Meaning of Material

Materials refers to raw materials, components, stores and spares used in

production process

Meaning of Certain Associated Terms

1. Direct Material: It refers to the material which forms part of the
finished product. Examples of Direct materials
 Cotton used in manufacture of textiles
 Wood used in manufacture of pencil
 Steel used in manufacture of pens
2. Indirect Material: It refers to the material used in the process of
production but does not forms the part of finished goods.
 Stationery used in Office
3. Material Cost: It refers to the cost of materials used in manufacturing of
a product, in relation to material,
 Procurement Cost: The cost of Purchasing or manufacturing the
new materials
 Holding Cost or Carrying Cost: The cost of Storage
 Ordering Cost: The cost of placing order for purchase of materials
 Step-up Cost: The cost of setting up facilities
 Shortage Cost: Fines, penalties, loss of demand and loss of
goodwill
Material Control
It refers to a system which ensures the provision of required quantity of
materials of right quality and at required time with minimum amount of capital.
It covers the various aspects of materials i.e procurement, storage and issue,
and controls them with the help of accounting with the purpose of ensuring
adequate and timely supply.

Objectives of Material Cost Control

 Continuity in Production
 It reduces the cost
 It reduces the wastage
 It supplies relevant and timely information relating to material for the
management

Advantages of Material Cost Control

 Smooth Running of Business
 Avoids unnecessary Working Capital Requirement
 It reduces the cost of purchasing
 It reduces the cost of storage
 It reduces the ordering Cost

Scope Or Areas of Material Cost Control

 Procurement --------- Economic Order Quantity (EOQ)
 Storage of materials --- Stock Levels
 Issue of Materials ------ FIFO, LIFO, Simple average and Weighted
Average Method
Economic Order Quantity (EOQ): The enterprise decides to purchase the
material from outside than to make it internally, one of the major decisions to
be made is regarding the quantity to be purchased in each order.

How to ascertain EOQ

EOQ =
√ 2 DO

D = Annual Demand
S

O = Ordering Cost per Order

S = Storage Cost per unit per annum
Problem – 1
Find EOQ from the following information
 Annual Usage 6,000 Units
 Cost of materials per unit Rs. 20
 Cost of placing and receiving one order Rs. 60
 Annual carrying Cost per unit 10% of inventory value
Problem – 2
Find EOQ from the following information
 Annual usage 1,20,000 units
 Cost of materials per unit Rs.1
 Cost of placing and receiving one order Rs. 60
 Annual carrying Cost per unit 10% of inventory value
Problem – 3
From the following particulars, calculate the EOQ
 Annual Requirement 1,600 units
 Cost of materials per unit Rs. 40
 Cost placing and receiving order Rs. 50
 Annual Carrying cost of inventory 10% of inventory Value
Problem – 4
Calculate EOQ from the following information. Also, state the number of orders
to be place in a year
 Consumption of materials 10,000 Kgs per annum
 Order placing Cost Rs. 50
 Cost of raw materials Rs. 2 per kg
 Storage costs is 8% on average inventory

Problem – 5
From the following information calculate EOQ and also calculate no of orders
per annum.
 Quarterly Consumption 4000 units
 Cost of placing one order Rs. 100
 Cost per unit is Rs. 80
  Storage and carrying cost 8% of inventory
Problem – 6
From the following information calculate EOQ and also calculate no of orders
per annum.
 Quarterly Consumption 2000 units
 Cost of placing one order Rs. 50
 Cost per unit is Rs. 40
 Storage and carrying cost 8% of inventory
Problem – 7
ABC ltd requires 1,500 units of materials per month costing Rs. 27 Per unit.
Cost per order is Rs. 150 and Inventory carrying cost works out to 20% of
Average inventory. Find EOQ and no of orders to be placed in a year.

