ACCOUNTING FOR MATERIALS

 Cost Control System

 How Costs Get Attached to Products?
3 Products Costs Component - Major function is to keep
expenditures within the limits of a
1. Direct Materials preconceive plan.
- Easily traceable and conveniently - Encourage cost reductions by
to a product or service provided. eliminating waste and operational
- Easy to determine efficiencies.
PRODUCT/SERVICE = COST - There is only an effective cost control
- Raw materials that form an integral if it is designed to control the people
part to finish product. responsible for the expenditures.
2. Direct Labor
- Labor for workers that is directly Note:
involved or associated in the
Cost can’t control themselves it is people
production.
who control costs.
Ex. Operators
Factory workers  Elements of an Effective Cost Control
3. Manufacturing Overhead System
- Consists of indirect costs (indirect
materials and labor) - A SPECIFIC assignment of duties and
- Cannot be easily identified with one responsibilities.
specific product or service but it is
needed to produce finish product. Supervisor cannot be the
accountant at the same time.
 Inventory Accounts for Manufacturers
- A LIST of individuals who are
3 Inventory Accounts
authorized to approve expenditures.
1. Raw Materials
- All materials to be use in production Not all employees are authorized
whether direct or indirect. to approve expenditures, but the
2. Work In Process managers or supervisors.
- Partially completed products but
include: - An ESTABLISHED plan of objectives
- Direct materials used in and goals.
production
Ex. Preparation of budget
- Direct labor costs incurred to
produce. - REGULAR reports showing the
- Manufacturing overhead costs differences between goals and actual
identified as part of cost of performance.
production. - A PLAN of corrective action designed
3. Finished Goods to prevent unfavorable differences
- Completed product that is now ready from recurring.
for sale. - FOLLOW UP procedures for
- Includes Direct material, labor, FOH. corrective measures.
  Acquiring Raw Materials  Materials Requisition
Purchasing manager (responsible of When materials are needed in the production
purchasing raw materials) fills out a purchase department:
order to order materials from a supplier
Production Supervisor fills out a
purchase requisition form (authorize the
use of materials on a job).
Manager will deliver it to the supplier

Materials storeroom clerk delivers the

Supplier will deliver it to the company requested materials in the production
area.

Materials Storeroom Clerk (smaller

company)/Receiving clerk (larger company) Form will be sent to accounting
will accept (fill up stock ledger cards), record department for recording purposes.
(issuance), and stocks (inspecting) the materials
in the store room. Work In Process xxx
Factory Overhead xxx
Raw Materials xxx
Materials storeroom clerk sends the receiving
report and sales invoice to the Accounting Note:
Department (will prepare the journal entry to
record the receipt of the materials). Treasury Material Storeroom Clerk Have to fill out
Department (will pay for the purchases). store ledger card all receipts and all
issuances of materials will be recorded
in ledger card
 Transaction to Acquire Materials
Purchase of materials for cash: Purchase Requisition contains:
Raw Materials xxx - Requisition no.
- Job no.
Cash xxx - Department
- Date
Purchase materials on account:
- Description of materials
Raw Materials xxx - Quantity
- Unit cost
Accounts Payable xxx - Total cost
Pay for materials previously purchased on
account:
Accounts Payable xxx
Cash xxx
Purchase Discount xxx
 Purpose of Materials Requisition  Commonly Used Control Procedures
Form
1. Order Cycling
1. Internal control of assets - Method where materials on hand are
- To mitigate theft and waste reviewed on regular or periodic
- prevent overstocking of cycle.
unneeded inventory which can Ex. 30 days
tie up cash. - Differ on the materials being
2. Tracing material costs to particular reviewed.
products Ex. Materials that are expirable,
- To know accurate cost of products to less important, or direct
set selling prices. materials have shorter period.
- Make other management decisions.
2. Min-Max Method
- Based on the assumption that
 Materials Control Procedures
inventory have minimum (to protect
company to stock up costs) and
It relates the following function:
maximum quantity.
Ex. When inventory reaches the
1. Purchase and receipt of materials
minimum level order is placed to
2. Storage of materials
increase the inventory to
3. Requisition and consumption of
maximum level.
materials.
 - Responsible for the preparation of
3. Two-bin Method materials requisition form.
- First bin is emptied that is when the
order is placed then the content of  Two Basic Aspects of Materials
second bin will be used. Control

