Professional Documents
Culture Documents
Material constitute one of the important factors of production in a business. The term material refers to the
commodities supplied to an undertaking for the purpose of consumption in the process of manufacture or of
rendering services or of transformation into products. The cost of all such materials form part of the cost of
jobs, operation, products, or services for which they are utilized.
The term store is often used synonymously with materials. The former has however a broader meaning and it
covers not only the raw materials consumed or utilized in production but also such other items as sundry
supplies, maintenance stores, fabricated parts, components, tools, jigs, fixtures and other equipments.
Finished and partly finished products are also part of the term store.
Mention may also be made of the term inventory which covers the stock not only of raw materials but
also components, work in progress and finished stock.
Inventory may be defined as the value of the materials and goods held by an organization to:
1. Facilitate production ( Raw material, subassemblies and work in progress)
2. For support activities ( Repair and maintenance, consumables etc)
3. For sale or customer service ( finished goods and spare parts )
The procedure followed in hotel and restaurant concern in respect of materials is broadly, to procure
materials, store them till such time as required and finally issue them for consumption in manufacture. In
order to prevent theft, deterioration, and wastage physical control of numerous kinds are available. But
simultaneously proper controls are absolutely necessary to avoid extra expenditure, a) of purchase of excess
of needs b) of slowing down production due to non availability of store and c) through improper use of
materials intentionally or otherwise. The system of control should be comprehensive enough to cover the
flow of material starting from the point when someone in the organization makes a request for purchase upto
the stage when materials are consumed and their costs are compiled and assembled in cost sheet.
Objectives of a proper inventory control system are:
1. Co ordination and cooperation between the various departments concerned, viz. Purchase, Inspection,
Storage, Issues and Accounts and Cost departments.
2. Use of standard forms and documents in all the stages of control
3. Classification, codification and standardization and simplification of materials.
4. Planning of requirement of materials and scheduling of deliveries.
5. Efficient purchase organization.
6. Budgetary control of purchases.
7. Planned storage of material; physical control as well as efficient book control through satisfactory
storage control procedures, forms and documents.
8. Appropriate records to control issues and utilization of stores in production.
9. Efficient system of internal audit and internal checks.
10. System of reporting to management regarding material purchase, storage and utilization.
Within the frame work of above broad outlines, the practice followed in different concerns vary,
particularly with regard to the detailed records maintained and number of copies of documents made out
etc.
PURCHASE CONTROL
Purchasing of store is primarily a function of the management. Nevertheless it forms an important part of
material control. and as such the cost accountant should be closely associated with the system of
purchasing in the undertaking. He can render assistance to the purchase department by presenting data
and information on the following aspects:
1.
2.
3.
4.
5.
1.Proper quality: Purchase of material of proper quality and specification obviates waste of material and
loss in production.
2. Proper time: Purchases are made at the proper time so that the advantages of a favourable market can
be taken.
3. Proper quantity: Purchase of the requisite quantity of materials avoids locking of working capital. At
the same time it ensures that sufficient material is always available so that there is no production delays.
The risk of surplus, obsolete, and deteriorated store is minimized.
4. Right source: Purchase from the best market and from reliable suppliers improves business relations
and makes available the best terms of supply and favourable delivery dates.
5. Right price: Purchase at the most appropriate price helps to maintain the predetermined food cost and
hence achieve the budgeted gross profit.
6. Right method: Adoption of the most adventitious method of purchase and proper drafting of purchase
agreement and contracts eliminate the risk of any dispute and financial loss.
PURCHASE REQUISITION
From _______________________Department
No._______________
To Purchase Department
Date:______________
Please take action to purchase the following material which is required on
(Date)______________________for utilization.
Particulars of material
Code No.
Unit of
quantity
Quantity
Signature
(To be filled in by the Purchase Department)
Purchase order No.___________________
Supplier____________________________
The purchase requisition is usually prepared in triplicate; one copy is retained in the indenting
department for the office record, and two copies are sent to the purchase department where one copy is
retained and the other returned to the indenter after quoting therein the details of the order placed. This
serves the purpose of confirmation that action on the requisition has been taken.
