by Control of Materials
Control of materials refers to the process of managing and monitoring the use of materials within a business or organization. It involves ensuring that materials are used efficiently and effectively, and that they are not wasted or stolen. The objective of material control is to maintain adequate levels of materials while minimizing the costs associated with inventory holding and ordering.
Effective material control can help a business to reduce costs, improve efficiency, and increase customer satisfaction by ensuring that products are produced and delivered on time and to the required quality standards. Material control can be achieved through the use of various tools and techniques, such as material requirements planning (MRP), just-in-time (JIT) inventory management, and barcode scanning systems.
Material control involves several activities, including:
- Procurement: The process of purchasing or acquiring materials from suppliers.
- Receipt and Inspection: The process of receiving materials from suppliers and checking to ensure that they meet the required specifications.
- Storage: The process of storing materials in an appropriate location to prevent damage, theft or loss.
- Issuing: The process of releasing materials from storage to the production department or other areas of the business where they are needed.
- Reordering: The process of determining when to reorder materials based on the levels of inventory and demand forecasts.
Control of Materials formula and example
There are several formulas that can be used for material control, depending on the specific aspect of control that is being considered. Here are some examples:
Material Usage Variance Formula:
Material Usage Variance = (Actual Quantity Used – Standard Quantity Allowed) x Standard Cost per Unit
This formula is used to calculate the variance between the actual quantity of material used and the standard quantity allowed for production. It helps to identify if there are any inefficiencies or wastage in the use of materials. For example, if a company uses 500 pounds of material to produce 1,000 units of a product, but the standard quantity allowed is 450 pounds, the material usage variance would be:
Material Usage Variance = (500 – 450) x $2 = $100
This indicates that the company used $100 worth of extra material, which could be due to inefficiencies or wastage.
Economic Order Quantity Formula:
EOQ = √(2DS / H)
This formula is used to calculate the optimal order quantity for materials, taking into account the costs of ordering and holding inventory. The variables in the formula represent:
D: Annual demand for the material
S: Cost of placing one order
H: Holding cost per unit per year
For example, if a company has an annual demand for a material of 10,000 units, a cost of $100 per order, and a holding cost of $2 per unit per year, the economic order quantity would be:
EOQ = √(2 x 10,000 x $100 / $2) = 1,000 units
This indicates that the company should order 1,000 units of the material at a time to minimize the total costs of ordering and holding inventory.
Material Turnover Formula:
Material Turnover = Cost of Goods Sold / Average Inventory of Materials
This formula is used to measure the efficiency of a company’s use of materials. It calculates how many times the average inventory of materials is turned over (used up and replaced) during a period of time. For example, if a company has a cost of goods sold of $1,000,000 and an average inventory of materials of $200,000, the material turnover would be:
Material Turnover = $1,000,000 / $200,000 = 5 times
This indicates that the company turns over its inventory of materials five times during the period, which could be compared to industry benchmarks to assess its efficiency in managing materials.
Control of Labour
Control of labor allocation refers to the process of managing and monitoring the use of labor within a business or organization. It involves ensuring that labor is utilized efficiently and effectively, and that labor costs are minimized while maintaining the desired levels of productivity and quality.
The objective of labor allocation control is to ensure that the right number of employees are assigned to the right tasks at the right time, based on the production needs of the organization. Effective labor allocation control can help a business to reduce costs, increase efficiency, and improve customer satisfaction by ensuring that products or services are produced and delivered on time and to the required quality standards.
Effective labor allocation control can be achieved through the use of various tools and techniques, such as labor planning software, time and attendance tracking systems, performance management systems, and lean manufacturing principles. By implementing these tools and techniques, a business can optimize the use of its labor resources, reduce costs, and increase productivity and profitability.
Labor allocation control involves several activities, including:
- Workforce Planning: The process of determining the number and type of employees needed to meet the production needs of the organization.
- Scheduling: The process of assigning employees to work shifts and determining the length of each shift.
- Time and Attendance Tracking: The process of monitoring the hours worked by employees and ensuring that they are paid accurately for their time.
- Labor Cost Analysis: The process of analyzing labor costs to identify areas for improvement and cost-saving opportunities.
- Performance Management: The process of setting performance standards for employees and monitoring their performance to ensure that they are meeting those standards.
Control of Labour Allocation formula with example
There are several formulas that can be used for labor allocation control, depending on the specific aspect of control that is being considered. Here are some examples:
Labor Utilization Rate Formula:
Labor Utilization Rate = (Actual Labor Hours Worked / Available Labor Hours) x 100%
This formula is used to calculate the percentage of available labor hours that are actually used to perform productive work. It helps to identify if there are any inefficiencies or idle time in the use of labor. For example, if a company has 10 employees who work 8 hours per day, and they work a total of 320 hours in a week, but only 280 hours are spent on productive work, the labor utilization rate would be:
Labor Utilization Rate = (280 / 320) x 100% = 87.5%
This indicates that the company is utilizing 87.5% of the available labor hours for productive work, and 12.5% of the time is wasted on non-productive activities.
