4.

Efficient purchasing,management,and investment in materials depend on an

Page 10 accurate forecast of sales and resulting production schedules.
SYSTEMS OF ACCOUNTING FOR MATERIALS ISSUED TO 5.Forecasts help determine when to order materials.Controlling inventory can
PRODUCTION AND ENDING MATERIALS INVENTORY be
Either the periodic inventory system or the perpetual inventory system may be accomplished by scheduling production.
used to account for materials issued to production and ending materials 6.Inventory control is more than maintaining inventory records.Control is
inventory. exercised
ACCOUNTING BY THE PERIODIC INVENTORY SYSTEM by people who are making personal judgments partially on the basis of past
Under a periodic inventory system,the purchase of direct and indirect experiences but within the general framework of organizational objectives and
materials is policies to achieve them.
recorded in an.account entitled"Purchases".If a beginning materials inventory 7.Methods of inventory will vary depending on the cost of the materials and
exists, their
it is recorded in a separate account entitled"Materials Inventory-Beginning". importance to the manufacturing procedure.Expensive materials and materials
Purchases added to the materials inventory-beginning will be equal to essential to production will tend to have their program for control reviewed
materials more
available for use.Ending materials inventory is determined by a physical count frequently despite the cost and effort of doing so by experienced personnel
of the The total cost of a finished producr is composed of the amount spent for
materials on hand at the end of the period.Cost of materials issued is materials
determined by direct labor and share in the facton cvrhead lt becomes necessary therefore t0
deducting from the materials available for use the materials inventory- pt a cost control systern fr cenh element n ime maior function,in general,of an
end.Note
cost control system is to keep expenditures within the limits provided
that under this method the cost of materials issued is not directly determined;it
is
indirectly computed by deducting the remaining inventory on hand from the Page 12
total 175
available for use. a0
ACCOUNTING BY THE PERPETURAL INVENTORY SYSTEM Chapter 7 Accounting for Materials
Under a perpetual inventory system,the purchase of direct and indirect by a preconceived plan.The control should also encourage cost reductions by
materials is eliminating waste and operational inefficiencies.An effective system of cost
recorded in an account entitled“Materials Inventory"rather than in a purchase control
is designed to control the people responsible for the expenditures because
Page 11 people

Cost Accounting control costs,costs do not control themselves.

174 COMMONLY USED CONTROL PROCEDURES.

acoount.The beginning materials inventory is the balance of the materials 1.Order cycling
inventon 2.Min-max method
a e end of the previns mautinls iveonteras ae issued,the Materia 3.Two-bin method
Woount is credited for the cod of diren materials with a corresponding et bo 4.Automatic order system
the man 5.ABC plan
work in process inventory.ssuance of indirect materials is debited to the factor Order cycling-method where materials on hand are reviewed on a regular or
e
periodic cycle,like let's say every 30 days.The cycle length will differ
mverhead control account.Under the perpetual inventory system,both the cost according to
of a
the type of material being reviewed.Essential or important materials will have
maaterials issued and the ending materials inventory can be directly a
ascertained after
shorter review cycle than less important items.At the time of the review,an
each transaction. order will
CONTROL PROCEDURES be placed to bring the inventory to a desired level.A technique often used for
It is of utmost importance that a company has a good system of materials small
inventory items is the 90-60-30 day method.When the inventory level drops to a 60-day
control.Achievement of good control keeps costs at a minimum level and supply,
plant an order will be placed for a 30-day supply.
production on a smooth,uninterrupted schedule.The following concepts Min-max method-this method is based on the assumption that materials
should be inventory
employed in an inventory control system. have minimum and maximum levels.Once the specific minimum and
1.Inventory is the result of purchasing raw materials and parts.It is also the maximum
result of quantities are determined,the minimum quantity will represent the order
applying labor and factory overhead to the raw materials to produce finished point.When
goods. the inventory reaches the minimum level,an order is placed to increase the
2.Reduction of inventory is the result of normal use and also finding inventory
alternative uses to the maximum level Minimum quantities are usually determined to protect
for scrapping unneeded items. the

3.Optimum inventory investment is based on quantitative techniques,which company against stockout.

are Two-bin method-this method is used for materials that are considered
designed to minimize the cost of carrying inventory and the cost of ordering inexpensive

inventory. and/or nonessential.The advantage of this method is that it is simpie and

requires
only a minimum of clerical time.Under this materials are divided and placed shipment should be properly documented and approved.
into Segregation of Duties.Thefooorin nctions should be segregated to minimize
two separate bins.The quantity of materials that will be used between the time opportunities for misappropriation of inventories-
an purchasing,receiving,stomge,uss,
order is received and the next order is placed will be on the first bin.The and recording.
second bin
Accuracy in RecordingIventor rscords oould permit the determination of
will contain the quantity of materials that will be used between the ordering
and ventory quantities on haie son ne e a o recors ho oien nona

