Semester Project

MATERIAL MANGMENT SYSTEM

FOR ORGANIZATIONS

Prepared By:

Student Name: Muhammad Asif KhanStudent ID:MB-2-05-51271Semester: Fall-2015

Submitted To:Course Name: Managerial Accounting

Course ID: 70404Course Instructor: Shaham Ahmed

Acknowledgment

This semester project has been written to complete the compulsory requirement to earn the three credit hours of Managerial Accounting (70404) course of MBA program of PAF-KIET (City Campus). Upon completion of the semester project, I would like to thanks to the course instructor Mr. Shaham Ahmed, on his continuous guidance throughout the accomplishment of the project. His supervision has enabled me to fully understand the importance of the subject in real working environment and how theses knowledge can be effectively utilize by the students in their professional career, irrespective of their area of working or specialization.

Page 2 of 23

Preamble

This semester project has been written to complete the compulsory requirement. The purpose of this semester project is to completely adhere with the material management and system for an organization. How mangers can effectively utilize the most important ‘M’ of management to enhance the organization productivity and profitability through minimizing the overall inventory cost of the organization and ultimately the product cost.

It explains the methods and procedures that can help an organization to effectively manage its material resources, and record relevant information in systematic manner that can provide accurate and up to date information to the management for the effective decision making.

Page 3 of 23

Definition of Materials Management

Material management is an approach for planning, organizing, and controlling all those activities principally concerned with the flow of materials into an organization.

The scope of Materials Management varies greatly from company to company and may include material planning & control, production planning, purchasing, inventory control, in-plant materials movement, and waste management (scrap handling).

It is a business function for planning, purchasing, moving, storing material in optimum ways which help organization to minimize the various costs like inventory, purchasing, material handling and distribution costs.

Objectives Of Material Management:

The fundamental objectives of the Materials Management function ,often called the famous 5 Rs of Materials Management, are acquisition of materials and services:

of the right quality  in the right quantity  at the right time

Page 4 of 23

 from the right source at the right price

From the management point of view , the key objectives of Material Management are : 

To buy at the lowest price , consistent with desired quality and service

To maintain a high inventory turnover , by reducing excess storage , carrying costs and inventory losses occurring due to deteriorations , obsolescence  and pilferage

To maintain continuity of supply , preventing interruption of the flow of materials and services to users

To maintain the specified material quality level and a consistency of quality which permits efficient and effective operation

To develop reliable alternate sources of supply to promote a competitive atmosphere in performance and pricing

To minimize the overall cost of acquisition by improving the efficiency of operations and procedures 

To hire, develop, motivate and train personnel and to provide a reservoir of talent 

To develop and maintain good supplier relationships in order to create a supplier attitude and desire furnish the organization with new ideas , products, and better prices and service

To achieve a high degree of cooperation and coordination with user departments

To maintain good records and controls that provide an audit trail and ensure efficiency and honesty

To participate in Make or Buy decisions 

Materials Management thus can be defined as that function of business that is responsible for the coordination of planning, sourcing, purchasing, moving, storing and controlling materials in an optimum manner so as to provide service to the customer, at a pre-decided level at a minimum cost.

Scope of Materials Management:

The scope is vast.  Its sub functions include materials planning and control, purchasing, stores and inventory controlling, but not limited.

Basically, under its scope are : 

emphasis on  the acquisition aspect inventory control and stores management material logistics, movement control and handling aspect purchasing, supply , transportation , materials handling etc supply management or logistics management all the interrelated activities concerned with materials

Sub Functions of Material Management:

In its process of managing, materials management has such sub fields as

Page 5 of 23

inventory management, value analysis, receiving, stores and management of obsolete, slow moving and non moving items. The various activities represent these four functions:

Planning and control Purchasing Value analysis and Physical distribution

The broad materials function has the following as identified  and interlinked sub functions:

Materials planning and control: Materials required for any operation are based on the sales forecasts and production plans. Planning and control is done for the materials taking into account the materials not available for the operation and those in hand or in pipe line. This involves estimating the individual requirements of parts, preparing materials budget, forecasting the levels of inventories, scheduling the orders and monitoring the performance in relation to production and sales.