Problem – 8
Calculate EOQ and the total cost of EOQ from the following
Quantity 50 units per month
Ordering cost Rs.12 per order
Carrying cost 20%
Price per unit Rs. 20

Problem – 9
About 50 items are required every day for a machine. A fixed cost of Rs. 50 per
order is incurred for placing one order. The inventory carrying cost per item
amounts to Rs. 0.02 per day. The lead time is 32 days. Calculate EOQ. (Consider
365 working days per annum)

Problem – 10
 Annual demand 2,400 units
 Unit price Rs. 2.40
 Ordering cost per order Rs. 4
 Storage cost 2% per annum
 Interest rate 10% per annum
Calculate EOQ and the number of orders placed during the year

Problem – 11
From the following particulars, calculate EOQ, number of orders and time gap
between two orders
 Annual requirements
 Cost of materials per unit Rs. 40
 Cost of placing and receiving one order Rs. 100
 Annual carrying cost of inventory 10%

Problem – 12
A manufacturer buys certain components from outside suppliers at Rs. 30 per
unit. Total annual need is 800 units. Annual return on investment is 10%. Rent,
insurance, taxes, etc. per unit per annum is Rs. 1, and cost of placing one order
is Rs.100. Determine EOQ, number of orders placed during the year, the Time
gap between one order and the other; and the total cost of EOQ.
 Storage of Materials
Methods of Storing
1. ABC Method: is a method where the materials are classified into three
categories viz., A, B and C, based on value and volume of materials and
stored accordingly
A = Materials which are low in volume but have high value
B = Materials which have moderate volume and value
C = Materials which are high in volume but low in valve

2. VED Analysis: Vital, Essential and Desirable

3. FSN Method:
F = Fast Moving Materials
S = Slow Moving Materials
N = Non -Moving Materials
Stock Levels
1. Re-order Level
2. Minimum Level
3. Maximum Level
4. Average Level
5. Danger Level

1. Re-Order Level: It is the level of stock at which action for purchase of

materials must be initiated.
ROL = Maximum Consumption X Maximum Lead Time
Or
ROL = Safety Stock + Lead time Consumption

2. Minimum Level: it refers to the lowest quantity of materials to be

maintained at all times to avoid stock-out situations.

Minimum Level = Re-Order Level – (Average Consumption X Average

Lead time)

3. Maximum Level: It refers to the level to stock above which the materials
should not be piled up.

Maximum Level = Re-Order Level + Re-Order Quantity – (Minimum

Consumption X Minimum Lead Time)

4. Average Level: it is the average of maximum and minimum stock Levels

Average Level = ½ X (Maximum Level + Minimum Level)

Or
Average Level = Minimum Level + ½ X Re-Order Quantity

5. Danger Level: It is the level at which emergency purchase action is taken to

replenish stocks upto minimum level.
 Danger Level = Minimum Consumption X Minimum Lead Time
Or
Danger Level = Average Consumption X Minimum Lead Time

Problems on Determination of Stock Levels

Problem – 1
Calculate Re-order Level, Maximum Level, Minimum Level and Average Level of
Stock from the following information.
 Re-Order Quantity 1,500 Units
 Re-Order Period 4 to 6 weeks
 Maximum consumption 400 units per week
 Normal Consumption 300 units per week
 Minimum Consumption 250 Units per week
Solution
1. ROL = Maximum Consumption X Maximum Lead Time
ROL = 400 X 6 = 2,400 Units

2. Maximum Level = Re-Order Level + Re-Order Quantity – (Minimum

Consumption X Minimum Lead Time)
Maximum Level = 2,400 + 1,500 – (250 X 4)
Maximum Level = 2,900 Units

3. Minimum Level = Re-Order Level – (Average Consumption X Average

Lead time)
Minimum Level = 2,400 – (300 X 5)
Minimum Level = 900 Units

Average Lead time = 4+6/2 = 5

4. Average Level = ½ X (Maximum Level + Minimum Level)

Average Level = ½ X (2900 + 900)
Average Level = 1900 Units.

Problem – 2
Two Components A and B are used as follows
Normal Usage 50 units per week each
Minimum Usage 25 units per week each
Maximum Usage 75 units per week each
Re-Order Quantity A: - 300 units, B: - 500 units
Re-Order Period A – 4 to 6 Weeks and B – 2 to 4 Weeks
Maximum Lead time for emergency purchases A – 2 weeks, B – 1 Week
Calculate Re-Order Level, Maximum Level, Minimum Level, Average Level and
Danger Level of Stock for each component.