delivery,plus additional units of safety stock.When the first bin is emptied,an inv the valuation of inventories for the preparation of financial statemems.
order
Is placed.The contents of the second bin will be used until the receipt of the Page 14
shipment. 177
Automatic order system-this method is used by most companies that are Chapter 7 Accounting for Materials
computerized.An order is automatically placed when the level of inventory Controlling the Investment in Materials.
reaches a one of the most important objectives of material control is maintaining the
predetermined order point quantity.Perpetual inventory record cards are proper
maintained balance of materials on hand.An inventory of sufficient size and diversity for
VVe 卫介 efficient operations must be maintained,but the size should not be excessive in
relation to scheduled production needs.The planning and control of the
Page 13 materials
176 inventory investment requires careful study of the following factors:usage of
funds,
Cost Accounting
costs of materials handling,storage,and insurance against fire,theft,or other
Bdtich record purchases and isuance of the specific materials.When tdhe
casualty.
venion a
loss from damage,deterioration,and obsolescence.These factors should be
nane is equal to the prane isuarc eoof ine guantiy a oder ie place i h
considered in determining(1)when orders should be placed,and(2)how many
a computer,it is possitble to periodically recompute the optimum investment
units
in
should be ordered.
inventory and thus revise the quantity to be purchased.
Order Point.A subsidiary ledger must'be kept for each individual item of raw
ABC Plan-method used by compunies witha large number of aterin
material used in the manufacturing process.This ledger will indicate the
having a different value.The materials control for a high-value item will
inventory on
nanurally be
hand for each item.The point at which an item should be ordered,called the
different from the material control for a low-value item.The ABC plan is
order
systematic way of grouping materials into separate classification and
point occurs when the predetermined minimum level.of inventory on hand is
determining the
reached.
degree of control that each group requires.For an example,inexpensive or not
Calculation of the order point is based on the following data:
cntical
1.Usage-the anticipated rate at which the matcrials will be used.
materials may be accounted for by using the min-max method.For expensive
and 2.Lead time-the estimated time interval between the placement of an order
critical materials a more sophisticated method,such as the automatic order and receipt of the material.
system, 3.Safety stock-the estimated minimum level of inventory needed to protect
may be used. against running out of stock.
MATERIAL CONTROL Assume that the expected daily usage of an item of material is 100 units,the
There are two basic aspects of materials control anticipated lead time is 4 days,and it is estimated that a safety stock of 800
1.Physical control or safeguarding materials units is
2.Control of the investment in materials needed.The following calculation shows that the order point is 1,200 units
Physical Comtrol of Materials 100 units(daily usage)x 4 days(lead time)
Every business requires a system of internal control that includes procedures 400 units
for the Safety stock
safeguarding of assets.Inventories,just like cash and marketable 800 units
securities,must be Order point
protected from unauthorized use or theft.Inventories usually represent a 1.200 units
significant
Economic Order Quantity.-the purchase order which results in the minimum
portion of a manufacturer's current assets and because of this,materials total
must be controlled from the time the order is placed with the vendor until they Inventory cost.In determining the quantity to be ordered,the cost of placing an
are order
shipped to customers in the finished form.In general,effective control of and the cost of carrying inventory must be considered.
materials
Factors to be considered in determining ordering costs:
involves:
1.Salarics and wages of employees engaged in purchasing,receiving,and
1.Limited access. inspecting
2.Segregation of duties. materials.
3.Accuracy in recording. 2.Communication costs associated with ordering,such as
Limited Acceas.Only authorized personnel should have access to materials telephone,postage,and
storage forms of stationery.
area.All issuance of materials for use in prodction and release of finished 3.Materials accounting and record keeping.
goods for
Page 15 470
178 EOQ=500 units(order size where total costs=400)
Cost Accounting number of units per order
Factors to be considered in determining carrying costs Order size
1.Materials storage and handling costs. 10,000/order size
2.Interest,insurance,and property taxes. No.of orders
3.Loss due to theft,deterioration,or obsolescence. No.of orders x P10 per order
4.Records and supplies associated with the carrying of inventories. Total order cost
METHODS OF COMPUTING ECONOMIC ORDER QUANTITY Average Inventory
。TABULAR METHOD-Under this method,several purchase order quantity Order size/2
alternatives are listed in separate columns.Total inventory costs,showing both average inventory x P0.80
carrying and ordering costs are calculated for each,alternative.The column Total carrying cost
with the Total order&carrying cost
lowest total amount of inventory cost will be the economic order quantity Total.order cost+Total carrying cost
The economic order quantity can also be determined by constructing a table as iniand,the greater the tolt oous tni the ser the ord eg e he i i
shown
invsnnoreasing the total ordering coss.,irisihe responsibiliy of mrars sefue be
below: peae
Total
Total Page 16
Total order 179
Order Chapter 7 Accounting for Materials
No.of the proper inventory policy that keeps the total inventory costs(total carrying
Order Cost costs+
Average total ordering costs)to a minimum.
Carrying 2.FORMULA METHOD-The formula method is easy to use and it produces
＆carrying an
Size exact figures The formula that can be used is:
orders EOQ=
Inventory 2CN
Cost K
Cost where:
100 EOQ=economic order quantity
100 C=cost of placing an order
P 1,000 N=number of units required annually
50 K=carrying cost per unit of inventory
P ILLUSTRATIVE PROBLEM1
40 To illustrate the application of the formula,let us assume the following:
P 1,040 Number of units of materials required annually
300 10,000
33 Cost of placing an order
330 P 10.00
150 Annual carrying cost per unit of inventory
120 P 0.80
450 Using the EOQ formula:
500 EOQ=
20 2(cost of order)(number of units required annually)
200 （carrying cost per unit)
250 2(P10)(10,000)
200 P0.80
400 P200.000
700 P0.80
14 250,000
140 500 units
350
280 Page 17
420 180
11 Cost Accounting
110 Order Point
450 Onea the Economic Order Quantity has been determined,management mmus
anccide
006
en o place the order,the order point must be established.If the lead time and
360 the
inventory usage rate are known,determination of the order point is easy.,Lead b.Annual carrying costs
time e SOLUTION TO ILLUSTRATIVE PROBLEM 4
s the period between the placement of the order and the receipt of the 1.EOQ
materials
2(cost of order)(number of units required annually)
ordered.Inventory usage rate is the quantity of materials used in production
over a （carrying cost per unit)

