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RAMACHANDRAN
Times Business School,Vashi,
Navi Mumbai-400 703
(October,2011)
Material Cost
Agenda
Introduction
Components of Material Cost
Classification of Inventory
Requirements of Material Stock Control
Purchase and Stores Procedure
Methods of Pricing Material Issues
Accounting Control of Waste, Scrap, Spoilage
Introduction
Raw Materials can be defined as Goods
Introduction
Indirect Material Cost
Cost incurred on materials which cannot be
traced in the end product but required in
production process and not necessarily
built in to the end product.
For Example: Gums, thread used in binding
books.
Components of Material
Cost
Direct Material Cost The basic rate charged
by the supplier on the goods sold to the buyer.
It also includes the following items:
Components of Material
Cost
Quantity Discount, Trade Discount
Illustrations
Classification of
Inventory
ICAI has defined inventory as
Tangible property held
follows:
the
manufacture of products.
Work- in-Progress - partly finished goods and materials, subassemblies etc. held between manufacturing stages.
Finished Goads - completely ready for sale or distribution.
areas:
Ordering,
Purchase,
Receipt,
Storage and
Issues.
Where materials are purchased specially for a specific Job, actual cost
Under this method materials are issued out of stock in the order in
which they were first received into stock. It is assumed that the
first material to come into stores will be the first material to be used.
CIMA defines FIFO as "a method of pricing the issue of material
using, the purchase price of the oldest unit in the stock":
Advantages
Advantages
Methods of Pricing
Material
Issues
Highest-in First-out Method (HIFO)
Under this method the materials with highest
Methods of Pricing
Material Issues
Methods of Pricing
Material Issues
Methods of Pricing
Material
Issues
Periodic Average Cost Method
Methods of Pricing
Material
Issues
Methods of Pricing
Material Issues
Methods of Pricing
Material
Issues
Next in First-out Method (NIFO)
This method is a variant of replacement cost method. Under
materials used
Quantum of materials used in the organization
Frequency of purchases and issues
Bulkiness and the price of the materials Economic
batch quantity
Tendency of inflation or deflation Violent
fluctuation in prices
Rate of stock turnover
Reutilization and mechanization of stores
procedures.
Important Considerations in
Selection of Material Pricing
Accounting practice acceptable in valuation of
inventory
Method
Steps to Avoid
Discrepancies
Steps to be taken to avoid discrepancies in physical stock
authorized persons.
Material requisition should be signed only by the
authorised persons.
Proper maintenance of stores records like Bin
Card/Stock Card, Stores Ledger etc.
Regular check by independent staff to detect and correct
mistakes.
Issue of material only against proper requisition slip.
Recording of all movements of stock.
Physical verification and counting at the time of
receipt and issue of material.
Use of FIFO method for stock issues for avoidance of
deterioration and obsolescence.
Methods of Pricing
Material Issues
Illus trations
Stock Levels
Methods of Pricing
Material Issues
Waste
Waste is a material loss during production or storage due to
evaporation, chemical reaction unrecoverable residue, shrinkage etc.,
Wastage may be visible or invisible wastage. Wastage may be normal
waste incidental to manufacturing activities or abnormal waste which
is in excess of material loss over the normal losses. Necessary steps
should be taken to minimize abnormal wastage.
Control on waste can be achieved in the following aspects:
Quantity Control: It involves maintenance of detailed records of
Methods of Pricing
Material Issues
Methods of Pricing
Material Issues
Scrap
Scrap is the residue material that has a recovery value. It is
incidental residue from the materials used in manufacturing
operations which is recoverable and measurable without processing,
Control For control purpose scrap may be classified into the following:
Methods of Pricing
Material Issues
the following
considerations:
If the value of the scrap is negligible, the good units should bear
the cost of scrap and any income realized will be treated as other
income.
When the value of scrap is considerable and identifiable with the
process or job., the cost of the scrap will be transferred to scrap
account and any realization from sale of such scrap will be
credited to the job or process account and any unrecovered
balance in the scrap account will be transferred to Costing Profit
and Loss Account.
If the scrap value is significant and it cannot be identified with
particular job or process, then the net sales realization after deducting
the selling cost is transferred to either Material or Factory
Overhead Account. This method will reduce the cost of material or
factory overhead to the extent of sale proceeds of scrap.
Methods of Pricing
Material Issues
Spoilage
Spoilage is the production that fails to meet quality or dimensional requirements
and these are so damaged in manufacturing operations that they are not capable
of rectification economically and hence taken out of the process and disposed of
without further processing. If spoilage is well within the limits, it is regarded as
normal spoilage. The limits of spoilage are laid down after thorough study of
material, men, processes and operating conditions. If spoilage exceeds the limits
of normal spoilage, it is referred to as abnormal spoilage requiring prompt quick
action.
Control of spoilage can be achieved in the following ways:
Control through predetermined standards.
Control through fixation of individual responsibility.
Prompt and systematic reporting of spoilage.
Accounting of Spoilage - The Accounting treatment of Spoilage is as follows:
If the cost of Spoilage is normal and inherent in the process or operation, then the cost of
Spoilage is absorbed by charging either to the specific production order or to product
overheads.
The cost of abnormal spoilage arise in the process is charged to Costing Profit and
Loss Account. If spoilt units are reused as raw material in the same process, no
separate accounting treatment is required and if, spoilage is used for any other
process or job, a proper credit should be given to relevant process account or job
account.
Methods of Pricing
Material
Issues
Defective
Defectives represent the part of production that does not meet
Methods of Pricing
Material
Issues
Defective work can be classified into the following:
Methods of Pricing
Material
Issues
Accounting of Defectives - The accounting treatment of
defectives is as follows :
Normal Defectives: If the defectives are of normal and within
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