Question

If material costa are significant part of total costs in the manufacturing company. Describe a system of material control that might be used in order to efficiently control cost paying particular aspect to the inventory control aspect. (purchase documentations)

Answer 1

A firm should implement a system for material control because materials are significant part of the inventory costs. The following controls are suggested.

· Perpetual inventory system.

A perpetual inventory system should be implemented to update and record the purchase and issue of material on continuous basis. A perpetual inventory system gives real time update of inventory items anytime and helps in tracking the inventory and controls the same

· Documentation

All issue to shop floor should be based on material requisition slip signed by the production in charge. Unused material should be returned to stores based on MRS reference number only.

· ABC analysis

Regular stock taking should be done for inventory items based on ABC analysis. ABC analysis classifies the items based on 70:20:10 rule. The 70% value of items is from top 10 items. The ‘A’ items should be physically verified weekly, ‘B’ items should be physically verified fortnightly and ‘C’ items should be physically verified monthly.

· Pareto analysis

An improved technique of inventory control similar to ABC analysis is Pareto analysis. Pareto analysis classifies items based on 80:20 rule. The top 80% value of items comes from 20% items. So it is important to prioritize focus on 20% items.