BBA Cost Accounting to Direct Material Inventory Control Topic Wise Short Notes Study Material

BBA Cost Accounting to Direct Material Inventory Control Topic Wise Short Notes Study Material : Bachelor of Business Administration BBA 2019 Important Notes Study Material Sample Model Question Papers All Semester in PDF Download on this Post.

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BBA Cost Accounting to Direct Material Inventory Control Topic Wise Short Notes Study Material
BBA Cost Accounting to Direct Material Inventory Control Topic Wise Short Notes Study Material
Bba Study Material  Cost Accounting to Direct Material Inventory Control Topic wise Study Material: After Studying this post you are able to understand, ABC Analysis, Average Stock Level, Carrying Stock Taking, Danger Stock, Dead Stock, Desirable items, Dormant Stock, Economic Order Quantity, Essential Items, Fast Moving Items, Fast Moving Items, Finished Good Inventory, FNSD Analysis, Input-Output Ratio, Inventory Policy, Inventory Levels, Just-in-Time, Maximum Stock Level, Minimum Stock Level, Normal Moving Items, Ordering Costs, Pareto Analysis, Periodic Stock Taking, perpetual Inventory System, Raw Materials Inventory, Re-order Level, Slow Moving Items, Stock Control, Stock-Turnover Ratio, Stock-Out Costs, Supply Chain Management, Two Bin System, VED Analysis, Vital Items, Work-in-Progress Inventory.

Learning objectives

  • Classification of inventory and features of good inventory policy
  • Requirements of stock control
  • Input-output ratio and stock turnover ratio
  • Economic order quantity, its assumptions and graphical presentation
  • Fixation of inventory levels
  • ABC, VED and FNSD analysis
  • Application of pare to analysis in inventory control
  • Application of just-in-time in inventory management
  • Supply chain management in reduction of inventory carrying costs

Bba Cost Accounting to Direct Material Inventory Control,Topic wise Short Notes Study Material

Introduction to Direct Materials: Inventory Control Topic wise short Notes

Introduction

ICAI has defined inventory as “tangible property held (a) for sale in the ordinary course of business or (b) in the process of production for sale or(c) for consumption in the production of goods or services for sale, including maintenance supplies and consumables other than machinery spares.”

In a manufacturing unit usually about 20 to 30% of the total assets are in the form of inventory and any effort in stock control will bring major benefits for the success of the enterprise.  The inventory of a manufacturing concern is classified into the following types:

Raw Materials-

it includes direct material used in the manufacture of a product and it also includes the components, fuel etc. used in the manufacture.

Work-in-progress-

it include partly finished goods and material, sub-assemblies etc, held between manufacturing stages. Stocks of work-in-progress are in the process of production.

Finished goods-

The goods ready for sale or distribution will come under this category. This classification of inventory of a particular firm depends upon the nature of business it carries. For a spinning mill, cotton is the raw material and yarn is the finished product. But In case of textile mill, yarn is the raw material and fabric is the finished product. A manufacturing concern’s inventory consist of all the above three types of inventory but in case of a trading concern, the first two categories will not appear in their stocks. The items of inventory, classification of inventory and costs related to each item of inventory before taking any step for efficient management of inventory. The efficiency shown In inventory will have direct impact on profitability of a business enterprise. In our study about management of inventory, here, we only discuss about the first category of inventory i.e., raw materials.

A good inventory policy should consist of the following features:

  • There should be proper accounting and physical controls.
  • The inventory should be stored properly to avoid the losses like breakage, spoilage, wastage, damage, deterioration, pilferage etc.
  • Fixation of inventory levels like, minimum, maximum and recorder levels and economic order quantity to ensure the optimum level of stocks.
  • Proper care should be taken to avoid stock-out situations.
  • Continuous supply of material should be ensured at the right time and right cost.
  • The investment in inventory should be optimized by avoiding over-stocking.
  • Regular monitoring of stock movements and reduce the investments in dormant and slow moving stocks.

Bba Cost Accounting to Direct Material Inventory Control, Topic wise Short Notes Study Material

Requirement of Stock Control 

CIMA defined stock control as ‘the systematic regulation of stock level’.

The material stocks control covers the following areas-

  • ordering
  • purchase
  • receipt
  • storage
  •  

The requirements for a better control over stocks are given below:

  • centralized purchase function i.e., all the purchases should be through purchase department.
  • Material is purchased with prior authority.
  • Proper planning of purchase function.
  • Materials purchased should be of proper quality and specification.
  • Standardization of materials.
  • Materials should be properly received and inspected.
  • Planned storage of all materials in stores.
  • Selection of suppliers keeping in view the quality, price and delivery.
  • Direct materials used in production should be charged to production on an appropriate and consistent pricing basis.
  • Indirect materials used in production and service departments should be appropriately apportioned and absorbed into product cost.
  • Proper documentation and accounting of material receipts and issues.
  • Material issues to be made only with proper authority.
  • Maintenance of bin cards and stores ledger and regular reconciliation of both the records.
  • Adoption of perpetual inventory system and continuous stock taking.
  • Fixation inventory levels i.e., maximum, minimum, re-order and danger levels.
  • Proper internal checks.
  • Proper procedures in dealing with shortages and discrepancies.
  • Proper classification and coding of materials.

