INVENTORY CONTROL

Material constitute one of the important factors of production in a business. The term material refers to the
commodities supplied to an undertaking for the purpose of consumption in the process of manufacture or of
rendering services or of transformation into products. The cost of all such materials form part of the cost of
jobs, operation, products, or services for which they are utilized.
The term store is often used synonymously with materials. The former has however a broader meaning and it
covers not only the raw materials consumed or utilized in production but also such other items as sundry
supplies, maintenance stores, fabricated parts, components, tools, jigs, fixtures and other equipments.
Finished and partly finished products are also part of the term store.
Mention may also be made of the term inventory which covers the stock not only of raw materials but
also components, work in progress and finished stock.
Inventory may be defined as the value of the materials and goods held by an organization to:
1. Facilitate production ( Raw material, subassemblies and work in progress)
2. For support activities ( Repair and maintenance, consumables etc)
3. For sale or customer service ( finished goods and spare parts )
The procedure followed in hotel and restaurant concern in respect of materials is broadly, to procure
materials, store them till such time as required and finally issue them for consumption in manufacture. In
order to prevent theft, deterioration, and wastage physical control of numerous kinds are available. But
simultaneously proper controls are absolutely necessary to avoid extra expenditure, a) of purchase of excess
of needs b) of slowing down production due to non availability of store and c) through improper use of
materials intentionally or otherwise. The system of control should be comprehensive enough to cover the
flow of material starting from the point when someone in the organization makes a request for purchase upto
the stage when materials are consumed and their costs are compiled and assembled in cost sheet.
Objectives of a proper inventory control system are:
1. Co ordination and cooperation between the various departments concerned, viz. Purchase, Inspection,
Storage, Issues and Accounts and Cost departments.
2. Use of standard forms and documents in all the stages of control
3. Classification, codification and standardization and simplification of materials.
4. Planning of requirement of materials and scheduling of deliveries.
5. Efficient purchase organization.
6. Budgetary control of purchases.
7. Planned storage of material; physical control as well as efficient book control through satisfactory
storage control procedures, forms and documents.
8. Appropriate records to control issues and utilization of stores in production.
9. Efficient system of internal audit and internal checks.
10. System of reporting to management regarding material purchase, storage and utilization.

Material control routine:

The routine for system of material control may be summarized as follows, the various steps having been
arranged in the sequence in which they occur;
1.
2.
3.
4.
5.
6.
7.
8.

Request for purchase of materials.

Inquiry and tender forms issued to prospective suppliers
Receipt of quotations from the supplier and selecting the suitable supplier.
Purchase actions.
Receipt of materials and inspection.
Transactions with supplies , e.g. payment of bills, issue of debit or credit note etc.
Bringing materials on charge and storage
Issue of materials.

Within the frame work of above broad outlines, the practice followed in different concerns vary,
particularly with regard to the detailed records maintained and number of copies of documents made out
etc.
PURCHASE CONTROL
Purchasing of store is primarily a function of the management. Nevertheless it forms an important part of
material control. and as such the cost accountant should be closely associated with the system of
purchasing in the undertaking. He can render assistance to the purchase department by presenting data
and information on the following aspects:
1.
2.
3.
4.
5.

Effects of overstocking on costs

Reports on redundant obsolete, dormant, surplus and slow moving stores.
Effect on cost of weak and strong purchase organization.
Economic buying vis-a vis cost of production.
Reports on cost of substitute materials, or materials of different qualities and grades. Use of inferior
material may reduce material price but may result in more consumption of materials and sometimes
more labour costs.
6. Comparative costs relating to problems of purchase of special items or taking decisions whether to
purchase an item or manufacture it in the factory.
7. Effect of changes of material prices on standard material costs, price quotations and valuation of
stock.
Much of the success of a business depends upon the efficiency of the purchase department . The
advantages of having an efficient purchase department and for that matter a good and adequate system of
purchase control are as follows:

1.Proper quality: Purchase of material of proper quality and specification obviates waste of material and
loss in production.
2. Proper time: Purchases are made at the proper time so that the advantages of a favourable market can
be taken.
3. Proper quantity: Purchase of the requisite quantity of materials avoids locking of working capital. At
the same time it ensures that sufficient material is always available so that there is no production delays.
The risk of surplus, obsolete, and deteriorated store is minimized.
4. Right source: Purchase from the best market and from reliable suppliers improves business relations
and makes available the best terms of supply and favourable delivery dates.
5. Right price: Purchase at the most appropriate price helps to maintain the predetermined food cost and
hence achieve the budgeted gross profit.
6. Right method: Adoption of the most adventitious method of purchase and proper drafting of purchase
agreement and contracts eliminate the risk of any dispute and financial loss.

Purchase requisition: ( First step)

The purchase department on its own does not initiate any action for purchase of materials. The action is
either taken by the store keeper for items of material required for regular production purpose or by the
production department or the production planning department for purchase of special items not normally
stocked.
Request for purchase are made to the purchase department on a form known as Purchase Requisition. It
will provide three basic information which assist the work of the purchase department. These are:
1. What material to be purchased ( material of right quality )
2. When it is to be purchased ( purchase at right time)
3. How much is to be purchased ( purchase of right quantity)

Format of purchase requisition:

PURCHASE REQUISITION
From _______________________Department
No._______________
To Purchase Department
Date:______________
Please take action to purchase the following material which is required on
(Date)______________________for utilization.

