DIRECT MATERIALS Maria Cristina P.
Obeso, CPA, MBA
CONTROL OF MATERIALS COST
Control of Materials Cost requires the following:
1. Estimates of materials cost, in total and per unit. -
Products are designed and manufacturing processes are carefully planned. Materials
requirements (in terms of quantity per unit and quality) are determined based on
product design and specifications at each stage of the manufacturing process
2. Production budget –
It shows the budgeted production volumes, monthly or quarterly, based on which
budgeted materials usage is computed.
It is used as guides in timing materials procurement and in estimating the incidental
costs involved and the desired inventory level of materials
3. Purchase requisition –
It informs the purchasing agent that materials as indicated therin are needed by the
issuing party
4. Purchase order –
It is issued to supplies stating the specifications, quantities and unit prices for the
different items being purchased and the desired delivery date or dates
5. Receiving report –
It certifies the quantity of items received and may state the results of inspection and of
quality tests
6. Materials requisition -
It notifies the storeroom or warehouse that materials as specified therein are needed by
the issuing party and may state the date the materials are needed
7. Materials ledger cards
These are the perpetual inventory records for materials showing receipts and issuances
for each class thereof and the resulting balances.
8. Returned materials report
This shows the materials previously issued and are being returned to the storeroom
9. Scrap report
It shows the quantity of scrap materials removed from the factory.
10. Return shipping order
This shows the materials returned or being returned to suppliers.
PURCHASE REQUISITION
PURCHASE ORDER
RECEIVING REPORT
MATERIALS REQUISITION SLIP/ FORM
PURCHASE OF AND PAYMENT OF MATERIALS
STORES CLERK/ MATERIALS DEPT.HEAD
** STOCK REACHES CRITICAL LEVEL
** PRODUCTION REQUEST ITEMS NOT IN STOCK
ISSUES PURCHASE REQUISTION
TO THE ACCOUNTING AND
PURCHASING DEPARTMENT
PURCHASING DEPARTMENT
Canvasses prices among suppliers
Bidding process
Issues a Purchase order to suppliers
PURCHASE ORDER
SUPPLIERS RECEIVES THE GOODS
RECEIVING AND
AND INSPECTS IT
INSPECTION
DEPARTMENT
DELIVERS THE GOODS AND ISSUES A RECEIVING AND
SALES INVOICE INSPECTION REPORT
STORES DEPARTMENT
ACCOUNTING DEPARTMENT
GOODS RECEIVED
*Receives copy of Sales Invoice TOGETHER WITH THE
*receives copy of Receiving and Inspection report RECEIVING AND
INSPECTION REPORT
* Validates Purchase Order
* Processes payment to the Suppliers and prepares
Disbursement voucher
SUPPLIERS RECEIVE
PAYMENT
RECORDING PURCHASES
Purchases are recorded in the voucher register under the voucher system or in the
purchase journal.
Entry: Materials xx
Accounts Payable/ Cash xx
ISSUANCE OF MATERIALS AND SUBSEQUENT RETURNS
- Issuance of Materials is covered by Materials Requisition.
- The form should clearly state the department or job to be charged and is
accomplished in quadruplicate providing twoccopies to the Accounting department,
the storeroom and file copy for the requisitioning department
RECORDING REQUISITIONS
- Requisitions are summarized monthly and recorded in one journal entry each month
or another alternative is to record it in a Requisitions Journal ( a special journal for
requisitions)
COSTING METHOD FOR REQUISITIONS
The costing method for materials issued are FIFO, LIFO and AVERAGE
PURCHASE DISCOUNTS
Trade discounts and quantity discounts are not recorded inasmuch as they are granted
upon purchase.
Cash discounts, being reductions in the amount paid for materials purchased , are
logically adjustments to purchase price but are treated as other income for convenience.
FREIGHT-IN
Freight cost for purchases may be treated as addition to purchase cost or as factory
overhead item. If freight is treated as a factory overhead, it requires the inclusion of estimated
freight-in cost in the computation forpredetermined factory overhead rate so that it is
automatically included in the production cost upon recording the applied amount.
