Need for Materials Control:

One of the first step in the installation of cost and management accounting system is planning the proper control of materials and supplies from the time orders are placed with supplier until they have been consumed in the plant and office operation or have been sold as merchandise.
Materials represent an important asset and is the largest single item of cost in almost every business; accordingly the success or failure of a concern may depend largely upon efficient material purchasing, storage, accounting, utilization and control.
Where materials are not properly controlled, excess stock of some items are likely to occur with a result unnecessary tying up of capital and loss through deterioration and obsolescence. Shortages of other materials may arise at the time when they are urgently needed and production will then be delayed.
The purchasing of materials is a highly specialized function. By ordering the right quantity and quality of materials at the most favorable price, and by ensuring that it arrives at the right time, the efficient buyer is able to make a valuable contribution to the   success of a business. The efficient material control costs out losses and forms of waste that otherwise ten to pass unnoticed. Theft, misappropriation, deterioration, breakage and additional storage costs can be reduced to a minimum by proper controls, and much avoid idle time in the factory will be cut out if materials are available to meet the demands of the production staff. Finally and most important to the cost accountant, it is impossible to produce reliable costing information if the records of materials issue are unsatisfactory, because a cost statement cannot be more accurate than the information on which it is based.

Requirements of a System of Materials Control:

 

The important requirements or essentials of adequate satisfactory system of materials control are as follows:

1. Proper Coordination
2. Competent Purchasing Agent
3. Use of Standard Forms
4. Control by Budgeting Materials and Equipment
5. Storage Location
6. Operation of Perpetual Inventory
7. Standards or Level to be Fixed
8. Storage Control and Issue
9. Internal Check
10. Development of Controlling Accounts and Subsidiary Records
11. Regular Reports

Proper Coordination:

Proper coordination of all departments involved, in material purchasing, receiving, testing, approving, storage, issue and accounting is essential.

Competent Purchasing Agent:

Centralization of purchasing in a purchasing department under the direct and authority of a competent trained purchasing agent is also considered essential.

Use of Standard Forms:

The use of standard forms for orders, requisition etc., upon which written and signed instructions are given are essential for proper control of materials.

Control by Budgeting Materials and Equipment:

Use of materials, supplies and equipment budgets so that the economy in purchasing and use of materials can be realized, is important factor for adequate control of materials.

Storage Location:

Storage of all materials and supplies should be in a designated location properly safe guarded under supervision and proper planning should be there for storing and issuing of materials.

Operation of Perpetual Inventory:

Operation of proper perpetual inventory system should be used so that it is possible to determine at any time the amount and value of each kind of materials in stock. It  also enables the comparison of book inventory with the result of physical counting.

Standards or Level to be Fixed:

A minimum quantity of each item of materials, below which point the inventory is not allowed to drop, and a maximum quantity, above which stock is not carried should be fixed. In the same manner ordering level and economic order quantity may be determined.

Storage Control and Issue:

The proper operation of a system of stores control and issue is introduced so that there will be delivery of materials upon requisitions to departments in the right amount at the time they are needed.

Internal Check:

The operation of internal check should be introduced to ensure that transactions involving materials and equipment are checked by reliable and independent officials.

Development of Controlling Accounts and Subsidiary Records:

Controlling accounts and subsidiary records reveal  summary of detailed materials costs at each stage of materials receipt and consumption from the storeroom to finished goods.

Regular Reports:

Regular reports and information should be provided for the management in connection with the purchase of materials, issues from stock, inventory balances, obsolete stock, goods returned to vendors, and spoiled of defective units