Stock Control Procedures
Annexes Applicable
for all
Types of Stock (including Consumables)
Page 1 of 23
Annex A - NRV Valuation Scenario
Determine the NRV for each of the following items of stock:
Table 1
Item Cost Price Estimated market Cost to complete /
price1 dispose off
Printer paper 2.00 3.50 0.50
Oil fuel 4.00 4.00 0.80
Spare parts 6.00 10.00 1.00
Toiletries 5.00 6.00 2.00
Cleaning supplies 1.00 1.20 0.25
The figure in bold and italics in Table 2 represents the value that should be used in valuing stock.
Table 2
Item Cost NRV
Price
Estimated Market Cost to complete/dispose = NRV
Price off
Lm Lm Lm Lm
Printer paper 2.00 3.50 0.50 3.00
Oil fuel 4.00 4.00 0.80 3.20
Spare parts 6.00 10.00 1.00 9.00
Toiletries 5.00 6.00 2.00 4.00
Cleaning supplies 1.00 1.20 0.25 0.95
Finally, the value of items in stock have to be calculated separately for those items valued at cost
price and for those written down to NRV. The table below gives example of the valuation.
Table 3
Item Cost Price NRV No of units Units Valued Units Valued at
at Cost NRV
Lm Lm Lm Lm
Printer paper 2.00 3.00 500 1,000
Oil fuel 4.00 3.20 1,000 0 3,200
Spare parts 6.00 9.00 750 4,500
Toiletries 5.00 4.00 750 0 3,000
Cleaning 1.00 0.95 2,500 0 2,375
supplies
Total 5,500 8,575
1
Use estimated market price taking into account the current state of the product, including obsolescence
and damage
Annex B AVCO Valuation
Example 1
Department A currently produces machine components. The following information gives details
regarding the receipts and issues of the stock items used in production during the month of May
2002.
May Receipts May Issues
1 50 units at Lm30 per unit 6 40 units
8 40 units at Lm35 per unit 13 20 units
15 70 units at Lm42 per unit 20 80 units
22 60 units at Lm28 per unit 27 70 units
29 30 units at Lm32 per unit
The valuation workings will be as follows:
AVCO Valuation
Page 3 of 23
Annex C - 1 Stock Ledger Card
Page 4 of 23
Annex C - 2 Stock Bin Card
Page 5 of 23
Annex C - 3 Summary Report by Stock Code
Page 6 of 23
Annex D - 1 Sample Stocktake Report
Page 7 of 23
Annex D - 2 Sample Valuation Report
Page 8 of 23
Annex D - 3 Statement of Stores Write-offs
Page 9 of 23
Annex E – 1 Goods Received Note (GRN) 1 copy for stores officer
1 copy for head of department
1 copy for purchasing officer
Page 10 of 23
Annex E – 2 Stores Material Requisition Note (SMRN) 1 copy for stores officer or recipients
1 copy for head of department
Page 11 of 23
Annex E – 3 Stores Material Transfer Note (SMTN) 1 copy for stores officer – sending department
1 copy for stores officer – receiving department
1 copy for head of department
Page 12 of 23
Annex E – 4 Bill of Material (BOM) 1 copy for stores officer
1 copy for head of department
1 copy for technically competent authority
Page 13 of 23
Annexes Applicable
for all types of Stock
Excluding
Consumables and Raw Materials
Page 14 of 23
Annex F - 1 Valuation Examples
Example (a): Construction
During 2001, Department C was responsible for the construction of a housing property. At year-
end, the total amount incurred in respect of raw materials totalled Lm150,000. The amount of
labour hours spent amounted to 10,000 hrs @ Lm6.00/hr, 2,000hrs @ Lm9.00/hr and 200 hrs @
Lm15.00/hr. Lm10,000 were spent on consultancy and architect fees specific for this project.
Overheads spent during the year amounted to Lm20,000 insurance on plant and machinery and
Lm30,000 administration expenses. This project is to absorb 50% of these overheads *.
In addition, Lm30,000 of electrical installation and finishing works were subcontracted to ABC
Ltd. By the end of the financial year, 30% of the contracted work was certified as complete but
still unpaid. Another 20% of the contracted work were complete but uncertified. In both cases,
supplier’s invoices have been submitted.