period of time.The order point should be where the inventory level reaches the Z(P50)(5,000)

number of units that would be consumed during the lead time 50

ILLUSTRATIVE PROBLEM2 P500,050

Assume that the expected daily usage of an item of material is 100 units and P50
the 10,000
anticipated lead time is 4 days..The following calculation shows that the order 100 units
point is 400 units. 2.a)Annual ordering cost-=5,000 x5、＝P2,500
Order point=100 units(daily usage)x4 days(lead time) 100
＝400 units b)Annual carrying cost
When the inventory level of materials is reduced to 400 units,an order should 100x50=2500
be 2
placed for 500 units(the EOQ)
Safety Stock Page 19
Since it is almost impossible to estimate lead time and average usage rate with Cost Accounting
accuracy,many companies prefer to carry a safety stock(or additional 182
inventory)asa
MATERIAL
cushion against possible stockouts.In such a case,the order point is computed
BUSINESS
by
SUPPORT
adding the safety stock to the estimate usage during the lead time.A safety
stock PAPERS
calculation should arrive at a figure which properly balances the risk of a USED
stockout TO
against the additional carrying costs incurred by the extra inventory. TRANSACTIONS
ILLUSTRATIVE PROBLEM 3 1.PURCHASE REQUISITION-is a written request,usually sent to inform the
Assume the use of same data as in the computation of the order point purchasing department of a need for materials or supplies.The purchase
above(without
requisition is usually preprinted according to the specifications of a particular
the safety stock),the revised order point may be computed as follows
company.Most forms usually include the requisition(serially numbered)name
assuming safety
of
stock of 800 units:
the department or individual making the request,quantity of items requested,
100 units(daily usage)x4 days(lead time)
description of the item,unit price,order data,required delivery date,and
400 units
authorized signature.
Safety stock
FIGURE 7-1
800 units
PURCHASE REQUISTION
Revised order point
NORTHERN CONSOLIDATED COMPANY
1.200 units
PURCHASE REQUISITION
Department or individual making the request
Page 18
Forming Department
181
ORDER DATE 1////9
Chapter 7 Accounting for Materials
DELIVERY DATE REQUESTED1/13/19
LLUSTRATIVE PROBLEM4
QUANTITY
A television manutacturer buys wooden cabinet from outside suppliers at P
DESCRIPTION
400 per
UNIT PRICE
set Total annual needs are 5,000 units at a rate of 20 sets per working day.The
DTAL
following cost data are available
600 UNITS
Desired annual return on inventory investment(10%x400)
Material A
P
P 5.50
40
P 3,300
01
TOTAL COST P3.300
Rent,insurance,taxes per unit per year
APPROVED BY
50
Using the Ilustrative problem of hapter 4.the Forming Department
Carrying costs per unit per year
requisitioned 600 units of Materials iTo o copies of the purchase requisition
Costs per purchase order-clerical costs,supplies,telephones,etc.
re customarily made,the original oig te te purchasing departmento place
50
ae order)and the copy remainin th te oreroom clerk ho reue e
Requirements:
purchase order(to keep track oorders placed)
1.What is the economic order quantity?
2.Compute for
Page 20
a.Annual ordering costs
183
Chapter 7 Accounting for Materials received,description of goods,diserepancies from the purchase order(or
PURCHASE ORDER-is a written request to a supplier for specified goods at mention of
an agreed upon price.The request also stipulates terms of delivery and terms damaged goods,and authorized signature
of FIGURE7-3
payment.The purchase order is the supplier's authorization to deliver goods RECEIVING REPORT
and NORTHERN CONSOLIDATED COMPANY
submit a bill.All items purchased by a company should be accompanied by NOVALICHES,QUEZON CITY
purchase orders,which are serially numbered to provide control over their SUPPLIER Ellery Company
issuance.The following items commonly included in a purchase order are PURCHASE ORDER NO.015
preprinted name and address of company placing the order,purchase order DATE RECEIVED
number,name and address of supplier,order date,date delivery is requested. 1/03/19
delivery and payment terms,quantity of items ordered,description,unit and QUANTITY
total
DESCRIPTION
price,shipping,handling,insurance and related costs,total cost of entire order,
DISCREPANCIES
and authorized signature.If the purchase requisition is properly completed,the
600
purchasing department will issue a purchase order(in this case,for 600 units of
Material A
Material A).Figure 6-2 below shows a purchase order.The original is sent to
none
the supplier(to place the order)copies usually go to the accounting department
AUTHORIZED SIGNATURE
（for future recognition in the purchases journal and the general and
subsidiary The original copy of the receiving report is kept by the receiving
department.Copies
ledgers),to accounts payable,(for eveniual payment within the discount
period), are sent to the purchasing depariment(to indicate the order was received)and
to the
to the receiving department(to alert them to expect a delivery),and a copy is
counts payable department(to be matched against the purchase order and the
kept by the purchasing department(to maintain a file of all purchase orders
supplier's bill).If all three agrme,peyme s uthorized.Copies are also sent to the
issued)
counting departent i o e urase ad the related liability)
FIGURE 7-2
and to the storeroom clerk who riginc ase requisitiont gee
PURCHASE ORDER
the goods have arrived).A copy also aecompanies the materials to the
NORTHERN CONSOLIDATED COMPANY storeromt.
NOVALICHES,QUEZON CITY
SUPPLIER Ellery Company Page 22
ORDER DATE 185
1/02/19 Chapter 7 Accounting for Materials
Cubao,Q.C. le
DATE REQUESTED BY1/03/19 MATERIALS REQUISITION SLIP-a written order to the storekeeper to
DELIVERY TERMS FOB Destination PAYMENT TERMS deliver materials or supplies to the place designated or to issue the materials
N/30 to
UANTITY QO
DESCRIPTION the person presenting a properly executed requisition.Each material
UNIT PRICE requisition
TOTAL O
009 form shows the job number or department requesting the goods,their quantity
Material A and description,and the unit cost and total cost of the goods issued.The cost
P 5.50 that is entered on the materials requisition is the amount charged to production
P 3,300 for materials consumed.
TOTAL COST FIGURE7-4
APPROVED BY MATERIALS REQUISITION FORM
P 3.300 MATERIAL REQUISTION FORM
DATE REQUISITIONED 1/05/19
Page 21 DATE ISSUED 1/06/19
184 DEPARTMENT REQUISTIONING FORMING
Cost Accounting APPROVED BY
3.RECEIVING REPORT-When the goods that were ordered are droive REQUISITION NO.05
red.the ISSUED BY
eiving department will unpaek and count them.It is interesting to moe that bhe QUANTITY
e DESCRIPTION JOB NO
denntity ordered is not shown on the copy of the purchase order sent to the UNIT COST
receiving
TOTAL
department.This deliberate Omission ensures that the goods delivered
200
ne actually counted.The goods are checked to be sure that they are not
damaged and 101

