Material And Stores Part 1

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In order to produce any product, we need material. In most cases material is an important constituent of total cost. The material may be in raw material form or manufactured state. Materials are basically of two kinds direct materials and indirect materials. Direct material means cost of raw material used or consumed in production. It is not necessary that all materials purchased in a particular period is used in production. Indirect materials are not easily identified and related with a particular product, job or process.

As we already discussed that the material constitute major part of total cost it should be handled carefully to reduce the costs incurred for its maintenance. The material maintenance can be done with effective store keeping. They can be stored in a safe way in well-established stores. Different materials like raw materials, tools, equipment, components, processed goods and finished goods are kept in stores at different places.

Store-keeper handles the material in store. He accepts the material, identify and classify the material and place those materials in prescribed places. He checks the material received with consignment note, inspection report and materials report.

Classification and Codification:

Classification and codification of materials is necessary for keeping the material in store. Store is classified into different departments and codified them to handle the materials and costs associated with material handling easily. The classification may be basing on nature of material, type of material or on their importance. Eg. Materials related with engineering are classified as bronze, copper, steel, and mild steel etc. Each category further classified suitably. A written document is maintained by store-keeper which describes the location of material.

Methods of Coding of Materials:

Image of Methods of coding Materials

Image of Methods of Coding Materials

Image of Methods of coding Materials

Alphabetical Method: In this method first alphabet letters are used for codification of each category of materials. For example, steel wire is coded as SW or steam coal is coded as SC etc.

Numerical Method: In numerical coding a list is prepared for various departments and allotting to each of them a suitable number. The first two digits of the code number represent the department for which the materials are meant and other two digits state the name of material as mentioned in the standard list or materials manual. For example, if code is 2341 it means Material No.41 [copper wire] is to be used in Department No.23.

Alphabetical-cum-Numerical Method: In this method, combination of alphabetical method and numerical method is used. Eg. SW4A/22 in which SW represents the material name i.e. Steel Wire and 4A represents the gauge length 4mm of quality A and 22 represents rack/bin. number 22. This method gives exact information about the material location.

Benefits of Codification:

(i) In absence of coding the title of an account may have to be written a number of times. This results in avoidable clerical work, particularly in case of lengthy account titles.

(ii) Secrecy about the exact nature of the transaction from the office employees is maintained.

Stock Levels:

Every company keeps required materials in the store in order to meet day to day requirement and to avoid unexpected problems (lack of material etc.). At the same time over stock is not good. That results additional costs to the business unit. So, proper balance of stock in the store is very important. For proper maintenance of stock there are different ways. Those are –

Maximum Stock Level: The maximum level is the largest quantity of a certain material which should be kept in the store at any point of time.

Maximum stock level = Reorder level + Reorder quantity – [Minimum consumption x

minimum reorder period]

(Or)

Maximum stock level = Economic order quantity + Minimum stock

Minimum Stock Level: The minimum stock level is the lowest quantitative balance of material which must be kept at all times. It helps in running the production process at the time of non-availability of materials.

Minimum stock level = Re-order level – [Normal consumption × average Reorder period]

Where, Re-order level – When stock material reaches certain point then order for material is automatically placed. It helps in avoiding any delays for material. The Re-order level depends on Maximum usage of material and Time interval i.e. the anticipated time lag between the date of issuing orders and the receipt of materials.

Re-order level = Maximum re-order period × Maximum usage

Average Stock Level: This indicates the average stock held by the firm.

Average stock level = 1/2 [Maximum stock level + Minimum stock level]

Or

Average stock level = Minimum stock level + 1/2 Re-order Quantity

Note: Average Stock Level can be calculated by either of the formulas. The result may be different. The selection of formula depends on the nature of the business.

Example:

The following information received from Monika industries in respect of Material No.ST45:

Normal consumption 400 units per week

Maximum consumption 600 units per week

Minimum consumption 200 units per week

Re-order period 6 to 8 weeks

Re-order Quantity 2000 units

Calculate:

(a) Re-order level (b) Maximum level

(c) Minimum level (d) Average stock level

Solution:

Re-order level = Maximum reorder period × Maximum usage

= 600 × 8

= 4800 units

Maximum stock level = Reorder level + Reorder quantity – [Minimum

consumption × Minimum reorder period]

= 4800 + 2000 – [ 200 × 6]

= 6800 – 1200

= 5600 units

Minimum stock level = Reorder level – [Normal consumption × average Reorder period]

= 4800 – [400 × 7]

= 4800 – 2800

= 2000 units.

(d) Average stock level = 1/2 [Maximum stock level + Minimum stock level]

= 1/2 [5600 + 2000]

= 7600/2

= 3800 units

(Or)

Average stock level = Minimum stock level + 1/2 Re-order Quantity

= 2000 + 1/2 [2000]

= 2000 +1000

= 3000 units

Note: The number of units of the average stock as per the alternative method need not be same.

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