Material control is the process of systematically controlling materials over the stages of

procurement, storage, and usage so as to help maintain the regular and uninterrupted flow
of the materials in the production pipeline.

No system of costing is complete without an effective material control system. Material

control is a system that ensures the provision of the required quantity of materials of the
required quality at the required time with the minimum capital investment.

Materials are all the commodities consumed in the production department to produce items
either directly or indirectly. Inventory is a common term used for raw materials, components,
work-in-progress, and finished goods stocked in the store.

Objectives of Material Control

▪ To prevent overstocking and understocking: Maintenance of optimum investment

in the inventory is significant taking into account the operational requirements and the
financial resources, with the aim of decreasing the carrying cost. Also to provide an
uninterrupted supply of the required inventory, so that the operational activities are
not held up for the long term.
▪ To Ensure Uninterrupted Production: The first objective of material control is to
ensure smooth production by making available all types of required materials in the
required quantity at the right time. The uninterrupted supply of materials is essential
for the smooth flow of production, which is important for the success of any business.

▪ To make certain proper quality: At the time of purchase of material, primary

consideration should be given to quality, as the material of inferior quality or
substandard quality or defective, would be of no use.
▪ To minimize total cost: Total cost includes ordering cost and carrying cost. Material
control takes into account various factors which ensure the availability of the material
at a very low cost.
Advantages of Material Control

1. Facilitates the continuous flow of materials to production

2. Prevents wastage, misuse, and losses during various activities
3. Assists in procuring the right quantity and quality of materials in a timely manner
4. Reduces the risk of fraud and theft.
5. Helps in preparing monthly statements of materials to help in internal checks and
audits.
6. Helps in the reconciliation of accounting records with physical stock taking.
7. Ensures cost reduction through the determination of Economic Order Quantity
(EOQ).
8. Helps in fixing responsibility on employees.
9. Avoids locking of working capital in materials.
Purchase Dept and Functions

A purchasing department is the division of a company that's responsible for acquiring the
goods and services the business requires to operate. Some companies refer to purchasing
departments as procurement departments or buying departments. These units are often an
important part of helping companies meet their daily needs and their long-term strategic
goals.
Management duties

The purchasing manager needs to handle the management of the various resources and
coordinate them properly. In the field of management they oversee the decisions related to
scheduling the meetings of the suppliers and the vendors. It is their duty to ensure that the
stock is always in surplus and the keep a check on the market trends as well. The
management duties are not just restricted to coordination but evaluation and monitoring the
different departments so that they can run efficiently. It may also involve managing other
people within the purchasing department.

Procurement duties

The procurement duties are related to the inventory stock of the company, ensuring that all the
products are available and ready in a timely manner. The purchasing manager has to prepare
the list of the products and coordinate with the vendors so that a consistent and regular supply
flow is maintained. Having too much stock on hand can be problematic at tax time and tie up
resources that would be better served elsewhere throughout the year. Having too little can
cause delays and impact profits. It’s a constant balancing act that should be fine-tuned and
constantly working to make better and better.

Contractual duties

Contract management is one of the important tasks which are accomplished by the purchasing
managers. While dealing with the suppliers and vendors, the managers have to negotiate,
prepare and execute contracts. Some will be for one-time only purchases and other contracts
are for extended periods of time and set up regular order intervals or pricing structures. Some
companies may have access to attorney’s while smaller companies may rely on the
purchasing manager to review and approve purchasing contracts.

Analytical duties

The analytical duties focus on the changing demands of the people and how to bring about
upgrades, advancements, and updates based on the data being analyzed. The purchasing
managers have to be familiar with the market trend and possess the desired knowledge to
take the right decision. It could also involve running reports, finding problems, or creating
better processes to become more efficient.

The Bill of Materials is the comprehensive listing of the raw materials required for the
manufacturing process. The Bill of Materials is also called product structure, as it consists of
the overall quantity of the raw material needed for production. An optimal bill of materials
must include the estimated cost of the raw materials for the product.
The Format of Bill of Materials
The Bill of Materials is formatted in a decent way to better understand the materials used,
quantity and overall estimation. The format of the BOM is divided into several parts.
Also Read: What are Raw Materials in the Manufacturing Industry?

1. Part Number
Every part, component, or raw material has a specific number to identify that particular item.
You can use these part numbers for referencing a specific element. There are three categories
of part numbers, and they are

• Intelligent: These are the category of the part number that you can arrange in a
particular manner to define or determine a specific term, i.e., the date of manufacturing,
expiry date, the weight of the product, etc.
• Unintelligent: These are the part numbers that do not have any particular meaning
towards the components, parts, raw material, etc. These are just the random
numbering of the elements during the manufacturing process.
• Vendor Assigned: Usually, sometimes the vendor assigns a number to the parts or
components to neglect the confusion and make the sorting easy and convenient.

