This document discusses various techniques for inventory control and material costing. It describes ABC analysis which categorizes inventory into A, B, and C items based on their value and need for control. It also discusses determining minimum, maximum, and reorder levels to manage stock. The economic order quantity formula is presented to determine the optimal order size to minimize total inventory costs. Other techniques covered include proper purchase procedures, store keeping methods like FIFO and LIFO, calculating inventory turnover ratio, and using a perpetual inventory system to continuously track inventory levels.

1. MATERIAL COSTING

2. Learning objectives
• Understand the concept of Material Costing and Issues related
to Inventory Control

3. MATERIAL OR INVENTORY CONTROL
CONTROL
It is defined as, “safeguarding of company property in the form
of materials by a proper system of recording and also to
maintain them at the optimum level considering operating
requirement and financial resources of the business.

4. Types of Mterials
• Direct Material
• Indirect Material
• Supplies
• Finished goods

5. Objectives of Material Control
 No under stocking
 No overstocking
 Minimum wastage
 Economy in purchasing
 Proper quality of materials
 Information about material
 Material report to management

6. Techniques of inventory
control
• ABC technique
• Minimum, maximum and re order levels
• Economic order quantity
• Proper purchase procedure
• Store keeping
• Inventory turnover ratio
• Perpetual inventory system

7. ABC technique
• ABC analysis is an inventory categorization technique.
• ABC analysis divides an inventory into three categories—
"A items" with very tight control and accurate records,
"B items" with less tightly controlled and good records, and
"C items" with the simplest controls possible and minimal
records.
• The ABC analysis suggests that inventories of an organization
are not of equal value.
• Thus, the inventory is grouped into three categories (A, B,
and C) in order of their estimated importance

8. Item Value Proportion control
'A' items 70% 20% Tight
'B' items 25% 30% Medium
'C' items 5% 50% Loose
ABC Technique

9. Techniques of inventory
control
• ABC technique
• Minimum, maximum and re order levels
• Economic order quantity
• Proper purchase procedure
• Store keeping
• Inventory turnover ratio
• Perpetual inventory system

10. Stock levels
 Maximum level
Reorder Level+ Reorder Quantity- (Minimum consumption× Minimum re
order period)
 Minimum level
Re order level – (Normal consumption ×normal re order period)
 Re order level
Maximum consumption ×maximum re order period
 Danger level
Normal consumption × maximum re order period for emergency
purchases
 Average stock level
(Minimum level +maximum level)/2

12. Calculate Stocklevels from the following

13. Techniques of inventory
control
• ABC technique
• Minimum, maximum and re order levels
• Economic order quantity
• Proper purchase procedure
• Store keeping
• Inventory turnover ratio
• Perpetual inventory system

14. Economic order quantity(EOQ)
• Economic order quantity (EOQ) is the ideal order quantity a
company should purchase to minimize inventory costs such as
holding costs, shortage costs, and order costs.
• The EOQ is a company's optimal order quantity that minimizes its
total costs related to ordering, receiving, and holding inventory.
• The EOQ formula is best applied in situations where demand,
ordering, and holding costs remain constant over time.
• One of the important limitations of the economic order quantity is
that it assumes the demand for the company’s products is constant
over time.

15. Formula- EOQ
Where,
S= Annual Consumption
D= Ordering Cost
C= Cost per unit
I= Inventory carrying cost/ Holding Cost

16. Practice Questions

17. Techniques of inventory
control
• ABC technique
• Minimum, maximum and re order levels
• Economic order quantity
• Proper purchase procedure
• Store keeping
• Inventory turnover ratio
• Perpetual inventory system

18. Proper purchase procedure
I. Purchase Requisition. ...
II. Identify the Sources of Supply. ...
III. Call for Tenders or Quotations. ...
IV. Analysis of Tenders. ...
V. Selection of Right Supplier. ...
VI. Placing of Purchase Order. ...
VII. Follow Up of Purchase Order. ...
VIII. Receiving of Materials.

19. Techniques of inventory
control
• ABC technique
• Minimum, maximum and re order levels
• Economic order quantity
• Proper purchase procedure
• Store keeping
• Inventory turnover ratio
• Perpetual inventory system

20. Methods of store keeping
• LIFO
• FIFO
• Simple average method
• Weighted average method

21. PrepareStoreedgerusingFIFOandLIFOmethod
fromthefollowing

22. PrepareStore edger usingFIFOand LIFO
methodfrom the following

23. Techniques of inventory
control
• ABC technique
• Minimum, maximum and re order levels
• Economic order quantity
• Proper purchase procedure
• Store keeping
• Inventory turnover ratio
• Perpetual inventory system

24. Inventory turnover ratio
• Inventory turnover indicates the rate at which a company sells
and replaces its stock of goods during a particular period.
• The inventory turnover ratio formula is the cost of goods sold
divided by the average inventory for the same period.
• A good inventory turnover ratio is between 5 and 10 for most
industries, which indicates that you sell and restock
your inventory every 1-2 months.
• This ratio strikes a good balance between having
enough inventory on hand and not having to reorder too
frequently.

25. Techniques of inventory
control
• ABC technique
• Minimum, maximum and re order levels
• Economic order quantity
• Proper purchase procedure
• Store keeping
• Inventory turnover ratio
• Perpetual inventory system

26. Perpetual inventory system
• A perpetual inventory system is an inventory management
method that records when stock is sold or received in real-time
through the use of an inventory management system that
automates the process.
• A perpetual inventory system will record changes in inventory at
the time of the transaction.
• The periodic inventory system uses an occasional physical count to
measure the level of inventory and the cost of goods sold (COGS).
• The perpetual system keeps track of inventory balances
continuously, with updates made automatically whenever a product
is received or sold.

27. Just in Time Inventory
• Just in time (JIT) inventory is a strategy to increase efficiency and
decrease waste by receiving goods only as they are needed in the
production process, thereby reducing inventory costs.
• In other words, JIT inventory refers to an inventory management
system with objectives of having inventory readily available to meet
demand, but not to a point of excess where you must stockpile extra
products.
General Motors operates using a JIT inventory, relying on
its supply chain to deliver the parts it needs to build cars.
The parts needed to manufacture the cars do not arrive
before or after they are needed; rather, they arrive just
as they are needed.
EXAMPLE

28. VEDAnalysis
Material
VITAL ESSENTIAL DESIRABLE
VITAL ESSENTIAL DESIRABLE
Vital items which render
the equipment or the
whole line operation in a
process totally and
immediately inoperative
or unsafe; and if these
items go out of stock or
are not readily available,
there is loss of
production for the whole
period.
Essential items which
reduce the equipment’s
performance but do not
render it inoperative or
unsafe; non-availability
of these items may result
in temporary loss of
production or dislocation
of production work;
replacement can be
delayed without affecting
the equipment’s
performance seriously;
temporary repairs are
sometimes possible.
Desirable items which
are mostly non-
functional and do not
affect the performance
of the equipment.

29. FSN Analysis:
• Here the items are classified into
fast-moving (F),
slow-moving (S) and
Non-moving (N)
• on the basis of quantity and rate of consumption.
• The non-moving items (usually, not consumed over a period of
two years) are of great importance.
• It is found that many companies maintain huge stocks of non-
moving items blocking quite a lot of capital.