Page 79 - DCOM202_COST_ACCOUNTING_I

Unit 4: Material Control

(v) Investment in materials kept under control: The investment in materials is kept at a Notes
minimum level as the actual stock is continuously compared with the maximum level and
minimum level.
(vi) Early detection of loss of stock: Loss of stock due to shrinkage, evaporation, accident, fire,
theft, etc. can be easily detected.
(vii) Accurate and up-to-date accounting records: Due to continuous stock-taking, the store-
keeper and stores accountant become more vigilant in their works and they maintain
accurate and up-to-date records.
(viii) Easy to prepare interim accounts: It is possible to prepare periodical profit and loss account
and balance sheet without physical stock-taking being made.

(ix) Availability of correct stock data: Correct stock data is readily available for settlement of
insurance claims.
Disadvantages of excessive Stock are as follows:

(a) Loss of interest on capital locked up in stock.
(b) Loss through deterioration.
(c) Risk of obsolescence.
(x) Employment of specialized staff: Since the work is spread throughout year, whole time
specialised staff can be engaged for the purpose.
(xi) Moral check on employees: The system acts as a moral check on the employees working in
the stores which increases their efficiency.

Such losses increase the cost of production. These losses may be in the form of wastage scrap,
defective and spoilage. The problems of waste, scrap, spoilage or defectives materials must arise
in almost all manufacturing industries. There is no uniformity the meaning and accounting
treatment of waste, scrap, spoilage and defective However, steps should be taken to minimize
the discrepancy so that efficiency can increased and proper material control is ensured.

FNSD Analysis

Age of inventory indicates duration of inventory in organization. It shows moving position of
inventory during the year. If age of inventory is minimum it means, the turnover position of
that particular item of inventory is satisfactory. If the age of any particular item of inventory,
it indicates the slow moving of stock which may be due to lower demand for the product,
inefficiency in shocking policy, excessive stocking etc. The excessive investment in stocks means,
high investment is locked-up in inventory leads to lower profitability of the firm due to excess
carrying costs.

FNSD analysis divides the items into four categories in the descending order of their usage rate
as follows:
‘F’ stands for fast moving items and stocks of such items are consumed in short span of time.
Stocks of fast moving items must be observed constantly and replenishment orders be placed in
time to avoid stock-out situations.
‘N’ means normal moving items and such items are exhausted over a period of a war or so. The
order levels and quantities for such items should be on the basis of a new estimate of future
demand to minimize the risks of a surplus stock.

LOVELY PROFESSIONAL UNIVERSITY 73