AGECON 211 Theory 09: Materials Management, Raw Material Costing and Inventory Control
B.Sc. (Hons.) Agriculture | Semester 3 | AGECON 211 | Theory 09
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Learning objectives
Explain purchasing and stores management, calculate raw material cost and reorder levels, and apply inventory controls to agricultural materials.
Scope and purchasing cycle
Materials management coordinates specification, sourcing, purchasing, receiving, storage, issue and control of materials. Its aim is reliable availability at an appropriate total cost and quality, rather than the lowest quoted price alone. The purchasing cycle moves from a requisition and specification through supplier comparison, order placement, receipt, inspection, documentation and payment.
Compare landed cost, quality, lead time, payment terms, reliability and after-sales support. Keep purchase authorization separate from receipt verification where staffing permits. Reconcile the purchase order, goods-received record and invoice before payment.
Raw material costing
Acquisition cost generally includes purchase price after relevant discounts and necessary inward transport or handling. Treatment of taxes depends on recoverability and applicable accounting rules. Maintain a clear, consistent costing policy. Normal processing loss increases cost per usable unit, while abnormal loss should be identified and investigated.
A batch costs ₹20,000 plus ₹2,000 inward freight. From 1,000 kg received, 50 kg is normal unusable loss. Cost per usable kg is ₹22,000÷950 = ₹23.16 approximately. Costing all 1,000 kg as usable would understate the material cost of saleable output. Include actual consumption and yield when estimating product costs.
Inventory records and classification
Raw materials, work in progress, finished goods, spares and consumables tie up cash. A bin card tracks physical receipts, issues and balances; a stores ledger adds values. Physical counts detect discrepancies and require reconciliation rather than automatically replacing recorded quantities.
ABC analysis classifies items by annual consumption value: annual usage multiplied by unit cost. High-value A items receive close control, while simpler systems may suffice for C items. Exact percentage cutoffs are organizational choices. ABC does not measure criticality; combine it with consideration of stockout consequences, shelf life and supply risk.
Reorder point and EOQ
Under a simple constant-demand model, reorder point = expected demand during lead time + safety stock. At 20 kg daily usage, five days lead time and 30 kg safety stock, reorder at 130 kg. Inventory position should consider stock on hand plus outstanding orders minus commitments where relevant.
Economic order quantity, EOQ = √(2DS/H), balances ordering and holding cost: D is annual demand in units, S is cost per order and H is annual holding cost per unit. With D=1,200 kg, S=₹300 and H=₹12/kg/year, EOQ≈245 kg. The basic model assumes steady demand, constant lead time and no shortages or quantity discounts. Perishable or strongly seasonal materials may require smaller, more frequent orders.
Agricultural safeguards
Use first-expiry-first-out for dated perishable inputs where appropriate, control humidity and pests, separate incompatible materials and record batch identities. FIFO for physical issue should not be confused with an accounting valuation method. Assess shrinkage, expiry, stockouts, supplier performance and inventory turnover. More stock can improve availability but also increase spoilage and financing costs.
Revision and assessment
- Calculate cost per usable kilogram in the example.
- Find the reorder point for the stated demand and lead time.
- Why is ABC alone insufficient for controlling a low-cost critical spare?
Answer guide
- ₹22,000÷950 ≈ ₹23.16/kg.
- 20×5 + 30 = 130 kg.
- ABC measures consumption value; a cheap spare can still stop the entire operation and requires criticality-based control.
Independent English study notes for the topics listed in the AGECON 211 course index. Consult your prescribed university syllabus for official course wording and assessment requirements. Numerical cases are hypothetical learning examples.
