MATERIAL/INVENTORY COSTING

MATERIAL/INVENTORY COSTING

Introduction
Materials are the tangible inputs into the process of producing useful output. Materials apply to firms that undergo manufacturing processes as part of their operations. Material costs form a large percentage of the cost of production and this is why they are normally incorporated under prime costs.
Definition of Key Terms
Materials:
Materials refer to physical substances used as inputs to production or manufacturing; they can also be defined as any substance used in construction such as building bricks, cement and concrete.
Purchase cost
This is the price charged by the supplier on an item of inventory.
Maximum stock level
This is the upper limit above which stock should not be allowed to exceed.
Re-order level
It is a point that lies between minimum and maximum stock levels at which purchase orders must be placed to ensure that goods ordered are received before the minimum stock level is reached.
Purposes of keeping inventory by firms
Buffer inventories
Firms keep these inventories to protect themselves against the uncertainties of demand and supply. To meet these uncertainties, firms normally hold inventories in excess of average or expected demand. They may also keep excess stocks to meet requirements during the time for which lead-time goes beyond normal.
Anticipation inventory
Firms keep some items of stock in anticipation that future demand for the item will increase. The whole idea underlying anticipation inventory is to smoothen the production process. This is attained by producing for a longer duration for continuous basis rather than operating with excessive overtime in one period leaving the system to be idle or close down for reason of inad- equate or no demand.
Appreciation inventory
Firms hold inventory in anticipation of an increase in price. Some items of inventory such as wines and spirits and jewelry appreciate in value the longer they are kept in the warehouse. However, quantitative models do not take into account the appreciation inventory.

Inventory Decisions
Inventory management is important since most organizations like merchandising and manufacturing firms; inventory represents the largest single investment. The major types of inventory are raw materials, work in progress and finished goods.
Majority of the decisions regarding the inventory are made by the manager in charge of inventory control and management. These decisions include:
1. The optimal quantity to order in order to minimize the inventory total costs.
2. When to make an order.
3. What commodities to stock.
4. The amount of safety stock to be kept in anticipation of variation in demand and supply among others.
The overall objective of inventory control is to maintain stock levels that minimize the total costs. These costs include the holding costs, acquisition or purchase costs, stock out costs and ordering costs.

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