Meaning of Material

Amity School of Business

The Institute of Chartered Accountants of

India define inventory as:
tangible property held; for sale in the ordinary
course of business or; in the process of
production for sale or; for consumption in the
production of goods and services for sale,
including maintenance supplies and consumable
other than machinery spares.

Objectives of Materials
Issue Control
Every issue must be authentically authorised.

Amity School of Business

Proper accounting of every authorised issue.

Proper pricing of material.
Proper charging of material cost to product, process
or job.

Methods of pricing materials

Amity School of Business

Cost price methods

Specific Price.
First in First out.
Last in First out.
Base Stock.
Highest in First out.
Next in First out.
Average cost price
methods
Simple average price.
Weighted average price.
Periodic simple average
price.

Periodic
weighted
average price.
Moving
simple
average.
Moving
weighted
average price.
Notional price
methods
Current Standard
Price.
Inflated Price.
Replacement price.
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Amity School of Business

At Cost or Actual Price Method

Specific cost method: Adopted where special
types of material are bought for the execution of a
job or contract.
The materials to be issued to jobs are identified
with the invoices prices and if any handling and
inspection costs are to be incurred such expenses
are also included to constitute issue prices.
The materials which are thus priced is commonly
known as special material as they specifically
purchased at the instance of customers.

First-In, First-Out Method (FIFO)

Amity School of Business

Material received first is issued first.

Assigns the cost of the previous accounting
periods equivalent units in beginning work in
progress inventory to the first units completed
and transferred out of the process.
Assigns the cost of equivalent units worked on
during the current period first to complete
beginning inventory, next to start and complete
new units and finally in units to ending work in
progress.
It follows that units costs are apportioned to cost
of production according to their chronological
order of receipts.
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Advantages of FIFO

Amity School of Business

As material are issued a actual cost but not on

estimates, unrealised profit or loss will not arise.
The value of closing stock will reflect current market
price.
For physical issue of materials, this method gives
correct cost of material consumed.
It is easy to understand and simple to operate.

Disadvantages of FIFO

Amity School of Business

Issue prices do not reflect current market price

and so does the cost of production.
Two similar jobs cannot be compared as difference
rates of material are used to execute the jobs.
During the period of falling prices cost of

production will remain high.

During the period of inflation, it will lead to lower
cost of sales and higher profits.

Suitability : Where there is fast stock turnover

or prices remain reasonably stable.
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Last In First Out (LIFO)

Amity School of Business

Material received at last are issued first.

The cost of goods sold and the value of closing inventory
is determined only after the final lot of goods is received.
The use of inventory is valued on the basis of the inverse
sequence of receipts.

Advantages of LIFO
Amity School of Business

All issues are priced at actual cost no unrealised

profit or loss is derived.
Issue price reflect the current market price and
hence the cost of production also conforms to the
current market price.
It is possible to fix the current market price.
Because of inflation in the cost of production the
reduced profit margin results in savings in tax.

Disadvantages of LIFO
Amity School of Business

Two similar jobs cannot be compared because of

charging different rates of material to different material.
The closing stock does not reflect current market price.
This may not be accepted by income tax authorities.
Cannot be operated when the invoice price does not
reach before issues are to be priced.

Suitability: Easy to operate where purchases are

made less frequently, price remain unstable.
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Amity School of Business

Base Stock Method (Minimum Stock): Used by

concerns as a safety measures to ensure
continuity in production.
Works under the assumption that a certain
minimum quantity of materials have to be set
aside which will be used during emergency
period.
The minimum stock is treated as Base Stock.
Materials in excess of base stock is issued either
on the basis of FIFO or LIFO principle.

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Highest in first out (HIFO)

Amity School of Business

A variation of LIFO method.

Issues are priced at the highest rates of material in
stock irrespective of dates of purchases.
Purpose:
To charge with the highest rate of materials to the
current cost of production.
Impact :
Cost of production overstated.
Profit understated.
Closing stock is understated.
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Amity School of Business

Next in first out (NIFO)

Issues are priced at the purchased rates of
material yet to arrive.
Material are issued at the price at which the new
order has been placed. This price will hold good
for all future issues until a next order is placed.

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Computed Actual Cost

Amity School of Business

Simple average price method

In simple average method, issue price of
materials are fixed at average unit price. Simple
average is an average of price without considering
the quantities involved.
The average price is calculated by dividing the
total of the rates of the materials in the stores by
the number of rates of prices.
Simple average price = Total unit prices of
material in stock
Number of purchases

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Weighted Average Method

Amity School of Business

ICAI says that..

A price which is calculated :
Total Cost of material in
the stock
Total quantity of material
in stock
It takes into account both the quantity and price of
material in the store for determining the issue price.
It is superior to simple average because it recovers
the cost price of materials from production.
When the perpetual inventory system is used, the
weighted average method is called the Moving
Average method.
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Advantages of Weighted Price

Amity School of Business
Method
Easy to operate.
In case of high fluctuations in price and quantities
purchase lots.
Issue price is not calculated every time, a
requisition slip is delivered.
Recovers cost of material from production.
Closing stock reflects a fair value.