Particulars of material

Code No.

Unit of
quantity

Quantity

Signature
(To be filled in by the Purchase Department)
Purchase order No.___________________
Supplier____________________________

The purchase requisition is usually prepared in triplicate; one copy is retained in the indenting
department for the office record, and two copies are sent to the purchase department where one copy is
retained and the other returned to the indenter after quoting therein the details of the order placed. This
serves the purpose of confirmation that action on the requisition has been taken.
Purchasing systems:
1. Fixed order quantity system
2. Replenishment system
3. Modified replenishment system

FIXED ORDER QUANTITY SYSTEM

Fixed order quantity system is a method of purchasing where the organisation places the order for
and purchases a fixed quantity of materials from a supplier.
The quantity for purchase remains unchanged irrespective of other factors.

This method is also known as Purchasing by EOQ.

Fixed order quantity system involves incurring the following costs:
1. Buying or ordering cost
2. Carrying cost
When the buying cost increases, the carrying cost decreases and vice versa.
EOQ or economic order quantity is when both the buying and carrying costs are minimum i.e. a+
b=0
Where; a= buying cost and b= carrying cost
This cost can never be negative.
The formula for EOQ is given by,
Q= 2 PU/ Ci
Where; Q is the quantity which is the economic order quantity (EOQ)
P is the ordering cost per order
U is the total consumption in one year
C is the cost per unit
i is the carrying cost which is expressed in terms of %/year.
Derivation of the formula for EOQ:

Let P be the ordering cost per order of Q units.

Therefore, ordering cost for one unit = P/Q
Ordering cost per U units = P/Q x U ..(a)
Let i be the carrying cost.
Therefore, carrying cost per C units = C x i
Therefore carrying cost per Q units = Ci x Q/ 2 (b)
EOQ is when a+ b= 0.
i.e. PU/Q + CiQ/2 = 0 ..(from a and b)
i.e. 2 PU + CiQ2 = 0
i.e. 2 PU = -CiQ2
But, as CiQ2 cannot be negative, 2PU= CiQ2
Therefore, Q= 2 PU/ Ci

Replenishment system: In the replenishment system of inventory management, there is no fixed ordering
quantity but there is fixed ordering time. Thus there is no consideration of the inventory costs. A
replenishment level or maximum level is fixed beyond which the stock is at no time expected to go. Stocks

are reviewed at fixed periodical intervals and orders are placed for a varying quantity, which is equal to
maximum level minus the stock in hand on the date of review. In deciding upon the reordering quantity
another factor to be considered is the time gap between the lead time and the time interval of review. If the
lead time is greater than the time interval of review, the quantity to be ordered
(maximum level minus
stock in hand) if further reduced by quantity already on order at the time of review.
Optional or modified replenishment system: There is another system of inventory management, called the
optional replenishment system by some authors which is modification of the replenishment system. In the
system also the ordering quantity is variable but a lower limit is placed on its size. The system that combines
the main features of fixed order quantity and the fixed order time system in as much as there is a maximum
level, a reorder point, a variable order quantity(subject to certain limit) and system of periodic review. The
ordering quantity in the system is:
Maximum level minus (stock in hand at the time of review plus the quantity already on order) provided,
stock in hand plus the quantity on order is less than the reorder point.

Identification of the raw material to be purchased:( 1st step)

If the material to be purchased is the regularly used, then the existing supplier is to be contacted. If the
material to be purchased is new and the existing supplier does not supply the same then the following step by
step procedure is to be followed.

Inquiry and call for quotation: (2nd step)

After the decision to purchase a material has been made, the next step is to locate the convenient and
economical source of supply. The purchase department is in constant touch with the market and maintains a
list of suppliers for supply of each item of the store required. Selection of a particular supplier is usually
made after inviting tenders from possible source of supply.

Comparative statement of tender: (3rd step)

Tenders are received in sealed envelope by the due date and are opened on the date and the time stipulated
for the purpose. In some concerns tenderers are invited to attend at the time of opening the tenders and the
prices quoted are read out, the objective being to get comparative rates in future quotations. The details
furnished in the tender are summarized and tabulated in a comparative statement. These statements are
scrutinized and the tender accepted by a person to do so. Acceptance of a tender indicated that terms offered
by the particular firm are acceptable and it is proposed to place order on that firm.

Purchase Order: (4th step)

Also known as supply order. Soon after the quotations are finalized and the supplier from whom materials
are to be purchased is finalized, a purchase order is placed asking them to deliver the supplies. Tender is
simply an offer and the but the purchase order is a contractual agreement with the supplier. Before sending
out the order it should be ensured the suitable funds have been provided in the purchase budget. The contents
of the purchase order must be complete and definite and it should contain full details so as not to leave any
room for ambiguity or misunderstanding. If the purchase order is not properly laid out, it may result not only

in subsequent disputes and bad business relationship but may also upset production schedules because of non
delivery or delayed delivery of materials.
Format of a purchase order:

Generally four copies of a purchase order are made for distribution as under:
- One copy to the supplier
- One copy to the receiving department.
- One copy is retained as office copy in the purchase department.
- One copy to the accounts department.

