COST ACCOUNTING AND CONTROL
ACCOUNTING FOR MATERIALS
MATERIALS • Two-bin method – used for materials that are
• Means any commodity or substance which is considered inexpensive and/or nonessential.
processed in a factory in order to be converted into
finished product. • Automatic order system – used by most
• First and most important element of cost. companies that are computerized.
Direct Materials – materials which form a part of a • ABC Plan – method used by companies with a
finished product. large number of materials, each one having a
different value.
Indirect Materials – materials which cannot be
conveniently and accurately allocated to a particular ECONOMIC ORDER QUANTITY (EOQ)
unit of product. • According to Investopedia, EOQ is the ideal order
quantity a company should purchase to minimize
Considerations in choosing materials: inventory costs such as holding costs and order costs.
1. Type of materials needed The model assumes that demand, ordering, and
2. Quality of materials holding costs all remain constant.
3. Quantity needed
4. Price (cost) per unit Formula
2 SYSTEMS OF INVENTORY RECORDING
• Periodic Inventory System
Facilitates the physical counting of materials at the
end of accounting or production period, whereby the
where:
updated balances of materials is
2 = constant
based on this physical count.
C = cost of placing an order
N = number of units required annually
• Perpetual Inventory System
K = carrying cost per unit of inventory
Facilitates recording of movement of materials in
every purchase and
ORDER POINT
issuance to production through the use of stock cards.
• The point at which an item should be ordered. Once
Inventory records are updated in every internal
the EOQ has been determined, management must
manufacturing transaction.
decide when to place the order.
CONTROL PROCEDURES
1. Usage – the anticipated rate at which the materials
• It is of utmost importance that a company has a
will be used.
good system of materials inventory.
• Achievement of good control keeps costs at a
2. Lead time – the estimated time interval between
minimum level and plant production on a smooth,
the placement of the order and the receipt of the
uninterrupted schedule.
materials ordered.
COMMONLY USED CONTROL PROCEDURES
3. Safety stock – the estimated minimum level of
• Order Cycling – method where materials on hand
inventory needed to protect against running out of
are reviewed on a regular or periodic cycle, like let’s
stock.
say every 30 days.
Formula:
• Min-max method – based on the assumption that
Order point = usage x lead time
materials inventory have minimum and maximum
levels.
COST ACCOUNTING AND CONTROL
ACCOUNTING FOR MATERIALS
Revised order point = (usage x lead time ) + safety
stock 5. Indirect charging – the freight incurred on the
purchase of raw materials is charged to Factory
Business Papers used to support material Overhead Control account.
transactions:
1. Purchase Requisition – is a written request, usually Spoiled Units, Defective Units, Scrap Materials
sent to inform the purchasing department of a need and Waste Materials in a Job Order Cost System
for materials or supplies.
2. Purchase Order – is a written request to a supplier • Spoiled Units – are units that do not meet
for specified goods at an agreed upon price. production standards and are either sold for their
3. Receiving Report – When the goods that were salvage value or discarded. When spoiled units are
ordered are delivered, the receiving department will discovered, they are taken out of production and no
unpack and count them. further work is performed on them.
4. Materials Requisition Slip – a written order to the
storekeeper to deliver materials or supplies to the • Defective Units – are units that do not meet
place designated or to issue the materials to the production standards and must be processed further
person presenting a properly executed requisition. in order to be saleable as goods units or as irregulars.
METHODS OF COSTING MATERIALS • Scrap materials – are left over from the production
• First-in, First-out (FIFO) Method process that cannot be put back into production for
Assumes that the first stock to be received is first to the same purpose, but may be usable for a different
be sold. The cost of materials used is based on the purpose or production process or which may be sold
oldest prices. to outsiders for a nominal amount.
• Moving average Method • Waste materials – are left over from the production
is calculated after each new purchase, and this process that has no further use or resale value and
amount is used to cost each may require cost for their disposal.
subsequent issuance until another purchase is made.
DISCOUNTS - constitute a reduction in the list
price.
1. Trade discounts – generally given in terms of
percentage (15% , 10%, 5%) and are not recorded on
the books because purchases are recorded on the
books net of the discount.
2. Quantity discounts – represent cost savings for
volume purchases.
3. Cash discounts – granted to customers to motivate
them to pay promptly.
FREIGHT-IN
4. Direct charging – the freight incurred on the
purchase of raw materials is added to the invoice
price. The account debited for the freight is materials
(perpetual inventory system) or debited as freight-in
(periodic).