Bba Cost Accounting to Direct Material Inventory Control, Topic wise Short Notes Study Material

Input-output ratio

Input-output ratio is used in material control, which indicates the relation between the quantity of material used in the production and the quantity of final output.

For example, if 500 units of material is introduced into the process or operation and the yield of final product is 400 units, the input-output ratio is calculated as follows:

Advantages

the advantages of analysis of input-output ratios are given below:

  • It helps in material planning by estimation of output and its raw material requirement.
  • The standard input-output ratio act as guide in control of material s used in the process by minimization of waste, scrap, spoilage and defectives.
  • It acts as a performance indicator or particular production cost centres.
  • It helps the management in investigation and analysis of any variations in material usage by establishing relation between input and output.
  • The cost-benefit analysis of use of different substitutes of raw material is possible by comparing each of the input-output ratios.

Bba Cost Accounting to Direct Material Inventory Control, Topic wise Short Notes Study Material

Stock Turnover Ratio

The stock turnover ratio indicates the movement of average stock holding of each item of material in relation to its consumption during the accounting period. The stock turnover ratio is calculated by applying the following formula:

Advantages the computation of stock turnover ratio will lead to the following benefits:

  • It highlight slow-moving or obsolete stocks where action is needed to reduce the stock held.
  • It indicates whether the stock holding is consistent with the material required for production.
  • It helps in location of excessive stocks and by avoiding unnecessary pile up of stocks. The financial strain on the working capital of the organisation can be reduced.

Bba Cost Accounting to Direct Material Inventory Control, Topic wise Short Notes Study Material

Economic Order Quantity

The prime object of inventory management is to find out and maintain optimum level; of investment in inventory to minimise the total costs associated with it. The EOQ is the optimum size of the order for a particular item of inventory calculated at a point where the total inventory costs are at a minimum for that particular stock item. It is an optimum size of either a normal outside purchase order or an internal production order that minimises total annual holding and ordering costs of inventory.  Stocks out costs are difficult to incorporate into this model. Since they are based on qualitative and subjective judgment. The ordering costs are the costs of placing a separate order multiplied by the number of separate orders placed in the period. The carrying costs can be calculated based on the assumption that annual cost of carrying a particular stock item on average, half the stock is on hand all the time in addition to the safety or buffer stock. The fewer the orders, the lower costs of ordering, but the greater the size of the order the greater the costs of carrying. The safety or buffer stock has no bearing on the EOQ, only on the timing of orders. The economic order quantity (EOQ) is an optimum quantity of materials to be ordered after consideration of the following three categories of costs:

Ordering Costs-

The costs of ordering inventory include the following:

  • Preparation of purchase order
  • Costs of receiving goods
  • Documentation processing costs
  • Transport costs
  • Intermittent costs of chasing orders, rejecting faulty goods
  • Additional costs of frequent or small quantity orders
  • Where goods are manufactured internally, the set-up and tooling costs associated with each production run.

Carrying costs-

The carrying costs of inventory include the following:

  • Storage costs(rent, lighting, heating, refrigeration , air-conditioning etc)
  • Stores staffing , equipment maintenance and running costs
  • Handling costs
  • Audit, stock taking or perpetual investment in current assets
  • Obsolescence and deterioration costs
  • Insurance and security costs
  • Costs of money tied up in inventory
  • Pilferage and damage costs

Stock –out Costs-

The stock-out costs are associated with running out of stock which includes the following:

  • Lost contribution through the lost sales caused by the stock-out
  • Loss of future sales because customers go elsewhere
  • Loss of customer goodwill
  • Cost of production stoppages caused by stock-outs of WIP or raw material
  • Labour frustration
  • Extra costs associated with urgent replenishment purchase of small quantities.

Assumptions of EOQ-

To be able to calculate a basic EOQ certain assumptions are necessary:

  • That there is a known, constant stock holding cost.
  • That there is a known, constant ordering cost.
  • That rate of demand are known and constant.
  • That there is a known, constant price per unit, i.e., there are no price discounts.
  • That replenishment is made instantaneously, i.e., the whole batch delivered at once.

Graphical Determination of EOQ the EOQ can be determined graphically as illustrated in figure

The following formula is used in calculated of EOQ:

where,

A = Annual Consumption

B = Cost of Placing an order

C = Cost per unit

S = Storage and other inventory carrying cost

EOD with Discounts A particular unrealistic assumption with the basic EOQ calculation is that the price per item remains constant. Usually some form of discount can be obtained by ordering increasing quantities. Such price discounts can be incorporated into the EOQ formula, but it became more complicated. a similar approach is to consider the costs associated with the normal EOQ and compare these costs with the costs at each succeeding discount point and then ascertain the best quantity to order, price discounts for quantity purchase have three financial effects, two of which are beneficial and one adverse.

Beneficial effects savings will come from:

(a) Lower price per item, and

(b) The large order quantity means that fewer orders need to be placed and hence, ordering costs are reduced.

 Adverse effects –increased costs arise from the extra stock holding costs caused by the average stock level being higher due to the larger order quantity.


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