Authored by: Dr. Girish V, M.COM., MBA., PGDFM., PGDFT., NET., PH.D.

Assistant Professor of Commerce, P.E.S College of SAC, Mandya.

Unit-02
Material Cost
Meaning of Materials in Cost Accounting
In cost accounting, materials refer to the raw inputs used in the production process to create
finished goods. These materials are crucial as they represent a significant portion of the
production costs. Proper management and accounting of materials ensure accurate cost
measurement and control, which are essential for pricing, profitability, and inventory
management.
Importance of Materials in Cost Accounting
1. Cost Control: Materials often constitute a major part of the total production cost.
Efficient use of materials helps in controlling costs and increasing profitability.
2. Inventory Management: Accurate tracking of material usage helps in maintaining
optimal inventory levels, preventing overstocking or stockouts, which can disrupt
production and increase costs.
3. Budgeting and Forecasting: Understanding material costs is essential for budgeting
and financial forecasting. It allows businesses to predict production costs and set prices
that ensure profitability.
4. Decision Making: Cost information related to materials helps management make
informed decisions regarding pricing, production methods, and product mix.
Types of Materials in Cost Accounting
1. Direct Materials: These are raw materials that can be directly traced to the production
of a specific product. For example, wood used in making furniture or fabric in clothing
manufacturing. The cost of direct materials is easily identifiable with the finished
product.
2. Indirect Materials: These are materials that are used in the production process but
cannot be directly traced to a specific product. Examples include lubricants for
machinery, cleaning supplies, or small tools. The cost of indirect materials is generally
categorized under overhead costs.
3. Raw Materials: These are unprocessed or basic materials used in the initial stages of
production. They are often purchased in bulk and stored in inventory until needed.
4. Work-in-Progress (WIP) Materials: These are partially finished goods that still
require additional processing. The value of WIP materials is tracked to understand the
cost of production at different stages.
5. Finished Goods: Although technically not "materials," the costs of the materials that
have been converted into finished goods are tracked and recorded in cost accounting.
This includes the cost of all direct and indirect materials used in the production process.

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Authored by: Dr. Girish V, M.COM., MBA., PGDFM., PGDFT., NET., PH.D.
Assistant Professor of Commerce, P.E.S College of SAC, Mandya.

Material Control

Material control refers to the systematic process of managing the procurement, storage, and
usage of materials to ensure that the right quantity and quality of materials are available at the
right time, minimizing costs and avoiding wastage. Effective material control is vital for
maintaining production efficiency, controlling costs, and ensuring product quality.

Techniques of Material Control

1. Economic Order Quantity (EOQ):
o EOQ is a formula used to determine the optimal order quantity that minimizes
the total costs of ordering and holding inventory. The goal is to find the quantity
that balances ordering costs (costs related to placing orders) and holding costs
(costs related to storing inventory).
2. Just-In-Time (JIT) Inventory:
o JIT is a strategy where materials are ordered and received only when they are
needed in the production process. This minimizes inventory levels, reduces
storage costs, and reduces waste, but requires precise coordination with
suppliers.
3. ABC Analysis:
o This technique classifies inventory into three categories based on their
importance:
▪ A items are high-value with low frequency of use.
▪ B items are moderate in value and frequency.
▪ C items are low-value but used frequently.
o This classification helps in prioritizing control efforts on the most critical items.
4. Perpetual Inventory System:
o In this system, inventory records are updated continuously with each
transaction, providing real-time information on stock levels. It helps in closely
monitoring material usage and maintaining accurate inventory records.
5. Vendor-Managed Inventory (VMI):
o VMI is a practice where the supplier manages the inventory levels of their
products at the customer’s location. This ensures that the customer always has
the right amount of stock, and it reduces the administrative burden on the
customer.

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Authored by: Dr. Girish V, M.COM., MBA., PGDFM., PGDFT., NET., PH.D.
Assistant Professor of Commerce, P.E.S College of SAC, Mandya.