Purchasing: Basically, the job of a materials manager is to provide, to the user departments right material at the right time in right quantity of right quality at right price from the right source. To meet these objectives the activities undertaken include selection of sources of supply, finalization of terms of purchase, placement of purchase orders, follow up, maintenance of relations with vendors, approval of payments to vendors, evaluating, rating and developing vendors

.Stores: Once the material is delivered, its physical control, preservation, minimization of obsolescence and damage through timely disposal and efficient handling, maintenance of records, proper locations and stocking is done in Stores.  

Inventory control: One of the powerful ways of controlling the materials is through Inventory control. It covers aspects such as setting inventory levels, doing various analyses such as ABC, XYZ etc, fixing economic  order quantities (EOQ), setting safety stock levels, lead time analysis and reporting.

Materials management can thus also be defined as a joint action of various materials activities directed towards a common goal and that is to achieve an integrated management approach to planning, acquiring, processing and distributing production materials from the raw material state to the finished product state.

Page 6 of 23

Why Material Management?

Effective materials management is essential in order to:

Provide the best service to customers, Produce at maximum efficiency, and Manage inventories at predetermined levels to stabilize

investments in inventories.

Successful materials management requires the development of a highly integrated and coordinated system involving sales forecasting, purchasing, receiving, storage, production, shipping and actual sales.

Both theory of costing materials and other inventories and the practical mechanics of cost calculations and record keeping must be considered.

Costing materials presents some important often complex, and sometimes highly controversial questions concerning the costing of materials used in production and the cost of inventory remaining to be consumed in a future period. In financial accounting, the subject is usually presented as a problem of inventory valuation, in cost accounting; the primary problem is the determination of the cost of various materials consumed in production and a proper charge to the cost of goods sold.

Materials management deals with:

Producers for materials procurement and use. Materials costing methods.

Page 7 of 23

Inventory valuation at cost or market, whichever is lower. Inventory pricing and interim financial reporting. Costing procedures for scrap, spoiled goods, and defective

work.

PROCEDURE FOR MATERIAL PROCURMENT AND USE:

Although production processes and materials requirements vary according to the size and type of industry, the cycle of procurement and use of materials usually involves the following steps:

Engineering, Planning and Routing: It determines the design of the product, the materials specifications and the requirements at each stage of operations.Engineering and planning not only determine the maximum and minimum quantities to run and the bill of materials for given products and quantities, but also corporate in developing standards where applicable.

The Production Budget: It provides the master plan from which details concerning materials requirements are eventually developed.

The Purchase Requisition: Inform the purchasing agent concerning the quantity and type of

materials needed.

The Purchase Order: Contacts for appropriate quantities to be delivered at specified dates to assure uninterrupted operations.

The Receiving Report: Certifies quantities received and may report results of inspection

and testing for quality.

The Materials Requisitions:

Page 8 of 23

Notified the store room or warehouse to deliver specified types and quantities of materials to a given departmental at a specified time or is the authorization for the storeroom to issue materials to departments.

The Material Ledger Cards: Record the receipt and the issuance of each class of materials and provide a perpetual inventory record.

PURCHASES OF PRODUCTIVE MATERIALS:

The actual purchase of all materials is usually made by the purchasing department headed by a general purchasing manager.

The purchasing department is responsible to:

Receive purchase requisitions for materials, supplies, and equipment;

Keep informed concerning sources of supply, prices and shipping and delivery schedules;

Prepare and place purchase orders, and Arrange the purchasing, the receiving, and the accounting

departments.

Purchasing Forms:The principal forms required in purchasing are the requisition and the purchase order.

