ACCOUNTING FOR
MATERIALS
Reorder Point, Periodic and Perpetual Costing System, etc.
OBJECTIVES OF MATERIALS
CONTROL
Efficient purchasing, management, and investment
in materials by forecasting sales based on
quantitative techniques
To keep storage costs of materials and avoidance
of spoilage costs
To have an optimal level of materials inventory for
uninterrupted production schedule
To focus on inventory control especially for
expensive raw materials that are prone to theft.
MATERIALS INVENTORY
CONTROL
LIMITED ACCESS – only authorized
personnel should have access to storage
area. Documentation of issuance of raw
materials is a must.
SEGREGATION OF DUTIES –
segregation of duties for purchasing,
receiving, storage, use and recording.
ACCURACY IN RECORDING
Inventory Control Methods
1. Min-Max Method
2. Two Bin System
3. Order Cycling System
4. Automatic Order System
5. ABC System
WHEN TO ORDER? WHAT IS
OUR ORDER POINT?
Order Point – the level of materials
inventory where purchasing should occur
for uninterrupted production schedule.
Things to Account for Relating to
Order Point
Usage – the anticipated rate at which the
materials will be used. Can be the average
usage of materials or based on
production experiences relative to time.
Lead Time – the estimated time interval
between the placement of order and
actual deliveries of suppliers.
Safety Stock – the estimated level of
inventory needed to avoid interrupted
production due to delayed deliveries.
Illustrative Example:
Average Daily Usage – 10,000 units
Lead Time – 7 days
Safety Stock – 30,000 units
To compute for Order Point:
Daily Usage 10,000 x Lead Time (7)= 70,000
Safety Stock 30,000
Reorder Point 100,000
CONCLUSION: WHEN THE NUMBER OF UNITS OF MATERIALS
REACHES 100,000 units, ordering of Purchasing Dept. must occur to
avoid running out of stock.
ECONOMIC ORDER QUANTITY
(EOQ)
The level of materials to be purchased
while incurring the minimum inventory
cost.
Since the purpose of EOQ is to
minimize inventory costs, cost of placing an
order and carrying cost must be accounted
for.
FORMULA
2𝐶𝑁
EOQ =
𝐾
Where:
EOQ = Economic Order Quantity
C = Cost of Placing an Order
N = Number of Units required Annually
K = Carrying Cost per unit of inventory
Sample Problem:
Number of Units Required Annually -
100,000
Cost of Placing an Order P 100.00
Carrying Cost per unit P 0.80
What is the EOQ?
Sample Problem: cont.
No. Units Required Annually 3,600
Cost of Placing an Order P50.00
Carrying Cost per unit P 1.0
What is the EOQ?
COSTING METHODS FOR
MATERIALS
1. FIFO METHOD
2. AVERAGE COST
Sample Problem
DATE TRANSACTIONS AMOUNT
JAN. 1 BEGINNING INVENTORY 400 units @ P10 4,000
8 PURCHASE 600 UNITS @ P12 PER UNIT 7,200
14 ISSUE 500 UNITS
18 PURCHASE 300 UNITS @ P15 PER UNIT 4,500
22 ISSUE 200 UNITS
27 PURCHASE 400 UNITS @ P14 PER UNIT 5,600
31 ISSUE 400 UNITS
1. NUMBER OF UNITS REMAINED
2. COST OF ENDING INVENTORY USING:
- FIFO PERIODIC
- FIFO PERPETUAL
- WEIGHTED AVERAGE
- MOVING AVERAGE
OTHER TRANSACTIONS AFFECTING
MATERIALS INVENTORY ACCOUNT
SPOILED UNITS - units that do not meet
production standards and are either sold for
salvage value or discarded.
DEFECTIVE UNITS – units that do not meet
production standards but can be processed to be
salable.
SCRAP MATERIAL – left over from the
production process that cannot be put back into
production for the same purpose, but may be
usable for different purpose.
WASTE MATERIAL – left over from the
production process that has no further use or
resale value.
SPOILED MATERIALS
CHARGED TO SPECIFIC JOB CHARGED TO ALL PRODUCTION
This method is used for
This method is used for
production if the spoilage is
production requiring difficult,
considered normal to the overall
complicated and intricate
production process being a
production process ( the job
normal loss but only to the
being the reason of spoilage )
extent set forth by the company.
JOURNAL ENTRIES JOURNAL ENTRIES
DR SPOILED GOODS XX DR SPOILED GOODS XX
DR FOH CONTROL( LOSS) XX
CR WIP INVENTORY XX
CR WIP INVENTORY XX
VALUATION: ESTIMATED SALES VALUATION: ESTIMATED SALES VALUE PER
VALUE PER UNIT X QUANTITY ( UNIT X QUANTITY ( SPOILED GOODS)
resale value) CREDIT TO WIP: TOTAL COSTS INCURRED
TO SPOILED UNITS ( UNIT COST PER UNIT)
SAMPLE PROBLEM:
JOB 3044 expects to make 4,000 units.
DM per unit 15.00
DL per unit 13.00
FOH including 1.00 for normal loss 12.00
When the job was completed, 200 are spoiled units, a normal number, with resale
value of 20.00
DR SPOILED GOODS 4,000
CR WIP 4,000
DR SPOILED GOODS 4,000
DR FOH CONTROL ( BALANCING FIGURE FOR
LOSS INCURRED) 4,000
CR WIP INVENTORY ( UNIT COST X NO OF UNITS) 8,000
DEFECTIVE MATERIALS
Since the treatment for the DEFECTIVE MATERIALS are NOT as SPOILED
MATERIALS, REWORK/ADDITIONAL WORK must be done to make it
salable.
Meaning, if this is charged to specific job, a debit to WIP INVENTORY and
CR to TOTAL MANUFACTURING COSTS INCURRED is necessary.
On the other hand, if the defective materials are charged to all production,
meaning the company experienced it normally, it is charged as a NORMAL
LOSS forming part to FOH CONTROL ACCOUNT WITH A CREDIT TO
TOTAL COSTS INCURRED
CHARGED TO SPECIFIC JOB CHARGED TO ALL PRODUCTION
DR WIP INVENTORY XX DR FOH CONTROL XX
CR DM INVENTORY XX CR DM INVENTORY XX
CR DL XX CR DL XX
CR FOH APPLIED XX CR FOH APPLIED XX
SCRAP MATERIALS
Cost accounting should provide also a method of costing
and control for scrap as it does for spoilage and
defective units.
Scrap materials are accounted for in either ways:
CHARGED TO SPECIFIC JOB CHARGED TO ALL PRODUCTION
DR SCRAP MATERIALS XXX DR SCRAP MATERIALS XXX
CR WIP XXX CR MISC. INCOME XXX
WASTE MATERIALS
The cost of disposing waste materials may be allocated
either to all jobs(included in the factory overhead rate
application) or to specific jobs (not included in the
factory overhead rate application)
CHARGED TO SPECIFIC JOB CHARGED TO ALL PRODUCTION
DR FOH CONTROL XX DR WIP INVENTORY XX
CR ACCOUNTS PAYABLE XX CR ACCOUNTS PAYABLE XX
End of presentation
God bless!
Source:
De Leon, Norma; De Leon, Ellery; De Leon, Guillermo, Jr., /Cost Accounting and Control 2019 Edition
