The Role of Cost Accountant

Responsible for generating financial

information required by the firm for
 Internal reporting
 External reporting

Accounting system information is used

by management to
 Plan
 Control
 Make decisions

1
The Role of Cost Accountant

Planning
 Detailed formulation of future actions
to achieve a particular end.
 Requires setting objectives and
identifying methods to achieve those
objectives.

2
The Role of Cost Accountant
Controlling
 The managerial activity of monitoring
a plan’s implementation and taking
corrective action as needed.
 Feedback is information that can be
used to evaluate or correct the steps
being taken to implement a plan.
 Performance reports compare budgeted
and actual data

3
The Role of Cost Accountant
Continuous Improvement
 Required in a dynamic environment if
a firm is to remain competitive or to
establish a competitive advantage.
 Searching for ways to increase overall
efficiency through
 Reduction of waste
 Quality improvement
 Cost reduction

4
The Role of Cost Accountant

Decision Making
 The process of choosing among
competing alternatives.
 Decisions are based on information
provided by the accounting system

5
 Cost Management
System
A cost management system (CMS) is
a collection of tools and techniques
that identifies how management’s
decisions affect costs.

The primary purposes of a cost management

system are:
1.To provide cost information for strategic
management decisions and operational
control and
2.For measures of inventory value and cost
of goods sold for financial reporting.
Cost Accounting Systems

Cost accounting is that part of the cost

management system that measures
costs for the purposes of management
decision making and financial reporting.
 Two
Processes

Collecting costs by some

Cost
“natural” classification
accumulation:
such as materials or labor

Cost Tracing costs to one or

assignment: more cost objectives
Accounting Information
System

9
Cost Management System
Cost accounting system
assigns costs to individual products and
services and other cost objects as
specified by management; satisfies
financial reporting and management
decision-making needs

Operational control system

provides accurate and timely feedback
concerning performance; concerned
with what activities should be
performed and assessing those
activities. 10
Materials and Control
Introduction
Inventory in a company includes
stock of raw materials, work-in-
progress, finished & semi-finished
products, spare components and
by-products,etc
Inventory control is an important
feature of cost accounting system
 Meaning of Material
Control
Material control is a system which
ensures that right quality of material is
available in the right quantity at the right
time and right place with the right
amount of investment .In simple words
material control is a systematic control
over the purchasing , storing and using of
materials so as to have the minimum
possible cost of materials.

“Because materials constitute such a

significant part of product cost and since
this cost is controllable , proper planning,
 ASPECTS OF MATERIAL CONTROL
There are two aspects of material control as given
below
(a) Accounting Aspect: This aspect of material
control is concerned with maintaining documentary
evidence of movement of materials at every stage
right from the time sales and production budgets
are approved to the point when materials are
purchased and actually used in production
operations.
(b) Operational Aspect: This aspect of material
control is concerned with the maintenance of
material supplies at a level so as to ensure that
material is available for use in production and
production services as and when required by
 ESSENTIALS OF MATERIAL CONTROL

1. Purchases of materials should be centralized i.e.,

one purchasing department should be authorized to
make all purchases of materials to avoid reckless
buying by all departments and to ensure that all
purchases are made at the most reasonable prices.
2. There should be proper scheduling of materials.
3. There should be proper co-operation and co-
ordination among the departments involved in
purchasing , receiving and inspection so that there
may be no inadequate availability of materials which
may disrupt production and lose sales.
4. The storage of materials should be well-planned
to avoid losses from theft, carelessness, damage,
evaporation and pilferage.

5. A good method of issue of materials to various

jobs, orders or processes should be followed so that
there is delivery of right type of materials in the right
quantity at the they are needed.

6. Perpetual inventory system of materials should be

operated to facilitate regular checking and avoiding
closing down factory for stock-taking.

7. Minimum, maximum and re-ordering levels for

each type of material should be fixed to ensure that
there is no shortage of materials and there is no
Material control
procedures
Purchase

