Costing Accounting – Unit II
Accounting for Materials
Dr.S.Balamurgan,Ph.D
Vice – Principal and Head,
PG and Research Department of Commerce,
C.P.A College,
Bodinayakanur.
Introduction
Material is very important factor of production. It includes physical commodities used to manufacture the final end product. It is the starting point from which the first operations start. It is inventorial and does not get waste and exhaust (unless it is deteriorated) with the passage of time as labour is wasted with the passage of time whether in use or not. That purchase of materials will include both direct and indirect materials. Direct and indirect materials are both treated as stores items, whereas stock of finished goods is not treated as a stores item. Direct and indirect materials purchased for strock purposes to be issued to different jobs, work orders or departments as and when required are known as stores.
Meaning of Material Control
Material control can be defended as a comprehensive framework for the accounting and control of material cost designed with the object of maintaining material supplies at a level so as to ensure uninterrupted production
but at the same time minimising investment of funds. In simple words material control is systematic control over the purchasing, storing and using of materials so as to have the minimum possible cost of materials. Matz, Curry and Frank state in their book ‘Cost Accounting’ as follows:
“Because materials constitute such a significant part of product cost and since this cost is controllable, proper planning, purchasing, handling and accounting are of great importance.
Need for (or Objectives of) Material Control
The methods of valuing material issues
I) First In First Out (FIFO) Method:
Under this method, materials received first are issued first. It is on the assumption that old stocks should be used first and new stocks should be used next or later. Hence under this method the value of closing stock will be at the current market price.
The methods of valuing material issues
II) Last In First Out (LIFO) Method:
This method is opposite to FIFO method. Under this method, materials received last are issued first. It is on the assumption that, the latest purchases are to be issued to production to reflect the current market price.
The methods of valuing material issues
III) Highest In First Out (HIFO)
Under this method, the highest priced materials are issued first irrespective of the date of purchase. It is on the assumption that, the closing stock should always remain in the minimum price or as low as possible. This method is not popular because it always under values the stock. It is suitable only for cost plus contract.
The methods of valuing material issues
IV) Base stock method
It is not a separate method. It works with FIFO and LIFO methods. Under this method, a minimum stock of the material is always maintained in stock, which is known as “Base stock”. The stock is valued at a price at which it is received. The base stock is created from the first lot and it should not be issued until emergency arises.
The methods of valuing material issues
V) Simple Average Price Method:
It is not a separate method. It works with FIFO and LIFO methods. Under this method, a minimum stock of the material is always maintained in stock, which is known as “Base stock”. The stock is valued at a price at which it is received. The base stock is created from the first lot and it should not be issued until emergency arises.
The methods of valuing material issues
VI) Weighted Average Price Method
Under this method the issue price is calculated by dividing the value of materials in hand by the number of units in hand. This method is more scientific than simple average price method. It reduces the number of calculations and gives the best results.
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