production of furniture,
varnish/paint is indirect material
4. MATERIAL CONTROL
Objectives are:
• To ensure funds invested in material are properly
used.
• To ensure the material purchased are of the right
standard.
• To ensure the availability of inventory.
• To prevent from damages.
• To ensure materials are only issued as authorized.
5. MATERIAL CONTROL PROCESS
2. STORAGE/
STOREKEEPING
1.
PURCHASING/PROCUREMENT
DEPARTMENT
3. STOCK
CONTROL
4. ISSUANCE 5. STOCK
VALUATION
& PRICING
7. STORAGE/STOREKEEPING
Responsibilities:
• Ensure goods received from supplier are properly
stored.
• Organize storage and monitor stock level.
• Protect goods from theft, fire etc.
• Issue Purchase Requisition Note (PRN) to
purchasing department when stock is insufficient.
• Issue material needed to production department.
9. PRODUCTION DEPARTMENT
Responsibilities:
• Send Material Requisition (MR) when requesting
material from storekeeper.
• Received material from store for production.
• Transform material into finished goods.
10. RECEIVING DEPARTMENT
Responsibilities:
• Received and checked material from the supplier
against invoice & delivery note.
• Issue Goods Receipt Note (GRN) and Inspection
Note (IN) if the goods received is satisfactory.
• Returned back to suppliers the defected material.
11. STOCK/INVENTORY
CONTROL SYSTEM
Important for:
1. Recording and monitoring the stock level.
2. Anticipating future demand.
3. Deciding when & how many to order.
4. Preventing excessive accumulation of inventory
items
12. STOCK/INVENTORY
CONTROL SYSTEM
TWO types of stock/inventory system:
• Perpetual inventory system maintains a
continuous/regular record of inventory
movement. The record will be up-to-date.
• Periodic inventory system updates
inventory records only periodically at
statement dates (quarterly or annually)
13. STOCK LEVEL CONTROL
1. Lead Time
2. Reorder level (ROL)
3. Reorder Quantity (ROQ)
4. Minimum Stock Level
5. Maximum Stock Level
6. Average Stock Level
14. LEAD TIME
• Time taken for the stock to reach the store.
• Time between placing an order and the
actual delivery.
15. REORDER LEVEL (ROL)
• The level where new stock needs to be
replenished
• Formula:
ROL = MAX USAGE x MAX LEAD TIME
16. REORDER QUANTITY (ROQ)
Size/Quantity that need to be ordered.
MINIMUM STOCK LEVEL
Minimum Quantity that must be available in the store.
Formula:
MIN SL = ROL – (AVG USAGE x AVG LEAD TIME)
17. MAXIMUM STOCK LEVEL
• The maximum quantity that can be placed in the
store.
• Formula:
MAX SL=ROL-(MIN USAGE x MIN LEAD
TIME) + ROQ
19. EXAMPLE
• Malay House of Silk is a well known
distributor of imported textiles in Malaysia.
One of the popular imported textiles is soft
silk fabric.
• The average demand for the product is
estimated at 45,000 rolls per month and
increase to 48,000 rolls during festive
season.
20. • The components of soft silk fabric consist
of 70% silkworm and 30% thread.
• The fabric is imported from China and the
average consumption is 1,400 rolls per day.
• The minimum and maximum consumption
of silk is 1,200 and 1,600 rolls per day.
21. • At the end of the week, the stock level is being
reviewed and if the reorder level is reached, an
order will be replaced the next day.
• Shipment from China is expected to be between 3
to 5 weeks from the ordering date.
• Re-order quantity is 20,000 rolls.
22. Calculate the following:
a) Re-order level
Formula : max usage x max lead time
: 1600 rolls x 5 weeks
: 8,000 rolls
23. b) Maximum SL
Formula: ROL - (Min usage x min
lead time) + ROQ
8000- (1200 rolls x 3 weeks)
+ 20000 rolls
24,400 rolls
24. c) Minimum SL
Formula: ROL - (avg usage x ave lead time)
8000 - {(1200 rolls + 1600rolls/2)} x {(3weeks + 5
weeks)/2}
2,400 rolls
25. ECONOMIC ORDER QUANTITY
(EOQ)
• Ideal order size of stocks to be ordered by
the business.
• Minimize total costs.
• TC=holding costs + ordering costs
26. EOQ ASSUMPTIONS:
• Demand for the product is constant.
• Holding and ordering costs are constant.
• Unit price is constant.
• Order of stocks can be replenished
immediately.
27. FORMULA EOQ
• EOQ 2DO/H
• D= DEMAND PER ANNUM
• O=ORDERING COST PER ORDER
• H=HOLDING COST PER UNIT
30. HOLDING COSTS (HC)
• Costs of handling the stocks in the store.
• Examples are:
– Storage charges
– Insurance and security
– Interest on fund borrowed to purchase stock
– Costs of obsolescence stock
31. ORDERING COSTS
• Costs associated with:
– Faxing order
– Phone calls
– Despatch
– Transportation charges
– Wages to workers who may have to bring down
the goods.
32. FIFO
• First material IN/RECEIVED will be the first
material OUT/ISSUED.
•Material issued is valued at the price of the
oldest batch.
33. LIFO
• Last material IN/RECEIVED will be the first
material OUT/ISSUED.
•Material issued is valued at the price of the
latest batch.
34. Weighted Average
• Used *average price for material OUT/Issued.
*Average Price = Total cost/total quantity
35. EXAMPLE
• On 1 January 2010, All One Stop Scarf
Online Shop was established by Pn. Maria
& Faridah specializing selling veils and
scarves.
• During the first 6 months of the business
operation, the following transactions have
occurred:
36. EXAMPLE
PURCHASES
DATE OF
RECEIPT
QUANTITY
(UNITS)
TOTAL
COST (RM)
9 JAN 200 2,200
2 FEB 400 4,000
12 MARCH 600 6,600
10 APRIL 400 4,000
14 JUNE 300 3,600
ISSUES
DATE OF
RECEIPT
QUANTITY
(UNITS)
TOTAL
SALES
(RM)
JAN 0 0
10 FEB 500 6,000
MARCH 0 0
20 APRIL 600 7,000
26 JUNE 400 5,000
37. EXAMPLE
Additional information:
1. A customer returned 5 scarves due to the wrong
colour on 25 April 2010. The scarves were sent
to her earlier on 20 April 2010 at RM11.00.
2. On 24 June 2010, the company returned 20
scarves that it purchased on 14 June.
3. The closing stock counted on 30 June 2010 was
375 units.
38. EXAMPLE
• Draw up a store ledger
card showing the
above transaction
using:
a) FIFO METHOD
b) LIFO METHOD