that they meet the specifications of the purchase order.This form includes the Material A

Supplier's name,purchase order number,date delivery was received,quantity P 5.00

R
1,000 Issue 500 units
400 18
Material A Purchase 300 units at P15
102 4,500
5.00 20
2,000 Issue 200 units
200 25
Material A Purchase 400 units at P14
102 5,600
5.50 28
1,100 Issue 400 units
TOTAL The inventory on August 31 shows 600 units on hand.Under periodic
P inventory
4.100 system,the most recent costs would be assigned to the units as follows:
METHODS OF COSTING MATERIALS From Aug.25 purchase 400 units at 14
the main objective of cost accounting is to produce accurate and meaningful P 5,600
figures From Aug.18 purchase 200 units at 15
for the goods manufactured and sold which are to be used by management for 3.000
control, Total
analysis and for the determination of the of the operating income.The more 600
common
P 8.600
methods of costing materials issued and finished goods sold are:
If the ending inventory is valued at P8,600,cost of materials issued is P12,700
1.First-in,first-out(fifo)
computed as follows:
2.Average cost
Materials,Aug.1
f
P 4,000
00
Purchases(7,200+4,500+5,600)
17.300
Page 23
Total available for use
186
21,300
Cost Accounting
Less:Materials,Aug.31
These methods are related to the flow of costs and not necessarily to the atie
coe e 8.600