Purchase Requisition:

The purchase requisition originates with:o A stores or warehouse clerk, who observes that the quantity on

hand is at a set ordering minimum,o A materials ledger clerk, who may be responsible for notifying

the purchasing agent when to buy,o A works manager, who foresees the need for materials or

unusual quantities,o A research, engineering or other department employee or

supervisor who needs materials or supplies of special nature, oro An information system that has been installed or developed to

produce replenishment advice for the purchasing department.o One copy remains with the originator, and the original is sent to

the purchasing department.

SPECIMEN OF PURCHASE REQUISITION

Page 9 of 23

Company Name PR No. _______

PURCHASE REQUISITION Date: ________

Requesting Department: ________________________________

Item # Qty Ref # Description Purpose Price / Unit

Deliver to: ____________________________

Required date of delivery _______________

Suggested Suppliers:_________________________________ _________________________________ _________________________________

Signed

Approved

Purchase Order: The purchase order, signed by is a written authorization to a vendor to supply specified quantities of described goods at agreed terms and at designated time and place.

The purchase order gives the vendor a complete description of the goods and services described the terms, the prices, and the shipping instructions.

SPECIMEN OF PURCHASE ORDER

Page 10 of 23

Receiving: The fundamentals of the receiving department are to:

o Unload and unpack incoming materials,o Check quantities received against the shipper’s packing

list,o Identifying goods received with descriptions on the

purchase order,o Notifying the purchasing department of discrepancies

disco…….,o Arrange for inspection when necessary,o Notifying the traffic department and the purchasing

department of any damage in transit, and o Route accepted materials to the appropriate factory

location.

The receiving report shows the purchase order number, the account number to be charged, the name of the vendor, details relating to transportation, and the quantity and type of goods received. The reports also include the inspection department’s note about quality & quantity of goods.

SPECIMEN FO GOODS RECEIVING

Page 11 of 23

ISSUING AND COSTING OF MATERIALS

To control the quantity and cost of materials, supplies, and services requires a systematic and efficient system of purchasing, recording, and storing. Equally necessary is a systematic and efficient procedure for issuing materials and supplies.

Material Requisition:The materials requisition is a written order to the storekeeper to deliver materials or supplies to the place designated or to give the materials to the person presenting a properly executed requisition.

The materials requisition is the basic form used to withdraw materials from the storeroom.

SPECIMEN OF MATERIAL REQUISITION

Page 12 of 23

Materials Requisitioned Journal:Material Requisitioned Journal is necessary to post the materials withdrawals from the store. The journal is form of materials summary. At the end of the month, the totals of the various columns are posted directly to the ledger accounts.

Bill of Materials:The bill materials, a kind of master requisition, are a printed or duplicated form that lists all materials and parts necessary for a typical job or production run. Time is saved and efficiency is promoted through the use of a bill of materials. When a job or production run is started, all the materials listed on the bill of materials are sent to the factory are issued on a pre arranged time schedule.

Just-In-Time Inventory Procedures:Manufacturing processes are increasingly being based on the receipt of raw materials from suppliers “Just-In-Time” for their use on the plant floor.When a firm’s raw materials can be handled in this immediate use mode, the traditional storeroom, receipt, storage and issuance procedures are abbreviated. Storage, except for brief periods directly on the plant floor is eliminated. Receipt and issuing documentation can be combined. As a result, there is saving in paperwork and, more importantly a savings in inventory investment, storage and handling.

Material Ledger Card: Perpetual Inventory:

In perpetual inventory system, an entry is made each time the inventory is increased or reduced.Materials ledger cards or stock ledger sheets constitute a subsidiary materials ledger controlled by the materials or inventory accounts in the general ledger. Materials ledger cards commonly show the account number, description or type of material, location, unit measurement, and maximum and minimum quantities to carry.

