Accounting for Materials and Materials Control

Introduction

Materials are usually the largest single element of cost in a manufacturing business, so controlling them well has a direct effect on profit. Materials control covers everything from buying the right quantity at the right time to storing it safely and issuing it to production at the correct price. This chapter studies the purchase and storage procedures, the documents used, the methods of pricing materials issued, the stock levels that prevent shortage and overstocking, and the economic order quantity.

Meaning and objectives of material control

Material control is the system of ensuring that the right quality of material is available in the right quantity at the right time and place, at the lowest possible cost. Its objectives are to avoid both shortage (which stops production) and excess (which locks up money and risks spoilage), to prevent waste, loss and theft, to keep the money invested in stock as low as is safe, and to give management accurate information about the materials on hand.

Purchase procedure and documents

Buying material follows a set routine supported by documents. A purchase requisition is raised by the storekeeper or a department asking the purchase department to buy material. The purchase department invites quotations, selects a supplier and sends a purchase order stating the quantity, price and delivery terms. When the goods arrive they are checked against a goods received note and a material inspection note. Purchasing may be centralised, where one department buys for the whole firm and gains from bulk discounts, or decentralised, where each department buys its own materials and gains speed and local knowledge.