Material Cost

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Material is a very important part of every business and forms one of the major components of total cost; hence it is very important to have a good inventory control system.

Inventory Control helps to provide continuous flow of materials, parts and components for effective, efficient and uninterrupted flow of production. 
Inventory Control helps to minimize investment in inventories keeping and thus reduces cost
Inventory Control helps to provide for efficient store of materials so that inventories are protected from loss by fire and theft and handling time and cost are kept at a minimum. 
Inventory Control helps to minimize surplus and obsolete items.

The following are the common techniques of inventory control:
 i. Min-max plan 
ii. The two-bin system 
iii. Order cycling system 
iv. The ABC analysis 
v. Fixation of various levels 
vi. Use of perpetual inventory system and continuous verifications 
vii. Use of control ratios 
viii. Review of slow and non-moving items.

It is the oldest methods of inventory control. Under Min-Max Plan the analyst lays down a maximum and minimum for each stock item keeping in view its requirements and margin of safety required to minimize risks of stock outs. The minimum level is the reorder point and order is placed for that quantity of material which will bring it to the maximum level.

The procedure used under this system is that for each item of stock, two piles, or bins are maintained. The first bin stocks so much quantity of inventory which is sufficient to meet its usage during the period that elapses between receipt of an order and the placing of the next order.

In this system, quantities in hand of each item or class of stock is reviewed periodically, which can be done in 30, 60 or 90 days. However if in the course of a scheduled periodic review it is observed that the stock level of an item will not be sufficient till the next scheduled review keeping in view its probable rate of depletion, an order is placed for its supply. 

It is popularly known as ABC analysis (Always Better Control), and is believed to have originated in the General Electric Company of America. This plan is based upon segregation of materials for selection control. ABC analysis measures the money value, i.e., cost significance of each material item in relation to total cost and inventory value. 
High value items deserve very close attention, 
Low value items need minimum expense and effort in the task of controlling inventories. 

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