If large quantities arc purchased, the carrying costs would be large. Discrepancies are readily discovered and rectified. You periodically have to physically count the number of units that remain in stock and compare the amount with the total given by the inventory control system. Investment must not tied up funds that could be better used in other activities. Material is one of the important elements of cost and it has been observed that in the total cost structure of a product, material content is about 60 to 65%. In this example, according to the above report, 160 items will have a consumption of Rs 7, 50,000.
Material Control also includes the process of documenting material consumption to create a traceable history of the components used in the final assembly of a product. Prices of the items remain stable which keep carrying cost constant. Materials control is a wider term, which includes inventory control. Calculate minimum level and maximum level of material A. Liquidity ratios measure an organization's ability to generate cash. Without these links, there would be considerable risk that decisions would be based on flawed information, that resources are misma … naged, and that the decisions would be ignored by the operating organization. Inventory control is confined to the techniques of maintaining stocks at desired levels whether they are raw materials, work in progress or finished goods with the primary objective of minimizing the cost.
Actual balance may be less due to shrinkage and evaporation. Actual balance may be more due to absorption of moisture. Losses and costs arising from slow moving stocks can be reduced by reducing their quantity in the store. You are required to compute: Illustration 6: In manufacturing its products, a company uses three raw materials, A, B and C, in respect of which the following apply: Illustration 7: a The availability of an imported machinery component is irregular, and consequently, the consumption pattern also varies during the year. As the stock taking involves verifying the physical quantities of stores in hand, some firms temporarily suspend plant operations when this is done. Advantages: The following are the advantages of the perpetual inventory system: 1. These cards are maintained by storekeeper and the storekeeper is answerable for any difference between the physical stock and balance shown in the bin card.
On the other hand, a high turnover ratio is an indication of fast moving stock and less investment in stock. Technique : Under this system, stock-taking is undertaken at the end of the accounting year. It is a point at which order for supply of material should be made. Amount of capital available 3. If the stock turnover ratio for a particular item is zero, it means that the item had not been used at all during the period and should be immediately disposed of otherwise the quality of the item will be deteriorated.
Wheldon has taken the maximum period and maximum consumption during that period so that factory may not stop in any case due to shortage of materials. When such information is presented in the form of tables, graphs, charts etc. On account of their high cost, these materials should be under the tightest control and the responsibility of the most experienced personnel. It has gotten 195 views and also has 5 rating. Reduce wa … stage and loss of material through pilferage, theft, spoilage, evaporation etc.
This is normally the point lying between the maximum and the minimum levels. In order to have more effective control, the process of continuous stock taking is usually undertaken by a person other than the storekeeper. One major aspect of cost mon … itoring and controlling is to determine the relationship between the expenditures and the accomplishments. What it does is forecasting and initiating for procurement of materials Factors affecting Material planning : 1 Macro factors : Global factors such as price trends, business cycles, government's import and export policies etc are called the Macro factors. Protection of stores against pilferage. Thus, it is a system of ascertaining balance after every receipt and issue of materials through stock records to facilitate regular checking and to avoid closing down the firm for stocktaking. Carrying Cost: It is the cost of holding the materials in the store and includes: 1.
After all what is done in continuous stocktaking? In addition, financial responsibility centers require managers to account for a unit's progress toward financial goals within the scope of their influences. Advantages of the Perpetual Inventory System: Following are the advantages of the perpetual inventory system: 1. Financial ratio analysis examines the relationship between specific figures on the financial statements and helps explain the significance of those figures:. These cards are not only used for recording receipt and issue of stores but also to assist the shopkeeper to control the stock. Essential E : A spare part will be considered essential if, due to its non availability, moderate loss is incurred. Audits may be conducted internally or externally.
Only at this stage the total of ordering cost and carrying cost is minimum. For instance, the items can be classified as follows: a. The quantity to be ordered is called economic order quantity because the purchase of this size of material is most economical. That is, once you test an item for a quality requirement the status of the material, passing or failing conforming or non-conforming , must be documented and controlled. The most commonly used ratios have been grouped under following categories: i Liquidity Ratios : Liquidity ratios are calculated to know short term financial position of business and its ability to pay short term liabilities.
It consists of a number of example problems for each chapter, following the chapters in the reference book, and worked solutions to all problems. Carrying Cost: It is the cost of holding the materials in the store and includes: a Cost of storage space which could have been used for some other purpose. Economic Ordering Quantity: The total costs of a material usually consist of: Total acquisition cost + Total ordering cost + Total carrying cost. Their consumption is also 5% of total inventory usage. Daily consumption of the material - 100 units.