RECEIVING CONTROL
Receipt of materials and inspection:

Materials when received from the supplier are under the temporary custody of the receiving
department. The materials are usually accompanied by one or both of the following
documents.

1. Advise of dispatch, which is sent by supplier intimating dispatch of materials

from the premises.
2. Delivery note (popularly called as challan)which is received from the carriers
who transport and deliver the materials.
Step by step procedure of receiving:

The procedure on a delivery arriving at n establishment is as follows:

1. Checking for short supplies and none supplies--A quick check is made
against the delivery note and the copy of the order to check that the majority of the
goods are being delivered. If there is a major difference between the delivery note and
the order placed this must be queried immediately, as a late delivery of food could
seriously upset the production department. In the event of short delivery or non
delivery, due to the inability of the supplier to obtain particular commodities, the
purchasing officer should be informed immediately so that he can try alternative
sources of supply for those items missing. A delivery note must accompany every
consignment by a supplier and this should be written into the terms of business with all
suppliers.
2. Quantity inspection-- The goods, on being offloaded, are then checked for quantity.
A basic knowledge of the units in which food. is purchased is essential at this stage
( e.g. crate, case, bushel, chip, boat ). Care must be taken to prevent being cheated of
a few pounds of an item by an unscrupulous supplier or a dishonest delivery man.
Some typical tricks of the trade illustrate the vigilance required at this rather
elementary stage:
a) a heavily iced delivery of fish could mean that ice was being brought at 25p per
pound. To check on items like this, all the fish must be taken from its container
and weighed free of ice.
A standard wooden container of spinach or Brussels sprout being wet could mean that
an incorrect allowance was being made for the container, and the contents were short
weight. To check,, remove contents and weigh in a container of known weight.
If any item is found not to equal the quantity stated in the delivery note, this should be
brought to the attention of the delivery man, and the request for credit note made out
and signed by the delivery man.
3. Quality inspection-- The goods, have been checked for quantity, are next checked
for quantity in accordance with the purchase specification. At this stage it is essential
for the receiving clerk to have a thorough knowledge of food and food terms in order
for the job to be done efficiently. If not, it will be necessary for a specialist in the

establishment to be sent for, e.g. a butcher or a senior chef; this, unfortunately, could
cause some delay in the goods being accepted.
Extreme care must be exercised at this stage as inferior quality produce cannot be
improved by the production department. Inferior produce usually results in quicker
deterioration of produce if stored, a lower yield, increased labour handling, lower gross
profit and dissatisfaction to the customer. It is, therefore, necessary to open crates and
inspect for quality, and in particular fruits and vegetables for over maturity.
Aids to inspecting for quality are not numerous. They consist of posteres showing the
different grades for fruits and vegetables and large line drawing for specifications to
indicate shape and inspection features. Large coloured photographs are extremely
valuable as, also are a variety of specification rulers made so that quick measurements
may be taken against item in which measurement features in the purchasing
specifications.
4. Price inspection-- After the goods are inspected for quality and quantity they are
checked for the price to ensure that the supplier has priced the commodities at the
agreed price. This becomes extremely important when the commodities are purchased
through daily market list and fortnightly quotation sheet when the price changes on a
daily basis.

5. In case of any discrepancies creation of request for credit note--

In case the quality does not match the standard purchase specification or the quantity
does not match the quantity mentioned in the delivery note or the supplier has priced
commodities at a higher price than the agreed price then immediately the receiving
clerk will raise a request for credit note mentioning the total value and the reason.
Both the receiving clerk as well as the van driver will have to sign that.

6. Transfer of the good to the store or the user departmentOnce the goods
have been checked for quality quantity and price and all the discrepancies have been
identified and the request for credit note has been created the good are sent to the
store in case of none perishables and to the user department in case of perishables.

EXAMPLE GROUP OF HOTELS LTD.

Request for Credit Note

No.____
Delivery note no.____
To

Purchase order no.____

Alan D'Costa & Co.
Butcher
223, Crawford Market,

Date

Mumbai

PLEASE ISSUE YOUR CREDIT MEMO FOR ITEMS LISTED BELOW

Qty

Unit
1.5

Reason

Kg

Item

Cost (in Rs.)

Total
Value

Unit Price

Beef Liver

55

82.5

Beef Liver was spoilt due to improper storage

Van
Driver

Requested By

Receiving Clerk

It
is essential in all circumstances that the supplier is fully aware that;

a) A delivery note must accompany all deliveries.;

b) Everything delivered will be checked in detail for quantity and quality;
c) The receiving department will not, in any circumstances, allow themselves to be
hurried when inspecting good;
d) A credit note will be required for all shortages or rejected goods.

Circumstances when the receiving clerk must raise the request for
credit note:
1. When the quantity of ingredients supplied is less than the quantity mentioned in the
delivery note.
2. When the quality of ingredients supplied is not as per the SPS.
3. The quantity of ingredients supplied and invoiced is much more than what is ordered
for.
4. Ingredients not ordered for but supplied and invoiced.
5. Ingredients not supplied but invoiced.
6. Prices mentioned in the invoice are more than the agreed price.

STORE CONTROL:
After the materials on order are received, checked and approved, the store
keeper take them on charge. He is responsible for placing the materials in their
appropriate places inside the store and for ensuring that they are maintained in
good condition during storage till required for utilization in production. The
control during this stage may be called storage control.
1.
1. What are the objectives of storing control?
ANSWER : Following are the objectives of storing control
a.
b.
c.
d.
e.
f.
g.
h.
i.

