MATERIAL VALUATION AND CONTROL IN A MANUFACTURING ORGANIZATION
ABSTRACT
The need for holding material is inherent in any business organization. The space of the material will be properly controlled and valued so that objective of carrying or maintaining adequate stock levels at minimum cost can be realized. Hence, the study of material evaluation and control in a manufacturing firm like Rokana Industry Plc has been grouped into the following sector to enhance the success of the work. The introductory chapter deals with the meaning of material cold its components in a manufacturing organization, as well as valuation. It also cover the method of controlling material and the dangers cold advantages inherent in each of them. Chapter two examines the related texts that the project written was able to come across. In this chapter, the study looked at the central of materials and the method employed in so doing. It further examined the need for material, various stock and methods of material valuation. Considering the nature of the study, and the company a lot of data were generated. Both primary and secondary data were used it is based on this third chapter tiled “Research methodology” stated the source of data collected, categorizing them into primary and secondary. The former was achieved through the use of such instruments as introduction, research, designs, questionnaire design, sampling and selection, other method used such as observation and survey. Source of data and statistical techniques used in analyzing the data. In chapter four, the data collected were presented, analyzed and interpreted. Firstly, an introduction of the method, data collection followed by the results of the interview concluded. The data were then analyzed and interpreted. Finally, chapter revealed the findings of summary made from the research, recommendation were drawn and the conclusion were based on the findings with a view to ensuring effective material valuation and control.
CHAPTER ONE
INTRODUCTION
1.0 BACKGROUND TO THE STUDY
Material represents a major assent of most industrial and commercial organization, and its essential that material are managed efficiently, so that materials do not become unnecessary large. A firm should determine its optimum level of investment in material and to do so, two conflicting requirements must be met. Firstly, it must ensure that materials are sufficient to meet the requirement for the production and sales. Secondly, it must avoid holding surplus material which is unnecessary and which increase the risk of obsolesces. The optimal level lies some where between these two extremes.
The study of material valuation and control measure is necessary in light of the need for a company whose goals is to optimize or maximizes its profit, retains the company’s goodwill and project the economy. Hence there is need to emphasis here that appropriate description and measurement of material demand careful attention because material is one of the most significant assets that any organization possesses.Material can be defined as assent items held for sale in the ordinary course of business or good that will be used or consumed in the production of good to be sold. From the above definition, on can decide that material can be classified into three classes of:
1) Stock of raw material-used for the production department.
2) Incomplete work (work in progress) – used to maintain continuity within the production department.
3) Material of finished good awaiting sales used to satisfy customer demand.
Each of these will normally represents a substantial par of the working capital of the organization. An efficient company will attempt to maximize this investment whilst at the same time ensuring that there is always sufficient to meet its requirement.
Investment in material refers to the monetary value of all material held in a company at any time, which must be very carefully controlled. They quality value of each material, which is to be held in stock, must be decided by management. In the course of evaluating this topic, one may ask the question, what is material valuation and control, in an organization? The answer are not far fetched as, this can said to means, the system designed by the organization to control its investment in material.
This is found to be existence at Rokana Industry plc Nigeria Nekede Owerri that produces item like Jordan tooth brush, candle and Milo.The system involves the recording and monitoring of stock levels, knowing when to place orders and how many orders to be placed.A critical look at the balance of most companies including Rokana Industry plc, it will be observed that material usually forms the largest figure of their current assets. Because of this large nature, an error in its valuation may cause a material misstatement of the financial position and of net income. An error of between 15% - 25% in valuing materials may have as much effect on the financial statement as would be the complete omission of cash. This is enough reason for a sound organization to place proper control over its material. Since company needs information in material as a guide to decision making material handling should not be placed on final and error basic rather on scientific models designed for it. Hence, it is our belief that techniques for material valuation an control in any organization when properly applied by management, irrespective of their field of operation, would surly lead to optimality in stock holding visa-visa is the firm wealth minimization.
1.1 STATEMENT OF THE PROBLEM
In principle, organizations are expected to apply the scientific models for valuing and controlling material so as to maximize their wealth. This has been observed is not strictly adhered to in practice due to either the nature of business of the organization, ignorance on the part of the organization or lack of qualified personnel to implement them. Problem of material valuation and control exist in almost all firms except service – oriented organization. These problem arise from the fact that most organization (mainly manufacturing ones) base their material control on experience, intuition, guess work and human judgment approach other than applying the modern scientific models like – re-order levels which removes all elements of bins in determining stock levels.