Calculation of Work-in-progress:
Lm
Raw Materials 150,000
Labour Costs (10,000 x 6) 60,000
( 2,000 x 9) 18,000
( 200 x 15) 3,000
Consultancy and Architect Fees 10,000
Direct Overheads Absorbed
Insurance (Lm20,000 * 50%) 10,000
Administration Costs (Lm30,000 * 50%) 15,000
Subcontracted work
Complete but unpaid (30% * Lm30,000) 9,000
Complete but uncertified (20% * Lm30,000) 6,000
------------
281,000
=======
Note: This example does not apply to the construction of fixed assets but only to the
construction of products for re-sale.
* For the purpose of this exercise, the absorption rate is taken to be without any specific reference
to the absorption costing technique which is explained in Annex F - 2.
Page 15 of 23
Example (b) : Manufacturing
Department XYZ manufactures furniture components. The following gives details regarding the
production of Job 123 in the manufacture of furniture components::
Direct Materials per unit Lm250.00
Direct Labour: Assembly 7.0 hrs @ Lm21.43/hr
(Refer to example in Annex F - 2) Finishing 8.0 hrs @ Lm15.63/hr
Packaging 6.5 hrs @ Lm10.77/hr
Direct Production Expenses Assembly 7.0 hrs @ Lm2.886/hr
to be absorbed: Finishing 8.0 hrs @ Lm2.136/hr
(Refer to example in Annex F - 2
- table 11) Packaging 6.5 hrs @ Lm2.314/hr
Calculation of Work-in-progress
Lm
Direct Materials 250.00
Direct Labour (7hrs x Lm21.43) 150.00
(8hrs x Lm15.63) 125.00
(6.5hrs x Lm10.77) 70.00
Direct Production Expenses (7hrs x Lm2.886) 20.20
To be absorbed: (8hrs x Lm2.136) 17.09
(6.5hrs x Lm2.314) 15.04
--------
Cost of production per unit 647.33
=====
In case of quarter ending 31st March 2003, the cost of production of Job 123 in the manufacture of
furniture components for 15 such jobs during the said period would be:
Lm647.33 * 15 cost units = Lm9, 709.95
Note: This example does not apply to the internal manufacturing of fixed assets for own use
but only to the manufacturing of products for re-sale or the provision as part of a service.
Page 16 of 23
Annex F - 2 Absorption Costing
Definitions
Production cost is made up of prime cost i.e.: direct labour, direct material and direct expenses;
and production overheads of both a fixed and variable nature.
Fixed production overheads are those indirect costs of production that remain relatively
constant regardless of the volume of production, such as depreciation and maintenance of factory
buildings and equipment, and the cost of operational management.
Variable production overheads are those indirect costs of production that vary directly, or
nearly directly, with the volume of production, such as indirect materials and indirect labour.
Cost unit is a quantitative unit of product or service in relation to which costs are identified and
calculated.
Cost centre is a location, section or function, or group of these, within a department in respect of
which costs may be identified and allocated.
Absorption costing is the principle whereby fixed as well as variable production overheads are
assigned to cost units or products.
Cost allocation is the allotment of whole items of cost directly identifiable to cost centres or cost
units.
Cost apportionment is the allotment of overheads to two or more cost centres on a proportional
basis in relation to the benefit received.
Allocating overheads to production and support departments
It is necessary to allocate all the production overheads to their cost centres. Some overhead
expenses, such as machine depreciation2 or indirect materials and indirect labour can be directly
allocated to production cost centres.
There are certain items of overhead expenditure, however, that cannot be directly attributed to
specific cost centres because they are incurred for the benefit of many cost centres. In respect of
these items, it is necessary to establish a logical basis for apportioning the overheads to cost
centres. The following tabulation gives examples of commonly used apportionment bases:
Table 1
Cost Basis of apportionment
Rent, electricity and lighting, repairs to building, water Area occupied by specific cost
centre
Employee-related expenditure: operational management, Number of employees
engineering, supervisory and technical staff, works canteen,
health and safety
Depreciation and insurance of plant and machinery, repairs Value of items of plant and
to plant and machinery machinery
2
Depreciation should apply when the respective policy is issued by the Ministry of Finance.
Page 17 of 23
Reapportionment of support cost centre overheads to production cost centres
Support cost centres are those sections within departments that exist to provide diverse support to
production cost centres of the organisation, for example stores and maintenance sections.
Therefore, it is not possible to allocate costs to products passing through these cost centres. Costs
must be apportioned to production cost centres that actually work on the manufactured product.
The method that is chosen to apportion these support costs to production cost centres should be
related to the benefits that the production cost centres derive from the support given.
