Page 90 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes 11. Document prepared by the stores department is …………………… .
12. The …………………… is in the form of an agreement with the suppliers which binds both
the purchaser and supplier.
13. …………………… is similar to numerical method.
14. …………………… is periodical or continuous.
15. …………………… represents a system of records maintained by the stores department.

4.4 Summary

z z Inventory control, therefore, aims at ensuring the availability of required quality material
in required quantity, at required time or period and place with minimum cost.

z z Inventory involves investment of money and locking up of precious space which has
alternate uses.
z z Inventory control is generally exercised over raw materials and work in progress.

z z The basic purpose of inventory control is to maintain optimum level of inventory.
z z The ordering of materials is usually tagged with three different components of costs viz:
™ z Acquisition cost of materials
™ z Ordering cost of materials and
™ z Carrying cost of materials

z z A system of classifying materials and supplies according to value is known as ABC
Analysis.

4.5 Keywords

ABC Analysis: Analysis of exercising the control on the inventory on the basis of value. Always
Better Control Analysis; A – High control for high value goods; B – Moderate control for lesser
value goods and C – Little control on the least value goods.
Carrying Cost: Cost incurred for carrying the materials from the place of purchase to place of
production centre/profit centre.
E.O.Q: Economic Order Quantity of materials to be ordered/procured.
Inventory: Stock of Raw materials, Stock of Work in Progress, Stock of Finished Goods and Stock
of Spares, but not Stock of Loose tools.

Ordering Cost: Cost incurred at the moment of placing the order of goods or materials,
administration costs, cost of communication and so on.

4.6 Review Questions

1. Briefly explain the procedure to be followed by the purchase department for the purchase
of a material till arranging for payment of the bill.
2. What is a purchase Order? Explain the terms and conditions that are to be clearly mentioned
in the purchase order. Also give a specimen form of purchase order with imaginary
details.
3. What is a purchase requisition? prepare a purchase requisition for material A with
imaginary figures.

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