Material Formula – Inventory cost & stock management

Inventory / Reorder Level Formula

1. Reorder level = Maximum usage * Maximum lead time (Or) Minimum level + (Average usage * Average Lead time)


2. Minimum level = Reorder level - (Average usage * Average lead time)


3. Maximum level = Reorder level + Reorder quantity - (Minimum usage * Minimum lead time)


4. Average level = Minimum level + Maximum level (or)2 Minimum level + ½ Reorder quantity


5. Danger level (or) safety stock level = Minimum usage * Minimum lead time (prefer) (or) Average usage * Average lead time (or) Average usage * Lead time for emergency purposes


6. EOQ (Economic Order Quantity - Wilson's Formula) = v2AO/C
   Where A = Annual usage units

O = Ordering cost per unit
C = Annual carrying cost of one unit
i.e. Carrying cast % * Carrying cost of unit

1. Associated cost = Buying cost pa + Carrying cost pa


2. Under EOQ Buying cost = Carrying cost


3. Carrying Cost = Average inventory * Carrying cost per unit pa * Carrying cost % (Or) Average Inventory * Carrying cost per order


4. Average inventory = EOQ/2.


5. Buying cost = Number of Orders * ordering cost.


6. Number of Orders = Annual Demand / EOQ.


7. Inventory Turnover (T.O) Ratio = Material consume.
   Average Inventory


8. Inventory T.O Period = 365 . Inventory Turnover Ratio


9. safety stock = Annual Demand *(Maximum lead time - Average lead time)365


10. Total Inventory cost = Ordering cost + Carrying cost of inventory +Purchase cost


11. Input Output Ratio = Quantity of input of material to production
    Standard material content of actual output

High and low inventory ratio Formula

1. High Inventory T.O Ratio indicates that the material in the question is fast moving


2. Low Inventory T.O Ratio indicates over investment and locking up of working Capital in inventories

Pricing of material Issues

1. Cost price method
   
   
   
   1. Specific price method
   
   
   2. First in First Out method (FIFO)
   
   
   3. Last in First Out method (LIFO)
   
   
   4. Base stock method


2. Average price method
   
   
   
   1. Simple average price method = Total unit price Total No. of purchases
   
   
   2. Weight average price method = Total cost Total No. of units
   
   
   3. Periodic simple average price method = Total unit price of certain period
      Total Number of purchases of that period (This rate is use for all issues for that period. Period means a month (or) week (or) year)
   
   
   4. Periodic weight average price method = Total cost of certain period
      Total Number of units of that period
   
   
   5. Moving simple average price method =Total of periodic simple average of certain number of periods
      Number of periods
   
   
   6. Moving weight average price method= Total of periodic weight average of certain number of periods
      Number of periods


3. Market price method
   
   
   
   1. Replacement price method = Issues are value as if it was purchase now at current market price
   
   
   2. Realizable price method = Issues are value at price if it is sold now


4. Notional price method
   
   
   
   1. Standard price method = Materials are price at pre determine rate (or) Standard rate
   
   
   2. Inflated price method = The issue price is inflated to cover the losses incur due to natural(or)climatic losses


5. Re use price method = When materials are return (or) reject it is valued at different price. There is no final procedure for this method.

ABC Analysis (or) Pareto Analysis :- In this materials are categorized into:
Particulars Quantity Value
"A" - Important material 10% 70%
"B" - Neither important nor unimportant 20% 20%
"C" - UN Important 70% 10%

Special Notes for Material Formula

1. Material receive as replacement from supplier is treat as fresh supply


2. If any material is return from Department after issue, it has to be first dispose in the next issue of material


3. loss in the book balance of stock and actual is to be transferred to Inventory adjustment a/c and from there if the loss is normal it is transferred to Over Head control a/c. If it is abnormal it is transfer to costing profit and loss a/c.


4. CIF = Cost Insurance and Freight (This consignment is inclusive of prepaid insurance and freight)


5. FOB = Free on Board (Materials moving by sea - insurance premium is not paid)


6. F.O.R = Free on Rail (Insurance and freight is not borne by the supplier but paid by the company or purchase)


7. For each receipt of goods = Goods Receipt note


8. Each issue of goods = Materials Requisition note (or) Material Issue note

Accounting Treatment

1. Normal Wastage = It should be distribute over goods output increasing per unit cost


2. Abnormal Wastage= It will be charge to costing profit and loss a/c


3. Sales value of scrap is credit to costing profit and loss a/c as an abnormal gain.


4. Sale proceeds of the scrap can be deduct from material cost or factory overheads.


5. Selling proceeds of scrap may be credit to particular job.


6. Normal Defectives = cost of rectification of defectives should be charge to specific


7. Abnormal Defectives = This should be charge to costing profit and loss a/c


8. Cost of Normal spoilage is to borne by good units


9. Abnormal spoilage should be charge to costing profit and loss a/c