Table 2
Support cost centre Basis of re-apportionment
Canteen, personnel, security, wages Number of employees
Cleaning Floor area
Stores Number of material requisitions
Purchasing Number of purchase requisitions
Calculation of appropriate cost centre overhead rates
The next stage is to allocate the overheads of each production cost centre to products passing
through that cost centre. The allocation bases used are volume-related or time-related in each
production cost centre i.e.: direct labour hours, machine hours and number of cost units produced
by that cost centre. Overhead absorption rate has to be computed for each cost centre. A
different overhead absorption rate may be used for separate cost centres depending on their
applicability. An estimate for the time needed to complete a product or service has to be prepared
and reviewed annually to establish a common benchmark.
Choice of overhead absorption rate
The following are the three overhead absorption rates of which one rate has to be chosen on the
basis of its applicability:
a) Cost unit rate
Where units passing through a cost centre are the same, each unit receives an equal share of the
overhead. In an entity providing services, one service may take 20 hours, whereas another might
take 2 hours. So it would not be appropriate to charge each different service with the same
amount of production overhead.
b) Direct labour hour rate
Most production overhead costs vary with the amount of time spent producing the cost units. For
example, if the number of direct labour hours were to increase by 50%, additional indirect staff,
such as storekeepers and canteen assistants, would need to be employed to support the increase in
the direct labour force. Therefore, production overheads are apportioned on the basis of the
length of time taken to produce a cost unit, so that products or services which make the most use
of production / service facilities would reflect an appropriate higher share of the overheads. This
method is suitable where the majority of production operations are carried out manually. Hence,
it is necessary to ensure that there is an appropriate record of activity time in order to obtain the
number of hours worked on each cost unit.
c) Machine hour rate
Where production is largely mechanised, most overhead costs are attributable to the use of a cost
centre using plant and machinery. In such circumstances, a machine hour rate is to be used to
absorb the overhead.
Page 18 of 23
Annex F - 2 (Cont.)
Example: Absorption costing technique
Department XYZ has three production cost centres, Assembly, Finishing and Packaging, and a
support cost centre, Cleaning. The overhead costs incurred during the year 2002 were:
Table 3
Lm Lm
Supervisory and management salaries:-
Cost centre Assembly 4,000
Cost centre Finishing 3,000
Cost centre Packaging 3,500
Cost centre Cleaning 2,500
Total supervisory and management salaries 13,000
National insurance contribution 780
Rent 600
Repairs to plant, machinery and equipment 600
Depreciation of plant and machinery 450
Repairs to furniture and fittings 300
Water and Electricity 560
Insurance 350
Health and Safety 200
The basis of apportionment for the cost centres is listed in the table below:
Table 4
Assembly Finishing Packaging Cleaning Total of
cost
centres
Area Square 10,000 8,000 7,000 5,000 30,000
meters
Number of Employees 20 12 15 13 60
employees
Book value of Lm 10,000 12,000 6,000 2,000 30,000
plant & machinery
Machine power CC 120 95 55 10 280
Page 19 of 23
Step 1: Overheads allocation
Carry out direct allocation to cost centres. The only example of such costs in the expenses list as
per table 1 are the supervisory and management salaries.
Table 5
Assembly Finishing Packaging Cleaning Total Cost
Centres
Lm Lm Lm Lm Lm
Supervisory and 4,000 3,000 3,500 2,500 13,000
management salaries
Step 2: Overhead Apportionment
Carry out the apportionment of overhead to the four cost centres. In order to illustrate the
calculations that follow, rent is being used as an example apportioned on an area basis:
Table 6
Cost Centre Rent Area Total Area Cost
apportionment
Lm Square Square Lm
meters meters
Assembly 600 * 10,000 / 30,000 200
Finishing 600 * 8,000 / 30,000 160
Packaging 600 * 7,000 / 30,000 140
Cleaning 600 * 5,000 / 30,000 100
Step 3: Support cost centre costs re-apportionment
The next step is to allocate the total cost of each support cost centre to those cost centres
using the service. The same procedure is adopted; the costs are allocated where possible,
otherwise they are apportioned using some suitable basis of apportionment. It is possible to
allocate the costs of the maintenance cost centre if employees engaged on maintenance work keep
a record of the time spent in each cost centre. The costs of other service cost centres like the
cleaning will have to be re-apportioned to the production cost centres. Examples of bases used
for support cost centres were explained in table 2.
Table 7 below lists the department expenses apportioned on the most applicable basis and the re-
apportionment of the costs of the cleaning cost centre, which is the only support, cost centre in
this case.