6. Material Requirement Planning (MRP):

o MRP is a computer-based system that calculates the materials needed for
production based on the production schedule, inventory levels, and lead times.
It helps in planning the purchase of materials to meet production demands
without overstocking.
7. Safety Stock:
o Safety stock is an additional quantity of material kept in inventory to guard
against uncertainties in demand or supply. It acts as a buffer to prevent stockouts
during unexpected fluctuations in demand or delays in supply.
8. Reorder Level System:
o A reorder level is a predetermined point at which a new order for materials is
placed. This level is set based on the lead time and average usage rate to ensure
that new stock arrives before the existing stock runs out.
9. Two-Bin System:
o In this system, inventory is divided into two bins. When the first bin is empty,
an order is placed to refill it while using the stock in the second bin. This method
ensures continuous supply without stockouts.
Economic Order Quantity (EOQ)
Economic Order Quantity (EOQ) is a fundamental concept in inventory management that
helps determine the optimal order quantity of a product that minimizes the total costs associated
with ordering and holding inventory. EOQ aims to strike a balance between two main types of
costs: ordering costs and holding (or carrying) costs.
Key Components of EOQ
1. Ordering Costs:
o These are costs incurred every time an order is placed, regardless of the order
quantity. They include costs related to processing purchase orders, receiving
goods, and handling invoices. Ordering costs tend to decrease as the order
quantity increases because fewer orders are needed over time.
2. Holding Costs:
o These are the costs associated with storing and maintaining inventory. They
include warehousing costs, insurance, depreciation, and opportunity costs of
capital tied up in inventory. Holding costs increase as the order quantity
increases because more inventory is stored over time.
3. Demand:
o This is the total quantity of the product required over a specific period (usually
a year).
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Authored by: Dr. Girish V, M.COM., MBA., PGDFM., PGDFT., NET., PH.D.
Assistant Professor of Commerce, P.E.S College of SAC, Mandya.

4. Unit Cost:
o The cost of purchasing a single unit of the product.
5. Lead Time:
o The time between placing an order and receiving the goods. Lead time is not
directly part of the EOQ formula but affects inventory management decisions.
Procedure of Material Procurement
1. Need Identification:
o Identify the need for materials based on production schedules, inventory levels,
or specific project requirements.
2. Requisition Approval:
o Create a material requisition form and get it approved by the appropriate
department or management, depending on the organizational hierarchy.
3. Supplier Selection:
o Identify and evaluate potential suppliers based on factors like price, quality,
delivery time, reliability, and past performance.
o Obtain quotes or bids from multiple suppliers for comparison.
4. Purchase Order (PO) Creation:
o Once a supplier is selected, create a purchase order detailing the material
specifications, quantity, price, delivery terms, and payment conditions.
o Send the PO to the supplier for confirmation.
5. Order Confirmation:
o Receive order confirmation from the supplier, agreeing to the terms specified in
the purchase order.
o Confirm the expected delivery date and any other specific requirements.
6. Material Receipt:
o Upon delivery, inspect the materials to ensure they meet the specified quality,
quantity, and condition.
o Record the receipt of materials and update inventory records accordingly.
7. Quality Inspection:
o Perform a detailed quality check to ensure that the materials meet the required
standards and specifications.
o Any discrepancies or defects should be reported immediately for resolution.

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Authored by: Dr. Girish V, M.COM., MBA., PGDFM., PGDFT., NET., PH.D.
Assistant Professor of Commerce, P.E.S College of SAC, Mandya.

8. Storage:
o Store the materials in the designated warehouse or storage area, ensuring proper
conditions to maintain material quality.
o Update the inventory management system with the new stock levels.
9. Invoice Verification and Payment:
o Verify the supplier’s invoice against the purchase order, goods received note,
and any other relevant documents.
o Process the payment according to the agreed terms after ensuring all conditions
are met.
10. Record Keeping and Documentation:
• Maintain records of all procurement documents, including requisitions, purchase
orders, delivery notes, inspection reports, and invoices.
• This documentation is essential for audit purposes and future reference.
11. Supplier Evaluation:
• After the procurement process is completed, evaluate the supplier’s performance based
on delivery time, quality, and service.
• Use this evaluation for future procurement decisions.
12. Follow-up and Feedback:
• Regularly follow up with suppliers to ensure they maintain the expected level of
service.
• Provide feedback to suppliers for continuous improvement.
This procedure ensures that materials are procured efficiently, cost-effectively, and in a manner
that supports the organization's production needs.
Documents involved in Material Accounting
In material accounting, several key documents are used to track the flow of materials, manage
inventory, and ensure accurate financial records. Here are the main documents involved:
1. Material Requisition Form
• Purpose: Used to request the release of materials from the storage or warehouse to the
production or usage department.
• Details: Contains information like material description, quantity required, department
requesting, and date of request.