Purchasing systems:
1. Fixed order quantity system
2. Replenishment system
3. Modified replenishment system
Replenishment system: In the replenishment system of inventory management, there is no fixed ordering
quantity but there is fixed ordering time. Thus there is no consideration of the inventory costs. A
replenishment level or maximum level is fixed beyond which the stock is at no time expected to go. Stocks
are reviewed at fixed periodical intervals and orders are placed for a varying quantity, which is equal to
maximum level minus the stock in hand on the date of review. In deciding upon the reordering quantity
another factor to be considered is the time gap between the lead time and the time interval of review. If the
lead time is greater than the time interval of review, the quantity to be ordered
(maximum level minus
stock in hand) if further reduced by quantity already on order at the time of review.
Optional or modified replenishment system: There is another system of inventory management, called the
optional replenishment system by some authors which is modification of the replenishment system. In the
system also the ordering quantity is variable but a lower limit is placed on its size. The system that combines
the main features of fixed order quantity and the fixed order time system in as much as there is a maximum
level, a reorder point, a variable order quantity(subject to certain limit) and system of periodic review. The
ordering quantity in the system is:
Maximum level minus (stock in hand at the time of review plus the quantity already on order) provided,
stock in hand plus the quantity on order is less than the reorder point.
in subsequent disputes and bad business relationship but may also upset production schedules because of non
delivery or delayed delivery of materials.
Format of a purchase order:
Generally four copies of a purchase order are made for distribution as under:
- One copy to the supplier
- One copy to the receiving department.
- One copy is retained as office copy in the purchase department.
- One copy to the accounts department.
RECEIVING CONTROL
Receipt of materials and inspection:
Materials when received from the supplier are under the temporary custody of the receiving
department. The materials are usually accompanied by one or both of the following
documents.
establishment to be sent for, e.g. a butcher or a senior chef; this, unfortunately, could
cause some delay in the goods being accepted.
Extreme care must be exercised at this stage as inferior quality produce cannot be
improved by the production department. Inferior produce usually results in quicker
deterioration of produce if stored, a lower yield, increased labour handling, lower gross
profit and dissatisfaction to the customer. It is, therefore, necessary to open crates and
inspect for quality, and in particular fruits and vegetables for over maturity.
Aids to inspecting for quality are not numerous. They consist of posteres showing the
different grades for fruits and vegetables and large line drawing for specifications to
indicate shape and inspection features. Large coloured photographs are extremely
valuable as, also are a variety of specification rulers made so that quick measurements
may be taken against item in which measurement features in the purchasing
specifications.
4. Price inspection-- After the goods are inspected for quality and quantity they are
checked for the price to ensure that the supplier has priced the commodities at the
agreed price. This becomes extremely important when the commodities are purchased
through daily market list and fortnightly quotation sheet when the price changes on a
daily basis.
In case the quality does not match the standard purchase specification or the quantity
does not match the quantity mentioned in the delivery note or the supplier has priced
commodities at a higher price than the agreed price then immediately the receiving
clerk will raise a request for credit note mentioning the total value and the reason.
Both the receiving clerk as well as the van driver will have to sign that.
6. Transfer of the good to the store or the user departmentOnce the goods
have been checked for quality quantity and price and all the discrepancies have been
identified and the request for credit note has been created the good are sent to the
store in case of none perishables and to the user department in case of perishables.
No.____
Delivery note no.____
To
Date
Mumbai
Qty
Unit
1.5
Reason
Kg
Item
Total
Value
Unit Price
Beef Liver
55
82.5
Van
Driver
Requested By
Receiving Clerk
It
is essential in all circumstances that the supplier is fully aware that;
Circumstances when the receiving clerk must raise the request for
credit note:
1. When the quantity of ingredients supplied is less than the quantity mentioned in the
delivery note.
2. When the quality of ingredients supplied is not as per the SPS.
3. The quantity of ingredients supplied and invoiced is much more than what is ordered
for.
4. Ingredients not ordered for but supplied and invoiced.
5. Ingredients not supplied but invoiced.
6. Prices mentioned in the invoice are more than the agreed price.
STORE CONTROL:
After the materials on order are received, checked and approved, the store
keeper take them on charge. He is responsible for placing the materials in their
appropriate places inside the store and for ensuring that they are maintained in
good condition during storage till required for utilization in production. The
control during this stage may be called storage control.
1.
1. What are the objectives of storing control?
ANSWER : Following are the objectives of storing control
a.
b.
c.
d.
e.
f.
g.
h.
i.