2. Part Name
Every part or component has its unique name, which helps the employee to identify the
product. These assigned names make production easy and convenient.

3. Phase
The phase of a product, component, raw materials, etc., determines the stage of its life cycle.
The phase is termed "In Production", "Unreleased", or "In design". It helps in tracking the
product's life cycle seamlessly.

4. Description
The description provides more detail than that of a part, component or raw materials. This
helps identify the basic working and the role of that particular item in the production—for
example, the size of a machine screw.

5. Quantity
The Bill of Materials consists of a column under "quantity". This column identifies the number
of parts or components required in the overall construction of a product.

6. Unit Measure
The unit measurement of any product, component or raw material determines the singular
entity of a specific element. This is very much essential in the evaluation of the overall cost.

7. Procurement Type
The procurement determines the overall chronology of a product, i.e., from where it is
extracted, from where it is designed, from where it will be shipped, etc.

8. Reference Designator
Consider an example of a circuit board. Therefore, the reference designator determines the
production location of every little part used in the circuit board.

9. Notes Section
The notes section is the additional section that you must fill according to requirement and
need. This section has the extra and detailed knowledge about an element or procedure you
need to carry out, which is an exceptional process.
Types Of Manufacturing Industries That Use BOM
The Bill of Material is designed and formatted according to the manufacturing company.
Therefore, these bills are different from each other, from industry to industry or company to
company. Mostly, the discrete manufacturing industries are the ones that use the Bill of
Materials. The Bill of Materials identifies that a particular element is finished, i.e., produced
entirely, therefore can be used in production and is liable for counting. Most commonly, the
cosmetic industries, paint industries, juice companies, etc., are the process manufacturing
industries that widely use the BOM for the proper and convenient manufacturing process flow.

Whenever specific materials are required in a production department, a materials

requisition form must be prepared. Also known as a requisition slip or materials requisition
note, a materials requisition form is a document that authorizes and records the issue of
materials for use. In other words, a materials requisition form is used to draw materials from
the stores, and it specifies the quantity and quality of materials required, along with the job
number or work order for which it is needed.

Methods of Pricing Material Issues –

1. First In First Out (FIFO) Method -

This methods of material pricing is by far more systematic than the methods discussed
above. The receipts and the issues follow a sequential pattern. i.e. the materials which are
received first are also issued first and when the complete lot is done with them the further
receipt is considered for issue. In simple words, the closing inventory simply represent the
stock which was procured at the last and thus represents the latest price.

Advantages

▪ Better valuation of inventory: By using FIFO, the balance sheet shows a better
approximation of the market value of inventory. The latest costs for manufacturing or
acquiring the inventory are reflected in inventory, and therefore, the balance sheet
reflects the approximate current market value.
▪ Accurate cost analysis: FIFO provides the most accurate picture of what your
inventory is costing the business at any given time. It aligns the current costs of the
business with the actual flow of goods or inventory out of the business more
accurately than any other method. This leads to better accounting and more real-time
analysis on where the business stands if it has a heavy amount of inventory.
▪ It’s easy to maintain and Cost effective.
▪ It’s realistic and logical assumptions.
▪ Increased Profits: this method provides higher profits to the firm as lower cost of
material is charged. Although, the tax liability will also increase due to increased
profits.

Disadvantages
▪ FIFO will not be an appropriate measure if the materials/goods purchased have
fluctuating price patterns, because this can result in misstated profits for the same
period as different costs of same goods during that same period are recorded.
▪ FIFO pricing valuation method although easy to understand may get clumsy and
cumbersome to operate and extract the costs of goods, as substantial amount of
data is required thus resulting in clerical errors.
2. Last In First Out (LIFO) Method -
Under this method, most recently purchased goods are released first. However, this
assumption is made only for the purpose of valuing the issues of an inventory. This method
operates in an inverse manner to FIFO method. The actual flow of inventory may differ. This
method employs the price of the latest lot until all the units from the lot are exhausted.
Afterwards it continuous with previous lots. If a new batch is received then such batch is
considered to be the last lot.

Advantages of LIFO method are as follow:

1. This method is suitable for the time period when price is rising.
2. Since material is charged at the latest price level the cost of production is realistic.
3. It is easy to understand.
4. This leads to minimal unrealised gain.