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Authored by: Dr. Girish V, M.COM., MBA., PGDFM., PGDFT., NET., PH.D.
Assistant Professor of Commerce, P.E.S College of SAC, Mandya.

2. Purchase Requisition
• Purpose: A document used internally to request the purchasing department to procure
materials.
• Details: Specifies the type, quantity, and quality of materials needed, along with the
preferred supplier, if any.
3. Request for Quotation (RFQ)
• Purpose: Sent to potential suppliers to invite them to submit a quotation for supplying
the required materials.
• Details: Contains detailed specifications of the materials needed, quantity, delivery
terms, and any other specific requirements.
4. Purchase Order (PO)
• Purpose: An official order issued by the company to a supplier to purchase materials.
• Details: Includes material specifications, quantity, agreed price, delivery schedule,
payment terms, and any other conditions.
5. Goods Received Note (GRN)
• Purpose: A document issued by the receiving department to confirm that materials have
been received.
• Details: Includes the date of receipt, description of materials, quantity received, and
any discrepancies compared to the purchase order.
6. Material Inspection Report
• Purpose: Documents the results of the inspection of materials upon receipt.
• Details: Details about the quality and condition of the materials, any defects found, and
the acceptance or rejection of the materials.
7. Invoice
• Purpose: A bill issued by the supplier to the buyer for payment for the materials
supplied.
• Details: Lists the materials supplied, their quantities, prices, total amount due, and
payment terms.
8. Material Transfer Note
• Purpose: Used to document the transfer of materials from one department to another
within the organization.
• Details: Specifies the materials being transferred, their quantities, the originating
department, and the receiving department.

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Authored by: Dr. Girish V, M.COM., MBA., PGDFM., PGDFT., NET., PH.D.
Assistant Professor of Commerce, P.E.S College of SAC, Mandya.

9. Material Issue Note

• Purpose: Records the issuing of materials from the store to the production or usage
department.
• Details: Includes information such as material description, quantity issued, issuing
date, and the department receiving the materials.
10. Material Return Note
• Purpose: Used when materials issued to a department are returned to the store.
• Details: Specifies the quantity of materials being returned, the reason for return, and
the date of return.
11. Stock Ledger (or Inventory Ledger)
• Purpose: A record that tracks all transactions related to inventory, including receipts,
issues, and current stock levels.
• Details: Contains detailed entries of all material movements, helping in inventory
management and cost tracking.
12. Bill of Materials (BOM)
• Purpose: A comprehensive list of materials, components, and assemblies required to
manufacture a product.
• Details: Includes material specifications, quantities, and the order in which materials
are used in the production process.
13. Material Cost Report
• Purpose: A summary report that tracks the costs associated with the materials used in
production.
• Details: Provides details on material costs, usage rates, and cost variances.
14. Inventory Reconciliation Report
• Purpose: Used to reconcile the physical inventory with the inventory records.
• Details: Identifies discrepancies between actual stock and recorded stock, helping to
ensure accurate inventory records.
15. Supplier Performance Report
• Purpose: Assesses the performance of suppliers based on factors like quality, delivery
time, and price compliance.
• Details: Used for supplier evaluation and decision-making for future purchases.
These documents are essential for accurate material accounting, helping organizations manage
their materials efficiently, control costs, and maintain proper financial records.

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Authored by: Dr. Girish V, M.COM., MBA., PGDFM., PGDFT., NET., PH.D.
Assistant Professor of Commerce, P.E.S College of SAC, Mandya.

