Material management and control
procedure are vital in an organisation; basically to resolve the issue between
over stocking, under-stocking or stock out.
procedure are vital in an organisation; basically to resolve the issue between
over stocking, under-stocking or stock out.
Material management and control
procedure will be discussed with the following content;
procedure will be discussed with the following content;
1.) Purchase of
stock of materials
stock of materials
2.) Storage of
materials
materials
3.) Materials
issues or materials issuance/raising and evaluation.
issues or materials issuance/raising and evaluation.
Purchase
of Stock of Material
of Stock of Material
It is important for a procedure to
be established for a purchase of material. A good material purchase procedure
could involved the following
be established for a purchase of material. A good material purchase procedure
could involved the following
1.) A demand for
material item should arise. That is, there should be need for that material.
material item should arise. That is, there should be need for that material.
2.) Such a
demand should be followed by a purchase requisition document.
demand should be followed by a purchase requisition document.
3.) An objective
search for suppliers.
search for suppliers.
4.) Submission
of tenders or bids or quotations by the supplier.
of tenders or bids or quotations by the supplier.
5.) Selection of
suppliers’ base on the quotation received.
suppliers’ base on the quotation received.
6.) Recommendation
and issuance of purchase order to suppliers’ selector.
and issuance of purchase order to suppliers’ selector.
7.) Establishment
of a system of receipt of material supplied.
of a system of receipt of material supplied.
Purchases of material give rise to
the various documentations that assist in accounting for material, such
document are;
the various documentations that assist in accounting for material, such
document are;
1.) Purchase
requisition note
requisition note
2.) Purchase
order
order
3.) Suppliers’
invoice
invoice
4.) Goods
received note.
received note.
Store
Keeping Procedures
Keeping Procedures
A good system of material storage
should be established to ensure that materials bought and received by the
company are properly managed. A good storage system must recognise the
following;
should be established to ensure that materials bought and received by the
company are properly managed. A good storage system must recognise the
following;
1.) Storage
Location: This is the location where the materials should be kept in the
warehouse before issuance to production
Location: This is the location where the materials should be kept in the
warehouse before issuance to production
2.) The
materials must be coded for the purpose of classification, identification and
logical arrangement.
materials must be coded for the purpose of classification, identification and
logical arrangement.
3.) There should
be identification evidencing receipt and issue of materials.
be identification evidencing receipt and issue of materials.
4.) The introduction
and adoption of store control techniques.
and adoption of store control techniques.
Material
Pricing and Valuation
Pricing and Valuation
Material pricing and valuation are
serious issues that throw up disagreement among accountants, in an attempt to
overcome this disagreement, the following methods are vital.
serious issues that throw up disagreement among accountants, in an attempt to
overcome this disagreement, the following methods are vital.
1.) First in
first out (FIFO) method
first out (FIFO) method
2.) Last in
first out (LIFO) method
first out (LIFO) method
3.) Simple
average cost method
average cost method
4.) Weighted
average cost method
average cost method
5.) Standard
price method.
price method.
First
In First Out (FIFO)
In First Out (FIFO)
This method of material pricing and
valuation assumes that stock of materials should be issued to production in the
order of their receipt at the price they were bought and when bought into the
stock.
valuation assumes that stock of materials should be issued to production in the
order of their receipt at the price they were bought and when bought into the
stock.
Advantages
of FIFO
of FIFO
1.) It is simple
and easy to apply
and easy to apply
2.) It is in
agreement with good stock keeping procedure
agreement with good stock keeping procedure
3.) Valuation of
materials is based on actual prices at which the material was bought.
materials is based on actual prices at which the material was bought.
4.) It is
recognised by statement of accounting standard (SAS4), it implies how stock is
valued in any organisation.
recognised by statement of accounting standard (SAS4), it implies how stock is
valued in any organisation.
5.) It encourage
track keeping of materials as they are received.
track keeping of materials as they are received.
Disadvantages
of FIFO
of FIFO
1.) In period of
changing prices, if this is goods, income figures are likely to fluctuate.
changing prices, if this is goods, income figures are likely to fluctuate.
2.) Where two or
more prices are used in one single invoice of material, difficulties will arise
as to which price to use when stock are issued.
more prices are used in one single invoice of material, difficulties will arise
as to which price to use when stock are issued.
Last
In First Out (LIFO)
In First Out (LIFO)
This method is the reverse of the
FIFO method. It assumes that material received last and at the price they came
in, will be issued out first in production.
FIFO method. It assumes that material received last and at the price they came
in, will be issued out first in production.
Advantages
of LIFO
of LIFO
1.) Materials
are issued in production at the actual price.
are issued in production at the actual price.
2.) It is simple
and easy to apply
and easy to apply
3.) Material
issue tends to be at current prices
issue tends to be at current prices
4.) It
underscores the concept of conservation.
underscores the concept of conservation.
Disadvantages
of LIFO
of LIFO
1.) The
statement of accounting standard number 4 (SAS4) does not recognise this
method.
statement of accounting standard number 4 (SAS4) does not recognise this
method.
2.) Profit
figures are likely to be diver stated
figures are likely to be diver stated
3.) In a
situation where materials are issued to different production unit, comparison may
be difficult.
situation where materials are issued to different production unit, comparison may
be difficult.
Simple
Average Method
Average Method
This method of material prices and
valuation simply uses the average of the material prices received in to stock
prior to the time they are issued to production.
valuation simply uses the average of the material prices received in to stock
prior to the time they are issued to production.
Weighted
Average Method
Average Method
It is based on the assumption of
multiplying the quantity of the material received by their respective price by
the total quantity received. The product becomes the price at which the
materials are issued to production.
multiplying the quantity of the material received by their respective price by
the total quantity received. The product becomes the price at which the
materials are issued to production.
Advantages
of Weighted Average Method
of Weighted Average Method
1.) It is easy
and simple to apply and understand.
and simple to apply and understand.
2.) During
period of rising prices, this method provides a reliable price for valuation of
materials. For example,
period of rising prices, this method provides a reliable price for valuation of
materials. For example,
1.) This method is
recognised by SAS4.
recognised by SAS4.
Disadvantage of Weighted Average Method
1.) For those
not good in arithmetic and maths, they will find it difficult.
not good in arithmetic and maths, they will find it difficult.