MATERIALS HANDLING COST
Materials Handling Cost -
refers to those incurred incidental to acquisition and storage of materials. These are the costs
incurred in ordering (purchasing department), receiving ( receiving and inspection department),
processing payment ( accounting department) and in handling and storing materials
(materialsdepartment).
- They are treated either as factory overhead of as additionalcost of materials
As Factory Overhead
Estimated Materials Handling Costs are included in the computation for predetermined
overhead rate and the actual figures are charged to Factory Overhead Control
As Additional Cost of Materials
Materials Handling Cost are charged to Materials Upon purchase at a predetermined
rate. Costs incurred are charged to Materials Handling Cost Control and the variance,if any,is
closed to cost of goods sold. If the variance is significant, it is allocated between cost of goods
sold and the inventories of materials, work in process and finished goods.
Materials Handling Cost Rate = Estimated Materials Handling Cost
Estimated materials purchases
MATERIALS LEDGER CARDS (Also known as Store Ledger Cards)
- Are the perpetual records of the different items in the storeroom
- Items received and issued for each class are posted to the corresponding card and
the resulting balance must be equal to the inventory for said item.
- If there is a difference between the balance in the materials ledger card and the
actual physical count of the materials, the possible cause thereof is determined,and
corresponding adjustments are to be made
COSTING METHODS FOR MATERIALS
1. FIRST IN,FIRST OUT (FIFO)
2. LAST IN, FIRST OUT (LIFO)
3. AVERAGE
FIRST IN,FIRST OUT
- Based on the assumption that cost should be charged to manufacturing cost or cost
of goods sold in the order in which incurred , based on earlier prices to later prices
- Inventories are stated in terms of most recent costs and expense is charged with the
earliest costs incurred
Illustrative Problem:
August 1 Inventory 400 units at P10 P4,000
12 Purchase 600 units at P12 7,200
16 Issue 500 units
18 Purchase 300 units at P15 4,500
20 Issue 200 units
25 Purchase 400 units at P14
28 Issue 400 units
DATE RECEIVED ISSUED BALANCE
8/1 400 at P10.00 P4,000
8/12 600 at P12.00 400 at P10.00 P4,000
600 at P12.00 7,200
8/16 400 at P10.00
100 at P12.00 500 at P12.00 P 6,000
8/18 300 at P15.00 500 at P12.00 P 6,000
300 at P15.00 4,500
8/20 200 at P12.00 300 at P12.00 3,600
300 at P15.00 4,500
8/25 400 at P14.00 300 at P12.00 3,600
300 at P15.00 4,500
400 at 14.00 5,600
8/28 300 at 12.00 200 at 15.00 3,000
100 at 15.00 400 at 14.00 5,600
LIFO METHOD
- Based on the assumption that cost should be charged to manufacturing cost or cost
of goods sold based on the latest price to the earliest prices
- Inventories are stated in terms of the earliest costs and expense is charged with the
latest costs incurred
Illustrative Problem:
August 1 Inventory 400 units at P10 P4,000
12 Purchase 600 units at P12 7,200
16 Issue 500 units
18 Purchase 300 units at P15 4,500
20 Issue 200 units
25 Purchase 400 units at P14
28 Issue 400 units
DATE RECEIVED ISSUED BALANCE
8/1 400 at P10.00 P4,000
8/12 600 at P12.00 400 at P10.00 P4,000
600 at P12.00 7,200
8/16 400 at P10.00 P4,000
500 at P12.00 100 at P12.00 P 1,200
8/18 300 at P15.00 400 at P10.00 P4,000
100 at P12.00 P 1,200
300 at P15.00 4,500
8/20 200 at P15.00 400 at P10.00 P4,000
100 at P12.00 P 1,200
100 at P15.00 1,500
8/25 400 at P14.00 400 at P10.00 P4,000
100 at P12.00 P 1,200
100 at P15.00 1,500
400 at P14.00 5,600
8/28 400 at P14.00 400 at P10.00 P4,000
100 at P12.00 P 1,200
100 at P15.00 1,500
AVERAGE METHOD
- This method is based on the assumption that units issued should be charged atan
average cost,such average being influenced or weighted by the number of units
acquired at each price
- The inventory at the end is computed by multiplying the weighted average cost per
unit by the units on hand, Illustrative Problem:
August 1 Inventory 400 units at P10 P4,000
12 Purchase 600 units at P12 7,200
16 Issue 500 units
18 Purchase 300 units at P15 4,500
20 Issue 200 units
25 Purchase 400 units at P14
28 Issue 400 units
-
DATE RECEIVED ISSUED BALANCE
8/1 400 at P10.00 P4,000
8/12 600 at P12.00 1000 at P11.20 11,200
8/16 500 at P11.20
500 at 11.20 5,600
8/18 300 at P15.00 800 at 12.625 10,100
8/20 200 at 12.625 600 at 12.635 7,575
8/25 400 at P14.00 1000 at 13.175 13,175
8/28 400 at 13.175 600 at 13.175 7,905
BIN CARDS (Also known as Bin Tags)
- Are those attached to the storage bins, shelves,racks or other containers of items in
the storeroom showing the movement of stock in said containers.
