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Module 2 Accounting For Materials

This document discusses accounting procedures for materials, including defining material costs, controlling physical materials, effective cost control methods, order points, economic order quantity, perpetual and periodic inventory systems, cost flow methods, and just-in-time materials control. Key aspects covered include segregating duties for materials storage and handling, using reports to track performance against goals, determining reorder points based on usage, lead time and safety stock, and minimizing total ordering and carrying costs through economic order quantity calculations.

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Ghillian Mae Guiang
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© © All Rights Reserved
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Download as PPTX, PDF, TXT or read online on Scribd
42 views

Module 2 Accounting For Materials

This document discusses accounting procedures for materials, including defining material costs, controlling physical materials, effective cost control methods, order points, economic order quantity, perpetual and periodic inventory systems, cost flow methods, and just-in-time materials control. Key aspects covered include segregating duties for materials storage and handling, using reports to track performance against goals, determining reorder points based on usage, lead time and safety stock, and minimizing total ordering and carrying costs through economic order quantity calculations.

Uploaded by

Ghillian Mae Guiang
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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ACCOUNTING

FOR MATERIALS
Materials

Material cost is the cost of materials used to manufacture a product


or provide a service. Excluded from the material cost is all indirect
materials, such as cleaning supplies used in the production process.
Physical Control of Materials

◦ Limited access to materials storage areas.


◦ Segregation of duties.
◦ Accuracy in recording.
Effective Cost Control

1. A specific assignment of duties and responsibilities.


2. A list of individuals who are authorized to approve expenditures.
3. An established plan of objectives and goals.
4. Regular reports showing the differences between goals and actual performance.
5. A plan or corrective action designed to prevent unfavorable differences from
recurring. 6. Follow-up procedures for corrective measures
Controlling the Investment in Materials
◦ Maintaining the appropriate level of raw materials is one of the
most important objectives of materials control.
◦ Inventory of sufficient size and diversity must be maintained.
◦ Management must determine other working capital needs in
determining inventory levels.
◦ Adequate planning and control is required
Order Point

◦ A minimum level of inventory should be determined for each type


of raw material, and inventory records should indicate the cost and
quantity of items on hand.

◦ Re-Order point is the point at which an item should be ordered.


Order Point (cont.)
The following items need to be taken into consideration when ordering:
1. Usage – anticipated rate at which the material will be used.
2. Lead time – estimated time interval between the placement of an order and the
receipt of the material ordered.
3. Safety stock – estimated minimum level of inventory needed to protect against
stockouts.
◦ (Daily usage X Lead time) + Safety stock = Order point
What Is Economic Order Quantity (EOQ)?

◦ Economic order quantity (EOQ) is the ideal order quantity a company should
purchase to minimize inventory costs such as holding costs, shortage costs,
and order costs. 

◦ The goal of the EOQ formula is to identify the optimal number of product
units to order. If achieved, a company can minimize its costs for buying,
delivery, and storing units. 
Economic Order Quantity (EOQ)

◦ The optimal quantity to order at one time.


◦ Minimizes the total order and carrying costs over a period of time.
◦ Ordering costs may include the salaries and wages of purchasing personnel,
communication costs, and materials accounting and record keeping.
◦ Carrying costs are the costs that a company may incur in storing materials.
These costs may include materials storage and handling costs, interest,
insurance, and property taxes, loss due to theft, deterioration, or
obsolescence, and records and supplies associated with carrying inventory.
Calculating EOQ

EOQ

(D) Demand
(K) Cost per order
(Kc) Carrying cost per case/year
Case Facts
Emperador Deluxe was introduced April of 2013. The goal of this product is
address the needs of the underserved but fast growing middle-income
markets. Emperador Deluxe is produce and bottled in Spain Emperador place
its order every 2 months. Based on the estimates of Emperador it is expected
to sell 50,000 cases (1 case = 12 bottle) at 750ml per bottle annually for 3
years after launching the product.

Emperador Deluxe is price at Php150.00 per bottle with a gross profit margin
of 38% or Php57.00 per bottle.
The following are given upon further checking of their
records:
(D) Demand : 50,000 cases or 4,166/Mo.
(K) Cost per order : P15,000(estimated)
(Kc) Carrying cost per case/year : (1,116 x 21%) = 234
Cost of Capital (Legal Interest) : 6%
Import Charges : 15% of landed cost
Cost per case : P93x12 = P1,116
Lead Time : 25 days
Emperador Operates 360 days per year.
Reorder Point

Reorder point = Lead time (Units/Days)


Reorder point = 25 days (50,000units x 360 days)
Reorder point = 3,472
Limitations of Using EOQ