Page 13 of 23

Physical Inventory : The alternative to a perpetual inventory system is the periodic inventory system, whereby purchases are added to the beginning inventory, the ending (remaining) inventory is considered the cost of material issued.Regardless of whether a periodic or a perpetual inventory system is used, periodic physical counts are necessary to discover and eliminate discrepancies between the actual count and the balances on materials ledger cards.These discrepancies may be due to errors in transferring invoice data to the cards, mistakes in costing requisitions, unrecorded invoices or requisitions or spoilage, breakage and theft.

MATERIAL COSTING METHODS

The ultimate objective of material management is to produce accurate and meaningful figures of the cost of goods sold for cost accounting.The figures can be used for purpose of control and analysis and are eventually matched against revenue produced in order to determine operating income.The more common methods of costing materials revenue produced in order to determine operating income.

The more common methods of costing materials issued and inventories are:

First-In-First-Out (FIFO) Average Costing Last-In-First-Out (LIFO) Other Methods-such as

o Market Price at date issue, or Last purchase price,o Standard Cost

First-In-First-Out (FIFO) Method of Costing:

Page 14 of 23

The first-in-first-out (FIFO) method of costing is used to introduce the subject of material costing. The FIFO method of costing issued materials used should carry the actual experienced cost of the specific units used. The method assures that materials are issued from the oldest supply in stock and that the cost of those units when placed in stock is the cost of those same units when issued. However, FIFO costing may be used even though physical withdraw is in a different order. Advantages claimed for the FIFO method are:Materials used are drawn from the cost records in a logical and systematic manner.Movement of materials in a continuous, orderly, single-file manner represents a condition necessary to end consistent with efficient materials control, particularly for materials subject to depreciation, decreasing and quality or style.

The FIFO method is recommended whenever: The size and cost of materials units are large, Materials are easily identified as belonging to a particular

purchased lot, and Not more than how two or three different receipts of the materials

are on a materials card at one time.

Average Costing Method:Issuing materials at an average cost assumes that each batch taken from the storeroom is composed of uniform quantities from each shipment in stock at the date of issue.Average costing may be used even though the physical withdrawal is in an identifiable order. If materials tend to be made up of numerous small items low in unit cost and especially if prices are subject to frequent change, average costing is advantageous because:

It is realistic costing method to management in analyzing operating results and appraising future production.

It minimizes the effect of unusually high or more stable cost estimates for future work.

It is a practical and less expensive perpetual inventory system.

Page 15 of 23

Last-In-First-Out (LIFO) Method of Costing:The last-in-first-out (LIFO) method of costing materials issued is based on the promise that materials units issued should carry the cost of the most recent purchase, although the physical flow may actually be different. The method assumes that the most recent cost (the approximate cost to replace the consumed units) is most significant in matching cost with revenue in the income determination process.

Advantages of the LIFO costing method are: Materials consumed are priced in a systematic and realistic

manner. It is argued that current acquisition costs are incurred for the purpose of meeting current production and sales requirements, therefore the most recent costs should be charged against current production and sales.

Unrealized inventory gains and losses are minimized, and reported periodic operating profits are stabilized in industries subject to sharp materials price fluctuations.

Inflationary prices of recent purchases are changed to operations in periods of rising prices, thus reducing profits, resulting in a tax saving, and there with providing a cash advantage through deferral

Page 16 of 23

of income tax payments. The tax deferral creates additional working capital as long as the economy continues to experience an annual inflation rate increase.

The advantages of the LIFO costing method are: In a period of declining volume and /or disinflation, the LIFO

method will result in increasing profits, thus increasing taxes and therewith causing as cash disadvantage.

LIFO is a “cost only” method, with no write to the lower of cost or market allowed for income tax purpose.

Under LIFO, the balance sheet reflects the earliest inventory costs incurred. Consequently, in periods of rising prices, the company’s inventory, current and total assets, and stockholder’s equity are understated.

An end-of-period variation is the level of inventory purchases can permit income manipulation, using LIFO procedures that would not occur with the use of LIFO.

