Benefits of MRP

The various benefits of implementing MRP system are:

Reduced inventory levels
Better production scheduling
Reduced production lead time
Reduced setup cost
Reduced product changeover cost
Better machine utilization
Improved product quality
Quicker response to changes in demand
COST PLANNING AND CONTROL
What is Cost Planning and Control?
The cost planning and control system consists of the database to determine the expected costs of
manufacture each products of the company.
It also consists of cost collection and analysis software to determine the expected costs of
manufacturing and the actual costs of manufacturing.
Cost Estimating Vs. Cost Accounting:
Cost estimating
Cost estimating is the process of determining the probable cost of the product before the start of
the product and before the start of its manufacture
Cost accounting
Cost estimating is the determination of an actual cost of a component after adding different
expenses in various departments.
Objectives of Cost Planning and Control System
The three objectives of the cost planning and control system are:
To determine the expected costs to manufacture and sell each of the companys products.
To determine the actual costs to manufacture and sell each of the companys products.
To find the differences between actual costs and expected costs and the reasons for these
differences.
Cost Planning

Cost planning is concerned with the first objective of the cost planning and control system.
That is, cost planning is concerned with the determination of expected costs to manufacture
and sell each of the companys products.
In other words, cost planning, also known as cost estimating, is concerned with the
determination of the standard cost for the product.
The standard cost for the product is the aggregate cost of labour, materials and allocated
overhead costs.
A list of data required to make a cost estimate is given in Table 5.2.
1. General design specifications: It refers a brief description of the product, its function, performance, and purpose.
2. Total anticipated quantity and the rate of production (i.e., the number per unit time).
3. Assembly or layout drawings.
4. List of the proposed subassemblies of the product.
5. Detail drawings and a bill of material for the product.
6. Test and inspection procedures and equipment.
7. Machine tool and equipment requirements.

8. Manufacturing routings.
Cost Control
Cost control is concerned with the second and third objectives of the cost planning and control
System. That is, cost control is concerned with (i) the determination c the actual costs to Manufacture
and sell each of the companys products; an(ii) the determination of the Differences between actual costs
and expected costs.
Costing, also known as cost accounting, is a systematic procedure for recordir accurately Every
item of expenditure incurred on the manufacture of a product I different sections of any manufacturing
concern.
Costing is the classifying and recording the appropriate allocation of expenditui for the
determination of the cost of products, and for presentation of suitable arranged data for the purpose of
control and guidance of management.
Cost control involves the collection of data from which the actual costs of the product can be calculated.
Data on material cost can be collected through the purchase department.
Data on labour cost can be collected from the shop floor control (SFC) system.
Overhead costs (such as factory overheads, administrative overheads, selling overheads, and
distribution overheads) are collected from all the concerned departments of the company.
Inventory management
Definition: Inventory control may be defined as the scientific method of determining what to order,
when to order and how much to order and how much to stock so that costs associated with buying
and storing are optimal without interrupting production and sales.
Inventory decisions: There are two basic decisions to be made for every item in the inventory. They are:
How much of an item to order when the inventory of that item is to be replenished? (i.e., order
quantity), and
When to replenish the inventory of that item? (i.e., order level).
Objective of Inventory Control
Tie main objectives of inventory control are:
(i)
To ensure continuous supply of materials so that production should not suffer at any time.
(ii)
To maintain the overall investment in inventory at the lowest le 1 consistent with operating
requirements.
(iii)
To minimize holding, replacement and shortage cost of inventories i maximise the
efficiency in production and distribution.
(iv)
To keep inactive, waste, surplus, scrap and obsolete items at the minim level.
(v)
To supply the product, raw material, WIP, etc., to its users as per th requirements at right
time and at right price.
(vi)
To ensure timely action for replenishment.
(vii)
To maintain timely record of inventories of all the items and to maint: the stock within
the desired limits.
(viii) To avoid both over-stocking and under-stocking of inventory.
Costs Associated with Inventory (What are Inventory Costs?)
The major costs associated with procuring and holding inventories are:
1. Ordering costs,
2. Carrying (or holding) costs,
3. Shortage (or stock out) costs, and
4. Purchase costs.
1. Ordering costs

Ordering costs are the costs associated with the placement of an order for t acquisition of
inventories. These costs include:
Costs of staff of purchase department,

Costs of stationery consumed for ordering, postage, telephone bills, required in ordering, and
Holding (or inventory carrying) costs

Inventory carrying costs are the costs associated with holding a given level of inventory on hand.
This cost vary in direct proportion to the amount of holding and period of holding the stock in stores.
This cost will not be occurred if inventory is not carried.
The holding costs include:
(/) Costs for storage facilities.
Handling costs.
1. Depreciation, taxes, and insurance.
2. Costs on record keeping.
3. Losses due to pilferage, spoilage, deterioration, and obsolescence.
4. Opportunity cost of capital.
Shortage (or stock-out) costss

When the stock of an item is depleted and there is a demand for it, then the shortage cost will
occur.
In simple terms, shortage cost is the cost associated with stock-out.
The shortage costs include:
1. Back order costs
2. Loss of future sales.
3. Loss of customer goodwill.
4. Loss of profit contribution by lost sales revenue.