Furthermore, the growing realization of the new and important of material control valuation and control because of the large capital investment associated with, it has become necessary to control these excessive costs which include: Carrying costs: The carrying cost is referred to as possession costs. The carrying cost include – storage costs, material handling cost, insurance cost, property taxes and security costs etc.
1.1.1 ORDERING COST: This consist of clerical processing order or production order, special processing and receiving costs relating to the number of orders process, it is usually represented by: - Transport cost, clerical and administrative cost.
1.1.2 STOCK OUT COST: this is a state of being without stock. One of the basic reasons why materials are held is to avoid these costs, which are always difficult to quality, even though they exist. Some of these cost include; loss of future sales and reduction in out put and consequently in profits. Base on all the facts highlighted above, I have thought, it wise to undertake a research on material valuation and control in a manufacturing organization with Rokana Industry Plc Nigeria as a case study of evaluate its system of material valuation and control and ascertain if it is efficient and effective.
1.2 OBJECTIVE OF THE STUDY
Having defined the problem of the research work, it is necessary to present the specific objective, which the work intends to achieve which are:
1. To ascertain if Rokana Industry plc employs the scientific models of material valuation and control.
2. To compare the various method of valuing materials and highlighting their advantages and disadvantages.
3. To highlighting the benefits of effective material control which facilitates the smooth running of a business, improves its profitability and enable enjoy the multiplier effect of merit.
4. To evaluate the system of internal control with respect to material.
5. To find out whether the cost incurred in maintaining the material is economically justifiable in the light of profit opportunities available.
1.3 SIGNIFICANCE OF THE STUDY
Although most exercise control over their material, the control are often not adequate resulting in loss of material through wastages pilferages, obsolesces, deterioration, evaporation, damages and falling prices. Because material comprises a significant portion of the assents to many organization, their valuation and presentation have a considerable effects in the determination and presentation of the financial position and results of operations of these enterprises, hence effective material control facilities the smooth running of a business, improves its profitability and enable the organization to enjoy the multiplier effect of its merits.
This study is important because it make it crystal dear why it is necessary for companies and individuals to control their material and bring to the knowledge of manufacturing firms the numerous solutions to the problem being encountered by various material managers. It is intended to produce a reliable costing information as regards the record of material movement which will invariable create on opportunity for a more coordinated work and profit maximization since the satisfaction of most organization is that they achieve maximum profit using minimum cost. To the store managers who are accountable for material and responsible for the stores department, this study will provide them with the necessary equipment needed for planning, control and procurement of material. To other users like future researchers, prospective entrepreneur or even fellow students it will improve to a great extent their theoretical and practical knowledge about material valuation and control. Finally, in this ear where there is a great emphasis on small scale industries, the study will be of immense help to any person who has an intention of setting up a small scale business and for those already in business. It is aimed at giving their proper guide towards the achievement of effective and efficient material control.
1.4 STATEMENT OF HYPOTHESIS
This dissertation is designed to test the reality and correctness of the question associated with efficient and effective material valuation and control in a manufacturing organization like Rokana Industry plc. The research question can only correct when they must have been tested and provided to be correct. Consequently, I have decided to use the questionnaire and interview methods to test our hypothesis.
HYPOTHESIS I
H0: Material valuation and control in Rokana Industry plc are not efficient and effective
HYPOTHESIS II
Hi: Material valuation and control in Rokana Industry plc are efficient and effective.
1.5 SCOPE OF THE STUDY
In order to collect enough information from the area of study, the research selected Nekede which is the headquarter of the case study Rokana Industry plc. Consequently, the scope of the study is to:
1) Evaluate the system of material valuation and control operating at Rokana Industry plc.
2) Investigate into the purpose of material control.
3) Investigate and find out whether the company keeps appropriate internal control system in relation to material.
4) Investigate and find out whether the company uses the scientific models of material stock level and economic order quantity (EOQ) etc.
1.6 LIMITATION OF THE STUDY
The research did not delve into all the measures and factors. Material evaluation and control rather the study was limited to raw material only with little mention of finished goods. This is to the limitation common to most studies. Consequently, the number of problem this dissertation was faced with includes.