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Disadvantages of Weighted
Average Price Amity School of Business
Calls for many calculations when purchases are
made frequently.
Issue rate has to be calculated each time when a
new purchase is made.

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Standard Price
Amity School of Business

Issues are based on a standard price for a specific period.

Basic standard price: The ideal standard price fixed for
long periods so as to help towards planning.
Current standard price: The basic standard price which
has been adjusted to provide permanent changes in cost on
account of prevailing trends in market.

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Inflated Price
Amity School of Business

Some material are subject to natural wastage such as :

material lost due to loading and unloading .
In such cases , the material are issued at an inflated price
so as to recover the cost of the natural wastage of
material from the production.
In this way the total cost of material is recovered.
Inflated price = Cost of material + Cost of contingencies
and other costs.

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Market Price/ Replacement Price

Amity School of Business

Materials are issued at the price at which they can be

replaced.
In other words, at the market price prevailing on the date
of issue.
Areas of application:
Material purchased in advance for use in large quantities.
Anticipation of economic/ profitable use.

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Choice of Methods
Amity School of Business

Extent of price fluctuations.

Frequency of receipt and issue of materials.
Impact on profit are analysed.
The suitability of the different methods to value
inventory is examined.
Managerial policy regarding the valuation of closing
stock.
The material should reflect the current market price of
the material.

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Methods of Costing

Amity School of Business

Job costing
Process costing
Batch costing
Contract costing
Unit or Single costing
Operations costing

JOB COSTING

Amity School of Business

A method of cost accounting whereby

cost is compiled for a specific
quantity of product, equipment
repair or other service
Examples: printers, machine tool
making industries, furniture making
concerns, interior decorations,
tailoring, painting, automobile repair
shop

Features of Job Costing

Amity School of Business

Dissimilar in nature
Production intermittent not continuous
Undertaken against customers orders
Industries need not incur selling and
distribution expenses
Each job treated as a cost unit
Work-in-progress differs from period to
period according to the number of jobs
in hand.

BATCH COSTING

Amity School of Business

A form of specific order costing

where similar articles are manufactured in
groups or batches either for sale or use
within the undertaking
When articles are produced in a group or
large number of articles is produced in one
setting of the machines or tools because
these articles are of the similar nature,
design, colour or size
Examples: bakery products, hardware,
readymade garments, drugs &
pharmaceuticals, shoe manufacture

CONTRACT COSTING

Amity School of Business

A variation of job costing applied in

those undertakings which are engaged
in constructional and repair work.
Variation of job costing difference lies
in the size of the order received
Examples: Builders, civil engineering
contractors, road repairing concerns,
dams & bridge constructional concerns

Features of Contract
Work executed
Costing
in the premises of

Amity School of Business

contractee and not in factory premises

Most contracts involve longer duration
for completion
Expenses chargeable to contracts are
direct in nature
Each contract undertaken treated as a
cost unit.
Payment received depends on stage
of completion

Process Costing

Amity School of Business

A system for applying costs to like

products that are mass produced in
continuous fashion through a series of
production steps called processes
Application in continuous or mass
production industries
Examples: Oil refineries, fertilizers,
breweries, dairy, chemical, sugar,
paper,
soap

Features of Process
Factory divided into various processes which
perform a certain Costing
limited operation

Amity School of Business

Finished products uniform in all respects such as

shape, size, weight, quality, colour, chemical content
Output of one process is the input of the subsequent
process
Not possible to distinguish finished products while
they are in the stage of processing
Common to incur normal loss & wastage
Usually a single product plant
Continuous and large scale production.

Single or Output or Unit

Costing

Amity School of Business

Used in industries where production

consists of a single product or a few
varieties of the same product with
variations in size, shape, quality etc
Examples: Brick Works, Sugar Mills,
Steel, Cement industries

Operating or Service
Costing
Cost of providing a service

Amity School of Business

operating cost
Method of cost ascertainment used
in those undertakings engaged in
providing services like transport,
electricity
These undertakings do not
manufacture tangible products

Features of Service
Costing
Uniformity of
service to all

Amity School of Business

Service undertakings do not produce

any tangible goods. Instead they
render service to the public
Cost unit may be simple
or composite

Cost Unit in Operating

Costing
Simple cost unit

Amity School of Business

Transport per kilometre or

per mile
Water Works per 1000 litres
Composite cost unit Electricity per kilowatt hour
Transport per passenger km or per tonne
km
Hospital per patient day
Cinema per seat per show or per man show
Hotel per room day

Features of Service
Costing
Uniformity of
service to all

Amity School of Business

Service undertakings do not produce

any tangible goods. Instead they
render service to the public
Cost unit may be simple
or composite

Cost Unit in Operating

Costing
Simple cost unit

Amity School of Business

Transport per kilometre or

per mile
Water Works per 1000 litres
Composite cost unit Electricity per kilowatt hour
Transport per passenger km or per tonne
km
Hospital per patient day
Cinema per seat per show or per man show
Hotel per room day