Costing and Taxation · Ch 5 — Cost of Materials
Materials Control and Fixation of Stock Levels
Materials Control and Fixation of Stock Levels
Materials Control is the systematic control exercised over the purchasing, storing and using of materials, so that there is a regular, uninterrupted supply of material for production, without either running out of stock or tying up excessive capital in idle stock.
Materials Control
Materials Control is the systematic control and regulation of purchase, storage, and use of materials, so as to maintain an even and uninterrupted flow of material for production at the lowest possible cost, while avoiding both stock-outs and overstocking.
Necessity/Objectives of Materials Control:
- To ensure that material of the right quality is available in the right quantity, at the right time, and at the right place.
- To avoid both understocking (which causes production stoppages) and overstocking (which locks up working capital and raises storage/carrying costs).
- To minimise wastage, pilferage, and deterioration of material while it is in store.
- To provide accurate and timely information to management on stock levels and material costs.
- To make bulk purchasing possible where it is economical, without accumulating excess stock.
Fixation of Stock Levels
A well-run materials control system fixes certain quantitative levels for each item of material, so that the store-keeper knows exactly when to raise a fresh purchase requisition, and management can judge whether stock is running dangerously low or has been allowed to build up too high. Five such levels are commonly fixed:
| Level | What it means | Formula (in words) |
|---|---|---|
| Re-order Level (ROL) | The stock level at which a fresh purchase requisition must be raised | Maximum Consumption × Maximum Re-order Period |
| Minimum Level | The lowest level of stock that should normally be allowed to fall to | Re-order Level − (Normal Consumption × Normal Re-order Period) |
| Maximum Level | The highest level of stock that should normally not be exceeded | Re-order Level + Re-order Quantity − (Minimum Consumption × Minimum Re-order Period) |
| Average Stock Level | The average level of stock normally carried | Minimum Level + ½ × Re-order Quantity |
| Danger Level | An emergency level, below the Minimum Level, at which normal re-ordering procedure is abandoned and urgent/emergency purchase action is taken | Average Consumption × Lead Time for Emergency Purchase |
A few points worth noting about these formulas:
- Re-order Period (also called Lead Time or Delivery Period) is the time gap between placing a purchase order and actually receiving the material — it is usually given as a range (a minimum and a maximum number of days/weeks), because deliveries are rarely perfectly punctual.
- Normal Re-order Period, used in the Minimum Level formula, is simply the average of the minimum and maximum re-order periods.
- Re-order Quantity is the quantity ordered each time a fresh purchase requisition is raised — in practice, this is usually fixed at the Economic Order Quantity (EOQ), covered next in this chapter.
- The Danger Level formula above uses the lead time available for an emergency/urgent purchase, which is normally shorter than the usual re-order period, since an emergency purchase is made through faster (and often costlier) means.
| Rank (high → low) | Stock Level | Significance |
|---|---|---| …
The systematic control and regulation of the purchase, storage and use of material, to maintain an even, uninterrupted supply at the lowest possible cost while avoiding bo …
The stock level at which a fresh purchase requisition must be raised, computed as Maximum Consumption × Maxi …
An emergency stock level, below the Minimum Level, at which urgent/emergency purchase action is taken; computed as Average Consumption × Lead Ti …