Material: Purchase, Storage and Control of Material, Stock Levels, Inventory, Control Techniques .

Material: Purchase, Storage and Control of Material, Stock Levels, Inventory, Control Techniques. Methods of Pricing Material Issues. 

Purchase, Storage, and Control of Material

Introduction:

Effective management of materials is critical for the smooth functioning of any organization, be it a manufacturing facility, a retail store, or a service provider. Proper handling of materials involves procurement, storage, and control to ensure a steady supply of materials when needed.

1. Purchase of Material

a. Material Requisition:

The process often begins with a material requisition, where a department requests the materials it needs for its operations.

b. Vendor Selection:

Choosing reliable suppliers is essential. Factors such as cost, quality, delivery reliability, and vendor reputation are considered during vendor selection.

c. Purchase Orders:

A purchase order is a formal request to a supplier to provide materials. It includes details like quantity, specifications, price, and delivery terms.

d. Receiving Materials:

When materials are delivered, they are compared to the purchase order to ensure accuracy and quality.

e. Invoice Verification:

Invoices from suppliers are matched with the purchase order and the receiving report to confirm the quantity and price.

f. Payment:

Once the invoice is verified, payment is made to the supplier. Timely payment helps maintain good relationships with suppliers.

2. Storage of Material

a. Warehouse Management:

Materials are stored in a warehouse or storeroom. Efficient warehouse management involves organizing materials for easy retrieval and minimizing storage costs.

b. Stock Location:

Materials should be organized in a logical manner with clear identification and labeling. Stock locations are determined to help find materials quickly.

c. Security:

Security measures are implemented to prevent theft, damage, or unauthorized access to stored materials.

d. Material Handling:

Efficient material handling processes are implemented to move materials within the storage facility, minimizing damage and reducing labor costs.

e. FIFO and LIFO:

The principles of First-In-First-Out (FIFO) and Last-In-First-Out (LIFO) are used to manage inventory and reduce the risk of obsolescence.

3. Control of Material

a. Inventory Control:

Inventory control involves monitoring the quantity and condition of materials in stock. It aims to ensure that the right materials are available at the right time in the right quantity.

b. Economic Order Quantity (EOQ):

EOQ is a formula that calculates the optimal order quantity that minimizes total inventory costs, considering ordering costs and holding costs.

c. Just-In-Time (JIT):

JIT is a philosophy that aims to reduce inventory to the minimum required for uninterrupted production, minimizing holding costs.

d. ABC Analysis:

ABC analysis categorizes inventory into three classes based on value and usage. A-items are high-value, B-items are moderate, and C-items are low-value with infrequent usage.

e. Reorder Point:

The reorder point is the level at which new orders should be placed to replenish stock before it runs out. It considers lead time and usage rate

Stock Levels and Inventory Control Techniques

1. Stock Levels:

a. Minimum Stock Level:

This represents the minimum quantity of an item that should be kept in stock to prevent stockouts. It accounts for usage during lead time.

b. Maximum Stock Level:

This represents the maximum quantity of an item that should be kept in stock to avoid overstocking. It considers storage space and carrying costs.

c. Reorder Level:

The reorder level is the level at which a new order should be placed to replenish stock. It is calculated as Reorder Level = (Usage Rate x Lead Time) + Safety Stock.

2. Inventory Control Techniques:

a. Just-In-Time (JIT):

JIT minimizes inventory by receiving materials just in time for production. It reduces holding costs and the risk of obsolescence.

b. ABC Analysis:

As previously mentioned, ABC analysis categorizes items into A, B, and C categories based on their value and usage. A-items receive the most attention in inventory management.

c. Materials Requirement Planning (MRP):

MRP is a computer-based system that helps plan and manage the materials needed for production by considering bill of materials, lead times, and demand.

d. Safety Stock:

Safety stock is a buffer of extra inventory kept to account for uncertainties in demand, lead times, and supply disruptions.

e. Vendor-Managed Inventory (VMI):

In VMI, the supplier manages the inventory of materials at the customer's location. The supplier is responsible for replenishing stock.

f. RFID and Barcoding:

Modern technology, like RFID (Radio-Frequency Identification) and barcoding, helps improve inventory accuracy and control by providing real-time tracking of items.

g. Consignment Inventory:

In a consignment arrangement, the supplier retains ownership of the inventory until it is used. This can help reduce carrying costs for the customer.

Methods of Pricing Material Issues

1. First-In-First-Out (FIFO):

Under the FIFO method, the cost of materials issued is based on the cost of the earliest acquired materials. This method is based on the assumption that the first materials received are the first to be used.

2. Last-In-First-Out (LIFO):

In contrast, LIFO assumes that the last materials received are the first to be used. This method may be chosen to match the most recent costs with current revenue for tax or financial reporting purposes.

3. Weighted Average Cost:

The weighted average cost method calculates the average cost of materials in stock and assigns this cost to materials issued. It's a straightforward method that evens out cost fluctuations.

4. Specific Identification:

Specific identification method assigns the actual cost of each item to materials issued. It's practical for items with distinct serial or batch numbers.

5. Standard Cost:

The standard cost method uses predetermined standard costs for materials. Any variations from the standard cost are recorded as variances and analyzed.

6. Base Stock Method:

Under this method, materials are priced at the base stock rate until the base stock is exhausted. After that, the replacement cost is used for pricing.

7. Market Price Method:

This method values materials at their market price at the time of issuance. It's used when market prices fluctuate significantly.

Conclusion

In conclusion, the management of material in an organization involves a series of interconnected processes, starting with the purchase of materials, followed by their storage and control. Effective inventory control and management techniques are crucial to ensure that the right materials are available at the right time and in the right quantity, while keeping costs under control.

Additionally, the choice of methods for pricing material issues has implications for cost accounting and financial reporting. Selecting the most appropriate method depends on factors like the nature of the materials, accounting and taxation requirements, and the organization's specific needs and goals. Proper material management contributes to cost efficiency, streamlined operations, and ultimately, improved profitability.