Labor Cost Per Unit Formula:
Labor Cost Per Unit = Total Labor Cost / Total Units Produced
This formula is used to calculate the cost of labor per unit of production. It helps to identify if labor costs are increasing or decreasing over time and if they are within budget. For example, if a company has a total labor cost of $50,000 for a production run that produced 10,000 units, the labor cost per unit would be:
Labor Cost Per Unit = $50,000 / 10,000 = $5 per unit
This indicates that the company spent $5 on labor for each unit produced during the production run.
Labor Efficiency Variance Formula:
Labor Efficiency Variance = (Actual Labor Hours – Standard Labor Hours) x Standard Labor Rate
This formula is used to calculate the variance between the actual labor hours used and the standard labor hours allowed for production. It helps to identify if there are any inefficiencies or idle time in the use of labor. For example, if a company planned to use 1,000 labor hours to produce 100 units of a product, but actually used 1,100 hours, and the standard labor rate is $20 per hour, the labor efficiency variance would be:
Labor Efficiency Variance = (1,100 – 1,000) x $20 = $2,000
This indicates that the company used $2,000 worth of extra labor hours, which could be due to inefficiencies or idle time.
Control of Overhead
Control of overhead refers to the process of managing and monitoring the indirect costs or overhead expenses of a business or organization. Overhead costs are those expenses that cannot be directly traced to a specific product or service, such as rent, utilities, salaries of non-production staff, and office supplies. Effective control of overhead is critical for businesses to operate efficiently and maintain profitability.
The objective of overhead control is to ensure that overhead costs are minimized while maintaining the desired levels of productivity and quality. Effective overhead control can help a business to reduce costs, increase efficiency, and improve profitability by optimizing the use of resources and identifying areas for improvement.
Effective overhead control can be achieved through the use of various tools and techniques, such as cost accounting systems, budgeting software, performance management systems, and lean manufacturing principles. By implementing these tools and techniques, a business can optimize the use of its resources, reduce costs, and increase productivity and profitability.
Overhead control involves several activities, including:
- Budgeting: The process of estimating and allocating overhead costs for each department or function of the organization.
- Cost Analysis: The process of analyzing overhead costs to identify areas for improvement and cost-saving opportunities.
- Performance Measurement: The process of setting performance standards for overhead costs and monitoring their performance to ensure that they are meeting those standards.
- Process Improvement: The process of identifying and implementing improvements to business processes to reduce overhead costs and increase efficiency.
- Resource Allocation: The process of allocating resources to different departments or functions of the organization based on their overhead requirements.
Control of Overhead formula with example
There are several formulas that can be used for overhead control, depending on the specific aspect of control that is being considered. Here are some examples:
Overhead Rate Formula:
Overhead Rate = Total Overhead Costs / Total Units Produced
This formula is used to calculate the overhead rate per unit of production. It helps to identify the proportion of overhead costs associated with each unit of production. For example, if a company has total overhead costs of $50,000 for a production run that produced 10,000 units, the overhead rate would be:
Overhead Rate = $50,000 / 10,000 = $5 per unit
This indicates that the company incurred $5 in overhead costs for each unit produced during the production run.
Overhead Variance Formula:
Overhead Variance = Actual Overhead Costs – Budgeted Overhead Costs
This formula is used to calculate the variance between the actual overhead costs incurred and the budgeted overhead costs. It helps to identify if there are any unexpected increases or decreases in overhead costs. For example, if a company budgeted $100,000 for overhead costs in a month but actually incurred $110,000 in overhead costs, the overhead variance would be:
Overhead Variance = $110,000 – $100,000 = $10,000
This indicates that the company incurred $10,000 more in overhead costs than what was budgeted for that month.
Overhead Absorption Rate Formula:
Overhead Absorption Rate = (Total Overhead Costs / Total Direct Labor Hours) x Direct Labor Hour Rate
This formula is used to calculate the overhead absorption rate per direct labor hour. It helps to identify the proportion of overhead costs associated with each direct labor hour. For example, if a company has total overhead costs of $200,000 and total direct labor hours of 10,000, and the direct labor hour rate is $20, the overhead absorption rate would be:
Overhead Absorption Rate = ($200,000 / 10,000) x $20 = $40 per direct labor hour
This indicates that the company incurred $40 in overhead costs for each direct labor hour worked.
