Lesson Three Cost accounting PDF

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this is a lesson from cost accounting, the third lesson, which is usually skipped my many tutors because they expect students to research the topics. here you will get vast knowledge from the note. enjoy...

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LESSON T THREE: HREE: Store-K Store-Keep eep eeping: ing: Meaning, T Types, ypes, Objectiv Objectives es Functions and Working of the Stores! Meaning: After the completion of purchase procedure, the next important aspect of materials management is storekeeping. A storehouse is a building provided for preserving materials, stores and finished goods. The in-charge of store is called storekeeper or stores manager. The organization of the stores department depends upon the size and layout of the factory, nature of the materials stored and frequency of purchases and issue of materials. According to Alford and Beatty “storekeeping is that aspect of material control concerned with the physical storage of goods.” In other words, storekeeping relates to art of preserving raw materials, work-in-progress and finished goods in the stores. Types: Stores may be Centralized or Decentra Decentralized. lized. Centr Centralized alized storage means a single store for the whole organization, Decentr Decentralized alized storage means independent small stores attached to various departments. Centralized storekeeping ensures better layout and control of stores, economical use of storage space, lesser staff, saving in storage costs and appointment of experts for handling storage problems. It further ensures continuous stock checking.

It suffers from certain drawbacks also. It leads to higher cost of materials handling, delay in issue of materials to respective departments, exposure of materials to risks of fire and accident losses are practical difficulties in managing big stores. On the other hand, decentralized stores involve lesser costs and time in moving bulky materials to distant departments and are helpful in avoiding overcrowding in central store. However, it too suffers from certain drawbacks viz., uniformity in storage policy of goods cannot be achieved under decentralized storekeeping, more staff is needed and experts may not be appointed. Objectives of stor storek ek ekeeping: eeping: Following are tthe he main objectiv objectives es of an ef efficient ficient system of storekeepin storekeeping: g: 1. To ensure uninterrupted supply of materials and stores without delay to various production and service departments of the organization. 2. To prevent overstocking and under stocking of materials, 3. To protect materials from pilferage, theft fire and other risks. 4. To minimize the storage costs. 5. To ensure proper and continuous control over materials. 6. To ensure most effective utilization of available storage space and workers engaged in the process of storekeeping.

Functions of Storek Storekeeping: eeping: In the light of abo above ve obje objects, cts, the funct functions ions performed b by y the stores department are outlined below: 1. Issuing purchase requisitions to Purchase Department as and when necessity for materials in stores arises. 2. Receiving purchased materials from the purchase department and to confirm their quality and quantity with the purchase order. 3. Storing and preserving materials at proper and convenient places so that items could be easily located. 4. Storing the materials in such a manner so as to minimize the occurrence of risks and to prevent losses due to defective storage handling. 5. Issuing materials to various departments against material requisition slips duly authorized by the respective departmental heads. 6. Undertaking a proper system of inventory control, taking up physical inventory of all stores at periodical intervals and also to maintain proper records of inventory. 7. Providing full information about the availability of materials and goods etc., whenever so necessary by maintaining proper stores records with the help of bin cards and stores ledger etc.

Working of the stores: There are four sections in the process of storekeeping viz. (a) Receiving section, (b) Storage section, (c) Accounting section, and (d) Issue section. These are explained as under: (a) R Receiving eceiving Section: There are four kinds of inventories received by stores viz., (i) raw materials, (ii) stores and supplies, (iii) tools and equipments, (iv) work-in- progress or semi-finished goods. Following pro procedure cedure is ffollowed ollowed in rece receiving iving these inv inventories: entories: (i) Receiving these incoming materials in stores. (ii) Checking and inspection of these incoming materials and stores etc. (iii) Recording the incoming materials in goods received book. (iv) Preparing and forwarding goods inwards note to purchasing section.