To ensure that the raw material in the store are protected from theft and pilferage
To ensure that the raw material are stored in their prime conditions
Not to store more than the decided maximum stock level at any given point in time.
The raw material should not be infested with rodents and pests.
Regular stock rotation is carried out.
Raw materials are issues on FIFO basis.
Issues are being priced as per the accepted norms by the hotel
No expired stock should be in the store.
Regular stock taking is carried out to establish accountability.

Stock levels:
1. REORDER STOCK LEVEL: , Purpose & Formula:
Stock reorder level indicates to the stock controller when it is necessary to reorder certain raw
materials or components.
The purpose of using this stock reorder level is to enable management to ensure there is
sufficient stocks to meet demands from the production department.

Formula=Maximum usage x Maximum lead time

Illustrated Example on how to compute Reorder Stock Level
Company X which is a manufacturer has a maximum usage of 5,000 units of component TX1
per week. The supplier of this component has a maximum lead time of 5 weeks.
Required: Compute the reorder level for component TX1.
Suggested Solution:
Reorder level=Maximum usage x Maximum lead time
= 5,000 x 5= 25,000 units.
2. MAXIMUM STOCK LEVEL:
To avoid cash being tied up in holding unnecessary high levels of stocks, some businesses set
up MAXIMUM level of stocks to be held at any one time. The formula to determine the
maximum level of stocks to be held is:
Formula=Reorder level-{Minimum usage x Minimum lead time} + reorder quantity.
Illustrated Example on how to compute MAXIMUM level of stock
Continued from above-reorder stock level is 25,000 units. Say the business has a minimum
usage of 1,000 units per week. The minimum lead time is 3 weeks. The reorder quantity is
12,000
Required: Compute the maximum level of stocks of TX1 to be held at any time.
Suggested answer:
Maximum level of stock to be held
=Reorder level {minimum usage x minimum lead time} + reorder quantity
=25,000- {1,000 x 3 } + 12,000 = 34,000 units of TX1
3. MINIMUM STOCK LEVEL:
Purpose of keeping minimum stock level is to enable the stock controller to avoid running out
stock.
Formula=Reorder level-{average usage x average lead time}
Illustrated Example on how to compute MINIMUM level of stock
Continued from above-reorder stock level is 25,000 units. Say the business has an average
usage of 1,200 units per week. The average lead time is 4 weeks.
Minimum level of stock to be held
= Reorder level-{average usage x average lead time}
= 25,000-(1,200 x4) =20,200 units of TX1
4. SAFETY STOCK LEVEL:

Purpose to ensure that the business NEVER runs out of stock, a safety stock level should be
maintained. Safety stocks are also known as BUFFER stock.
Above example, assuming the business required a buffer stock of 2,800 units, then the
minimum level stocks to be held would increase to 23,000 units of TX1

Different methods of inventory control in store

1. Perpetual or automatic inventory system:
The control of material while in storage is effected through what is called as
perpetual inventory. Inventory means a list of goods on hand and the term perpetual
inventory derives its name from the function of indicating at all time the balance of
each item of store in hand. Thus the two main function of the perpetual inventory
system are:
1. Recording store receipts and issues so as to determine at any time the stock in
hand , in quantity or value or both without the need for physical count of stock.
2. Continuous verification of the physical stock with reference to the balance
recorded in the store records at any frequency, as convenient for the
management.
Perpetual inventory system comprises:
a) Bin card (Quantitative perpetual inventory)
b) Store ledger (quantitative cum valued perpetual inventory)
c) Continuous stock verification (physical perpetual inventory)
a) Bin card: also called as bin tag or stock card. A bin card is a quantitative
record of receipts, issues and closing balances of items of the store. Separate bin
cards are maintained for each item in the store and are placed in shelves or bins or
are suitable hung up as convenient along side the material in go downs.
Format of bin card: Given in the next page.
BIN CARD
NO.
Item Description :
Item Code:
DAT OPENING
E
STOCK

PURCHASE
S

Max. Stock
Level:
Reordering
Level:
Minimun Stock
Level:
ISSU
BALANC
ES
E

BIN CARD
NO.
0098

Max. Stock
Level:300
Reordering
Item Description : Tobasco Sauce
Level: 150
Minimun Stock
Item Code: 0022
Level:70
OPENING
PURCHAS ISSUE BALANC
DATE
STOCK
ES
S
E
01-Mar
210
210
05-Mar
210
30
180
10-Mar
180
30
150
13-Mar
150
150
300

On receipt of consignment of materials , suitable entry of quantity is made in the receipt

column of the bin card from the goods received note. Similarly issues of materials to the
different departments are entered in the issue column. All these entries are supported by
receipts or issue documents as the case may be. The main features of a bin card is after
posting a transaction whether receipts or issue the balance quantity is calculated and
recorded. Stores returned from the department are recorded either as receipts of minus entry
in the issue column.
The various levels indicated in the bin card enable the store keeper to keep a watch on the
balance and to place requisition for replenishments as and when necessary.
b) Store ledger: (Quantitative cum valued perpetual inventory)
Like bin card store ledger is maintained to record all receipt and issue transactions in respect
of materials with the difference that along with the quantities, the values (sometime also the
rate per unit quantity) are entered in to the receipt, issue and balance columns. Additional
information as noted in the bin card regarding maximum, minimum and reordering quantities
etc are also maintained in the store ledger.
Like the bin card separate ledger sheets are maintained in the store ledger for each item of
material. The ledger sheets are generally in loose leaf form in binders, separate binders being
maintained for each class of materials. Another method is to arrange each binder according to
the location of stores separately for each go down. The sheets are numbered serially and
initialed by a responsible official so as to obviate the risk of removal or loss.