To ensure that the raw material in the store are protected from theft and pilferage
To ensure that the raw material are stored in their prime conditions
Not to store more than the decided maximum stock level at any given point in time.
The raw material should not be infested with rodents and pests.
Regular stock rotation is carried out.
Raw materials are issues on FIFO basis.
Issues are being priced as per the accepted norms by the hotel
No expired stock should be in the store.
Regular stock taking is carried out to establish accountability.
Stock levels:
1. REORDER STOCK LEVEL: , Purpose & Formula:
Stock reorder level indicates to the stock controller when it is necessary to reorder certain raw
materials or components.
The purpose of using this stock reorder level is to enable management to ensure there is
sufficient stocks to meet demands from the production department.
Purpose to ensure that the business NEVER runs out of stock, a safety stock level should be
maintained. Safety stocks are also known as BUFFER stock.
Above example, assuming the business required a buffer stock of 2,800 units, then the
minimum level stocks to be held would increase to 23,000 units of TX1
PURCHASE
S
Max. Stock
Level:
Reordering
Level:
Minimun Stock
Level:
ISSU
BALANC
ES
E
BIN CARD
NO.
0098
Max. Stock
Level:300
Reordering
Item Description : Tobasco Sauce
Level: 150
Minimun Stock
Item Code: 0022
Level:70
OPENING
PURCHAS ISSUE BALANC
DATE
STOCK
ES
S
E
01-Mar
210
210
05-Mar
210
30
180
10-Mar
180
30
150
13-Mar
150
150
300
Maintenance of the bin card along with the store ledger at times considered a duplication of
work. It is however advantageous to maintain both the sets of records for the following
reason:
1. Bin cards are not accounting records. It is essential that these be located with the store
in various go downs.
2. Store ledger is maintained centrally in the cost office from where consolidated
information may be made available.
3. Store ledger constitutes a second check on the quantity recorded in the bin cards.
4. Frequent overall review of the store balance may be conveniently made with the help
of the store ledger.
Format of stores ledger has been discussed in the class
STORES LEDGER
DESCRIPTION: ---------------------------------------------------------------------------------------------------
MAX STOCK:
------------------------------------
MIN STOCK :
------------------------------------
REORDER LEVEL:
-------------------------------NORMAL ORDER :
-------------------------------
RECEIVED
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The perpetual inventory system is not complete without a systematic procedure for physical
stock verification of store. The bin card and the store ledger record the balance but their
correctness can be verified by means of physical verification only. The books indicate what the
balance should be or should have been where as a physical check would reveal what the
balances actually are. The process of physical check under the perpetual inventory system is
outlined below:
a) The stock verification staff plan the programme of stock taking in a systematic
manner with proper distribution of work among themselves about counting,
weighing, measuring and listing the stock.
b) Different sections of the store are taken up in rotation. The programme should be
so planned, that in the course of a year the entire range of goods should be
covered. Some items may need verification at intervals of less than a year
depending to their importance or the degree of control desired. On the other
hand bulky items of smaller values may be verified once in two to three years.
c) Notice of the particular stock to be verified each day is given to the store keeping
staff only on the day of actual verification.
d) The physical stock of an item in the store is counted, weighed or measured, as
the case may be and the results of the stock verification is suitably recorded in
the stock verification sheet
Format of stock verification sheet has been discussed in the class.
Advantages of perpetual inventory:
1. Physical stock can be counted and book balance adjusted whenever desired
without waiting for the entire stocktaking to be done at the end of the year.
Under this system therefore closing the organization for the purpose of
annual stock taking may not be necessary.
2. Prompt availability of stock figures enables quick compilation of profit and
loss account for interim period.
3. Discrepancies are easily located and thus corrective actions can be promptly
taken to avoid their recurrence. Periodical checking of store also fixes
responsibilities and has a moral check on the staff. This lessens the risk of
loss, pilferage etc.
4. Fixation of the various levels and check of actual balance in hand with those
levels assist the storekeeper in maintaining stocks within limits and in
initiating purchase requisition for then correct quantity at the proper time.
5. Correct stock figures are readily available for insurance for insurance purposes
and seeking loans against stocks from banks and other financial institutions.
6. A systematic review of perpetual inventory reveals the existence of surplus,
dormant, obsolete and slow moving materials so that remedial measures can
be taken in time.
close of the annual accounting period so as to facilitate valuation of store for exhibition in
the final accounts. {Periodic stock taking usually necessitates the shutdown of the concern
and hence should be completed as soon as possible.