naterials of finisthed goods the mey the eeaterials were acquired a the brae Direct materials used
bveal g P12.700
har round,then valuation of maerials inventory,end,will not be a problcru
nccause Page 24
n aiue can be computea by rareri muinying the is o hand r 187
thne siame can be said for the rinished goods because if the units were preoru Chapter 7 Accounting for Materials
at e
When perpetual inventory system is used,a stock card is used to record the
same cost all year round,the value at the end of the period can be conpuited by costs
a
assigned to units issued and to cost relating to the units on hand.
mutiplying the finished goods on hand by the cost to produce each unit.The
DATE
different
RECEIVED
methods are used because the materials are acquired at different costs during
the year. ISSUED
verage cost for perpetual inventory system refers to moving average and for BALANCE
periodie 400 at P10.00
inventory system-weighted average. P4,000
FIRST-IN,FIRST-OUT(FIFO)METHOD OF COSTING 8/1
The first-in,first-out(FIFO)method is based on the assumption that cost should 12
be
600 at P12.00
charged to manufacturing cost or cost of goods sold in the order in which
400 at 10.00
incurred.
4,000
Inventories are stated in terms of the most recent costs and expense is charged
with 600 at 12.00
the earliest costs incurred. 7,200
ILLUSTRATIVE PROBLEM 5 16
August 1 400 at 10.00
Inventory 400 units at P10 100 at 12.00
P 4,000 500 at 12.00
12 6,000
Purchase 600 units at P12 18
7,200 300 at P15.00
16 500 at 12.00
6,000 。Weighted average method-used for periodic inventory system.Thise mh osi
300 at 15.00 naede on the assumption that uaits ioened should be charged at an svr i
4,500 eah average being infueneed os weighted by the number of units agur at
20 euch price.The inventory at the end is computed by multiplying the weighted
200 at 12.00 age cost per unit by the units on hand.Using the ilustrative problem on page
300 at 12.00 186,the weighted average unit cost is computed as follows:
3,600 P
300 at 15.00 4,000
4,500 400 units at P 10.00
25 7,200
400 at P14.00 600 units at 12.00
300 at 12.00 300 units at 15.00
3,600 4,500
300 at 15.00 5,600
4,500 400 units at 14.00
400 at 14.00 1,700
5,600 21,300
28 Weighted averaged unit cost=21,300
300 at 12.00 1,700
200 at 15.00 ＝P 12.529
3,000 Inventory,August 31(600 units x P 12.529)=P 7,517.65
100 at 15.00 b.Moving average metbod-when a perpetual inventory system is used,a.new
400 at 14.00 weighted average unit cost is calculated after each new purchase,and this
5,600 amount
As shown on the issued section of the stock card-above,the cost of materials is used to cost each subsequent issuance umtil another purchase is made.
issued is: DATE
400 at P 10.00 RECEIVED
P ISSUED
4,000 BALANCE
100 at 8/1
12.00 400 at P 10.00 P 4,000
1,200 12
200 at 600 at P12.00
12.00 1,000 at 11.20
2,400 11,200
300 at 16
12.00 500 at P11.20
3,600 500 at 11.20
100 at 5,600
15.00 18
1,500 300 at 15.00
。100 800at 12.625
12.700 10,100
The value of the units on hand,August 31 using perpetual inventory system is 20
the 200 at 12.625
same as that computed under period inventory system.The amount is 600 at 12.635
computed as
7,575
follows:
25
200 at P 15.00
400 at 14.00
P
1,000 at 13.175
3,000
13,175
400 at
400 at 13.175
14.00
28
5.600
600 at 13.175
600
7,905
8.600
The computation of the unit cost is as follows:
Aug.12
Page 25
Balance
188
400 at P10.00
Cost Accounting
P
AVERAGE METHOD
4,000
Purchase 1.
600 at 12.00 Trade discounts-generally given in terms of percentage(15%,10%,5%)
7,200 and are used to convert single price list into a series of price lists for
1,000 different types of middleman.Trade discounts are not recorded on the
P 11,200 books because purchases are recorded on the books net of the discount.
The new weighted average unit cost CLR
＝
P 11,200 Page 27
1,000 units Cost Accounting
P11.20 061
ILLUSTRATIVE PROBLEM 6
Page 26 Windy Corporation buys all of ir materials and supplies from the Oregore
187 Pamon
Chapter 7 Accounting for Materials 000,00p aiam tom a gar r a
Aug.18 before the discount.
5,600 The entry to record the purchase is:
P Materials
Balance P 360,000
500 at P11.20 P 360,000
Purchase Accounts Payable
300 at 15.00 （400,000x90%)
4,500 2)Quantity discounts-represent cost savings for volume purchases.Like
800 trade discounts,quantity discounts are not given explicit accounting
10.100 recognition in the books.
The new weighted average unit cost 3)Cash discounts-granted to customers to motivate them to pay promptly.
P 10,100 a)When taken method-purchases and liabilities are recorded at gross
800 units amounts at the time of purchase.The discount is only recognized when
P 12.625 the account is paid within the discount period.
The cost of materials issued may be computed from the data presented under （q
issued When not taken method-purchases and liabilities are recorded at net
section. at the time of purchase;when payment is made after the lapse of the
5,600 discount period,the discount not availed of is charged to a"Purchase
500 units at P 11.20 Discount Lost"account.It is called when not taken method because
P even if the account is paid within the discount period,no"Purchase
200 units at 12.625 Discount”is recorded and therefore readers of the financial statements
2,725 would not know that the company has availed of the discount.
400 units at 13.175 c)
5,270 When offered method-purchases are recorded at net and the liability
1,100 is recorded at gross,the difference is charged to an"Allowance for
P 13,395 Purchase Discount"account.When payment is made after the lapse of
COMPARISON-FIFO AND AVERAGE METHODS the discount period,the discount not availed of is charged to the
AVERAGE ＂Purchase Discount Lost"account.
P 4,000
OHa Page 28
Inventory Chapter 7 Accounting for Materials
P 4,000 191
Purchases ILLUSTRATIVE PROBLEM7
17.300 The Jenelle Company purchased materials listed at P40,000;terms,2/15,n/30
17.300 on
Total available for use August 1.