Maintenance of the bin card along with the store ledger at times considered a duplication of
work. It is however advantageous to maintain both the sets of records for the following
reason:
1. Bin cards are not accounting records. It is essential that these be located with the store
in various go downs.
2. Store ledger is maintained centrally in the cost office from where consolidated
information may be made available.
3. Store ledger constitutes a second check on the quantity recorded in the bin cards.
4. Frequent overall review of the store balance may be conveniently made with the help
of the store ledger.
Format of stores ledger has been discussed in the class

STORES LEDGER
DESCRIPTION: ---------------------------------------------------------------------------------------------------

MAX STOCK:
------------------------------------

CODE NO. :---------------------------------------------

MIN STOCK :
------------------------------------

BIN BO. :-------------------------------------------------

REORDER LEVEL:
-------------------------------NORMAL ORDER :
-------------------------------

RECEIVED

D
AT
E

OPE
NING
STO
CK

IN
VO
IC
E
NO
.

SU
PP
LI
ER

Q
TY
.

R
AT
E

ISSUED

TO
TA
L
VA
LU
E

D
AT
E

OPE
NIN
G
STO
CK

IN
D
E
N
T
N
O.

TO
WH
OM

Q
TY
.

R
AT
E

TO
TA
L
VA
LU
E

BALAN
CE

STOCK
VERIFICA
TION

B
A
L.
Q
T
Y

D
AT
E

VA
LU
E

QUA
NTIT
Y

Reconciliation of bin card and the stores ledger:

After posting in the bin cards , the receipt and the issue documents are valued and
then passed on to stores ledger clerk for entry ion the ledger. Thus normally there
should be no difference between the balance shown in the two sets of records. In
practice however difference arise mainly due to the following reasons:
1. Arithmetical errors in working out the balances.
2. Non posting of a document either in the bin card or in the store ledger. Sometimes
difference arise due to non receipt of documents by the store ledger clerk although it
may be posted in the bin card. This may be avoided if a list indicating the serial number
of all documents made out in a period is prepared check exercised to ensure that all the
documents listed are received and posted.
3. Posting in the wrong bin card or the wrong sheet of the stores ledger.
4. Posting of receipt documents in the issue column and vice versa.
5. Material s issued or received on loan or for approval are sometimes entered
temporarily in the bin cards only. Such transactions are not priced and they are not
posted in the store ledger.
Any difference between the bin card and the stores ledger defeats the purpose for
which the two separate sets are maintained and renders physical stock taking
ineffective as the correct book balance for the purpose of comparison with the physical
balance is not available. The difference should therefore be reconciled and corrected at
regular intervals. For this purpose it is essential to keep all the postings updated. If the
closing balance on a particular day do not agree , all the previous transactions should
be checked in order to locate the difference. Another method that facilitate automatic
reconciliation is to note the stock balance on all the receipt and issue documents after
they have been posted in the bin cards . At the time of posting these documents in the
stores ledge, the balance can be tallied with the store ledger balance. This methods
however involves extra work and its significance is eventually lost if postings are not
made strictly in the chronological order.

c) Continuous physical stock verification:

The perpetual inventory system is not complete without a systematic procedure for physical
stock verification of store. The bin card and the store ledger record the balance but their
correctness can be verified by means of physical verification only. The books indicate what the
balance should be or should have been where as a physical check would reveal what the
balances actually are. The process of physical check under the perpetual inventory system is
outlined below:
a) The stock verification staff plan the programme of stock taking in a systematic
manner with proper distribution of work among themselves about counting,
weighing, measuring and listing the stock.
b) Different sections of the store are taken up in rotation. The programme should be
so planned, that in the course of a year the entire range of goods should be
covered. Some items may need verification at intervals of less than a year
depending to their importance or the degree of control desired. On the other
hand bulky items of smaller values may be verified once in two to three years.
c) Notice of the particular stock to be verified each day is given to the store keeping
staff only on the day of actual verification.
d) The physical stock of an item in the store is counted, weighed or measured, as
the case may be and the results of the stock verification is suitably recorded in
the stock verification sheet
Format of stock verification sheet has been discussed in the class.
Advantages of perpetual inventory:
1. Physical stock can be counted and book balance adjusted whenever desired
without waiting for the entire stocktaking to be done at the end of the year.
Under this system therefore closing the organization for the purpose of
annual stock taking may not be necessary.
2. Prompt availability of stock figures enables quick compilation of profit and
loss account for interim period.
3. Discrepancies are easily located and thus corrective actions can be promptly
taken to avoid their recurrence. Periodical checking of store also fixes
responsibilities and has a moral check on the staff. This lessens the risk of
loss, pilferage etc.
4. Fixation of the various levels and check of actual balance in hand with those
levels assist the storekeeper in maintaining stocks within limits and in
initiating purchase requisition for then correct quantity at the proper time.
5. Correct stock figures are readily available for insurance for insurance purposes
and seeking loans against stocks from banks and other financial institutions.
6. A systematic review of perpetual inventory reveals the existence of surplus,
dormant, obsolete and slow moving materials so that remedial measures can
be taken in time.

