Classification and Codification of Materials

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on September 9, 2021

Classification of Materials

Classification is the systematic division, grouping, or categorization of materials or items based on some common characteristic.

Classification of materials can be performed on different bases (e.g., nature, manufacturing process, value, and purpose). To identify materials that are purchased and stored for commercial purposes, they should be properly classified.

The department in charge of storage should closely study and monitor the materials, ensuring their safe custody, meticulous handling, and protection from damage, fire, pilferage, and spoilage.

A broad classification of materials is shown below, based on their nature, use, and service.

  • Raw Materials
  • Consumable Stores
  • Machinery and Plant
  • Factory and Office Equipment
  • Inflammable Stores
  • Chemicals
  • Furniture and Fixtures
  • Scrap Materials
  • Packaging Materials
  • General Stores

Basis for Classification of Materials

The basis for the classification of materials involves several aspects, including nature, manufacturing process, and value.

Basis of Nature

Based on their nature, materials can be divided into:

(i) Direct Materials: Direct materials are items that can be identified with a product or a group of products and can be easily measured and charged directly into the product. These materials are part of the finished product (e.g., timber in furniture).

(ii) Indirect Materials: These are materials that cannot be traced to a specific product or be charged directly to various products. Indirect materials do not form part of the product. Examples include repair and maintenance stores, lubricating oils, and cleaning materials.

Basis of Manufacturing Process

Based on the manufacturing process, stores are divided into:

(i) Pre-process Stock: These are items that are yet to be used in the manufacturing process and are obtained prior to the start of production. They include raw materials, bought-out parts and assemblies, and stock in the pipeline of materials in transit.

(ii) Intermediate Stock: Intermediate stock comprises the parts or assemblies that are manufactured within the factory for use in the final product.

(iii) Finished Goods or Finished Products: As the name indicates, finished goods are the items that have been duly manufactured in the factory and are ready for shipment or sale to the customers.

Basis of Value

Based on value, stores may be divided into:

(i) Category A: Category A consists of materials which constitute 5% to 10% of the total items in the stores and represents 70% to 85% of the total stores value.

(ii) Category B: This category consists of materials which constitute 10% to 20% of the total items in the stores and represents 10% to 20% of the total stores value.

(iii) Category C: This category consists of cheap materials which constitute 70% to 85% of the total items in the stores and represents 5% to 10% of the total stores value.

Category A items are costly items, calling for a greater level of control to preserve them. A reasonable degree of care may be taken to control category B items, while a routine type of care may be applied to control C category (or residuary) items.

Basis of Movement of Stores

Based on the movement of stores (i.e., rate of consumption), stores items may be divided into:

(i) Fast Moving Stock: Fast moving stock is exhausted rapidly due to high demand from production departments.

(ii) Slow Moving Stock: This category consists of stores or materials that are consumed or exhausted slowly due to limited demand from the production departments.

(iii) Dormant Stock: This category consists of items that are not in demand at present and may regain demand in the future. This category includes seasonal materials, which are only required during specific seasons.

Advantages of Classification of Materials

Classifying the items that a business holds in its stores leads to many advantages. These include:

1. Helpful in Grouping of Stores Items: Classification helps to group different items in the store. Items that fall under a particular category can be stored in one location, ensuring optimal use of storage space.

2. Easy Location: Proper classification of stores items helps in the easy identification of the various items. Storekeepers can easily find materials whenever they are required in the production departments.

3. Proper Accounting: Record-keeping processes are easier when items are properly classified. Furthermore, simplified record-keeping ensures accuracy in posting receipts and issues in the stores records.

4. Proper Care: By classifying items based on value, storekeepers can ascertain their relative importance. Accordingly, a suitable degree of supervision and control can be exercised that is proportional to the value of each item.

5. Avoidance of Duplication: Proper classification helps to avoid the possibility of duplicate stock items and materials.

6. Standardization: Classification helps to standardize various items in the stores. Standardization involves variety reduction using fixed sizes and types, leading to uniform standards for similar items.

Codification of Materials

After classifying and grouping the various items in an organization’s stores, it is useful to codify them.

Codification is the process of assigning a number or symbol to each store item, along with a name, in order to make it easy and convenient to identify.

The codification of store items thus leads to time-saving and labor efficiencies.

Different kinds of store codes are used today. Most have been specially designed to suit the requirements of a particular organization.

These codes may be based on the nature of stock items, the purpose for which the items are used, or on any other basis that is viewed as suitable according to the local circumstances.

Also, the accurate identification of the materials may require a lengthy description. This can be complicated and, hence, may add to the confusion.

Codification is necessary because it involves the assignment of logical and systematic numbers or alphabets (or both) to help in the simple but accurate identification of the materials.

Advantages of Codification

The main advantages of codification include:

  • Avoidance of long and unwieldy descriptions
  • Accurate and logical identification of items
  • Avoidance of duplication
  • Standardization of purchasing and storage
  • Reduction of variety
  • Effective planning and high-quality production

The use of codification also leads to efficiencies in the following areas:

Systems of Codification

In materials departments, four main systems of codification are commonly used. An overview of each system is given below.

Alphabetical System

In the alphabetical codification system, alphabetical codes rather than numerical codes are applied to items.

Each item in the storehouse is first classified and grouped based on its nature, use, and other factors. In turn, the items are analyzed to create a unique and descriptive alphabetical identifier.

For example, under an alphabetical codification system, iron ore may be assigned the code IN-O, whereas iron bars may be assigned the code IN-BA.

Numerical System

In a numerical system, the codes assigned to materials are numerical. Numbers are allotted as codes, which is useful for future expansion. For example, iron ore may receive the code of 05—10 and iron bars may have 11—67.

Decimal System

Codes in a decimal system consist of numbers, but instead of dashes in between two numbers, decimals (i.e., periods or full stops) are placed.

This makes the codes more flexible and makes future expansion a straightforward affair. For example, iron may be assigned the code 11.67.02 and iron bars may have 11.67.03.

Combined Alphabetical and Numerical System

Hybrid systems exist that combine all three of the above. Codes in a hybrid system may look like IN–05.10 (e.g., for iron ore) and IN-11.6 (e.g., for iron bars), and so on.

Bins and Racks

Bins

A bin is a compartment or a separated portion of a cabinet or pigeon-hole used to store a specific material.

A bin card is used to show, at a glance, the quality and quantity of the materials stored inside. It functions as a materials movement record and as a replenishment index.

A bin card is a brief version of the stock ledger pertaining to an item. It serves the purpose of a ready-reckoner for the binned item. As such, it is a kind of mirror for the bin.

A specimen of a bin card is shown below.

Bin Card Specimen

Racks

A rack is a fixed or movable frame of either wood or metal bars.

Racks are used to keep materials inside a store. They are just like almirahs, whether open or closed. Racks are mostly used to hold general store items, and they are in common use.

Racks are commonly applied to store tubes, bars, sheets, plates, cables, drums, and other items. Other racks acks may also be specially designed.

 

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

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