1.6.1 FINANCE: The financial strength of the researcher as at the period of inflationary tend was a major set back as it made things a little bit difficult most especially in the areas of transportation.
1.6.2 TIME CONSTRAINTS: Being a graduating student, time was shared between this work and other academic commitment, which created partial conflict between lecture hours and appointments scheduled with the company under case study.
1.6.3 LACK OF ENOUGH MATERIAL: The major limitation, which the research encountered, is lack of enough material to cover the topic, as most books on this topic were not found in both the institution and public libraries. Again, past literature review were not found and this made the work to be stressful the researcher.
1.7 DEFINITION OF PROFESSIONAL TERMS
For better understanding and to avoid misinterpretation of this dissertation. I have thought is necessary to explain some of the operating terms that have unique application in this research.
1) CARRYING COST: This arises when stock of goods for sales productions are held. They consist of the opportunity cost of the investment tied up in material and the cost associated with storage. Such are space rented and insurance.
2) CONTROL: This is the ct of setting performances expected and monitoring actual performance against standard.
3) MATERIAL: Materials are items of value held for use or sale by an enterprise and usually comprise of raw materials and suppliers used in production, work-in-progress and finished goods.
4) MATERIAL CONTROL: This is a system designed to ensure that the required quantity of material is proved at the required time the minimum capital investment. It includes such areas as, procurement, storage, stock control, issuing and material valuation.
5) ORDERING COSTS: The consist of the clerical costs of preparing a purchasing order and the special processing and receiving costs relate to the number of order processed.
6) SAFETY MATERIAL: This is minimum or better material that is held as a cushion against unexpected increase in demand.
7) STOCK OUT: The term stock out” simply means the unavailability of finished goods in the store, when demanded by customer or raw material when needed by the production department for continuous or increased production to meet up with customer demand.
8) STORE RECORD CARD: These are record maintained for each time of material stock showing details of receipts. Issue and stock balance, as well as details of order placed, allocation made and free balance available.
9) MAKE OR BUY DECISION: This is a situation where by an organization takes a decision of making some of their materials in house or buying them from outside supplier.
10) FORECASTING: This is the means of analyzing and interpreting data of post sales seasonal variation in prices availability and demand for material. They forecasting future trends and plan material requirement accordingly.
11) STANDARDIZATION: It is “that which has been established as a model to which an object or action can be compared”. However one should take note that even a substitute technically feasible. It is not always economic standardization is not necessary so use it. The economic of standardization is not necessarily so complex.
12) VALUE ANALYSIS AND VALUE ENGINEERING: They are close to the same thing. They are approaches to cost saving goals that deal primarily on product design.
13) SAFETY STOCK: Management is often f aced with uncertainties. Because of this proper prediction usage and lead time becomes difficult.
14) LEAD TIME: This is normally taken in receiving the delivery of material after the order has been placed.
15) AVERAGE COLLECTION PERIOD: This measures how long it takes from the time the sale is made to time the cash is collected from the customer.
16) CONVENTION PERIOD OF MATERIAL: This is the speed with which material can be converted into cash.
17) PROCUREMENT: This is defined as the acquisition of good and services by firm, industries, government and their subsidiary agencies such as parastatals Uzor (2004: page 422).
18) RESEARCH: Research is a systematic investigation for the purpose of gaining new knowledge in order words, it is any study that leads to knowledge the person undertaken the research.
19) HYPOTHESIS: Is a conjectural statement which a researcher make ahead of his study and which must be subjected to test to be accepted or rejected.
20) SOURCING: Sourcing according to Baily and Farmer (1979:113) sourcing is said to be the identification of suitable source of supply.
21) QUALITY: This is seen as the totality of feature and characteristics of a product or a service that bears on the ability to satisfy a state or implied needs.
22) SPECIFICATION: Specification according to Lee and Doubler (1981:48) are description of the material ports, and components used in making a product.
23) MANAGEMENT CONTROL: Anthony defined management control as ensuring that resources are obtained and used effectively and efficiently in the accomplishment of the organization objectives.
24) DATA CONTROL: Data is a series of system like number, letter of the alphabets, sound, electric current electromagnetic warier words, mathematical expression cheques deposit, slip test scores etc. information is anything that produces a change in a person knowledge information is data that is processed.
25) QUESTIONNAIRE: Is consist of a set of question (or spaces) the answer of which respondents are required to full in according to design or instructions.