21,300 Assume payments as follows:
21,300 a)
Less:Inventory,Aug.31 Full payment is made on August 14.
8,600 b) Full payment is made on August 30.
7,905 Requirements:Entries to record the purchase and payments assuming:
Direct materials used 1)
P12.700 When taken method is used.
P13.395 2)
SPECIAL PROBLEMS IN MATERIAL ACCOUNTING When not taken method is used.
1. 3)When offered method is used
DISCOUNTS-constitute a reduction in the list price. 1)When taken method is used:
Aug.1 40,000
Materials Cash
40,000 II.FREIGHT-IN
Accounts Payable 1.Direct charging-the freight incurred on the purchase of raw materials is
40,000 added to the invoice price.The account debited for the freight is Materials.
14 The effect is an increase in the unit cost.If two or more materials are
Accounts Payable purchased and delivered at the same time,the freight must be allocated using
40,000 the following methods:
Purchase Discount a.Relative peso value method-freight is allocated on the basis of the peso
800 value of the items purchased.This is used for materials purchased and
Cash expressed in different terms of measurement.
39,200 b. Relative weight method-freight is allocated on the basis of the weight of
30 the items purchased.
Accounts Payable 2.Indirect charging-the freight incurred on the purchase of raw materials is
40,000 charged to Factory Overhead Control account.
Cash ILLUSTRATIVE PROBLEM 8
40,000 An invoice for raw materials A,B,and C is received from the Bulacan
2)When not taken method is used: Corporation.
Aug.1 The invoice totals are:A-P25,000;B-P15,000;C-P10,000.The freight charge on
Materials this shipment weighing 10,000 pounds is P1,500.Shipping weights for the
respective
39,200
materials are 5,000,2,000,and 1,000,respectively.
Accounts Payable
Required:
39,200
1.Entry to record the purchase of materials and the freight using:
14
a. Direct charging method.
Accounts Payable
b.Indirect charging method.
39,200
2.
Cash
The cost per poumnd to be entered in the materials ledger cards for A,B,and
39,200
C,if freight is allocated using:
30
a.
Accounts Payable
Relative peso value method.
39,200
b.Relative weight method.
008
Purchase Discount Lost
Page 30
Cash
193
40,000
Chapter 7 Accounting for Materials
3)When offered method is used:
00
Aug.1
Direct charging method:
Materials
1.a)
39,200
Materials
Allow for Purchase Discount
51,500
800
51,500
Accounts Payable
Accounts Payable
40,000
b)Indirect charging method:
Materials
Page 29
50,000
192
Factory Overhead Control
Cost Accounting
1,500
14
51,500
40,000
Accounts Payable
008
re
Accounts Payable
g
Allow.For Purchase Discount
2, a)
39,200
Relative peso value method:
Cash
Share in
30
Total
Accounts Payable
Cost per
40,000
Mat.
008
Invoice
Purchase Discount Lost
Percentage
008
freight
Allow.for Purchase Discount
Cost AE
Pound ABC
0 ABC
5.15
25,000 Page 1
3% 194
750 Cost Accounting
25,750 SPOILED UNITS,DEFECTIVE UNITS,SCRAP MATERIAL,AND
15,000 WASTE MATERIAL IN A JOB ORDER COST SYSTEM
3% The terms spoiled units,defective,serap material and waste material are not
450 synonymous,and they should not be used interchangeably.
15,450 For this
7.725 discussion,the following definitions.will apply.
10.000 Spoiled units.are units that do not meet production standards and are either
3% sold for
300 their salvage value or discarded.When spoiled units are discovered,they are
10.300 taken out of production and no further work is performed on them.
10.30 Defective units are units that do not meet production standards and must be
1 processed further in order to be salable as good units or as irregulars.
50.000 Scrap material are left over from the production process that cannot be put
back into
1,500
production for the same purpose,but may be usable for a different purpose or
51.500
production process or which may be sold to outsiders for a nominal amount.
Percentage
Waste materials are left over from the production process that has no further
1,500 use or
＝3% resale value and may require cost for their disposal.
50,000 TWO METHODS OF ACCOUNTING FOR SPOILED MATERIALS
（q The method to account for spoiled materials depends on the reason for such
Relative weight method spoilage.
Weight 1.Charged to the specific job-this method is used if the reason for the spoilage
Freight per is
Share in the job itself,because it requires exacting specifications,or a difficult,intricate
or
Total
complicated manufacturing process.The effect of this method is that it will
Cost per
increase the unit cost of the remaining perfect finished articles in the job.
Mat.
XXX
（pounds)
Entry:
Pound
Spoiled goods
freight
Work in process
Cost
XXX
Pound
The amount debited to spoiled goods and credited to work in process is equal
5,000
to
0.1875
the number of units spoiled multiplied by the estimated sales value per unit.
937.50
25,937.50
Page 2
5.1875
Chapter 6 Accounting for Materials
2,000
195
0.1875
2.Charged to all productionc-this method is used if the reason for the spoilage
375.00 is
15,375.00 considered normal to the process and the number does not exceed the limit set
7.6875 by
1,000 the company.With this method,all units manufactured during the period are
0.1875 charged with an additional cost which is added to the factory overhead
rate.The
187.50
unit cost originally charged will not increase anymore even if there are spoiled
10,187.50
units discovered later on.
10.1875
Entry:
8.000
Spoiled goods
1.500.00
Factory overhead control
51,500.00
Work in process
Freight per pound
XXX
1,500
The amount debited to spoiled goods is equal to the number of units spoiled
8,000
0.1875
multiplied by the estimated sales value per unit.The amount credited to work 152,000
in 2.Loss is charged to the specific job.
process is equal to the total costs incurred/charged to the spoiled units.The a)
loss is
Work in Process
charged to factory overhead control.
156,000
If the number of units spoiled exceed the limit set by the company,or if the
reason is Materials