Other Materials Costing Method:Besides LIFO, FIFO & Average Cost methods of costing materials units into work in process, various other methods exist:

o Market Price at Date of Issue or Last Purchase Price: Materials precisely standardized and traded on commodity exchanges such as cotton, wheat, copper, or crude oil, are sometimes costed in to production at the quoted price at the date of issue. In effect, this production substitute replacement cost for experienced or consumed cost and has the virtue of changing materials into production at a correct and significant cost.

o Standard Cost: This method change issued materials at a predetermined or estimated cost reflecting a normal or is expected future cost. Receipts and issues of materials are recorded in quantities only on the materials ledger cards or in the computer data bank, thereby simplifying the record keeping and reducing clerical or data processing costs.

MATERIAL PLANNING AND CONTROL

The planning and control of inventory from product design to find delivery are of considerable strategic significance to management. Inventories serve as a cushion between the production and consumption of goods and exist in various forms materials waiting processing, partially completed products or components, and finished goods at the factory, in transit at warehouse, distribution points, and in retail outlets.An inventory planning and control method should have but one goal that might be expressed in two ways:

To minimize total cost, or To maximize profit within specified time and resource allocations.

Planning Materials Requirements:

Page 17 of 23

Materials planning begin with the design of product. Whether it is a regular product or a special contract, a series of planning stages is necessary to get materials into production.In the preliminary stages, the engineering department studies the proposal, design, blueprints and other available specifications and prepares a product requirement statement. The tooling department studies the work details necessary to manufacture the product in a particular plant.The manufacturing control department examines production in terms of existing and contemplated production schedules. The material planning and cost estimating departments study the cumulative information and submit a cost estimate for the production proposal. The long-range or economic planning section suggests a product price based on considerations of present product lines, economic co ordinations of present product lines, economic conditions and expectations, company policies, and expansion plans. Executive management must finally decide whether to proceed with, reject, or modify the proposed.To plan manufacturing requirements, every stock item or class of items must be analyzed periodically to:

Forecast demand for the next month, quarter, or year. Determine acquisition lead time. Plan usage during the lead time. Establish quantity on hand. Place units on order. Determine reserves or safety stock requirements.

Materials planning deals with two fundamentals factors - the quantity and the time to purchase. Determination of how much and when to buy involves two conflicting kind of cost – the cost of carrying inventory and the cost inadequate carrying.

Materials Control:Materials control is accomplished through functional organization, assignment of responsibility, and documentary evidence obtained at various stages of operations. These stages begin with the approval of sales and production budgets and with the completion of products which are ready for sale and shipment to warehouse stocks or to customers.

The control of materials must meet two opposing needs:

Maintenance of an inventory of sufficient size and diversity for efficient operations, and

Maintenance of a financially favorable inventory.

A basic objective of materials control is the ability to place an order at the appropriate time the best source to acquire the proper quantity at the right price and quality. Effective inventory control should:

1. Provide a supply of required materials and parts for efficient and uninterrupted operations.

2. Provide ample stock in periods of short supply (seasonal, cyclical, or strike), and anticipate price changes.

Page 18 of 23

3. Store materials with a minimum of handling time a cost and protect them from loss by fire, theft elements and damage through handling.

4. Keep inactive, surplus, and obsolete items to a minimum by systematic reporting of product changes which affect materials and parts.

5. Assure adequate inventory for prompt delivery to customers.6. Maintain the account of capital invested in inventories at a

level consist with operating requirements and management’s plans.

Control Principles:Inventory control systems and techniques should be based on the following principles:

1. Inventory is created by purchasing:a. Materials and parts, andb. Additional labor and overhead to process the materials

into finished goods.2. Inventory is reduced through sales and spoilage.3. Accurate sales and production schedule forecasts are

essential for efficient purchasing, handling, and materials investment.

4. Management policies, which attempt to balance size and diversity of inventory, are the greatest factor in determining inventory investment.