The EOQ formula assumes that consumer demand is constant. The calculation
also assumes that both ordering and holding costs remain constant. This fact
makes it difficult or impossible for the formula to account for business events
such as changing consumer demand, seasonal changes in inventory costs, lost
sales revenue due to inventory shortages, or purchase discounts a company
might realize for buying inventory in larger quantities.2
Materials Control Procedures

Materials Control Personnel


◦ Purchasing Agent – employee who does the buying of raw materials.
◦ Receiving Clerk – employee who is responsible for the receipt of incoming
shipments.
◦ Storeroom Keeper – employee who has charge of the materials after they
have been received.
◦ Production Department Supervisor – employee who is responsible for the
operational functions within the department.
Control During Procurement

◦ When the order point is reached the procurement process begins.

◦ Supporting documents are essential to maintain control during the


procurement process.
Documents Common to the Procurement Process

◦ Purchase Requisition – the form used to notify the purchasing agent that materials are
needed.
◦ Purchase Order – the purchase requisition that gives the purchasing agent authority to order
the materials.
◦ Vendor’s Invoice – the invoice from the vendor that should be compared to the purchase
order.
◦ Receiving Report – the form that the receiving clerk uses to count and identify the materials
received.
◦ Debit-Credit Memorandum – the document that is used when the shipment of materials does
not match the order and/or the invoice.
Control During Storage and Issuance

Materials Requisition
◦ Prepared by the authorized factory personnel to withdraw materials from the
storeroom.

Returned Materials Report


◦ Describes the materials being returned to the storeroom and the reason for the
return.
Perpetual Inventory System

◦ Perpetual inventory is a method of accounting for inventory that records the


sale or purchase of inventory immediately through the use of computerized
point-of-sale systems and enterprise asset management software.
◦ a method in which a company maintains records of its inventory by regularly
scheduled physical counts.
Materials Accounting

◦ The materials accounting system must be integrated with the


general ledger.
◦ Purchases are recorded as debits to materials in the general ledger.
◦ Materials account is supported by a subsidiary stores or materials
ledger in which there is an individual account for each item.
Determining the Cost of Materials Issued

In selecting the method to be used, the company should review their accounting
policies and the federal and state tax regulations.

The flow of materials does not dictate the flow of costs.


◦ Flow of materials – the order that materials are issued for use in the factory.
◦ Flow of costs – the order in which unit costs are assigned to materials.
Cost Flow Methods
First – In, First – Out Method (FIFO)
◦ Assumes that materials used in production are costed at the prices paid for
the oldest materials and the ending inventory is costed at the prices paid for
the most recent purchases.

Last – In, First – Out Method (LIFO)


◦ Assumes that materials used in production are costed at the prices paid for
the most recently purchased prices, and the ending inventory is costed at
prices paid for the earliest purchases
Cost Flow Methods (cont.)

Moving Average Method


◦ Material issued and the ending inventory are costed at the average
price. This average unit price is computed every time a new lot of
materials is received and it continues to be used until another lot
is purchased.
Periodic Inventory System

A periodic inventory system only updates the ending inventory balance in the
general ledger when a physical inventory count is conducted.

Raw Materials Inventory Beginning XXXX


Add: Net Purchases XXXX
Raw Materials Available for Use XXXX
Less: Raw Materials Inventory Ending XXXX
Raw materials Used XXXX
Accounting Procedures

◦ The purpose of materials accounting is to provide a summary from


the general ledger of the total cost of materials purchased and used
in manufacturing.

◦ All materials issued during the month and materials returned to


stock are recorded on a summary of materials issued and returned
form.
Selected Materials Accounting Transactions
Selected Accounting Transactions
Selected Sales-Related Accounting Transactions
Just-In-Time (JIT) Materials Control

Materials are delivered to a factory immediately prior to their use in


production.
◦ Reduces inventory carrying costs.
◦ Reducing inventory levels through JIT may increase processing
speed.
Just-in-time advantages and disadvantages

The main advantages of JIT are that it can improve production efficiency and
competitiveness.
It does this by:
◦ preventing over-production
◦ minimising waiting times and transport costs
◦ saving resources by streamlining your production systems
◦ reducing the capital you have tied up in stock
◦ dispensing with the need for inventory operations
◦ decreasing product defects
Disadvantages of just in time inventory management

◦ Risk of running out of stock: By not carrying much stock


◦ Lack of control over time frame: Having to rely on the timeliness of
suppliers for each order puts you at risk of delaying your customers’ receipt of
goods.
◦ More planning required: With JIT inventory management, it’s imperative
that companies understand their sales trends and variances in close detail. 
◦ JIT or lean manufacturing also opens businesses to a number of risks, notably
those associated with your supply chain.

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