Duties of Store Keeper

The storekeeper plays a crucial role in managing and maintaining the inventory in an
organization. Below are the key duties and responsibilities of a storekeeper:
1. Receiving Materials
• Inspection: Check the quality, quantity, and condition of materials received against the
purchase order and delivery note.
• Documentation: Prepare and sign the Goods Received Note (GRN) and report any
discrepancies or damages to the concerned department.
2. Storage of Materials
• Organization: Properly organize and store materials in designated areas to prevent
damage, deterioration, or loss.
• Labeling: Ensure that all materials are correctly labeled with relevant details such as
item name, code, and expiry date (if applicable).
• Safety: Maintain safe storage practices, including proper stacking, temperature control,
and pest management.
3. Issuing Materials
• Material Requisition: Issue materials based on approved material requisition forms
from various departments.
• Record Keeping: Update stock records immediately after issuing materials to maintain
accurate inventory levels.
• FIFO/LIFO: Ensure that materials are issued on a First-In-First-Out (FIFO) or Last-
In-First-Out (LIFO) basis, as appropriate, to manage inventory effectively.
4. Inventory Management
• Stock Levels: Monitor inventory levels regularly and inform the purchasing department
when stocks reach reorder levels.
• Stock Rotation: Implement stock rotation practices to minimize waste due to
obsolescence or expiration.
• Periodic Stock Taking: Participate in periodic physical inventory counts and reconcile
the physical stock with the stock records.
5. Maintaining Records
• Inventory Ledger: Keep accurate and up-to-date records of all materials received,
stored, issued, and returned.
• Documentation: Maintain proper documentation for all transactions, including
receipts, issues, transfers, and returns.

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Authored by: Dr. Girish V, M.COM., MBA., PGDFM., PGDFT., NET., PH.D.
Assistant Professor of Commerce, P.E.S College of SAC, Mandya.

• Reports: Prepare and submit regular inventory reports to management, detailing stock
levels, discrepancies, and any other relevant information.
6. Stock Security
• Access Control: Restrict unauthorized access to the store to prevent theft, pilferage, or
misuse of materials.
• Security Measures: Implement security measures such as surveillance cameras, locks,
and alarms to safeguard the inventory.
7. Coordination with Other Departments
• Collaboration: Work closely with the purchasing, production, and finance departments
to ensure smooth material flow and resolve any issues related to inventory.
• Supplier Communication: Coordinate with suppliers for timely delivery, replacement
of defective materials, and other supply-related matters.
8. Handling Returns and Rejections
• Return Process: Manage the return of defective, excess, or incorrect materials to
suppliers and ensure that credit notes or replacements are obtained.
• Record Keeping: Document all returns and rejections, updating inventory records
accordingly.
9. Compliance with Policies and Procedures
• Adherence: Ensure that all store operations comply with the organization's policies,
procedures, and safety regulations.
• Audits: Prepare for and participate in internal and external audits by maintaining
accurate and organized records.
10. Maintaining Cleanliness and Order
• Housekeeping: Ensure that the store is kept clean, organized, and free from clutter or
hazardous materials.
• Maintenance: Oversee the maintenance of storage equipment, such as shelves, racks,
and forklifts, to ensure safe and efficient operations.
11. Reporting
• Regular Updates: Provide regular updates to management on stock levels, material
consumption, and any issues related to inventory management.
• Incident Reporting: Report any incidents, such as accidents, thefts, or material
damage, to the appropriate authorities.

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Authored by: Dr. Girish V, M.COM., MBA., PGDFM., PGDFT., NET., PH.D.
Assistant Professor of Commerce, P.E.S College of SAC, Mandya.

12. Training and Supervision

• Team Management: Supervise and train junior store staff or assistants, ensuring that
they understand their roles and responsibilities.
• Skill Development: Stay updated with the latest inventory management techniques and
tools, and apply this knowledge to improve store operations.
The role of a storekeeper is vital to ensuring that an organization’s inventory is well-managed,
secure, and efficiently utilized to support production and operations.

Review Questions:
Part-A-(2 Marks)
1) What is Material?
2) What is EOQ?
3) What is LIFO and FIFO?
4) What do you mean by inventory control?
Part-B-(10 Marks)
1) Explain the types of Materials.
2) Explain the techniques of inventory control.
3) Explain the procedure for procurement of materials.
4) Explain the documents involved in material accounting.
5) Explain the duties of store keeper.
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