(v) Informing the purchase department about damaged and defective goods and surplus or deficit supplies etc. along with rejection forms and notes. (vi) Returning damaged or defective goods to the suppliers in accordance with the instructions of the purchase department. (vii) Forwarding the materials to respective stores and locations where these are to be stored or preserved. (b) Stor Storage age Section: The store room should be located at a convenient and appropriate place. It should have ample facilities to store the materials properly viz. bins, racks and shelves etc. There can be a single store room in case of a small organization, but a large scale concern can have different or multiple stock rooms in addition to general or main store. The separate stockrooms may be used for different classes of inventories. The material should be stored in such a manner as to protect it against the risks of damage, destruction and any kind of loss. Each article should have identifying marks viz., stamping, embossing, colour, coding and painting etc. These risks are very useful in locating or identifying an article in the stores. (c) Accounting Section: This section is concerned with keeping proper records with regard to receipt and issue of materials. The primary task of this section is to undertake the process of inventory control. (d) Issue Sect Section: ion: The materials should be issued to respective departments on receiving duly authorized requisition slips. An entry should be

made immediately on the bin card attached with the bin from where the material has been issued. Bin cards contain valuable information with regard to receipt and issue of materials, which is greatly helpful in exercising a system of inventory control. These cards are further helpful in determining various levels of materials viz., maximum, minimum, and re-ordering level. Meaning Of Centr Centralized alized Store, Its Adv Advantages antages And Disad Disadv vantages Meaning of centr centralized alized stor stores es A centralized store is that store which receives materials for and issues them to all departments, divisions and production floors of the company. Such a store is only one in the company which receives materials for and issues to all who need them. The materials required for all the departments and branches are stored and issued by only one store. Adv Advantages antages of Centr Centralized alized Stores The followings are the main advantages of centralized stores. 1. A better supervision of store is possible because the store is located under a single supervision. 2. A better layout of store and its control are possible. 3. Less space is occupied. 4. Investment in stock is minimized. 5. It is economical for storing materials. 6. Safety of materials is possible according to the nature of materials. 7. Trained and specialized persons can be appointed. 8. Wastage of materials can be minimized.

Disadv Disadvantages antages of Centr Centraliz aliz alized ed Store The followings are the main disadvantages of centralized stores. 1. Delay in sending materials to the departments and branches. 2. Increase in material handling cost. 3. Greater risk of loss by fire. 4. Not suitable for a large company. Decentra Decentralized lized Store, Its Ad Adv vantages and Disadv Disadvantages antages Meaning of Decentr Decentralized alized St Stores ores A decentralized store is that type of store which receives materials for and issues them to only one department and not to the whole company. The decentralized store may be in many numbers in the company, as each department has its own such store. Purchasing and handling of materials are undertaken by each and every department separately. If the volume of material activities is large, this type of store is suitable because each and every branch has their own store for facilitating smooth operations of their production activities. Concept And Meaning of Cen Central tral S Store tore With Sub Store Its Adv Advantages antages And Disad Disadv vantages This is a mixed store system, a mix of centralized and decentralized stores. Under this store system, sub-stores are established in different departments according to the requirement of the company. Sub-stores are maintained at each department when the central store is at a distance from the production department. Such sub-stores are managed and controlled bu the central store itself. At the beginning of a period, the central store

issues a fixed quantity of materials to the sub-stores. At the end of the period, sub-stores send a filled requisition form to the central store to maintain the stock to a predetermined level. Adv Advantages antages of Centr Central al Stores With Sub-stores 1. Overcoming the demerits of centralized stores. 2. Offering an easier location for storing of materials. 3. Avoiding delay in issuing materials. 4. Providing services to meet the special needs of individual departments. 5. Reducing the internal transportation cost. Disadv Disadvantages antages of centr central al stores with sub-stores 1. 2. 3. 4. 5.

High cost for stationary and staffing. High material handling cost. More time in stock taking. Extra set-up cost. Complicated store control.

