Material control: purchase procedure, stock levels, EOQ and inventory techniques
Cost and Management Accounting · Foundations · Topic 3 of 18 · 5 min read
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1. Material control and its objectives
Material control is the system that ensures the right quantity and quality of material is bought at the right price, received, stored and issued only on authority, with no more capital locked up in stock than necessary. Its objectives are continuous supply to production, minimum investment in stock, prevention of waste, pilferage and obsolescence, and accurate records for costing.
2. Purchase procedure
- Purchase requisition from the storekeeper (for regular items when the re-order level is reached) or from a department (for special items).
- Selecting the supplier: inviting quotations or tenders, comparing price, quality, delivery and credit terms.
- Purchase order issued to the supplier, with copies to stores, accounts and the requisitioning department.
- Follow-up to secure delivery on time.
- Receiving and inspection: a goods received note is prepared; rejected goods go back with a debit note (material returned note).
- Checking and passing the invoice against the order and the goods received note, and payment.
Centralised purchasing means one purchase department buys for the whole concern. Advantages: bulk discounts, standardised materials, specialised buyers, less duplication, better control. Disadvantages: delay for distant branches, higher overhead of a large department, risk of a single wrong decision affecting all units, and loss of local knowledge. Decentralised purchasing lets each branch or plant buy for itself: quicker and suited to local needs, but without the bulk-buying benefits.
3. Stock levels: formulas
| Level | Formula |
|---|---|
| Re-order level (ROL) | Maximum consumption × maximum re-order period |
| Minimum level | ROL − (normal consumption × normal re-order period) |
| Maximum level | ROL + re-order quantity − (minimum consumption × minimum re-order period) |
| Average stock level | (Maximum + minimum) / 2, or minimum + ½ re-order quantity |
| Danger level | Normal consumption × emergency purchase period |
The economic order quantity is the order size at which the total of ordering cost and carrying cost is lowest. EOQ = √(2AO / C), where A = annual requirement in units, O = cost of placing one order, C = carrying cost per unit per year (price × carrying rate). At EOQ the annual ordering cost equals the annual carrying cost. Its assumptions: steady demand, known and constant prices and costs, instant replenishment.
4. Solved problems
(a) January 2026 (B.Com, 80 marks). Annual requirement 72,000 units; price Rs. 300; carrying cost 12% a year; ordering cost Rs. 2,250; lead time maximum 20, minimum 8, average 14 days; consumption maximum 400, minimum 200, average 300 units a day.
- Carrying cost per unit = 300 × 12% = Rs. 36.
- EOQ = √(2 × 72,000 × 2,250 / 36) = √90,00,000 = 3,000 units (re-order quantity).
- Re-order level = 400 × 20 = 8,000 units.
- Minimum level = 8,000 − (300 × 14) = 3,800 units.
- Maximum level = 8,000 + 3,000 − (200 × 8) = 9,400 units.
(b) January 2025 (B.Com). Consumption minimum 100, normal 120, maximum 150 kg a day; re-order quantity 1,500 kg; re-order period 10–15 days, normal 12; emergency supply 3 days.
- Re-order level = 150 × 15 = 2,250 kg.
- Minimum level = 2,250 − (120 × 12) = 810 kg.
- Maximum level = 2,250 + 1,500 − (100 × 10) = 2,750 kg.
- Danger level = 120 × 3 = 360 kg.
(c) January 2026 (B.Com, 100 marks). Annual requirement 1,600 units at Rs. 40; ordering cost Rs. 50; carrying cost 10%. C = Rs. 4. EOQ = √(2 × 1,600 × 50 / 4) = √40,000 = 200 units, i.e. 8 orders a year. Check: ordering cost 8 × 50 = 400; carrying cost (200/2) × 4 = 400. Equal, as they must be.
5. Inventory control techniques
- Fixing stock levels (above), so that buying is triggered automatically.
- EOQ, fixing how much to order.
- ABC analysis (always better control): items are ranked by annual value. ‘A’ items, perhaps 10% of items but 70% of value, get strict control and frequent review; ‘B’ items moderate control; ‘C’ items, many in number but small in value, simple control with large orders.
- VED analysis: vital, essential and desirable items, used for spare parts where a stock-out of a vital part stops the plant.
- Perpetual inventory system: bin cards and the stores ledger are written up for every receipt and issue so that the balance is always known, backed by continuous stock verification on a rota, with discrepancies investigated.
- Just-in-time (JIT): material arrives just when production needs it, cutting stock to near zero; it needs reliable suppliers close by.
- Inventory turnover ratio (cost of material consumed / average stock) to find slow-moving and dead stock.
- Material budgets and standard quantities for each job.
- Proper storage: bin cards, codes, a store-keeper responsible for custody, and issue only against a signed material requisition.
How this is examined
A 6-mark problem (levels, EOQ) and a 10-mark essay (“Discuss various inventory control techniques,” January 2026 and January 2025) sit in Unit II, with short notes on EOQ, material purchase procedure (100 marks, January 2026) and centralised and decentralised purchasing. Write the formula, then the substitution, then the answer with units.
Now try the real questions: Cost and Management Accounting past question papers.