Material Costing Overview Quiz

Study Notes

Material encompasses all commodities consumed during manufacturing; defined as anything that can be stored or stockpiled.

Direct Materials: Identifiable with specific production units, integral to finished products. Examples include:
- Component parts (e.g., tyres in cars, picture tubes in televisions).
- Materials fully consumed in production (e.g., fertilizers in agriculture).
- Primary packaging materials (e.g., containers, bottles).
Indirect Materials: Not directly tied to a specific product, generally support production.

Material control involves systematic management of purchasing, storage, and usage of materials.
Objectives include:
- Preventing under and over stocking.
- Ensuring cost-effective purchasing.
- Maintaining proper quality.
- Minimizing wastage.
- Providing information about materials.

ABC Technique: Classifies materials by value, allowing for targeted management:
- Category A (High Value): Small percentage of total items, requiring the tightest control.
- Category B (Medium Value): Under normal control procedures.
- Category C (Low Value): Large number of items, managed with simple methods.
Stock Levels: Setting maximum, minimum, and re-order levels helps prevent under and over stocking.
- Re-order Level: Trigger point for new orders, determined as:
  - Re-order level = Max consumption x Maximum re-order period.
- Danger Level: Set to manage risks of stock depletion during emergencies, calculated as:
  - Danger Level = Normal consumption x Max re-order period under emergency conditions.
- Average Stock Level: Calculated as:
  - Average Stock Level = (Minimum level + Maximum level) / 2.
- Maximum Level: Highest permissible stock limit to avoid excess inventory.