SCRAP MATERIALS
Scrap- refers to pieces or fragments of materials or something to be discarded .
Examples: - pieces of cloth resulting from cutting the material in the manufacture of tshirts
- Fragments of iron bars when cutting them into desired length
- A scrap report is prepared regularly and scrap materials cannot be avoided.
However, they must be minimized and reported and controlled.
- When the value of scrap is significant and readily determinable, an entry is made
upon transfer thereof to storeroom . Otherwise, an entry is made only upon sale.
SPOILED GOODS
Spoiled goods – those that have developed imperfections and are disposed of as such.
- The difference between the selling price and accumulated cost is treated either as a
charge to factory overhead (loss on spoiled goods) or left with work in process as
additional cost of the remaining good units in a job
- The charge is to factory overhead when spoilage is normal or inherent in the
manufacture of standard jobs. In making the entry, the cost of the spoiled units is
removed from work in process and spoiled goods are taken up at their estimated
market value with the loss in value debited to factory overhead
- When spoilage is due to the special nature of a job or due to strict specifications or
difficult processing involved,the loss is treated as part of the cost of the particular
job or is left with work in process. In making the entry, only the estimated cost
recovery is removedfrom work in process so that whatever loss is incurred from
spoilage is left with work in process as part of the cost of the remaining good units in
the particular job.
DEFECTIVE GOODS
Defective goods – are those that have developed imperfections and are reprocessed so that
they can be sold as regular finished goods.
- Cost of reprocessing defective work may be charged to factory overhead or to work
in process.
- The debit is to factory overhead when imperfections are normal or expected in
standard jobs. Charging reprocessing cost to factory overhead has the effect of
prorating said cost amongall jobs and requires the inclusion of sufficient provision
therefor in computing for the factory overhead rate.
- Reprocessing cost is charged to work in process or to a particular job when
imperfections are due to the special nature of the job.
TREATMENTS FOR LOSS FROM SPOILAGE AND REPROCESSING COST COMPARED
IMPERFECTIONS REPROCESSING COST OR LOSS FROM
SPOILAGE TREATED AS:
Normal or inherent in the regular Factory overhead
manufacturing process
Normal in particular jobs or due to strict Additional cost of the job (or workin process)
specifications
Due to extraordinary causes Charge to specific loss account
ACCOUNTING FOR BASIC MATERIAL TRANSACTION
TRANSACTION BUSINESS PAPER ENTRY SUBSIDIARY
RECORDS
Purchases of Voucher supported Received
Materials in Advance by invoice; Materials xx section of
of Use receiving report and Accounts Payable xx stock card
purchase order
Emergency purchases Voucher supported Material
of direct materials by invoice; Work in process xx section of
Receiving report and Accounts payable xx cost sheet
purchase order
Emergency purchases Voucher supported Factory
of indirect materials by invoice; Factory overhead control xx overhead
Receving report and Accounts payable ledger
purchase order xx
Return of materials Return shipping Received
and supplies to order with debit Accounts payable xx section of
vendor memo Materials xx stock card
Issue of direct Materials requisition Material
materials Work in process xx section cost
Materials xx sheet
Issue
section of
stock card
Issue of indirect Materials requisition Factory overhead control xx Overhead
materials and Materials ledger
supplies xx Issued
section of
stock card
Return of excess Returned materials Issued
materials from report Materials xx section of
factory Work in process xx stock card
Material
cost sheet