Solution
1. ROL = Maximum Consumption X Maximum Lead Time
Component - A = ROL = 75 X 6 = 450 Units
 Component - B = ROL = 75 X 4 = 300 Units

2. Maximum Level = Re-Order Level + Re-Order Quantity – (Minimum

Consumption X Minimum Lead Time)
Component A
Maximum Level = 450 + 300 – (25 X 4)
Maximum Level = 650 Units
Component B
Maximum Level = 300 + 500 – (25 X 2)
Maximum Level = 750 Units

3. Minimum Level = Re-Order Level – (Average Consumption X Average

Lead time)
Component A
Minimum Level = 450 – (50 X 5)
Minimum Level = 200 Units
Component B
Minimum Level = 300 – (50 X 3)
Minimum Level = 150 Units

4. Average Level = ½ X (Maximum Level + Minimum Level)

Component A
Average Level = ½ X (650 + 200)
Average Level = 425 Units.
Component B
Average Level = ½ X (750 + 150)
Average Level = 450 Units.

5. Danger Level = Normal Consumption X Emergency Delivery Time

Component A
50 X 2 = 100 units
Component B
50 X 1 = 50 units

Problem – 3
Two materials X and Y are used as follows
Minimum usage 50 units per week each
Maximum usage 150 units per week each
Normal usage 100 units per week
Re-order quantity X – 600 units; Y – 1000 Units
Delivery Period: X – 4 to 6 weeks; Y – 2 to 4 weeks
Calculate Re-order level, Maximum Level, Minimum Level and Average Level

Solution

1. ROL = Maximum Consumption X Maximum Lead Time

Component - X = ROL = 150 X 6 = 900 Units
Component - Y = ROL = 150 X 4 = 600 Units
2. Maximum Level = Re-Order Level + Re-Order Quantity – (Minimum
Consumption X Minimum Lead Time)
Component X
Maximum Level = 900 + 600 – (50 X 4)
Maximum Level = 1,300 Units
Component Y
Maximum Level = 600 + 1000 – (50 X 2)
Maximum Level = 1500 Units

3. Minimum Level = Re-Order Level – (Normal Consumption X Average

Lead time)
Component X
Minimum Level = 900 – (100 X 5)
Minimum Level = 400 Units
Component Y
Minimum Level = 600 – (100 X 3)
Minimum Level = 300 Units

4. Average Level = ½ X (Maximum Level + Minimum Level)

Component X
Average Level = ½ X (1300 + 400)
Average Level = 850 Units.
Component Y
Average Level = ½ X (1500 + 300)
Average Level = 900 Units.

Problem – 4
Calculate the Maximum level and Minimum Level of stock from the following
particulars
Ordering quantity 800 units
Maximum consumption 30 units per week
Minimum consumption 10 units per week
Delivery period – Maximum 30 weeks and minimum 20 weeks

Problem – 5
In manufacturing its product, a company ses three raw materials A, B, and C in
respect of which the following information is given as follows
Usage Re- Re-
Raw
per unit order Price Delivery order Minimu
Material
of quantity per Kg Period level m Level
s
output (kg) (kg)
A 10 10,000 10 1-3 8,000 -
B 4 5,000 30 3-5 4,750 -
C 6 10,000 15 2-4 - 2,000
Weekly production varies from 175 units to 225 units. What would you except
the quantity of the following to be Minimum Level of A, Maximum Level of B,
Re-Order Level of C and Average Level of A?

Problem – 6
 From the following data, calculate Re-ordering level, Maximum Level and
Minimum Level
 Re-order Quantity 3,000 units
 Re-order period 4 – 6 weeks
 Maximum consumption 800 units per week
 Minimum consumption 500 units per week
 Normal consumption 600 units per week

Records and Documents relating to Stores

 Bin Card
 Store ledger
 Material return note
 Material outward Return Note

 Bin Card: is a quantitative record of receipts, issues and closing balance

of the items of stores.
 Store Ledger: is a record of all receipts, issues and balances of materials
along with the rates and their values.