The following information is provided for material PQ2510. Maximum Consumption= 6,000units per week. Minimum Consumption = 4,000 units per week. Re- order period or Lead time 4 – 6 weeks. Re- order Quantity = 30,000units Re Required quired to calcu calculate: late: a) Re- order level b) Minimum stock level c) Maximum stock level d) Average stock level

a) R Ree- order lev level el ROL = Max consumption x Max Re order period ROL = 6,000 x 6 weeks. ROL =36,000units. b) Minimum stock lev level el MSL = ROL - ( Max C + Min C) x ( Min ROP + Max ROP 2 2 Min SL = 36,000 – ( 6,000+4,000 2

4+ 6 2

Min SL = 36,000 – ( 50,000 x 5 ) Min SL = 36,000- 25,000 Min SL = 11,000 c) Maximum stock lev level el Max SL = Min LS + ROQ + (MINC X MIN RP) Max SL = 11,00+ 30,000 + ( 4,000 x4 ) 41,000 + (16,000) 57,000 Unts. d) Av Average erage Stock lev level el AVSL =Max SL + Min SL 2 57,000 + 11,000

2 = 34,000 units MA MATE TE TERIAL RIAL COSTS Materials refer to the tangible inputs into the process of producing useful output. They could be direct materials or indirect materials (overheads) e.g. to produce tea, tealeaves is the material (input). Material cost classification Material costs may be, classified as: a) Direct Material Cost Cost:: Refers to costs of materials that may readily be identified with output units. The cost of timber used in the manufacture of a chair is an example of a direct material. b) Indire Indirect ct Material cost: refers to items of raw materials for which it would be difficult and or inefficient to attempt to charge directly to specific cost units. For example the glue used to bind the joints in the assembly of a chair Other examples of indirect materials include: - Materials used by service departments e.g. spare parts used by maintenance department in repairing and servicing plant and machinery - Materials used by non production functions e.g. stationary used in accounting department Material cost control Materials form a significant cost of output units and therefore should be controlled. Material Control is more than simply recording the accounting transactions relating to material cost.

Control should be implemented to ensure that material is available a) In appropriate quantities b) In appropriate quality c) In appropriate location d) At an appropriate time e) At the most economic cost Control may be exercised at a number of points in the business cycle as follows a) When the choice is made as to the type and quality of material to be used b) Where the purchase order is being placed with the chosen supplier c) On receipt of the material from supplier, check the appropriateness of quality and quantity of materials received. d) Where the material is held in store before use: It must be safe from theft and damage e) Where the material is issued from the store: It must be issued to the correct department f) Where the material is being used for intended purposes e.g. the material must be utilized to produce the desired output.

The material control system must attempt to ensure that the company does not incur costs in excess of an agreed efficient level of expenditure. Lack of adequate control routines will result

in the incidence of costs in excess of an acceptable level, reduced profitability of production and increased operational costs. Inv Inventory entory Contro Controll and Management The objectives of inventory management are  To ensure adequate stocks to allow for continuous operations/production, and  To minimize the cost of having inventory. Inventory management is important since in most organizations it represents the largest single investment. The major types of inventory are:  Raw materials  Work in progress  Finished goods To achieve the above objectives of material cost costing , the manager has to make decisions regarding the following: a)

What commodities to stock? Use Material Requirement Planning From the Master Production Schedule, the manager has determined the products to be produced. A Bill of Materials can then be prepared. This lists in descending order the components required to make the final product. The information required includes part name or description, part number, next higher level assembly, required quality per end

item, quantity per end item and quantity required for the next higher level assembly.

b)How much to stock? Use The Economic Order Quantity Model This is a simple model that helps the manager to determine the optimum quantity of stock to order so as to keep total costs at a minimum. The main costs of inventory are: 

Holding or carrying costs



Ordering or set up costs



Shortage costs

ECONOMIC ORDER QUA QUANTIT NTIT NTITY Y: To determine the economic order quantity the following formula may be used: DCO EOQ = √2 Ch

Where D is the annual demand (knits) Co is the cost of making one order Ch is the holding cost per unit per annum Assumption of EOQ EOQ.. That the annual demand is considered to be constant. That the curve should always meet. That there will not be inflation, that the cost per unit should not change.

That at every time the supplier delivers the same quantity.