Disadvantages of LIFO method is as follows:

1. It does not conform to the physical flow of the goods.

2. Inventory is not priced at current market price.
3. Price comparison is different, if similar jobs are carried out using material from different
lots.
4. This method is not supported by Income Tax Act or Accounting Conventions.
5. This method leads to inflated profit and tax liability in the time of downward prices and vice
versa.
6. It can be difficult to calculate if there are frequent price changes.

3. Weighted Average Price Method -

Weighted average price of the materials procured is considered and the quantity is duly
taken into account. This method follows a practical approach as compared with the other
methods. The issue price calculated is a realistic one and in ratio of the material procured.
Every time a new lot is procured. Weighted average price is recomputed.
Following are the advantages of weighted average price method :

1. There is not much of critical work as the price of issue is constant till the expiry of the
current lot.

2. Which method is simple and easy.

3. The value of closing inventory calculated is quite accurate and can be taken into
consideration while preparation the financial statements.

4. When prices fluctuate the debits are set off as against the credits, thus no profit and loss
exist on account of issues.

Following are the disadvantages of weighted average price :

1. In order to minimize clerical error, calculations are made to 4/5 decimal places, which
makes the job tedious.

2. Closing inventory is valued at per the calculations and not the current cost.

3. The issues continue to be made at a fixed price even after the previous lot of stock has
been totally consumed till the new stock comes in.
4. Standard price method -
All the materials are then issued at this price only for the entire period. Standard price should
remain fixed for short period in case, the prices fluctuate heavily and should be constantly
reviewed and revised.
After taking into consideration various factors like :
a) Current Prices
b) Anticipated Market Trends
c) Discount Available
d) Transport Charges etc.
A standard price is fixed for a certain period.

5. Highest in first out method -

This method assume the principle of conservatism. The materials with highest purchase
price are issued is usually followed by materials at the low prices, irrespective of their date of
purchase. It presume that, under inflectional situation product can absorb the extra burden of
increased prices and thus be allocated leaving low priced materials for deflation.

6. Periodic simple average price method -

Just like simple average price method , issue price is calculated the only difference being
that the price calculated is fixed for a particular period and not for a particular issue.
Total of purchase prices. during the period
PSA = -------------------------------------------------
No. of prices during the period

In other words, the total amount paid during a period for various purchases is added up and
is divided by the quantity of the material purchased to arrive at a rate for valuing the closing
inventory.

7. Replacement price method (Market Price)

Every time the materials are issued their market prices checked. This market price is taken
as the replacement price and the issues are recorded at this price.
Basis of

Differences FIFO LIFO

Under this
method Under this
material method
purchased material
1. Basic first is issued purchased last
assumptions first. is issued first.
Higher
income is Lower income
reported is reported
since old cost since current
are matched cost are
with current matched with
revenue. As current
a result revenue. As
Income Tax result Income
2. In case of liability is Tax liability is
rising prices increased. reduced.
Cost of Cost of goods
goods sold sold equales
consists of to cost of
3. Cost of cost of earlier recent
goods sold purchases. purchases.
Balance Balance sheet
sheet shows is distorted
the ending because
inventory at a ending
4. Distortion value near inventory is
in balance the current understated at
sheet market price. old cost.
Inventory Ending
valuation is inventory
done using represents
5. ending cost of recent cost of Ariel
inventory purchases. purchases.
Economic order quantity (EOQ) is a term for the ideal quantity a company should
purchase to minimize its inventory costs, like shortage or carrying costs. It is a technique to
determine how much should be the quantity to hold which is economic in terms of cost. The
economic order quantity (EOQ) is the order quantity that minimizes total holding and
ordering costs for the year. Even if all the assumptions don’t hold exactly, the EOQ gives us
a good indication of whether or not current order quantities are reasonable.
Formula for EOQ determination:
EOQ = √ 2DO/H

Where, D = Annual Demand in units

O = Order cost: Each order incurs a fixed cost. It is generally unaffected by the number of
units ordered or the volume of the order. This is known as the ordering cost of an order and
includes packing and forwarding charges, freight, and so on.
H = holding cost: Inventory has its own set of costs. It can take the form of godown space
or storage area rentals, as well as electricity bills, repairs, and maintenance. Carrying cost is
another term for it. Then there's the cost of human resources to keep the stock in good
condition. Furthermore, if the company had not invested in the product under consideration,
it could have been used for something else. It is the cost of holding a specific product.

Implication of Economic Order quantity:

1. Inventory cost reduction - Storing inventory may be extremely expensive for any
operation, especially small businesses. The main advantage pertaining to the EOQ
model is the customized recommendations that are provided regarding the most
economical number of units per order. This could easily reduce storage costs as you
develop a thorough understanding of how much inventory is needed.