Management of Issue
 First In First Out (FIFO)
 Last In First Out (LIFO)
 Simple Average Method
 Weighted Average Method

Problem – 1
The following transaction took place in A Ltd in respect of purchase and issue of
Material X
January 2 Purchased 4,000 units at Rs. 4 per unit
January 20 Purchased 500 units at Rs. 5 per unit
February 5 Issued 2,000 units
February 10 Purchased 6,000 units at Rs. 6 per unit
February 12 Issued 4,000 units
March 2 Issued 1,000 units
March 5 Issued 2,000 units
March 15 Purchased 4,500 units at Rs. 5.50 per unit
March 20 Issued 3,000 units
Prepare Stores ledger account under FIFO and LIFO

Solution
Store Ledger Account Under First In First Out (FIFO)
Receipts Issues/Payments Balance
Date Particulars Rat Rat
Qty Rs. Qty Rs. Qty Rate Rs.
e e
January 16,00
Purchases 4,000 4 - - - 4,000 4 16,000
2 0
January 4,000 4 16,000
Purchases 500 5 2,500 - - -
20 500 5 2,500
Februar 2,000 4 8,000
Issues - - - 2,000 4 8,000
y5 500 5 2,500
 2,000 4 8,000
Februar 12,00
Purchases 6,000 6 - - - 500 5 2,500
y 10 0
6,000 6 36,000
2000 4 8,000
Februar
Issues - - - 500 5 2,500 4,500 6 27,000
y 12
1500 6 9,000
March
Issues - - - 1000 6 6,000 3,500 6 21,000
2
March 12,00
Issues - - - 2,000 6 1,500 6 9,000
5 0
March 24,75 1,500 6 9,000
Purchases 4,500 5.50 - - -
15 0 4,500 5.50 24,750
March 1,500 6 9,000
Issues - - - 3,000 5.50 16,500
20 1,500 5.50 8,250

Store Ledger Account Under Last In First Out (LIFO)

Receipts Issues/Payments Balance
Date Particulars Rat Rat
Qty Rs. Qty Rs. Qty Rate Rs.
e e
January 16,00
Purchases 4000 4 - - - 4,000 4 16,000
2 0
January 4,000 4 16,000
Purchases 500 5 2,500
20 500 5 2,500
Februar 500 5 2,500
Issues - - - 2,500 4 10,000
y5 1,500 4 6,000
Februar 36,00 2500 4 10000
Purchases 6000 6 - - -
y 10 0 6000 6 36000
Februar 24,00 2500 4 10000
Issues - - - 4000 6
y 12 0 2000 6 12000
March 2500 4 10000
Issues - - - 1000 6 6000
2 1000 6 6000
March 1000 6 6000
Issues - - - 1500 4 6000
5 1000 4 4000
March 2475 1500 4 6000
Purchases 4500 5.5 - - -
15 0 4500 5.5 24750
March 16,50 1500 4 6000
Issues - - - 3000 5.5
20 0 1500 5.5 8250

Problem – 2
The stock in hand of material as on September 1, in the stores Ledger of B ltd.,
was 500 units at Rs. 1 per unit. The following purchases and issues were
subsequently made.
Purchases Issues
September 100 units @ Rs. 1.10 p.u September 9 500 units
6
September 700 units @ Rs 1.20 per September 22 500 units
20 unit
September 400 units @ Rs. 1.30 per September 30 500 units
27 unit
October 13 1000 units @ Rs. 1.40 per October 15 500 units
unit
 October 20
500 units @ Rs. 1.50 per October 22 500 units
unit
November 400 units @ Rs. 1.60 per November 11 500 units
17 unit
You are required to prepare the stores ledger under LIFO and FIFO
method.