Reasons for surplus and deficiency in stock taking and accounting thereof:
Surplus and deficiency revealed in course of stock taking may arise due to the following:
1. Normal deficiency, evaporation, dry age, shrinkage etc of materials in the normal
course and the normal surplus, e.g. absorption of moisture etc.
2. Stores misplaced
3. Errors in stock taking
4. Accounting error such as non recording of receipts or issues or wrong posting of
receipts and issues or closing balance entries.
5. Errors in issues, short or over issues, wrong measures, difference in scale, issues in
small quantities etc.
6. Breakage and wastage due to wrong handling
7. Theft, pilferage and heavy losses.
An efficient system of purchase and storage control should be able to obviate slow-and
non-moving materials but in practice, this is hardly so. The reasons for materials becoming
slow-moving, non- moving or obsolete are:(i)
(ii)
(iii)
(iv)
Of an item valued at Rs.20,000 will rank earlier to 20,000 kgs. Of an another item the value of
which is Rs.18,000. A running total of all the values is then taken. It will usually be found that
a large percentage of the total value is covered by the first few items in the list. A decision is
now taken as to the percentages of the total value (or the total number of items) which should
be covered by the A and B categories. For example, the management may decide that 70%
consumption value items, i.e. such of the items, starting in order from the first to the one
which makes up 70% of the total consumption value, may be considered to be A items; the
next set of items whose aggregate value covers, say 20% of the total, as B items and the
remaining (i.e. with 10% of the total value) as C items.
STOCK TURNOVER
The rate of stock turnover is calculated by the formula :
This means that the total value of the stock turned over 4.14 times in 28 days trading period
and just under one weeks stock was held on an average at any time.
Management should lay down guidelines for the purchasing officer as to the value of the stock
is to be held at any period and the rate of stock turnover required. This would operate on a
sliding scale depending upon the volume of business being done. The rate of stock turnover
will vary with different types of establishments and because of such things as the size of store
and the location of the establishment relative to the supplier.
The problems of having a low stock turnover are:
a) that capital is tied up and cannot be used else where in the business
b) that there is an increased risk of spoilage.
c) That with an unnecessarily high stock level the pay roll may be greater than is
really necessary.
d) The insurance on the stock is higher than necessary.
e) There is increased chances of pilferage of raw material
The problems of having high turnover are:
a) Order processing cost increases due to increased number of orders
b) Too many number of transactions leading to complications in bill
processing.
c) Inventory carrying costs also increases.
The rate of stock turn over will differ between the two main groups of commodities that is
perishables and non perishables.
Perishables usually have a high rate of about 20 or more per 28 day period, with items being
frequently purchased on a daily basis. Non perishables have a much lower rate of about 4 per
28 day period with items being purchased once in a week.
ISSUE CONTROL
When goods are received into the store room from the goods in department, they should
be checked for quantity against a carbon copy of the goods ordered and signed for. The
quality of certain items can be further inspected as when opening cases of canned goods
any damaged cans would be identified. To facilitate effective rotation of stock, it is common
to mark the date on the cases and cans of goods. It is also quite common practice to mark
the prices on the packaging of each commodity to aid the pricing of issues. Items are
issued to the different department usually at set times in the day against a requisition note
signed by an authorized person, such as the head barman, restaurant manager, head
waiter, or the chef de partie in the kitchen. When the requisition is large one which would
take the store keeper some time to collect together, it should be handed to the stores the
evening before for collection in the morning or around lunch time for an afternoon
collection. Supplement issues are usually obtainable during the normal hours of the store
being open, but there should not be encouraged as to many issues of this nature would
prevent the store man from doing his routine work efficiently.
Perishables:
In the case of perishable commodities, as already stated, they frequently go direct to the
kitchen as direct issues and are priced against the actual purchase price of the commodity.
When, however, a perishable storage system is operated the daily issues can be more
efficiently controlled and a much more accurate gross profit calculated for each day. Some
intricacies do occur under this method at times e,g the butchery department will draw food
items from the stores, manufacture them into process item and return to the storage to be
issue at a later date. The method of costing here must be clearly worked out as often central
butchery department are required to be self sufficient. Also the purchasing officer and then
food and beverage manager having closely decided that was cheaper and more efficient to
have a butchery department in the establishment, requires to maintain their previous make or
buy decision at periodic intervals. Perishables foods may be pricd out in any of the seven
method by which non perishable food can be priced. In some instances the method used
would be restricted to large establishment because of the degree of skill necessary to install
and control.