In case of reapportionment, the basis of re-apportionment has to exclude the part apportionable to
the support cost centre and hence the total basis of re-apportionment has to be re-computed. The
total number of employees will add up to 47 by excluding the employees in the cleaning cost
centre.
Page 20 of 23
Table 7
Cost Amount Basis of Assembly Finishing Packaging Cleaning
apportionment
Lm Lm Lm Lm Lm
Cleaning personnel 1000 1000
Indirect material - 500 500
consumables
Supervisory and 13,000 Allocation 4,000 3,000 3,500 2,500
management salaries
National insurance 780 Indirect wages 240 180 210 150
and salaries
Rent 600 Area (sq. ft.) 200 160 140 100
Repairs to plant, 600 Book value 200 240 120 40
machinery and
equipment
Depreciation of plant 450 Book value 150 180 90 30
and machinery
Repairs to furniture and 300 Area (sq. ft.) 100 80 70 50
fittings
Water and electricity 560 HP of machines 240 190 110 20
Insurance 350 Book value of 120 135 75 20
plant and
machinery plus
average stock
Health and safety 200 No of 70 40 50 40
employees
Sub-Total 18,340 5,320 4,205 4,365 4,450
Re-apportionment of No of 1,894 1,136 1,420 -4,450
cleaning support employees
centre
Total 18,340 7,214 5,341 5,785 -
Page 21 of 23
Step 4: Methods of Overhead Absorption
There are a number of methods for calculating absorption rates, each one involving the use of a
different base. Those most commonly used are listed below together with the relevant formulae:
Table 8
Direct labour hour rate = Total overhead of cost centre / Direct labour hours
Machine hour rate = Total overhead of cost centre / Machine hours
Cost unit rate = Total overhead of cost centre / Cost units
Example:
The following cost statement has been prepared for Department XYZ for the year ending 2002:
Table 9
Assembly Finishing Packaging Total
Lm Lm Lm Lm
Direct material cost 10,000 11,500 8,500 30,000
Direct labour cost 4,000 5,000 5,500 14,500
Direct expenses 1,000 800 1,200 3,000
Prime cost 15,000 17,300 15,200 47,500
Production overhead (as per Table 7) 7,214 5,341 5,785 18,340
Cost of production 22,214 22,641 20,985 65,840
Table 10
Cost units produced 1,500 units
Direct labour hours 2,500 hours
Machine hours 2,000 hours
Calculate an overhead absorption rate for production overhead using the methods of overhead
absorption as per Table 8.
Table 11
Assembly Finishing Packaging
Lm Lm Lm
Cost unit rate 7,214 / 1,500 = 4.809 5,341 / 1,500 = 3.561 5,785 / 1,500 = 3.857
Direct labour hour rate 7,214 / 2,500 = 2.886 5,341 / 2,500 = 2.136 5,785 / 2,500 = 2.314
Machine hour rate 7,214 / 2,000 = 3.607 5,341 / 2,000 = 2.671 5,785 / 2,000 = 2.893
Page 22 of 23
Step 5: Application of overhead absorption rates
The overhead absorption rate for a cost centre is then applied to the cost units passing through
that cost centre.
Example. During the year 2002, work was carried out on Job 123. The following costs and
times were recorded:
Table 12
Assembly Finishing Packaging Total
Lm Lm Lm Lm
Direct material cost 250
Direct labour cost 150 125 70 345
Direct expenses 102
Prime cost 697
Assembly Finishing Packaging Total
Direct labour hours 7 8 6.5 21.5
Machine hours 5 4.6 4.2 13.8
Using the overhead rates computed in Table 7, show the production overhead that would apply to
Job 123 for each method adopted.
Table 13
Method Assembly Finishing Packaging Total
As Lm Lm Lm Lm
Cost per unit rate (Table 11) 4.809 3.561 3.857 12.23
Direct labour hour rate (Table 11) 2.886 2.136 2.314
* Direct labour hours (Table 12) *7 *8 * 6.5
= 20.20 = 17.09 = 15.04 52.33
Machine hour rate (Table 11) 3.607 2.671 2.893
* Machine hours (Table 12) *5 * 4.6 * 4.2
= 18.04 = 12.29 = 12.15 42.48
If the direct labour hour rate is applicable, the cost of production for job 123 would be:
Table 14
As per Lm
Prime cost Table 12 697.00
Production Overhead Table 13 52.33
Cost of production of Job No. 123 749.33
Page 23 of 23
