The main aspects of materials control are the physical control or safeguarding of materials. Physical control protects materials from misuse or misappropriation. Maintaining an appropriate level of raw materials inventory is one of the most important objectives of materials control. An inventory of sufficient size and variety for efficient operations must be maintained, but the size should not be excessive in relation to scheduled production needs. Every business requires a system of internal control that includes procedures for the safeguarding of assets.
Because highly liquid assets, such as cash and marketable securities, are particularly susceptible to misappropriation, the protection provided for such assets is usually more than adequate. However, other assets, including inventories, must also be protected from unauthorized use or theft. Because raw materials usually represent a significant portion of a manufacturer’s current assets and often comprise more than 50% of a product’s manufacturing cost, a business must control its materials from the time they are ordered until the time they are shipped to customers in the form of finished goods.
In general, to effectively control materials, a business must maintain: •Limited Access. Only authorized personnel should have access to materials storage areas. Raw materials should be issued for use in production only if requisitions are properly documented and approved. Also, procedures should be established within each production area for safeguarding work in process. Finished goods should be safeguarded in limited-access storage areas and not released for shipment in the absence of appropriate documentation and authorization. Segregation of Duties. A basic principle of internal control is the segregation of employee duties to minimize opportunities for misappropriation of assets.
With respect to materials control, the following functions should be segregated: purchasing, receiving, storage, use, and recording. The independence of personnel assigned to these functions does not eliminate the danger of misappropriation or misuse because the possibility of collusion still exists. However, the appropriate segregation f duties limits an individual employee’s opportunities for misappropriation and concealment. In smaller organizations, it is frequently not possible to achieve optimum segregation of duties due to the limited number of employees. Small businesses must therefore rely on specially designed control procedures to compensate for the lack of independence of assigned functions. •Accuracy in Recording. An effective materials control system requires the accurate recording of the purchase and issuance of materials.
Inventory records should document the inventory quantities on hand, and cost records should provide the data needed to assign a cost to inventories for the preparation of financial statements. Periodically, recorded inventories should be compared with a physical inventory count, and any significant discrepancies should be investigated. Differences may be due to recording errors or to inventory losses through theft or spoilage. Once the cause has been determined, appropriate corrective action should be taken.