Non perishables:In the case of non perishables, one of several different methods may be
adopted for pricing of the issues.Actual purchase price. This may be applied to ityems which
are infrequently purchased and of which only a small stock is held, and also for slow moving
items.
here are different methods of pricing materials issue. The various methods used fall under the
following main categories:
I. Cost Price Methods
(a) First in First out (FIFO)
(b) Last in First out (LIFO)
(c) Base Stock
II. Average Price Methods
(a) Simple Average.
(b) Weighted Average.
III. Notional Price Method
(a) Standard Price.
(b) Inflated Price.
(c) Replacement price.
Under this method materials are used in the order in which they are received. In other words,
materials received first are issued first. This process is repeated throughout.
The price of the earliest consignment is taken first and when that is exhausted, the price of
the next consignment is adopted and so on. This method is most suitable for use where the
material is slow moving and has comparatively high unit cost This method is also useful in
times of falling prices because the issue price of material to the job will be high while the
replacement cost of material will be below.
When using the weighted average method, divide the cost of goods available for sale by the
number of units available for sale, which yields the weighted-average cost per unit. In this
calculation, the cost of goods available for sale is the sum of beginning inventory and net
purchases. You then use this weighted-average figure to assign a cost to both ending
inventory and the cost of goods sold.
The net result of using weighted average costing is that the recorded amount of inventory on
hand represents a value somewhere between the oldest and newest units purchased into
stock. Similarly, the cost of goods sold will reflect a cost somewhere between that of the
oldest and newest units that were sold during the period.
The weighted average method is allowed under both generally accepted accounting principles
and international financial reporting standards.
Standard Price:
Standard Price is predetermined price fixed on the basis of a specification of all the factors
affecting that price. Firms which follow standard costing will record all the receipts and issues
of materials at the standard price which will be fixed in advance. In this case, both the receipts
and issues will be costed at a standard rate.
In case the purchase price is more or less than the standard price, the difference is charged to
an account which is known as the standard price, the difference is charged to an account
which is known as Price Variance Account. For example, if the standard price is 5 per unit
and the actual price is Rs. Rs. 5.50, then the Stores Ledger will be debited at the rate of Rs. 5
and Price Variance Account with 50 paise per unit. Issues are all costed at the standard price.
It serves to measure efficiency in use of materials, also it saves clerical labour.
Inflated Price:
Where materials are subject to natural wastage the cost may be inflated to account for the
wastage. Thus, if 100 units of materials are bought for Rs. 150 and if, out of this, only 90 units
can be normally used (the other ten going to waste), the issues may be costed not at 1.50 per
unit but at Rs.1.67 per unit, i.e. 150 h- 90. With the actual issue of 90 units the amount will be
exhausted and so will the actual quantity. Both in the stores ledger a quantity balance of 10
units will remain; it should be written off.
Replacement price:
Here cost of the materials in hand is not considered. When an issue is made the market price
is ascertained and the issue is priced at that price. It is claimed that where quotations have to
be made, this is the best method since it would reflect the latest competitive condition. But
this confuses estimating, with costing.
It is also claimed for this method that it would automatically disclose efficiency or inefficiency
in buying. The Stores Ledger will use cost for receipts and the market price for issues. Higher
rate for issues than for receipts will disclose efficiency in buying (and vice versa). This will
leave a proportionately small amount for the quantity in hand. There may even be a negative
amount for a positive quantity balance.
It is, however, submitted that this would unnecessarily complicate costing books, and, in any
case, costing has nothing to do with profits or losses as such. This method introduces an
element of profit or loss in the cost itself because of the use of market price rather than the
cost for issue of materials. It is better to avoid the use of the method even though the market
price would naturally be taken into consideration at the time of sending tenders or fixing
prices.
The method is also called Replacement Cost Method since the market price on the date of
issue means the price at which present stock could be replaced by new stock. The term
Replacement Price has been defined by the Institute of Cost and Management Accountants
of England as:
The price at which there could be purchase of an asset identical to that which is being
replaced or revalued.
In most small and medium sized catering establishments it would be convenient to apply the
actual purchase price method for perishable commodities and the average price method in
case of non-perishables.