Materials: Purchase, Storage, Issue and Control
What this domain tests
Materials are usually the largest cost, so questions cover the purchase cycle, stock levels, economic order quantity, stores records (bin card versus stores ledger), issue pricing under FIFO and weighted average, and the treatment of normal loss, abnormal loss and scrap. A stores ledger or a stock-level calculation is the common numerical task.
Core rules
- Re-order level = maximum consumption × maximum lead time.
- Minimum level = re-order level − (normal consumption × average lead time). Maximum level = re-order level + EOQ − (minimum consumption × minimum lead time).
- EOQ = √(2AO/C), where A is annual consumption in units, O is the cost of placing one order, and C is the carrying cost per unit per year.
- FIFO issues at the oldest price; weighted average recalculates a new average after every receipt; LIFO is generally not accepted in cost records.
- Normal loss is absorbed by the good units; abnormal loss and abnormal gain are valued at the cost per good unit and disclosed separately.
Worked example
Annual consumption 12,000 units, ordering cost ₹75 per order, carrying cost ₹2 per unit per year. EOQ = √(2 × 12,000 × 75 ÷ 2) = √9,00,000 ≈ 949 units. If maximum consumption is 60 units a week and maximum lead time 3 weeks, re-order level = 180 units. With normal consumption 45 units and average lead time 2 weeks, minimum level = 180 − 90 = 90 units.
Traps
- Putting the purchase price of one unit in place of the annual ordering cost in the EOQ formula.
- Valuing abnormal loss at selling price rather than at the cost per good unit.
- Mixing up the bin card (quantities only) with the stores ledger (quantities and values).
- Ignoring that EOQ takes no account of quantity discounts - mention the discount when the question gives one.