Solution
Store Ledger Account Under First In First Out (FIFO)
Receipts Issues/Payments Balance
Date Particulars Rat Rat
Qty Rs. Qty Rs. Qty Rate Rs.
e e
Sep – 1 Opening Bal - - - - - - 500 1 500
500 1 500
Sep – 6 Purchases 100 1.1 110 - - -
100 1.1 110
Sep – 9 Issues - - - 500 1 500 100 1.1 110
Sep – 100 1.1 110
Purchases 700 1.20 840 - - -
20 700 1.20 840
Sep – 100 1.1 110
Issues - - - 300 1.20 360
22 400 1.20 480
Sep – 300 1.20 360
Purchases 400 1.30 520 - - -
27 400 1.30 520
Sep – 300 1.20 360
Issues - - - 200 1.30 260
30 200 1.30 260
Oct – 200 1.30 260
Purchases 1000 1.40 1400 - - -
13 1000 1.40 1400
Oct – 200 1.30 260
Issues - - - 700 1.40 980
15 300 1.4 420
Oct – 700 1.40 980
Purchases 500 1.5 750 - - -
20 500 1.5 750
Oct – 200 1.40 280
Issues - - - 500 1.40 700
22 500 1.5 750
Nov – 200 1.40 280
Issues - - - 200 1.5 300
11 300 1.5 450
Nov – 200 1.5 300
Purchases 400 1.60 640 - - -
17 400 1.6 640

Problem – 3
C Ltd uses copper wire as a raw material which is purchased form the market
as and when necessary. The following particulars are available in respect of the
transactions for January 2018.
 Jan – 1: Opening balance 300 kg at Rs. 25 per kg
 Jan – 2: Purchased 500 kg at Rs. 26.60 per kg
 Jan – 4: Issued 220 kg
 Jan – 10: Issued 440 kg
 Jan – 20: purchased 490 kg at Rs. 23 per kg
 Jan – 25: Issued 300 kg
 Jan – 27: surplus 20 kg returned to stores out of quantity issued of Jan 4
 There was a shortage of 25 kg on Jan 15. Prepare Stores Ledger for these
transactions under LIFO and FIFO
Problem – 4
Following particulars are available from the cost records of E Ltd., for the
month of March 2018, in respect of raw materials X
March 1: Opening balance 25 units worth Rs. 162.50
March 4: Issued 8 units
March 6: Received 50 units at Rs. 5.75 per unit
March 7: Issued 12 units
March 10: Returned to vendor 10 units
March 12: issued 15 units
March 13: Issued 20 units
March 15: Received 25 units at Rs. 6.10 per units
March 17: issued 10 units
March 19: received replacement 10 units
March 20: Return to stores 5 units
March 22: Transferred 5 units from job 182 to job 187
March 26: issued 10 units
March 29: Transferred 5 units from Dept A to Dept B
March 30: Shortage 2 units treated as abnormal loss
Prepare Store ledger under LIFO and FIFO methods

Problem – 5
The following transactions look place in respect in respect of raw materials in
the books of G ltd during September 2024
Date Receipts Rate per units Issues (units)
September - 2 200 2.00 -
September – 10 300 2.40 -
September – 15 - - 250
September – 18 250 2.60 -
September -20 - - 200
September – 25 400 2.70 -
September – 30 - - 400
You are required to record the above transaction in stores ledger pricing the
issues under
 Simple Average Method
 Weighted Average Method

Problem – 6
Following are the receipts and issues of a raw materials in I Ltd. During April
2024
April 1: Opening balance 1,000 units at Rs. 50 per units
April 3: Issued 140 units
April 4: Issued 200 units
April 8: Issued 160 units
April 13: received 400 units Rs. 48 per unit
April 16: Issued 360 units
April 18: return of surplus from work order 30 units at Rs. 48 per untin
April 20: Received 480 units at Rs. 52 per unit
April 24: Issued 608 units
April 25: Received 640 units at Rs. 50 per unit
April 26: Issued 524 units
April 28: Refund of surplus from a work order 24 units (issued on April 3)
April 30: Received 200 units at Rs. 54 per unit
You are required to record the above transaction in store Ledger, pricing the
issues under
 Simple Average
 Weighted Average method