not considered normal to the process,the loss on the spoiled units is charged to 60,000
a loss Payroll
account. 52,000
IILLUSTRATIVE PROBLEM 9 Factory Overhead Applied
Job 3044 called for the making of 4,000 with these unit costs: 44,000
P Materials=
15.00 4,000x15.00
Direct materials Labor
13.00 4,000x 13.00
Direct labor Overhead=
Factory overhead(includes a P1.00 4,000x11.00
12.00 b) Spoiled Goods
allowance for spoiled work) 3,600
40.00 Work in Process
Total 3.600
Mlen the order was completed,200 rejected units,a normal number,were sold Finished Goods
for 152,400
P18.00 each. C)
Required: Work in Process
。Entries if the loss is charged to all production. 152,400
2.Entries if the loss is charged to the specific job. Under the method,loss charged to al prodiuction,the unit cost of the completed
units
Page 3 remains at P40.00.In spite of the spoiled units,the unit cost
196
Cost Accounting Page 4
1.Loss is charged to all production: Chapter 7 Accounting for Materials
160,000 197
a)Work in Process remained the same because the increase was made at the start(when P1.00 was
60,000 added

Materials io the factory overhead rate as allowance for spoiled work).All units
processed
52,000
during the period,even those jobs without spoiled units,will absorb the
Payroll additional
48,000 P1.00.Upon completion of the job,even if there were spoiled units,the unit
Factory Overhead Applied cost will
Materials= be the same as the amount originally charged to the job.
4,000x 15.00 On the other hand under the method,loss charged to the specific job,it will be
Labor noted
4,000x 13.00 that the factory overhead rate was recorded at the original amount
P11.00(allowance
Overhead=
of P1.00 for spoiled work was not added).The remaining perfect units in the
4,000x 12.00 job will
b) absorb the loss on the spoiled,resulting in an increase in the unit cost
Spoiled Goods （152,400
3,600 （3,800 units=40.105/unit
Factory Overhead Control the increase in the unit cost(40.105-39.00=1.105)may be computed as
4,400 follows:
8,000 Cost of spoiled(200x 39.00)
Work in Process 7,800
Spoiled= Less:Amount recovered from sale(200x 18)
200x18.00 3.600
WP Loss on spoiled goods
200x40.00 4.200
6 The loss on spoiled goods will be absorbed by the remaining good units(4,200
Finished Goods divided by 3,800 units=1.105/unit).
152,000 TWO METHODS OF ACCOUNTING FOR DEFECTIVE MATERIALS
Work in Process
The accounting problem for defective units is the additional costs to be a
incurred in Work in Process
reprocessing the units to convert them into perfect articles.There are two 160,000
methods
large
available:
Materials
。Charged to the specific job-same for spoiled units,if the reason for the
defect is Payroll

the job itself,the additional costs incurred(materials,labor,and overhead)will 60,000