2. Periodic inventory or stock verification:

Besides the method of continuous stock verification, there is another system known as
periodic stock verification. Under this system the entire stock is verified all at a time at
periodic intervals, usually once in a year. It is advantageous to have the verification at the

close of the annual accounting period so as to facilitate valuation of store for exhibition in
the final accounts. {Periodic stock taking usually necessitates the shutdown of the concern
and hence should be completed as soon as possible.
Reasons for surplus and deficiency in stock taking and accounting thereof:
Surplus and deficiency revealed in course of stock taking may arise due to the following:
1. Normal deficiency, evaporation, dry age, shrinkage etc of materials in the normal
course and the normal surplus, e.g. absorption of moisture etc.
2. Stores misplaced
3. Errors in stock taking
4. Accounting error such as non recording of receipts or issues or wrong posting of
receipts and issues or closing balance entries.
5. Errors in issues, short or over issues, wrong measures, difference in scale, issues in
small quantities etc.
6. Breakage and wastage due to wrong handling
7. Theft, pilferage and heavy losses.

Identification and prevention of slow and Non moving or obsolete

materials. Many business concerns carry large inventory that are slow-moving or nonmoving. Slow moving items are those whose rate of consumption or sale is low compared to
their stockholding so that heavy stocks to be maintained for a long time till the item are used
up. Dormant stores constitute a type of slow-moving items the consumption or sale of which is
occasional; there are long intervals between two consecutive issues. Non-moving items are
those which have not been issued for a long period of time. When such items are found to be
of no use to the business in any manner whatsoever in the near future, these are termed
obsolete stores.
It will be apparent from the definitions of the various terms given in the preceding
paragraph that no universally suitable norms can be fixed for these items. Each concern has,
therefore, to lay down specific guidelines in this regard such as what should be the optimum
rate of issue below which an item should be considered to be slow-moving, what should be the
issue interval for an item to be called dormant or what length of time should elapse before an
item is categorized as non-moving. For an item to be declared obsolete, two conditions should
be laid down, viz. that the item would not be required by any department of the company in
the near future. In certain cases, however, the first condition may not be satisfied and even
current items may suddenly become obsolete. Since the disposal of obsolete items results
mostly in loss, proper authorization at the appropriate level should be obtained for classifying
an item of material as obsolete.
A continuous review of the stores ledger folios will reveal the presence of slow-moving
and non-moving items of materials. These can also be identified at turnover, i.e. the ratio of
cost of materials used to average stock of materials is a good indicator of slow-and nonmoving items.

An efficient system of purchase and storage control should be able to obviate slow-and
non-moving materials but in practice, this is hardly so. The reasons for materials becoming
slow-moving, non- moving or obsolete are:(i)
(ii)
(iii)
(iv)

Failure of the purchase department.

Ineffective documentation and no review of the stores ledger.
Change in design and other technological changes in products and processes of
manufacture, use of substitute materials etc.
Failure to locate and report on slow-moving items and to recommend alternative use
on time. Some of these items become obsolete in course of time.

Whenever excess inventory arises due to slow or non-movement or due to obsolescence,

immediate action should be taken to reduce it through various means such as exploring
probable alternative use, return to the supplier or disposal by sale.

The ABC Method of Stores Control.

Based on the concept of Selective

Inventory Management, the ABC method is an analytical method of control which aims at
concentrating efforts in those sectors where attention is needed most. The method follows
from the general principle of Pareto (Wilfredo Pareto, Italy, 1896) that in any series of
elements to be controlled, a selected small fraction in terms of effect.
In large organizations, the materials may be classified into a number of categories according
to their importance, namely their value and frequency of replenishment during a period. One
category, which we may call the group A items, may consist of only a small percentage of the
total items handled but may have a combined value that constitutes a major or large portion
of the total stock-holding of the business. The second category, consisting of group B items
may be relatively less important. In the third group, consisting of C items, we may place the
rest which is of least importance, i.e. this group may consist of a very large number of items,
the value of which is not high.
The classification of the items into the categories A,B and C is made on the basis
of such factors as their value of consumption, investment value ,i.e. the value of stock, or
sales or profit potential ----the last named factor being more relevant in a trading concern. For
example, high value items of goods or items that yield high percentages of profit and thus
have more earning power per rupee of cost may be grouped under the A category.
Classification of the items under A, B and C categories may also be made according to
shortage (or stock-out) costs, length of lead times, seasonal availability, license laws etc,
besides their values.
Since the classification of inventory into various categories depends upon a large
number of factors such as the nature and varieties of the items, nature of the business and
the products manufactured, specific requirements of the concern etc, the ABC classification
may be made in several ways. Under one such procedure, all the items of inventory are first,
listed out and each item is valued. The value is obtained by multiplying the average estimated
consumption of an item during a period by its unit cost. The items in the list are then rearranged in the descending order of their values irrespective of their quantities. Thus, 200 kgs.