Illustra Illustration: tion: From the following information find out the Re-order Quantity. Min Consumption 2,000units per week. Min reorder period 4weeks Min stock level 3,000units Max stock level 12,000units ROQ = Max SL – Min SL – ( Min C x Min Re- Order P ) = 12,000 – 3, 000 – ( 2,000 x 4 ) = 9,000 - 8,000 = 1,000 From the following data calculate economic order quantity. And number of orders to be placed in one year Total annual demand 6,000kg Cost of placing the order $30 Cost per unit of inventory $5 Carrying cost 20%on cost of inventory per unit c) When to stock? This will be influenced by the inventory system in place as follows:

Periodic ord order er system. The firm receives a new order of the amount specified by the order quantity at equal intervals of time. The firm determines the maximum and minimum inventory, the safety stock and the reorder level. Continuous R Review eview S System ystem The firm places orders at regular intervals but the order quantity varies according to how much a firm requires to bring the level to some predetermined size or value. Just In Time In Inventory ventory System This is a concept developed by the Japanese and advocates zero inventory and stockless production. In addition, it calls for 100 per cent quality. Some of the major features of JIT include: a) Frequent and reliable deliveries to avoid inventory build up. Companies are also setting delivery dates with penalties for not meeting them. b) Closer location to suppliers and customers c) Improved communication between companies and suppliers through the use of computerized purchasing systems that allows for online ordering. d) Single sourcing and building long-term relations with a few trusted suppliers. e) Increased supplier involvement in the design aspects of a product to ensure that they meet the company’s quality requirements. f) Maintenance of strict quality control by all parties.

Material Handling The objective is to ensure that goods are delivered to the right places at the right time and in aright manner to avoid delays, congestation and unnecessary handling. A big percentage of production costs is taken up by material handling activities. A good material handling system should minimize these costs. The manager needs to determine the type of equipment to be used to handle the material. The type of equipment that is most frequently used includes:  Cranes  Lifts  Trucks  Conveyors  Towing The fact factors ors that influence the ttype ype of equipment used in includes: cludes:  Type of materials being moved  Volume  Rate or frequency of movement  Route of movement speed required  Method of storage employed  Safety or hazards involved.

Storag Storage e and Issu Issue e of Material A number of factors are relevant in control of materials during storage and issue of materials. They are: a) Stores location and layout b) Stock level and its control. c) Stock control records and issue procedures d) Stock taking procedures e) Valuation of inventories (issues and closing stock)

Stores location and la layout yout The layout of stores should ensure a) Ease of access for movement of material in and out of stores b) The issue of perishable materials on a first in first out basis c) The segregation of toxic and dangerous materials in a separate location d) Security of materials by restriction of access to authorized personnel only The location of stores should ensure a) Nearness to point of use to minimize expenditure on handling costs b) Specialist stores e.g. spare parts for machinery should be located close to the point of use.

Stock Level a and nd its control Management must make decisions about the control of stock levels with a view to minimizing the cost of the company while achieving more efficiency in the availability of material to fulfill planned usage requirements. Consideration should be given to the following control levels: a) Minimum stock level b) Maximum stock level c) Re-order level d) Re-order quantity (Note the re-order quantity is not necessary for the EOQ)

a)

Minimum stock lev level el This is the level below which stock should not fall. It is essentially a base (buffer) stock level. If stock falls below this point, there is a danger of stock out. Minimum stock level = Reorder level – (Normal consumption x normal reorder period)

b)

Maximum stock lev level el This is the upper limit above which stock should not be allowed to rise. Each material to be kept in store must have a maximum level and stock should not be allowed to go beyond this level

Maximum stock level = Re-order level + re-order Quantity (Minimum consumption x minimum re-order period) c)

Re Re-order -order lev level el Is a point that lies between minimum and maximum stock levels at which purchase orders must be placed to ensure that goods ordered are received before the minimum stock level is reached? It is the level of stocks at which replenishment must be made to avoid a stock-out. Re-order level = maximum consumption X maximum re-order period

d)

Re Re-Or...