Material Cost

a.) Re-order level = Maximum Lead Time x Minimum Lead Time

b.) Maximum level = Reorder Level + Reorder Quantity – (Minimum Usage x Minimum Lead Time)

c.) Minimum level = Reorder Level – (Normal Usage x Normal Lead Time)

d.) Danger level = Maximum Level x Lead time for Emergency purchases

The importance of various items is decided on the basis of following factors:

-Critical nature of inventory

-Amount of investment

-Value of material consumed.

ABC analysis means ‘Always Better Control’ is a technique which classifies the various items of inventory according to their importance. It is an analytical method of inventory control which concentrates on the most significant inventory items. For example: A class consists of those items which are less in number but most important in nature. B class consists relatively less important items. C class consists of large number of items which are less important.

Bill of materials - is the list of all materials including all the details and quantity as required for a job or production process. This is prepared by the production department as soon as the order for the job is received. This also ensures proper inventory control. It gives an indication to the purchase department about the materials to be purchased if there is any shortage of material in the stores. A bill of material prepared in advance serves a base for quoting the price of the job.

This level is fixed below minimum level. If the stock reaches this level an immediate action must be taken by the company in respect of getting supply. This level indicates a panic situation for the company as it has to make purchases in a rush which may involve higher costs.

This level is fixed between maximum and minimum level in such a way that the requirement of materials for the production can be met properly till the fresh supply of material is received. This level of material stock indicates that steps should be taken for procurement of further lots of material.

This level is fixed below the re-order level but above the danger level. The level of stock should not be reduced below this level. If it does, then it involves the risk of non availability of material whenever required. This level is fixed after considering two factors: Rate of Consumption and Lead Time.

This is the top level which indicates that level of material stock should not exceed this level. If it does, it may involve blocking of funds in inventory which may be used for some other useful purposes. This level is fixed after considering following factors:

-Maximum Usage

-Lead Time

-Storage facilities available

-Prices of material

-Other various costs involved like insurance, storage cost etc.

-Availability of funds for procurement of materials

-Nature of material

- EOQ

Fixation of inventory levels facilitates easy maintenance and control of various materials in a proper way. However, following points should be remembered: Only fixation of inventory levels does not facilitate inventory control. A constant watch on the actual stock level of materials should be kept so that proper action can be taken in time The levels which are fixed are not for permanent basis and are subject to regular revision.

Perpetual inventory system - is a system under which continuous stocking takes place. This system is implemented by the large manufacturing units. It aims at maintaining bin cards and stores ledgers to know the quantity and value of the stock at any point of time which ensures that the physical balance and the book balance tallies. By systematically maintaining perpetual inventory system discrepancies can be easily located and can be adjusted in time. It also enable in locating slow and non-moving items and to take action for the same.

The techniques of inventory control are:

-Economic Order Quantity

-Fixation of Inventory Levels

-Maximum Level

-Minimum Level

-Average Level

-Re-order Level

-Danger Level

Valuation of issues is a complex process because the material may be issued out of various lots which might have been purchased at various prices. Following methods are used for this purpose:

- First in First out(FIFO)

- Last in First out (LIFO)

- Average Price Method

- Simple Average Method

- Weighted Average Method

- Highest in First out

- Market Price

- Specific Price

- Standard Price

There are two categories of material discrepancies:

First category includes-

-Quantity received in excess

-Quantity received in short

-Quantity damaged

-Receipt of incorrect quantity of material.

These discrepancies are normally caused by the transportation system.

Second category includes – Discrepancies in quality of material supplied.

These discrepancies are caused by the manufacturer.

Valuation of returns indicates the material returned by the production department to stores department. This valuation is done on two basis:

- At the same price at which issued

- At the current price of issues

Weighted Average Method - is the method of calculation in which the weighted average of both the lot sizes as well as the prices of the lot. This method is best for valuing material issues. This method is very useful where the prices and quantities of items vary. Practically, this method is very simple to calculate.

Average Price Method - is the method by which the value of total assets or expenses is assumed to be equal to the average cost of the total assets or expenses. Under this method, it is assumed that the cost of inventory is based on the average cost of the goods available for sale during the period. It is computed by dividing the total cost of goods by the total units which gives a weighted average unit cost for the units of the closing inventory.

Global Tender: is open to anybody from any part of the world to supply the required quantity and quality of materials.

Open Tender : is open to all the suppliers within the country who can supply the required quantity and quality of materials. Such invitation is made by advertising in newspapers, journals etc.