2. Business Specific - Another advantage pertaining to the EOQ model is that it is able
to provide specific numbers particular to the business regarding how much inventory
needs to be held, when to re-order it, and how many items are needed to be ordered.
This can smooth out the re-stocking process and ultimately results in enhanced
customer service.
3. Assumption Based – Utilizing EOQ models assume steady demand of a business
product, which is not the case for majority of organizations. There is seasonality for
all types of businesses, and there needs to be an accounting for inventory during
peak periods. It assumes fixed costs of inventory units, ordering charges, and holding
charges. This inventory model requires continuous monitoring of inventory levels.
The EOQ model is a useful tool for companies looking to minimize their total cost;
however, there are other factors to keep in mind that the formula doesn't calculate.
This model keeps the consumer demand at a constant, assuming that sales are
forecasted to remain the same all year round. However, this is not a reality for most
businesses.
4. Improved productivity - Correct EOQ calculations mean companies have enough
inventory on-hand to operate efficiently. As sales naturally ebb and flow throughout
the year, the formula accurately determines how the stock levels should reflect the
forecasted sales. Therefore, the warehouse can avoid shortages or excess products
that could disturb business productions.
The following are the primary advantages of calculating EOQ.

1. Reduced inventory costs

Having an excess inventory can quickly increase storage costs. Inventory costs can
also rise as a result of how you order, what gets damaged, and which products never
sell. If you're constantly re-ordering products with low velocity, EOQ can help you
figure out how much to order in a given time frame.

2. Reduce stockouts

EOQ can help you understand how much and how frequently you need to reorder.
You can avoid stock outs by calculating how much inventory you need based on how
much you sell in a given period of time. You might be surprised to learn that ordering
in smaller quantities is more cost-effective for your company, or that the opposite is
true — calculating EOQ can help you determine this.

3. Increasing overall effectiveness

Overall, calculating EOQ can assist you in making better decisions regarding inventory
storage and management. The truth is that many e-commerce businesses place
orders based on a "gut feeling" of how much product is required, rather than ordering
how much product is required. Calculating EOQ is an efficient way to better quantify
how much you require based on key cost variables.

Limitation of EOQ
▪ Seasonality and Changing demand

The EOQ model is a straightforward model for products that have consistent demand all
year. This, however, is not always the case. Newly launched products may have a higher
initial demand that fades over time. Products with seasonal demand, where sales fluctuate
throughout the year, may render EOQ calculations invalid. You can't just measure EOQ at
the start of the year and expect it to be accurate. As a result of inconsistent reordering, this
could result in stockouts or excess inventory.

▪ Supply constraints
Inventory shortages are another limitation of the EOQ model. Some businesses that are
new to using EOQ may be conservative in their reordering, resulting in smaller orders and
your store being understocked.
 Perpetual Inventory System

Perpetual inventory is a continuous accounting practice that records inventory changes in

real-time. In perpetual inventory system is “the recording, as they occur, of receipts, issues
and the resulting balances of individual items of stock in either quantity or quantity and
value.” This system starts with the baseline from a physical count and updates based on
purchases made in and shipments made out.

Pros: This method removes the need for manual counting. It gives warehouse managers a
snapshot of their inventory counts over a specific period of time. Doing so drives data-driven
decision-making for sales, ordering, and inventory management.
Cons: An inventory control software can be expensive to maintain. Moreover, it might not
capture discrepancies due to product theft, loss, damage, and scanning errors.

ABC Analysis
ABC analysis in inventory control classifies stocks based on their importance, price, and
sales volume. These criteria determine the number of items a company will bring to the
market. ABC rates products based on demand, cost, and risk data, and inventory managers
classify objects based on those criteria. This assists company executives in determining
which items or services are most important to their organisation's financial success. ABC
analysis’ full form is Always Better Control Analysis.

The main purpose of ABC analysis of inventory control is to identify products with high
cost of inventory so that management can concentrate on inventory items with high
inventory cost. It gives business owners insight into inventory value and highlights areas where
too little or too much time and energy is being used.

Just as its name suggests, it consists of the following categories:

• A class – expensive, high-class items with tight controls and small inventories
• B class – average-priced, mid-priority items with medium sales volume and stocks
• C class – low-value, low-cost items with high sales and huge inventories

Benefits

• This technique aids organisations in maintaining control of pricey assets with

significant capital outlays.
• It offers order to the chaos of managing all the merchandise. Not only does it cut
down on pointless employee costs, but it also ensures that stock levels are always
kept at their ideal levels.
• The ABC approach ensures that the stock turnover ratio is significantly higher
through systematic control of inventories.
• With this technology, storage charges are significantly reduced.

