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production.
LABOUR :The aggregate of all human physical and
completing a Process, that does not contribute directly to the end product. Also called burden cost.
Materials
The term Materials refers to substances and
commodities other than fixed assets introduced and consumed in the productive process of an organization.
It includes the following: Raw Materials Spare parts and components Consumable stores Packing materials Materials may be direct or indirect.
Materials Control
In almost all manufacturing concerns, materials constitute a
organization relating to the procurement, storage and usage of materials in such a way so as maintain an even flow of production without excessive investment in material stock.
The materials control is divided in 3 stages: Purchase Control Storage Control Issue Control
Availability of Materials Avoidance of wastage Avoidance of out-of-stock danger Economy in purchasing Effective utilization of materials
Methods/Ways/Techniques of Materials Control Centralized Vs. Decentralized Purchasing ABC Analysis Just-In-Time (JIT) System Fixation of Various Stock Levels Economic Order Quantity
specialized department
its own purchases.
Decentralized purchasing means each branch or department makes Some advantages of Centralized purchasing: Since purchases are in bulk, they can be economical due to favorable terms such as higher trade, cash discount, lower transport costs, etc. Purchase department can employ qualified and experienced staff, having knowledge and skills, in order to avoid reckless and haphazard purchasing. Usually, centralized purchasing is preferred but in some cases, where
highly technical or precious materials are required, the purchases can be made by individual departments.
ABC Analysis
ABC Analysis is also known as Always Better Control. To have an effective and proper control on stores, all
the items of stores should be classified in 3 groups/categories on the basis of investment involved: Category A: Heavy Investment, very tight control, complete and accurate records, frequent review. Category B: Substantial Investment but not as much as Category A, less tightly controlled, good records, regular review. Category C: Not much of Investment required, simplest controls possible, minimal records, large inventories, periodic review and reorder.
receipt and usage of the material to the maximum extent possible coincide. This means raw materials are purchased Just-In-Time to proceed to production process. This system ensures maximum economy in material handling costs, ordering costs and stock holding costs. The chances of pilferage, leakage, spoilage, etc is reduced to the minimum.
economy in purchasing any material. It involves 3 kinds of costs: Cost of Purchase Cost of Acquiring costs (Ordering Costs): Ordering costs will be greater if orders are placed more frequently and of lower quantities. Cost of Holding Inventory (Carrying Costs): The larger the volume of inventory, higher will be the inventory carrying costs and vice versa.
EOQ Model
10,000 Relevant Total Costs (Dollars) 8,000
6,000 5,434 4,000 Annual relevant carrying costs Annual relevant ordering costs
2,000
1,800
2,400
quantity ordered.
EOQ Model
EOQ =
2 AB C
Where, A = Annual Demand in units for a specified time period B = Relevant ordering/ Buying costs per purchase order C = Relevant carrying costs of one unit in stock
Example: Compute the Economic Order Quantity from the data given below: Annual usage of materials 6000 units Cost per unit Rs. 24 Buying Cost per order Rs. 60 Cost of carrying inventory 20%
RTC =
or
Re-Order Level
Danger Level Average Stock Level
inventory should not be allowed to be kept, else it would lead to over-stocking and blocking capital unnecessarily.
= Re-order level + Re-order Quantity (Minimum Consumption X Minimum Re-order Period)
Minimum Level/ Safety Stock Level: The level below which
Units
Minimum level
500
Danger level
Weeks
Question:
Two components X and Y are used as follows: Normal Usage: 600 units per week each Maximum Usage: 900 units per week each Minimum Usage: 300 units per week each Re-order Quantity: X 4,800 units and Y 7,200 units Re-Order period: X 4 to 6 weeks and Y 2 to 4 weeks Calculate for each component
(a) Re-Order level (b) Minimum level (c) Maximum Level (d) Danger Level (e) Average Stock Level
Inventory Systems
Periodic inventory System: It is a method of
recording inventory at the end of the accounting year after making a physical verification of the quantity in hand.
Perpetual Inventory System: It is a system of
recording inventory after each receipt and issue. Under this system, stock registers are regularly maintained and gives the balance of inventory at any time desired.
Question:
Following transactions took place in respect of materials: August 4 Received 500 units @ Rs. 2 each August 18 Received 350 units @ Rs. 2.10 each August 19 Issued 600 units August 24 Receipts 600 units @ Rs. 2.20 each August 25 Issued 450 units August 26 Received 500 units @ Rs. 2.30 each August 28 Issued 510 units August 30 Issued 100 units Calculate the value of closing stock of materials according to: FIFO Method LIFO Method Weighted Average Method
Aug 18
350
2.10
735
500 350
2 2.10
1000 735
Aug 19
500 100
2.00 2.10 -
1000 210 250 250 600 2.10 2.10 2.20 525 525 1320
Aug 24
600
2.20
1320
Aug 25
250 200
2.10 2.20 -
525 440 400 400 500 2.20 2.20 2.30 880 880 1150
Aug 26
500
2.30
1150
Aug 28
400
110
2.20
2.30
880
253 390 2.30 897
Aug 30
100
2.30
230
290
2.30
667
Aug 28
500
10
2.30
2.20 2.20
1150
22 220
250
140 250 40
2.00
2.20 2.00 2.20
500
308 500 88
Aug 30
100
Quantit y
Aug 4 Aug 18 Aug 19 Aug 24 Aug 25 Aug 26 500 350 600 500
Rate
2 2.10 2.20 2.30
Amt
1000 735 1320 1150
Quantit y
600 450 -
Rate
2.04 2.15 -
Amt
1225 968 -
Quantit y
500 850 250 850 400 900
Rate
2 2.04 2.04 2.15 2.15 2.24
Amt
1000 1735 510 1830 862 2012
Aug 28
Aug 30
510
100
2.24
2.24
1141
224
390
290
2.24
2.24
870
646
(c) Weighted Average: Under the weighted average approach, both inventory and the cost of goods sold are based upon the average cost of all units bought during the period. When inventory turns over rapidly this approach will more closely resemble FIFO than LIFO.
(d) Specific Identification method : This method determines specific costs for each unit in stock. This method is suitable when the stock is not homogenous, less in quantity and high in value.
Material Losses
There is usually a difference between the input of
material in a process and the output. This difference represents loss of materials.
Material Losses may be in the following forms: Waste Scrap Spoilage Defectives
low money or use value. In normal practice, the sale value of scrap is deducted from the cost of materials or factory overheads (Recoverable). Spoilage: Those materials or components which are so damaged in the manufacturing process that they cannot be repaired or reconditioned (Irrecoverable).
spoiled are sold as scrap. Spoilage can be normal or abnormal.
Some spoilage can be sold as seconds while some that are badly
products which are not according to standard specifications but can be rectified.
Labour
Labour means human efforts engaged in the process of
the production process. Indirect labour means the labour which is not directly engaged in the production but engaged to assist direct labour. E.g. Supervisory staff, storekeepers, foreman, time-keepers, watchmen, etc.
Labour Control
Labour costs represent 20 to 25% of the total cost of the product. There is a need for an effective control over labour costs. There are mainly 5 departments in an organization for labour control: Personnel Department: Performs functions of recruitment, selection, training and induction of various grades of workers, also looks after fixation of wages, promotion and discharge of employees. Engineering Department: Prepares plans and specification for each job schedule for production in order to reduce labour turnover rate. Time Keeping Department: Maintains records of effective utilization of labour time. Pay Roll Department: Involves computation of gross wages, deductions to be made and disbursement of pay. Cost Accounting Department: Collects and analyses all costs related to labour. This department prepares wages abstract or analysis sheet to give a number of information that facilitates decision-making.