be Scrap
charged to all units in the job. Factory Overhead Applied
Entry: 52,000
Work in process 1.I
XXX 48,000
行药 b) Factory Overhead Control
Materials 8,000
Payroll Materials
RB 2,000
Factory Overhead Applied Payroll
Factory Overhead Applied
Page 5 4,000
Cha 2,000
198 c)
Cost Accounting Finished goods
2.A 160,000
2.Charged to all produetion-if the reason is normal to the procese ane e 2.1
fumber of defective units do not exceed the normal limit,then the additional Work in Process
costs 160,000
Incurred will be charged to all units being processed during the period. the cost of the finished goods wil remoin at the original amount charged to the
Entry: job
XXX （160,000 divided by 4,000 units=P40.00)
Factory overhead control
Materials Page 6
Payroll Chapter 7 Accounting for Materials
XXX 661
Factory overhead applied ＇g
ILLUSTRATIVE PROBLEM 10 2.Additional cost is chanxed to the specific job.
Job 3044 called for the making of 4,000 units with these unit costs: the
Direct materials sts
P Work in Process
15.00 156,000
Direct labor Materials
13.00 60,000
Factory overhead(includes a P1.00 Payroll
allowance for defective units) 52,000
12.00 Factory Overhead Applied
Total 44,000.
40.00 b) Work in Process
The 8,000
During processing 300 units were found to be defective and required the Materials
following 2,000
（164, Payroll
total additional costs:materials-P2,000;labor-P4,000;and overhead-P2,000. 000
re-pr Factory Overhead Applied
Required: 2,000
ACC C)
1.Entries if the additional cost is charged to all production Finished Goods
A co 164,000
2.Entries if the additional cost is charged to the specific job. Work in Process
it do 164,000
the n The unit cost of the completed units increased from the original P39.00 to
1.Additional cost is charged to all production. P41.00
shoul OD
（164,000 divided-by 4,000 enits)..All units in the job will share in the cost disposal cost.
incurred to The cost of disposing of most type of waste is expected to increase
re-process the defective units. significantly in the
ACCOUNTING FOR SCUAP MATERIAL near future as existing garbage dumps fill up and more elaborate and
A cost accounting systen shoeld provide a method of costing and control for expensive forms
scrap as of disposal must be developed.
it does for spoilage and defceve units.When the amount of scrap produced
exceeds Page 8
the norm,it could be an indication of inefficiency.A predetermined rate for Chapter 7 Accounting for Material;
scrap
201
Should be prepared as a guide for comparison with the actual scrap those
results.If ACCOUNTING FOR BASIC MATERIAL TRANSACTION

large differences ocour,management should find the reason and correct the SUBSIDIARY
problem. TRANSACTION
Scrap materials have commtionly been accounted for in either of the BUSINESS PAPER
following ways. ENTRY
1.If the serap recovered can be traced to a specific job,the entry is RECORDS
Scrap/Scrap Matertals Purchases of
Work in Process Voucher supported
The amount recovered for the scrap will be entered negative()on the materials Dr.Materials
section of the job order cost sheet. Received
2.If the scrap recovered are not traceable to a specific job,the entry is: Materials in
Scrap/Scrap Materinls by invoice;receiving
XXX Cr.Accounts
MiscelfaAeodt thcome section of
XXX Advance of use
report and purchase
Page 7 Payable
200 stock card
Cost Accounting order(PO)
3.If the scrap recovered are from factory supplies,the entry is: Emergency
Scrap/Scrap Materials Voucher supported
XXX Dr.WP
XXX Material section
Factory overhead control Purchases of
ACCOUNTING FOR WASTE MATERIAL by invoice;
The cost of disposing of waste materials may be allocated either to all Cr.Accounts
iobsinelled
of cost sheet
in the factory overhead application rate)or to specific jobs(not included in the
Direct material
factory
receiving report and
overhead application rate).
Payable
1.If the cost of disposing the waste materials is allocated to all jobs,the entry
is purchase order
Factory overhead control Emergency
XXX Voucher supported
Accounts payable Dr.FOC
XXX Factory OH
2.If the cost of disposing the waste materials is allocated to a specific job,the Purchases of
entry by invoice;
Work in process inventory-(Job number) Cr.Accounts
Accounts payable Ledger
XXX Ind.Materials
Waste exceeding a specified normal level(based on past experience)indicates receiving report and
inefficiencies somewhere in the production process and signals management Payable
to take
purchase order
corrective action.
Return of
Although the cost of disposing of waste materials is minimal as compared to
Return shipping
the total
Dr.Accounts
production costs,in some manufacturing and service corporations it may
involve Received section
significant expenditure.For example,a chemical manufacturer may have toxic Materials and
waste order with debit
which requires special packaging before disposal and thus results in an Payable
expensive of stock card()
Supplies to vendor
memo
Cr.Materials
Issue of
Materials
Dr.WP
Mat.section cost
Direct materials
Requisition
Cr.Materials
sheet.
Issued section of
stock card
Issue of indirect
Materials
Dr.FOC
OH ledger
Mat.& supplies
requisition
Cr.Materials
Issued section
stock card
Return of excess
Returned
Dr.Materials
Issued section
Materials from
materials report
Cr.WP
of stock card()
Factory
Mat.cost sheet