Module II (Material and labour)

Materials
Material refers to things used for producing an article or providing a
services. It is classified into two direct material and indirect material.
Material cost control
It is a systematic control over purchasing, storing and consumption
of materials. It maintain a regular and timely supply of materials and
it minimize over and under stocking.
Objectives/ Importance of material cost control
 To avoid the situation of under stocking.
 To avoid the situation of over stocking.
 To avoid wastage and losses.
 To minimise the total cost of material.
 To maintain proper and up to date records.
 To provide required information to the management.
 To ensure procurement of material.
 To ensuring optimum utilization of material.
 To ensure proper storage of material.
Essentials/ Requirements/ Principles of sound material control
 Proper coordination among various departments.
 Proper cooperation among various department.
 Purchase should be made by a centralized department.
 Proper classification and codification of materials.
 Separate inspection department.
 Proper system of internal check.
 Standard forms should be used for orders.
 Material should be purchased at the right time.
 Material requirement should be properly planned.
Stores control
It simply means control over storage of materials. The main objective
of stores control is to reduce the material cost.
Functions/ Duties/ Responsibilities of Stores dept. (Storekeeper)
 To issue purchase requisition.
 To receive material.
 To keep material in proper places.
 To make store neat and clean.
 To take stock at periodical intervals.
 To maintain bin card for each material.
 To protect material from theft and damage.
 To prevent the entry of unauthorized persons.
 To report on waste, scrap and obsolete stock.
 To maintain up to date records related to stores.
Inventory
It is the raw material used to produce goods as well as the goods that
are available for sale.
Perpetual inventory system
This is a system of verification of materials. It is a system of records
maintained by the controlling departments which reflects the
physical movements of stock and their current balance.
Advantages of perpetual inventory system
 Quick valuation of closing stock.
 Lesser investment in materials.
 Helpful in formulating proper purchase policies.
 Adequacy of working capital.
 Immediate detection of theft and leakages.
 Beneficial in ascertaining efficiency of stores organisation.
 Overstocking and understocking can be avoided.
 It provide a moral check on the stock keeper.
Bill of materials
A bill of material is centralised source of information used to
manufacture a product.
Material abstract
It is a document which classify the records of issue of material,
material return or transfer. It is a material issue analysis sheet.
Material requisition
It is a document authorizing the store keeper to issue material stated
therein to consuming department.
 Material inspection note
It is a report prepared by the inspection department after inspecting
the material received.
Periodic stock taking
It refers to physical verification of entire stock once in a specific
period preferably annually and generally on the last day of an
accounting year.
Continuous stock taking
It means stock taking is conducted on regular basis.
Advantages of continuous stock taking
 Improved stock management
 Prevent unnecessary wastage and losses.
 Improved stock management.
 No need to shut down operations.
 Eliminate delay in production and delivery.
Prime cost
Prime cost is the total direct cost of production including raw
materials and labour.
Bin Card (Stock card)
It is the record maintained under the perpetual inventory system by
the stores department and shows the quantities of the materials
received, issued and balance. It is also known as stock card.
Stores Ledger
It is a ledger which provides information for the pricing of material
issued and the money value at any time of each items of stores.
Difference between bin card and stores ledger
Bin card Stores ledger
It is attached to the bin. It is kept in the cost office.
It is maintained by storekeeper. It is maintained by cost clerk.
It is a record of quantity only. It is a record of quantity and value.
It is a recording document. It is an accounting record.
It is kept inside the stock room. It is kept outside the stock room.
Transactions are recorded Summarized transactions are
individually. recorded.
Entries are posted when Entries are posted after
transactions take place. transactions took place.
Techniques/ Methods of inventory control (Material/ store control)
 Classification and codification of material
 Double bin system
 Stores stock levels
 Economic order quantity
 Material turnover ratio
 Stock verification system
 Imprest system
 ABC analysis
 VED analysis
 JIT techniques
Economic order quantity (EOQ)
The quantity of material to be ordered at one time is known as
economic order quantity. It is the ideal order quantity a company
should purchase to minimize inventory costs.
ABC analysis
It is an inventory management technique that determine value of
inventory items based on their importance to business.
VED analysis
It is an inventory management technique that classifies inventory
based on its functional importance.
JIT (Just In Time)
It is an inventory management method whereby labour, material and
goods are scheduled to arrive exactly when needed in the
manufacturing process.
Reordering level
It is that point of level of stock of a material where the storekeeper
starts the process of initiating purchase requisition for fresh supplies
of that materials.
Safety lock level
It is also known as minimum level. It is the minimum quantity of
material which must be maintained in hand at all times.
Maximum level
It is the maximum of stock which should be held in stock at any
period of year
Danger level
It is a level of stock at which normal issue of materials are stopped
and issues are made only under specific instructions.
FIFO (Fist in First Out)
Under this method, material received first are issued first.
Applicability of FIFO
 Increased warehouse space.
 Keeps stock handling to a minimum.
 Enhanced quality control.
 Warranty control.
 Warehouse operations are more streamlined.
Advantages of FIFO method
 It is simple and easy to operate
 Materials are issue at actual costs.
 Closing stock is valued at market price.
 In condition of falling prices, this method give better results.
Disadvantages of FIFO method
 This method increases the possibility of clerical errors.
 This method is unsuitable in terms of rising prices.
 Issue price does not reflect the current market conditions.
LIFO (Last in First Out)
This method is a just reverse of FIFO method. Under this method,
material received last are issued first.
Advantages of LIFO method
 It is simple to operate.
 It is easy to understand.
 It is more suitable in time of rising prices.
 It is useful when transactions are not too many.
 It provides tax benefits to the business.
 Materials are issued at actual price.
Disadvantages of LIFO method
 This method involve considerable amount of clerical work.
