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Unit -3 Elements of Cost Materials, Materials: Means the commodities that are used in production, Industry in original form., Material Control means purchasing, storing & Consumption of, materials in a systematic manner., Significance of material Cost control:, 1) Co-ordination & Co-operation between various department., 2) Centralised purchasing department, 3) Classification of materials, 4) Properly planned materials requirements., 5) Setting of stock levels., Purchase control means it ensures getting of materials from, the right sources and at a right price., Purchase manager: Means Purchasing materials responsible, person. It is also known as supply manager or the chief buyer., Procedure involved in purchasing department:, 1) Receiving purchase requisitions, 2) Determining of quantity to be purchased, 3) Inviting tenders or quotations from different suppliers, 4) Placing order and following up delivery, 5) Receiving and inspecting materials, 6) Checking and passing of bills payments., Material Purchase Price: 1) invoice price 2) Quantity discount, 3) Trade discount 4) Cash Discount 5) Freight or transport, 6) Sales tax (GST), Excise duty etc. 7) Cost of container., 1) Invoice Price: Means it is the basic price at which materials, are charged into stores., 2) Quantity Discount: Means it is an allowance made by the, supplier to the purchaser to encourage large orders., 3) Trade Discount: Means it is an allowance made by the, supplier to the purchaser who has to resell the goods., 4) Cash Discount: means it is allowed by the supplier to the, purchaser to encourage prompt payment of bills., 5) Freight or Transport: Means any expenses incurred for, bringing the materials to the factory should be added to the, invoice price for determining the material cost., 6) Sales tax (GST), Excise duty etc: Means Any tax paid such as

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excise duty, customs duty, octroi etc should be added to the, purchase price of materials., 7) Cost of Container: Means Suppliers may or may not charge, for Containers., Economic Ordering quantity: (EOQ) Means the quantity of, materials to be ordered at one time. EOQ it is also Called, Purchase of right quantity of materials at right time at a right, price., EOQ = √ 2 AO/C, A= Annual Consumption, O= Ordering & Receiving cost per unit, C = Cost of Carrying inventory, C = % of inventory /Price or cost per unit X 100, Store Control: Means a building constructed for preserving the, materials. Store includes : Raw materials, Components,, maintenance of materials, tools, patterns, work in progress,, finished goods, consumable stores., Store keeper: Means the store is under the charge of one, responsible person who is also called as the store, superintendent or chief store keeper., Functions of store keeper:, 1) Receiving goods into stores after checking them with goods, received note and inspection report., 2) Maintenance of proper record of material received, 3) Proper Classification of materials, 4) Maintain stock levels for each item of materials., Techniques of Store Control:, 1) Fixation of stock levels 2) EOQ 3) Stock Turnover ratio, 4) ABC Analysis 5) Bin card 6) Input output ratio 7) Issue of, materials 8) Pricing of materials., 1) Fixation of Stock Levels: Means in order to ensure that the, optimum quantity of materials is purchased and stocked neither, less or more., Stock Levels are as follows: 1) Minimum stock level or safety, stock 2) Reorder level 3) Maximum stock level 4) Danger level, 5) Average stock level.

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1) Minimum Stock Level: Means it represent the minimum, quantity of the material must be maintained in the stores all the, time., Minimum Stock Level (MSL) = Reorder Level – (Average, consumption X Average Delivery Period), Average (Normal) Consumption = Maximum Consumption +, Minimum Consumption /2, Average delivery Period = Maximum Delivery Period +, Minimum Delivery Period /2, 2) Reorder Level: it is level of stock at which the storekeeper, places the purchase order for fresh supplies. It is generally, somewhere between the minimum stock level and maximum, stock level., Reorder Level = Maximum Consumption X Maximum delivery, period. Or Minimum stock + (Average Consumption X Average, Delivery Period)., 3) Maximum Stock Level: Means it is the limit of stock to be, held in the stores above which the stock is not allowed to rise, under normal conditions., Maximum Stock Level = Reorder level + Reorder Quantity –, ( Minimum consumption X minimum delivery period), 4) Danger level : Means it is stock of material is generally below, the minimum level where quick measures are to taken for, receiving fresh supplies., , Danger level = Minimum consumption X Emergency, delivery period., 5) Average stock Level : Means it is the average of, minimum & Maximum stock level., Average stock level = Maximum stock level + minimum, stock level /2., Or = Maximum stock level + ½ of reorder level quantity., 3 Material Turnover ratio or Stock Turnover ratio or, inventory turnover ratio means it is the ratio of value of, materials consumed during the period to average stock, held during that period.

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Material turnover ratio = Cost of Material consumed during the, period / Cost of Average stock held during the period., Average stock = Opening stock + Closing stock /2, Material consumed = Opening stock + Purchase – Closing, stock., Material turnover ratio in days = 365/ Material turnover ratio., 4) ABC Analysis: Means it is a technique of material control,, Material are listed in A, B & C categories in descending order, based of money value of Consumption. It is also Called Always, better control., 5) Bin card: Means a bin is place, Container, bag, open space, where the goods are stored. It is details of record the receipts,, issues and balance in the stores., 6) Input output ratio: means it is the ratio of material charged, to the production process and the quantity of materials, content in the final output., 7) Issue of Material: Means the systematic control of material, issue is very necessary to minimize the cost., 8) Pricing of materials: Means materials are issued to the, production department from the stores as and when required., When materials purchased in one lot and issued in different, lots as and when they are required by production department., Methods of pricing issues: are as follows:, 1) First in first out (FIFO) Method 2) Last in First out (LIFO), Method 3) Weighted Average Method 4) Base stock Method 5), Standard price method., 1) First in First Out (FIFO) Method: means it is material are, issued in order in which they are received. Or the first lot which, is received first is issued first then the second lot and so on., Merits or Advantages of FIFO Method:, 1) It is simple method, 2) It Represents good inventory management, 3) there is no danger of over or under recovery of cost., 4) It is good where the prices are falling or decrease., Disadvantages of FIFO Method:, 1) Cost fluctuation in different jobs., 2) It involves Complicated calculations

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3) it results in higher tax liability., Periodic evaluation: means it is a technique of inventory, control is made by working out inventory turnover ratio., Perpetual inventory system means a system of records, maintained by the controlling department which reflects, physical movements of stocks and their current balances., Last In First Out (LIFO) Method Means Under this method the last, purchased are issued first to the production., Merits or Advantages:, 1) It is simple Method 2) It helps in reducing the tax burden 3), Uptodate profit picture 4) No danger of over or under recovery of, cost., Demerits or Dis-advantages :, 1) Job cost will be differ 2) It leads to more Clerical Mistakes. 3) Bad, inventory Management. 4) Balance sheet fails to give true picture., 3. Weighted Avearage method: Means in this method calculation of, issue price is calculated by Dividing the total value of materials in, Stock at the time of issue by the quantity of materials in the stores., Merits:, 1) it is simple method 2) Avearage price calculation will be more, meaningful., Demerits:, 1) There is a denger of over recovery or under recovery of costs. 2) it, is difficult for Calculation. Formula for issue rate = Cost of materials, purchased upto date of issue / Quantity of stock upto date of issue., 4. Base Stock Method: Means it is necessary to all the organisations, to maintain the minimum quantity of material in the stock to ensure, the continuous production., Merits: 1. It is simple method 2. Inventory valuation is very easy. 3. It, has the merits of LIFO or FIFO method. 4. Guaranted minimum stock., Demerits: 1. It is mislinking 2. unnecessary capital lock up 3. Deflated, profit and Financial position