Drawbacks

• It is necessary for the materials in the shop to be standardised correctly for this
strategy to function and produce excellent outcomes.
 • This analysis needs a solid classification system for materials already used to
function.
• This study misses other elements that could be more crucial for your company
because it only considers the goods' monetary worth. This divergence is essential as
a result.

Just-in-time (or JIT)

It is an inventory management method in which you keep as little inventory on hand as

possible. That means you don’t stockpile products and raw materials just in case you need
them—you simply reorder products to replace those you’ve already sold. To cut inventory
costs, a strategy is used to plan raw material orders from suppliers by the production
schedules. Since there won't be any extra inventory held beyond what's needed for
production, there won't be any room for deadstock in the company.

Companies utilize the Just in Time method of inventory accounting so that it directly aligns
with the goods they are producing. They create goods directly related to the orders being
placed, instead of making extra goods to meet the needs of any potential orders that may be
placed.

Pros

The JIT inventory method helps businesses keep enough inventory on hand to fulfill
customer orders, while also keeping inventory levels as low as possible. This allows you to
enjoy significant cost savings on inventory storage (since you have fewer items to
store), but it has a couple of other financial benefits.

For starters, keeping less inventory on hand gives you more freedom when it comes to
your cash flow. Instead of spending all your revenue from the past month on a massive
replenishment order, you can allocate a small portion of your earnings for inventory. That
leaves you free to use that money on other business costs.

JIT systems also help you mitigate risk in your inventory. Large product orders are a bit of
a gamble, since you have no guarantee that you’ll actually sell every item on your shelves.
But if you order smaller numbers of items at a time, you enjoy greater agility to abandon
products that are no longer selling well.

Cons

The problem with keeping low stock on hand? You run the risk that you won’t have
enough product to meet demand. Stockouts can have a drastic impact on customer
satisfaction, so businesses using the JIT strategy will need to streamline their production
processes and supply chain management. In a JIT system, there’s little to no room for
errors like missed shipping windows and slower-than-usual production.

JIT systems also have the potential to lower your profit margins. Since you have to replenish
stock as soon as you sell it, you don’t have the luxury of waiting around for the best
price. So if your supplier charges extra for your order due to a recent natural disaster or
national holiday, it’ll eat into your bottom line.
 VED Analysis
Next, you can use the VED analysis method. It is an inventory analysis method whose
classification is dependent on the user’s experience and perception. It classifies inventory
according to the relative importance of certain items to other items, like spare parts. Thus,
when performing the VED analysis, you organize the items into three categories, which
include:
• Vital – inventory that you need to keep in stock consistently. As the name suggests, the
category “Vital” includes inventory, which is necessary for production or any other process
in an organization. The shortage of items under this category can severely hamper or
disrupt the proper functioning of operations. Hence, continuous checking, evaluation, and
replenishment happen for such stocks. If any of such inventories are unavailable, the entire
production chain may stop. Also, a missing essential component may be of need at the
time of a breakdown. Therefore, the order for such inventory should be beforehand. Proper
checks should be put in place by the management to ensure the continuous availability of
items under the “vital” category.

• Essential – keeping a minimum supply of this inventory is enough. The essential category
includes inventory, which is next to being vital. These, too, are very important for any
organization because they may lead to a stoppage of production or hamper some other
process. But the loss due to their unavailability may be temporary, or it might be possible to
repair the stock item or part.

• Desirable – optional; operations can run with or without it. The desirable category of
inventory is the least important among the three, and their unavailability may result in minor
stoppages in production or other processes. Moreover, the easy replenishment of such
shortages is possible in a short duration of time.

Advantages-

• It helps in classifying items into three category and stocked accordingly, for eg. Vital items
are stocked maximum. The essentials and least amount of desirable item is stocked.
• It brings economy in stock maintenance as each item need not to be stocked in abundance.

Disadvantages-

• This method is not suitable when thousands of items are used in production.
• Vital items are purchased in bulk and hence gets piled-up sometime and increases cost.

FSN analysis is the method of classifying materials based on their frequency of movement
from inventory stores to production for a specified period. This analysis categorizes the items
of inventory into four broad categories, in descending order, according to their usage rate.

F-Fast moving items: That are consumed in short span of time. This category denotes
fast moving goods.
N-Normal moving items: That are consumed over a period of one year. These are
normal moving items of the stock and these items are generally utilized over relatively
longer period from 6 months to 1 year.
S-Slow moving items: These items are not frequently issued and consumed over a
period of two years or more. These slow moving items have a stock holding period of
more than 1 year.
D-Dead items: Consumption of such items are almost nil. It can also be taken as
obsolete items.