5. Ordering materials is a response to forecasts, scheduling production controls inventory.

6. Inventory records alone do not achieve inventory control.7. Control is comparative and relative, not absolute. It is

exercised by people with varying experience and judgment.Rules and procedures guide these individuals in making evaluations and decisions.

Organizing for Materials Control: Material Controls is commonly centralized in one department called the materials management or materials control department. Size of the company, number of purchased items in a finished product, time required to manufacture a product, and physical size, weight and unit value of items are factors that influence the organization and personnel required for effective materials control.

A materials management department may include some or all of the following sections:

o Planning and Scheduling o Purchasingo Receivingo Inspectiono Storeso Materials Handlingo Warehousing

Page 19 of 23

o Packingo Traffico Shippingo Statistical Analysis

Material Control Methods:Materials control methods differ primarily in the care and cost expanded. Critical items and high-value items require greater attention than do low-value items.Control methods include the:

Order cycling, The min-max, and Just-in-time

1) Order Cycling Method or Cycling Review Method: This method examines periodically (e.g. each 30, 60, or 90 days) the status of quantities on hand of each item or class.Different companies use different time periods between reviews and may use different cycles for different types of materials. High value items and that would tie up normal operations if out of stock usually require a short review cycle. On low-cost and non critical items, a longer review cycle is common, since these materials would be ordered in large quantities and stock out would not be as costly.

2) Min-Max Materials: This method is based on time premise that the quantities of most stock items are subject to definable limits. A maximum quantity for each item is established. A minimum level provides the margin of safety necessary to prevent stock outs during a recorder cycle. The minimum level sets the order point, and the quantity to order will usually bring inventory to the maximum level.

3) Just-in-Time Materials Control: The saving that can result from a minimum inventory investment and associated carrying costs has led to increasing attention to a just-in-time (JIT) system. Such a procedure calls for heightened coordination with suppliers so that materials arrive immediately prior to their use.Japanese industry is credited with pioneering this procedure that is now being used by some U.S. manufacturers. For example, General Motors has implemented this approach, with a fully automated JIT parts inventory system.

4) Selective Control: The ABC Plan:

Segregation of materials for selective control called the ABC plan is an analytical approach based upon statistical averages. The ABC Plan, measures the cost significance of each materials item.

o “A” or High Value, items would be under the tightest control and the responsibility of the most experienced personnel.

o “B” or Medium-Value, items would under the less strict control as compare to A.

Page 20 of 23

o “C” or Low-Value, items would be under simple physical controls, such as the bin-system with safety stocks.

The plan provides an impressive saving in materials’ cost. The ABC plan concentrates on important items and is also known as control by importance and exception (CIE). The procedure for segregating materials for selective control consists of six steps.

Determining future use in units over the review forecast period month, quarter or year.

Determining the price projected price per unit by the projected unit requirements to determine the total cost of that item during the period.

Arranging the items in terms of total cost, listing first the item with the highest total cost.

Computing for each item its percentage of the total for:o Units-number of units of each item divided by total units of all

items, ando Total cost-total cost of each item divided by total cost of all

materials. Plotting the percentages on a graph.

CONTROLLING MATERIALS IN PROCESSThe materials cost control responsibility is not ended when materials are requisitioned for production. Until goods are finished, packed, sold, and shipped, inventory control problems and cost savings potentials exist. This is particularly true of in process inventories, which are intimately related to production processes and schedules but often are not controlled. Generally, the objective is to maintain inventory levels based on maximum production or the lowest unit cost.Work in process inventory investment is largely determined by the time necessary for goods to pass through the production process. The time involved includes:

1. Set up time-preparing to run a job on a machine.2. Running time-actually performing the work.3. Queue Time- the amount of time that the job spends waiting to be

worked on.4. Move time-transporting the goods to the next processing location.5. Wait time-time spent waiting to be moved.

Controlling Finished Goods:An accurate sales forecast is the key to effectively managing finished goods inventories and meeting delivery dates. This forecast must be communicated to production control departments in order to develop production schedules for meeting sales commitments.