Receipt

Storage Stocktaking

Issue
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
Material control
procedures
Establishing optimal stock levels is of
vital importance of in controlling of
stock
Once the optimal stock levels are
established, the store department is
responsible for ensuring that optimal
stock levels are maintained for each
item of materials in stock. Normally, a
bin card is used to record the quantity
of materials in stock for each item
When items of materials have reached
their re-order point, the storekeeper will
make out a purchase requisition
requesting the purchasing department
to contact with appropriate supplier
When the purchasing department
receives the purchase requisition, the
purchasing officer will examine the
different sources of supply for the
purpose of securing the highest quality
materials at the lowest price
On the receipt of the goods, the stores
department will inspect and compare
the supply with the purchase order
When the departmental foreman
receives a production order, he will give
a materials requisition to the
storekeeper. On the receipt of
requisition, the storekeeper checks for
correctness and authorisation. If
satisfactroy, the issue will be made and
entered the details in bin cards. He then
forwards the store requisition to
When the accounts department
receives the stores requisition, it
will price each of the items listed
on it by appropriate pricing
methods (e.g FIFO etc). Then, the
amount of materials issued is
charged to appropriate job or
overhead account and the stock
values are reduced
Pricing of the issues of
material
Pricing of materials may change from
time to time.
Materials are usually acquired by
several deliveries at different prices
Actual costs can then take on several
different values
Therefore, the materials pricing system
adopted should be the simplest and the
most effective one
Methods of stock valuation
First-in-first-out(FIFO)
Last-in-first-out(LIFO)
Weight average cost (WAVCO)
Specific identification/unit cost
method
First-in-first-out
This method assumes that the first
stock to be received is the first to
be sold
The cost of materials used is based
on the oldest prices
The closing stock is valued at the
most recent prices
Last-in-first-out (LIFO)
This method assumes that the last
stock to be received is the first to
be sold
Therefore, the cost of materials
used is based on the most recent
prices
The closing stock is valued at the
oldest prices
Weight average cost
(WAVCO)
This method assumes that the cost
of materials used and closing stock
are valued at the weighted
average cost
Specific identification/unit
cost method
This method assumes that each
item of the stock has its won
identity
The costs of materials used and
closing stock are determined by
associating the units of stock with
their specific unit cost
Stock control level
The stores should control its stock
at an appropriate level so as to
minimize the costs related to stock
These cost can be classified into
three categories:
 Costs of obtaining stock
 Carrying cost
 Stock-out-stock
Cost of obtaining
stock/ordering cost
Purchase costs of goods acquired
Carriage inwards
Administrative costs of purchasing
and accounts department
Stock-out cost
Loss of sale revenue due to the
stop in production
Reduction in future sales because
of the loss of goodwill
Higher costs for urgent and small
order of materials
Cost of storage (carrying
cost)
Storage and handling cost
Interest on capital tied up by the
stock
Insurance and security
Stock loss due to deterioration,
obsolescence and pilferage
Audit, stocktaking and stock
recording cost
Economic Order Quantity
(EOQ)
EOQ
EOQ is the size of the order which
contributes towards maintaining
the stocks of material at the
optimal level and at a minimum
cost
 The formula
EOQ = 2*O*Q
C

Where EOQ = Economic Order Quantity

O= order cost per order
Q = Annual quantity required in units
C =Carrying cost per unit per annum
Example
The annual consumption of a part
“X” is 5000 units. The procurement
cost per order is $10 and the cost
per unit is $0.5. The storage and
carrying cost is 10% of the
material unit cost.
Required:
Calculate the EOQ
Solution
O= $10 Q= $5000, C= $0.5*10%

EOQ = 2 O Q
C

EOQ = 2 * 5000 *10

0.5*10%
= 1414 units
Cost $

120

Total cost
Minimum cost
80
Carrying cost

40 Ordering cost

EOQ=1414 units Unit per order

400 1200 2000
The graph shows the line
representing ordering cost sloping
downward, indicating lower cost
when a large quantity is purchased
and the line representing cost of
carrying stock going upward,
indicating a higher cost for a large
quantity
Level setting
Level setting
It is to determine the correct or
most optimal stock level so as to
avoid overstocking or
understocking of materials
These levels are known as the
Maximum, Minimum and Re-order
levels
 Re-order level
The level of stock of material at
which a new order for the material
should be placed
The formula:

Re-order level
= (Maximum usage * Maximum lead time )
Re-order quantity
Reorder quantity is the size of each
order
The formula:
Reorder quantity = Maximum stock –(Reorder level –
Minimum usage in minimum lead
time)
 Maximum level
The maximum stock level is
highest level of stock planned to
be held
Any amount above the maximum
level will be considered as
excessive stock
Maximum level
The formula:
= re-order level + Re-order quantity(EOQ) –Minimum
anticipated usage in Minimum lead
 Minimum level/Safety
stock
The minimum level is that level of stock
that provides a safety buffer in the
event of increased demand or reduced
receipt of stock caused by the
lengthening of lead time
The stock level should not be allowed to
fall below the safety stock
The formula:
Minimum level=
Re-order level – Average usage in average lead time
Units

Maximum level
1500

Reorder level
1000

Minimum level
500

Weeks
Example
Average usage 100 units per week
Minimum usage 70 units per week
Maximum usage 140 units per week
Lead time (the time 3-5 weeks
between ordering and
replenishment of
goods)
Ordering cost per order $180
Annual cost of carrying $5.2
a unit in stock
Calculate:
 Economic Order Quantity (EOQ)
 Reorder level
 Reorder quantity
 Minimum level
 Maximum level
Economic Order Quantity (EOQ)

EOQ = 2 O Q
C

EOQ = 2 * $180 *5200

5.2
= 600 units
 Reorder level
Re-order level
= (Maximum consumption * Maximum re-order period )
= 140 units *5
= 700 units
 Minimum level
Minimum level
= Re-order level – Average usage in average lead time
= 700 units – (100 units *4)
= 300 units
 Maximum level
Maximum level
= re-order level + EOQ –Minimum anticipated usage
in Minimum lead
= 700 units +600 units – (70 units *3)
= 1090 units
 Reorder quantity
Reorder quantity = Maximum stock –(Reorder level –
Minimum usage in minimum lead
time)
= 1090 units – (700 units – 70 units *3
= 600 units
Materials Acquisition

1. Materials
InventoryP100,000
Cash/Payable
P100,000
Issuance & Charging
1. WIP-Materials P60,000
Materials P60,000

FOH Control-Indirect Materials

P60,000
Materials
P60,000