 It is difficult to control the cost of jobs.
 The value of closing stock does not reflect the current market
conditions.
Direct labour
Direct labour refers to the labour which can be identified with a
particular product or job. It is the workforce directly engaged in the
manufacturing activities.
Indirect labour
Indirect labour refers to the labour which cannot be identified with a
particular job or product. It is the workforce not directly engaged in
the manufacturing activities.
Labour cost
Labour cost refers to the total expenditure incurred by employers for
the employment of employees.
Labour cost control
Labour cost control means control over the cost incurred on labour.
It is a system which ensures proper employment of labour and its
effective utilization.
Importance/ Objectives/ Advantages of labour cost control
 It minimize labour cost per unit of production.
 It control ideal time, overtime, labour turnover etc.
 It increases the labour productivity.
 It helps in absorption of overhead.
 It improves profitability and prosperity of firm.
 It facilitate effective utilization of skilled labours.
Techniques of labour cost control
 Assessment of manpower requirement
 Time and motion study
 Job evaluation and merit rating
 Labour productivity
 Wages system/ Incentive system
 Control over time keeping and time booking
 Control over labour turnover
 Control over casual/ contract and other workers.
Time keeping
The process of recording the time arrival and departure of workers is
known as time keeping.
Objectives/ Purpose of time keeping
 To facilitate preparation of pay roll.
 To meet statutory requirements.
 To maintain discipline in attendance.
 To calculate overtime.
 To control labour cost.
 To introduce incentive plan of wage payment.
Methods of time keeping
 Manual methods
 Attendance register method
 Disc or token method
 Mechanical methods
 Time recording clocks
 Dial time recorder
 Key recorder
 Biometric time attendance system
Time Booking
It is the recording of time spend by the workers on different jobs or
work.
Objectives/ Purpose of time booking
 To ensure the time spend by a worker in a factory.
 To ascertain labour cost of each individual job.
 To ascertain unproductive time or ideal time.
 To know the efficiency of workers.
 To prevent waste of labour time.
Methods of time booking
 Daily time sheet
 Weekly time sheet
 Job card
Difference between time keeping and time booking
Time keeping Time booking
It record attendance time of It is a record work time of
workers. workers.
It is a statutory obligation. It is not statutory required.
It is the first step in time It is the second step in time
recording. recording.
It is Maintained by the time It is maintained by departmental
keeper. supervisors.
It is for the purpose of wage It ensure wage paid are properly
calculation. ensured.
The purpose is to enable The purpose is to ascertain
preparation of pay roll. labour costs of job.
Merit rating
It is a labour cost control technique. It aims at evaluating the workers
actually performing the jobs.
Wages abstract
It is a document showing distribution of wages by job, department
etc. It is also called wage analysis sheet. It is prepared by costing
department.
Payroll (Wage sheet)
It is a sheet containing the details of wage payable to the workers.
It is a consolidated statement of wage payable to each workers.
Must roll method
Attendance register or must roll method record the time of arrival
and departure by a time recording staff or by putting signature by
the workers themselves.
System/ Methods of wage payment
1. Time wage system or time rate system
2. Piece wage system or piece rate system
3. Incentive wage system
Time wage system or time rate system
Under this method of wage payment, the workers is paid at an
hourly, daily, weekly or monthly rate.
Advantages of time rate system
 It is simple to understand.
 It is easy to operate.
 It guarantees minimum wages to workers.
 Quality of output become superior.
 It is acceptable to the workers and trade union.
 It ensure careful handling of tools and equipments.
Disadvantages of Time rate system
 Workers are not motivated.
 Strict supervision negatively affect.
 It encourages go slow of work.
 It does not provide incentive to work hard.
 Ideal time is considerably increased.
 Workers become lazy.
 Workers try to avoid work.
Piece rate wage system
Under this system of wage payment, a fixed rate is paid for each unit
produced, job completed or an operation performed.
Advantages of piece rate wage system
 Workers are paid according to their merits.
 Workers are motivated to increase production.
 Profit per unit increases.
 Idle time is minimized.
 The employer can make quotations confidently.
 Less case of defective tools and machinery.
 Less supervision is required.
 Inefficient workers are motivated to become efficient.
Disadvantages of piece rate system
 This system opposed by trade union.
 Minimum wage are not guaranteed.
Halsey Premium Plan
Under this method, the worker is given wages for the actual time
taken and a bonus equal to half of wages for time saved.
Advantages of Halsey Premium Plan
 It is simple to calculate.
 It guarantees time wages to workers.
 Helpful in reducing labour cost per unit.
 It motivates efficient workers.
 Helps to reduce production cost.
Disadvantages of Halsey Premium Plan
 Quality of work suffers.
 Workers criticize this method on the ground that the employer
gets a share of wages of the time saved.
Rowan Plan
Under this method bonus is that proportion of the wages of the time
taken which the time saved bears to the standard time allowed.
Advantages of Rowan Plan
 It guarantees time wages to workers
 The quality of work does not suffer
 Labour cost per unit is reduced.
 Fixed overhead cost is reduced.
Disadvantages of Rowan Plan
 Workers do not get the full benefit of the time saved by them.
 Very efficient and not so efficient workers may get the same
bonus.
Ideal time
There is a difference between the time booked to different jobs or
work orders and time recorded at the factory gate. This difference is
known as ideal time.
Normal ideal time
Normal ideal time refers to the ideal time which is normal and which
cannot be avoided.
Abnormal ideal time
Abnormal ideal time refers to ideal time due to abnormal reasons.
It can be avoided.
Over time
It is the work done beyond the normal working period in a day or
week.
Time and motion study
It is a technique for recording the time of performing a specific job
which is carried out under specific conditions.