To meet customer performances and competition, many product lines feature a growing array of colors, sizes, and optional equipment. This results in added finished goods inventory items and more work in process inventory. The need for tighter control becomes increasingly important.

Control of Obsolete and Surplus Inventory:

Page 21 of 23

Almost every organization is faced with the problem of surplus and obsolete inventory at one time or other. Whatever the many possible reasons for such conditions, some action is required in order to reduce or eliminate these items from inventory and free the related capital.

To accomplish a reduction, management should first make certain that the buildup will not continue due to present ordering policies, and should then take steps to dispose of stock.

Accurate perpetual inventory records showing acquisitions and issue quantities and dates, as well as periodic review of the records, are necessary to identify obsolete and surplus items.

Obsolete inventory usually results from changing a design or dropping a product. Prompt sale of the inventory for the first reasonable offer in often the best policy.

Reporting on Inventory Control: Management requires timely information concerning inventory control efforts. This information should be reported in a concise, easily understood form.Quantitative as well as graphic comparisons of actual and budgeted inventory use to report inventory trend within the organization.

THE IMPACT OF MODERNIZER FACTORY PROCESSES ON MATERIAL MANAGEMENT

In inventory numbers, factories are moving from manufacturing processes involving manual and / or fixed automated systems. The shift is toward flexible manufacturing system, which consist of an integrated collection of automated production processes, automated materials movement, and computerized system controls to utilize the facilities in the efficient manufacture of a highly flexible variety of products. The extent of product variety is constrained by the need for the products to share certain broad characteristics that allow grouping within a particular family of products while maintaining considerable flexibility.

Flexible manufacturing systems impact upon and alter many of the factors that management should consider in evaluating a system, especially the planning and control of raw materials and work in process inventories. The affect of each system-manual, fixed automation and flexible manufacturing–on these factors is summarizing as follows:

FACTORSMANUAL SYSTEMS

FIXED AUTOMATION SYSTEMS

FLESIBLE MANUFACTURING SYSTEMS

Number of Kinds of Products Many Only one SeveralViable production volumes Low High MiddleProduct Quality Varies Tightly ConsistentSet up times High Very High ShortLearning Curve Effect Substantia Depends on None

Page 22 of 23

l Degree of Automation

Learning Times (Per Unit) to supply customer demands

Usually High

Moderate Moderately Low

Direct Labor Cost Total / Per Unit

High Low Very Low

Inventories Materials work in Process

High High High

Machine Utilization Low High HighSpace Requisition Extensive Extensive ModerateCapital Cost Low High HighSensitivity to effects of breakdown of single machine or group of machines

Low High High

Responsiveness to change in demand

High Low High

EDP (Electronic Data Processing) For Material Management:The preceding descriptions of invoice approval and payment were for manual operations performed by an accounts payable clerk or an invoice clerk.

In an electronic data processing (EDP) system, the computer-to a great extent-replaces the clerk. Upon receipt of the invoice (the source document), the accounts payable clerk enters the account distribution on the invoice. The data are then directly inputted from the invoice to the computer data bank via a terminal device. The data are edited, audited, and merged with the purchase order and the receiving order data, both of which have been stored in the computer data bank. The common matching criterion on all documents is the purchase as all documents is the purchase order number. Quantities, monetary values (amounts), due dates, terms and unit prices are matched. When in agreement, the cost data are entered in the accounts payable computer file with a date for later payment, or a printout of a check is transmitted for payment. Listings in journal form can be produced as needed.

The above proceed are deals with the accounts payable phase of a purchase transaction of equal importance is the need for posting the data in quantities and amounts to the materials inventory file in the EDP system. The information enters the EDP system from either the invoice or the invoice or the invoice approval from, which would have to include all computer necessary data. The internal computer program updates the materials inventory file. The withdrawal of materials could also be computerized, so that manual postings to the materials inventory file, as well as other manual operations, would be eliminated.

Page 23 of 23