Of an item valued at Rs.20,000 will rank earlier to 20,000 kgs. Of an another item the value of
which is Rs.18,000. A running total of all the values is then taken. It will usually be found that
a large percentage of the total value is covered by the first few items in the list. A decision is
now taken as to the percentages of the total value (or the total number of items) which should
be covered by the A and B categories. For example, the management may decide that 70%
consumption value items, i.e. such of the items, starting in order from the first to the one
which makes up 70% of the total consumption value, may be considered to be A items; the
next set of items whose aggregate value covers, say 20% of the total, as B items and the
remaining (i.e. with 10% of the total value) as C items.

STOCK TURNOVER
The rate of stock turnover is calculated by the formula :

Cost of food consumed

Rate of stock turnover =

Average stock at cost

Example: Rs 2900 of food purchases were consumed in a 28 day trading period.

Opening stock on day one was valued at Rs 750
Closing stock on 28th day was Rs 650
Therefore the rate of stock turnover= 2900
(750+650)
= 2900
700
==4.14

This means that the total value of the stock turned over 4.14 times in 28 days trading period
and just under one weeks stock was held on an average at any time.

Management should lay down guidelines for the purchasing officer as to the value of the stock
is to be held at any period and the rate of stock turnover required. This would operate on a
sliding scale depending upon the volume of business being done. The rate of stock turnover

will vary with different types of establishments and because of such things as the size of store
and the location of the establishment relative to the supplier.
The problems of having a low stock turnover are:

a) that capital is tied up and cannot be used else where in the business
b) that there is an increased risk of spoilage.
c) That with an unnecessarily high stock level the pay roll may be greater than is
really necessary.
d) The insurance on the stock is higher than necessary.
e) There is increased chances of pilferage of raw material
The problems of having high turnover are:
a) Order processing cost increases due to increased number of orders
b) Too many number of transactions leading to complications in bill
processing.
c) Inventory carrying costs also increases.
The rate of stock turn over will differ between the two main groups of commodities that is
perishables and non perishables.

Perishables usually have a high rate of about 20 or more per 28 day period, with items being
frequently purchased on a daily basis. Non perishables have a much lower rate of about 4 per
28 day period with items being purchased once in a week.

ISSUE CONTROL
When goods are received into the store room from the goods in department, they should
be checked for quantity against a carbon copy of the goods ordered and signed for. The
quality of certain items can be further inspected as when opening cases of canned goods
any damaged cans would be identified. To facilitate effective rotation of stock, it is common
to mark the date on the cases and cans of goods. It is also quite common practice to mark
the prices on the packaging of each commodity to aid the pricing of issues. Items are
issued to the different department usually at set times in the day against a requisition note
signed by an authorized person, such as the head barman, restaurant manager, head
waiter, or the chef de partie in the kitchen. When the requisition is large one which would
take the store keeper some time to collect together, it should be handed to the stores the
evening before for collection in the morning or around lunch time for an afternoon
collection. Supplement issues are usually obtainable during the normal hours of the store
being open, but there should not be encouraged as to many issues of this nature would
prevent the store man from doing his routine work efficiently.

Format of a requisition slip or indent:

Why are Requisitions an essential part of Issue Control?

ANSWER :
a.
b.
c.
d.

It forms a basis of accountability on part of the store

It forms the record of materials issued to the kitchen
It gives the food cost for a particular period of time
It prevents any theft or mis-use of raw materials, as the user department is
accountable for the consumption.
e. It helps in assessing the performance of the kitchen
Since the issues are priced the chef comes to know the exact cost of raw materials issued to
him from the stores.
PRICING OF ISSUES
Whatever food is used by a department, there must be a system established so that the
department cam be fairly charged for what it has requisitioned for its use. The method of
pricing the food issued depends mainly on the type of commodity requisitioned.

Perishables:

In the case of perishable commodities, as already stated, they frequently go direct to the
kitchen as direct issues and are priced against the actual purchase price of the commodity.
When, however, a perishable storage system is operated the daily issues can be more
efficiently controlled and a much more accurate gross profit calculated for each day. Some
intricacies do occur under this method at times e,g the butchery department will draw food
items from the stores, manufacture them into process item and return to the storage to be
issue at a later date. The method of costing here must be clearly worked out as often central
butchery department are required to be self sufficient. Also the purchasing officer and then
food and beverage manager having closely decided that was cheaper and more efficient to
have a butchery department in the establishment, requires to maintain their previous make or
buy decision at periodic intervals. Perishables foods may be pricd out in any of the seven
method by which non perishable food can be priced. In some instances the method used
would be restricted to large establishment because of the degree of skill necessary to install
and control.
Non perishables:In the case of non perishables, one of several different methods may be
adopted for pricing of the issues.Actual purchase price. This may be applied to ityems which
are infrequently purchased and of which only a small stock is held, and also for slow moving
items.
here are different methods of pricing materials issue. The various methods used fall under the
following main categories:
I. Cost Price Methods
(a) First in First out (FIFO)
(b) Last in First out (LIFO)
(c) Base Stock
II. Average Price Methods
(a) Simple Average.
(b) Weighted Average.
III. Notional Price Method
(a) Standard Price.
(b) Inflated Price.
(c) Replacement price.