4. Automatic Order System 1. Physical Control or safeguarding of

- Used by company that is materials.
computerized. - Limited access
- Segregation of duties
5. ABC Plan - Accuracy of recordings
- Used by company with larger
number of materials that have 2. Control of the investment in
different value. materials
- Determine degree of control in each - Maintaining an appropriate level of
material. raw materials
Ex. High value = More control - When orders should be placed
- How many units should be ordered

 Personnel involved in Materials

Control

Purchasing Agent
- Designated to talk to suppliers
- Prepare the purchase order
- Canvas the cost of different materials
Receiving Clerk
- Responsible for the receipt of
materials delivered.
- Check if the quantity and quality of
the materials conform with the order.
Material Storeroom Clerk
- Responsible for the safekeeping of all
the materials.
- One to prepare the purchase
requisition when materials are
running low.
- Prepare and deliver the materials
needed by a department.
Production Department Supervisor
- Responsible for actual conversion of
raw materials to finish product.
ACCOUNTING FOR LABOR 2. Piece-Rate Plan
- Known as incentive wage plan.
 Payroll Accounting System for a - Based on quantity produced by
Manufacturer employee.
- Quality may be sacrificed in order to
Record the hours worked or quantity maximize quantity.
of output by employees in total and
by job, process, or department.
No. of units produced x predetermined rate
3. Modified Wage Plan
Analyze the hours worked by - Minimum wage is set if quota is not
employees to determine how labor attained.
time is to be charged. - If quota exceeded bonus is added to
the minimum wage level.
- On days quota is not met it is charged
Charge payroll time to jobs, to factory overhead
processes, departments, and factory - When production work teams are
overhead. utilized, single incentive for the
group is given.

Prepare the payroll.  Labor Time Records

- Given the magnetic card reading
technology available today, the time
Note:
record typically takes the form of a
Direct labor is also known as touch labor. computer file.
- The labor hours recorded should be
reviewed by a production supervisor
 Wage Plan for accuracy.
- Should comply with government
agencies like DOLE.  Payroll Function
- Primary responsibility is to compute
1. Hourly Rate Plan the wages and salaries earned by the
- This does not provide an incentive employees.
for the employee to achieve a high - Forms should include a payroll
level of productivity. record and employees earnings
records.
Rate per hour x No. of hours worked - A summary of the payroll is sent to
accounting to records the payroll in
; productivity of an employee is not the accounting records.
considered.
 - The payroll record is sent to the
treasurer’s department for making  Employer’s Payroll Taxes
payments to employees. - SSS
- Philhealth
- Pag-ibig

 Payroll Records
- Forms used by companies will vary,  Recording Salaries and Wages
but all forms possess some common - Labor -time records are sent to the
characteristics. payroll department on a daily basis.
- Entry to record payroll: - The labor costs are charged to the
appropriate jobs or departments and
factory overhead ledger.
Payroll xxx - Earnings or salaries employees are
Withholding Tax Payable xxx recorded in the factory overhead
ledger accounts and on the labor cost
SSS Premiums Payable xxx summary.
Philhealth Premiums Payable xxx
 Labor Cost Summary
Pag-ibig Premiums Payable xxx - Hourly workers should be recording
their time on a labor cost summary.
Wages Payable xxx - Labor costs are recorded on a labor
cost summary.
 Employee Earnings Records - This summarizes the direct labor and
- Company maintains a record of the indirect labor charges to a
earnings for each employee. department for the period.
- The cumulative record of earnings is - Salaried employees are often not
needed to compute earnings subject required to prepare labor time
to many types of taxes. records.
- Information is also used to prepare
form W-2 and W-3.

 Payment of Net Earnings

- Accounting department sends the
payroll record to the treasurer’s
office.
- The treasurer’s office is responsible
for making the payments to
employees.

Wages Payable xxx

Cash xxx
 Payroll Accrual
 - When the end of the period does not
coincide with the ending date for a
payroll, an accrual for payroll
earnings should be made.

Payroll xxx
Wages Payable xxx

 Special Labor Cost Problems

- Shift Premiums
- Employee Pension Costs
- Bonuses
- Vacation and Holiday Pay