Material costing and control

Fahad Sattar (06)
Junaid Saleem (16)
Waqas Mehmood (28)

The substance or substances out of
which a thing is or can be made.
Something, such as an idea or
information, that is to be refined and
made or incorporated into a finished
effort.

The cost of the raw materials that go into
a product.
Material cost of a product excludes any
indirect costs, for example, overhead or
wages, associated with producing the
item.

Material control is a systematic control over
the purchasing storing and using of material
to minimizing the possible cost.
Material control may be defined as the level
of material maintenance so as to ensure
uninterrupted production and minimizing the
investment of funds.

The material whose cost
can easily be identified
to a particular unit of
product is called direct
material. Such as all raw
material and all
purchased parts of that
product.
The material whose cost
can not be easily identified
to a unit of product is
called indirect cost. This is
not the part of finished
product but is necessary to
manufacture it.

Purchase of all materials.
Headed by General Purchasing Agent.

Receive purchase requisition for materials,
supplies and equipment.
Keep informed concerning sources of supply,
prices, shipping and delivery schedules.
Prepare and place purchase orders.
Arrange systematic reports between the
purchasing, receiving and accounting department.
Verify and approve for payments all invoices
received.

Purchase Requisition is document generated by
a internal organization or by store to notify the
purchasing department of items required, their
quantity and the time frame.
Also called purchase request or requisition.
It is an internal document and it is not used
outside the enterprise.

Signed by purchasing agent.
Written authorization to vendor to supply
specified quantities of described goods.
Carries all necessary information regarding
price, discount agreement, delivery stipulations
and number of account to which order is to be
charged.

A department of company which deals
with incoming goods and payments is
called receiving department.

Unload and unpack incoming materials.
Check quantities received against the shipper’s packing
list.
Identify goods received with description on the
purchase order.
Prepare receiving report.

Notify the Purchasing Department for
discrepancies discovered.
Arrange for inspection when necessary.
Notify the Traffic Department and Purchasing
department of any damage in transit.
If the materials require any quality control or
inspection, they are sent for such testing.

Shows the purchase order number.
Shows the account number to be charged.
Name of vendor.
Details relating to transportation.
Quantity and type of goods received.

Written order to store keeper to deliver
material or supplies to the
Manufacturing Department or where it
is needed.
It is issued by the Manufacturing
Department to the Store.

1)First In First Out (FIFO) Method.
2)Last In First Out (LIFO) Method.
3)Average Costing Method.

 It is an inventory costing method which
assumes that the first items placed in
inventory are the first consumed.
 Inventory at the end of a year consists of the
goods most recently placed in inventory.

It is simple to understand and easy to operate.
Material cost charged to production represents actual cost.
In the case of falling prices, the use of this method gives better
results.
Closing stock of material will be represented very closely at
current market price.
It is a logical method because materials are issued in order of
purchases, so materials received first are utilized first.
This method is useful when transactions are not too many and
prices of materials are fairly steady.

If the prices fluctuate frequently, this method
may lead to clerical error.
In case of fluctuations in prices of materials,
comparison between one job and the other job
becomes difficult.
For pricing rise, the issue price does not reflect
the market price as materials are issued from the
earliest consignments.

Practice Question.
ABC Co. has following data available
01-06-2011 Inventory 800 units@Rs.6/unit.
05-06-2011 Purchased 200 units@Rs.7/unit.
08-06-2011 Purchased 200 units@Rs.8/unit
10-06-2011 Issued 700 units to work in Process

ABC Corporation.
Material Costing ledger
Balance
Date Description Quantity Amount Units Amount
01 June Opening balance 800@6/unit 4800 800 4800
05 June Purchases 200@7/unit 1400 1000 6200
08 June Purchases 200@8/unit 1600 1200 7800
10 June Issued 700@6/unit 4200 500 3600
11 June Issued 100@6/unit
200@7/unit 2000 200 1600

LIFO is an inventory costing method which
assumes that the last items placed in inventory
are first consumed during an accounting year.
Inventory at the end of a year consists of the
goods placed in inventory at the beginning of
the year.

The cost of materials issued will be nearer to the current
market price.
It enables us to match cost of production with current
sales revenues.
The use of the method during the period of rising prices
does not reflect undue high profit in the income
statement.
In the case of falling prices profit tends to rise due to
lower material cost.
In the period of inflation LIFO will tend to show the
correct profit and thus avoid paying undue taxes to some
extent.

Calculation under LIFO system becomes complicated
when frequent purchases are made at highly fluctuating
rates.
Costs of different similar batches of production carried
on at the same time may differ.
This method of valuation of material is not acceptable to
the income tax authorities.
The stock in hand is valued at price which does not
reflect current market price.
Closing stock will be understated or overstated in the
Balance Sheet.

Practice Question.
ABC Co. has following data available
05-06-2011 Purchased 500 units@Rs.8/unit.

ABC Corporation.
Balance
Date Description Quantity Amount(Rs.) Units Amount(Rs.)
01-June Purchases 100@Rs5/unit 500 100 500
06-June Issued 200@Rs8/unit 1600 400 2900
08-June Issued 100@Rs10/unit
200@Rs8/unit 2600 200 1300

Inventory costing method in which
material is issued at average cost is called
weighted average method.

ABC Corporation.
Balance
Date Description Quantity Amount(Rs.) Units Amount(Rs.)
06-June Issued 200@Rs7.5/unit 1500 400 3000
08-June Issued 300@Rs8/unit 2400 200 1600

Receiving and checking all materials
Storing all materials and supplies
Issuing materials and supplies for use and sale
Keeping complete records of material
Verifying the accuracy of the book inventory

The inventory level at which an
order is placed for additional
stock.

Is a limit where we have low quantity of material
and must order for caring the production if material
decreases from this point this may interrupt
production

Question:
Here we have maximum daily requirement is 100 units
and time required for receipt of material is 15 days
and Economic Order Quantity is also given 2000 units.
So what would be the Ordering point ???

Question:
Here we have average daily consumption is 20units
and the time required to secure emergency supplies is
8 days and minimum daily requirement is also given
50 units. So what would be a Danger Level???

 Average Daily Requirements 30units
 Time required for receipt of
payment 20days
 Maximum Daily Requirement 50units
 Minimum Daily Requirement 10units
 Economic Order Quantity 2000units
 Period Required to secure
Emergency supplies 5days

Requirement are :
1) Ordering Point ???
2) Minimum Point ???
3) Maximum Point ???
4) Danger Level ???

Formula:
Maximum Daily Requirement
×
Time Required For Receipt Of Material
50×20=1000
Ordering point is 1000

Formula:
Ordering Point – Average Daily Requirement
×
Time Required for Receipt Of Material
1000-(30×20)=400 Units
Minimum Point Is 400 Units

Formula:
Ordering Point – Minimum daily Requirement
+
Economic Order Quantity
1000 – 200 + 2000 = 2800
Maximum Point is 2800

Formula:
Average Daily Requirement
×
Time Required to Secure
Emergency Supplies
30×5=150
Danger level is 150

Material costing and control

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