First in First out Method (FIFO)

Under this method materials are used in the order in which they are received. In other words,
materials received first are issued first. This process is repeated throughout.
The price of the earliest consignment is taken first and when that is exhausted, the price of
the next consignment is adopted and so on. This method is most suitable for use where the
material is slow moving and has comparatively high unit cost This method is also useful in
times of falling prices because the issue price of material to the job will be high while the
replacement cost of material will be below.

Last in First Out Method: (LIFO)

This method is exactly the opposite of FIFO method. Under this me materials received last are
issued first. The price of the material to be issued would the cost price of the last lot of
materials purchased.
This method is useful during t period of rising prices because materials will be issued from the
latest consignment a price which is closely related to the current price levels. Under this
method product' cost is calculated on a basis which approximates to replacement cost.

Base Stock Price

This is not a distinct method of pricing materials issue. This method is based o^ the principle
that a certain minimum quantity of material is always maintained in to ensure continuous
production.
This minimum stock is treated as fixed asset and is called as base stock. Since minimum stock
is created out of first lot of material purchased, it is always valued at cost price of first lot of
materials. The quantity in excess of this base stock is issued at a price similar to FIFO or LIFO
method.
This bad stock method operates in conjunction with some other methods like FIFO or LIFO and
is called Base Stock - FIFO method or Base Stock - LIFO method. The advantages of FIFO and
LIFO are applicable in this method.

Simple Average Price Method

Under this method, materials issued are valued at average price. This is calculated by dividing
the total of the price of the materials on the stock from which the material to be priced could
be drawn by the number of prices used in that total.
Unit pieces of material in stock Issue Price / Number of purchases.
A new simple average price is to be determined when a fresh receipt is made. The rate is also
revised when an earlier consignment is exhausted.

Weighted average price method:

When using the weighted average method, divide the cost of goods available for sale by the
number of units available for sale, which yields the weighted-average cost per unit. In this
calculation, the cost of goods available for sale is the sum of beginning inventory and net
purchases. You then use this weighted-average figure to assign a cost to both ending
inventory and the cost of goods sold.
The net result of using weighted average costing is that the recorded amount of inventory on
hand represents a value somewhere between the oldest and newest units purchased into
stock. Similarly, the cost of goods sold will reflect a cost somewhere between that of the
oldest and newest units that were sold during the period.
The weighted average method is allowed under both generally accepted accounting principles
and international financial reporting standards.

Standard Price:
Standard Price is predetermined price fixed on the basis of a specification of all the factors
affecting that price. Firms which follow standard costing will record all the receipts and issues
of materials at the standard price which will be fixed in advance. In this case, both the receipts
and issues will be costed at a standard rate.
In case the purchase price is more or less than the standard price, the difference is charged to
an account which is known as the standard price, the difference is charged to an account
which is known as Price Variance Account. For example, if the standard price is 5 per unit
and the actual price is Rs. Rs. 5.50, then the Stores Ledger will be debited at the rate of Rs. 5
and Price Variance Account with 50 paise per unit. Issues are all costed at the standard price.
It serves to measure efficiency in use of materials, also it saves clerical labour.

Inflated Price:
Where materials are subject to natural wastage the cost may be inflated to account for the
wastage. Thus, if 100 units of materials are bought for Rs. 150 and if, out of this, only 90 units
can be normally used (the other ten going to waste), the issues may be costed not at 1.50 per
unit but at Rs.1.67 per unit, i.e. 150 h- 90. With the actual issue of 90 units the amount will be
exhausted and so will the actual quantity. Both in the stores ledger a quantity balance of 10
units will remain; it should be written off.

Replacement price:
Here cost of the materials in hand is not considered. When an issue is made the market price
is ascertained and the issue is priced at that price. It is claimed that where quotations have to
be made, this is the best method since it would reflect the latest competitive condition. But
this confuses estimating, with costing.
It is also claimed for this method that it would automatically disclose efficiency or inefficiency
in buying. The Stores Ledger will use cost for receipts and the market price for issues. Higher
rate for issues than for receipts will disclose efficiency in buying (and vice versa). This will
leave a proportionately small amount for the quantity in hand. There may even be a negative
amount for a positive quantity balance.

It is, however, submitted that this would unnecessarily complicate costing books, and, in any
case, costing has nothing to do with profits or losses as such. This method introduces an
element of profit or loss in the cost itself because of the use of market price rather than the
cost for issue of materials. It is better to avoid the use of the method even though the market
price would naturally be taken into consideration at the time of sending tenders or fixing
prices.
The method is also called Replacement Cost Method since the market price on the date of
issue means the price at which present stock could be replaced by new stock. The term
Replacement Price has been defined by the Institute of Cost and Management Accountants
of England as:
The price at which there could be purchase of an asset identical to that which is being
replaced or revalued.

In most small and medium sized catering establishments it would be convenient to apply the
actual purchase price method for perishable commodities and the average price method in
case of non-perishables.

1. Explain the issuing procedure

ANSWER :
a. A requisition is prepared in three copies by the user department and signed by the concerned
authority.
b. The requisition is then sent to the stores.
c. The goods are then weighed and measured as per the requirement in the requisition.
d. They are then issued if available in the required quantities.
e. The issues are then priced as per the practiced norms
f. Any balance not issued is mentioned on the requisition
g. One copy goes to the controls one remains with the store and the `book copy
remains in the user department.