CORONEL, HARRIET L.

Accy 1

Chapter 7 Accounting for Materials

SYSTEMS OF ACCOUNTING FOR MATERIALS

1. Periodic Inventory System

- purchase of materials (PURCHASES account)
- beginning inventory is separate from Purchases (Merchandise Inventory, beginning)
- Materials Available for Use = MI, beg + Purchases
- MI, ending = physical count of materials on hand
- Cost of Materials = MAFU – MI, end

2. Perpetual Inventory System

- purchase of materials (MERCHANDISE INVENTORY account)
- issuance of direct materials: MI is credited, Work in Process inventory is debited
- issuance of indirect materials: MI is credited, Factory Overhead Control is debited
- cost of materials issued can be directly ascertained

CONTROL PROCEDURES – keeps costs at a minimum level with smooth production schedule

1. Inventory – result of purchasing raw materials, and applying labor and FOH to raw materials
2. Reduction of Inventory – result of normal use
3. Optimum Inventory Investment – quantitative techniques to minimize cost of carrying inventory
4. Efficient purchasing and management depend on accurate forecast of sales
5. Forecasts – help determine when to order materials, scheduling production (control inventory)
6. Inventory Control – made through personal judgments with basis on experience
7. Methods of inventory vary (cost of materials and their importance)

Total Cost of a Finished Product = materials, direct labor, share in the FOH

CONTROL PROCEDURES

1. Order Cycling
- materials on hand are reviewed on a regular cycle
2. Min Max Method
- assumes that MI have min and max levels
- min quantity represents order point; order is placed once level reaches min
3. Two-bin Method
- used for materials considered inexpensive; requires minimal clerical time
- materials are placed on two separate bins
- First Bin – materials that will be used between order is received until next order is placed
-Second Bin – materials that will be used between the ordering and delivery + safety stocks
*When first bin is emptied, an order is placed
4. Automatic Order System
- computerized system; order is placed once level of inventory reaches a predetermined order
point quantity

5. ABC Plan
- used for large number of materials with different value
- systematic way of grouping material into separate classification
-Example: inexpensive (min-max method); expensive (automatic order system)

MATERIAL CONTROL

1. Physical Control of Materials – safeguarding assets

o Limited Access
o Segregation of Duties
o Accuracy in Recording
2. Control of the Investment in Materials
- maintaining proper balance of materials on hand
- inventory of sufficient size must be maintained

Factors to be considered:
• Usage of funds
• Cost of Materials Handling
• Storage
• Insurance Against Fire
• Theft
• Loss from Damage
• Deterioration
• Obsolescence

ORDER POINT – a subsidiary ledge must be kept for each individual raw material used; call order points
once predetermined minimum level of inventory on hand is reached

Calculation of Order Point:

1. Usage – anticipated rate at which the materials will be used

2. Lead Time – estimated time interval between placement of order and receipt of material
3. Safety Stock – estimated min level of inventory needed to protect against running out

Example:

expected daily usage of material = 100 units

anticipated lead time = 4 days

estimated safety stock = 800 units

Solution:

100 x 4 = 400 + 800 (safety stock) = 1,200 units

ECONOMIC ORDER QUANTITY – purchase order which results in the min total inventory cost

Factors to be considered in determining ordering costs

1. Salaries and wages (purchasing, receiving, inspecting)

2. Communication cots for ordering (telephone, postage, forms of stationery)
3. Materials accounting and record keeping

Factors to be considered in determining carrying costs

1. Materials storage and handling costs

2. Interest, insurance, and property taxes
3. Loss due to theft, deterioration, and obsolescence
4. Records of supplies associated with the carrying of inventories

METHODS OF COMPUTING ECONOMIC ORDER QUANTITY

1. Tabular Method - purchase order quantity alternatives are listed in separate columns

Example:

Order Size No. of Orders Total Order Cost Ave Inventory Total Carrying Cost Total O&C
100 100 P1,000 50 P40 P1,040
300 33 330 150 120 450
500 20 200 250 200 400
700 14 140 350 280 420
900 11 120 450 360 470

EOQ = 500 unit (order size where total costs = 400)

Where:

Order Size = number of units per order

Number of orders = 1,000/order size

Total order cost = No. of orders x P10/order

Average inventory = order size/2

Total carrying cost = average inventory xP0.80

Total O&C Cost = total order cost + total carrying cost

TOTAL ORDER AND CARRYING COSTS VARY INVERSELY

Total Carrying Cost Total Order Cost

Greater Inventory on Hand greater lower
Small Inventory on Hand lower (more orders to place) greater
2. Formula Method
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

BUSINESS PAPERS USED TO SUPPORT MATERIAL TRANSACTIONS

1. Purchase Requisition
- written request sent to inform the purchasing department of a need for materials
2. Purchase Order
- written request to a supplier (serially numbered)
- supplier’s authorization to deliver goods and submit a bill
3. Receiving Report
4. Materials Requisition Slip
- written order to the storekeeper to deliver materials or supplies to the place designated
- includes job number, department, quantity and description, unit cost, total cost of the goods

METHODS OF COSTING MATERIALS

1. First-in, First-Out (FIFO)

2. Average Cost
o Weighted Average (Periodic)
o Moving Average (Perpetual)

SPECIAL PROBLEMS IN MATERIAL ACCOUNTING

1. Discounts
o Trade Discounts
o Quantity Discounts – cost savings for volume purchases
o Cash Discounts – motivate prompt payment
a. When Taken Method
- purchases and liabilities are recorded at gross amounts
- discount is only recognized when account is paid within discount period
b. When Not Taken Method
- purchases and liabilities are recorded at net amounts
- when payment lapsed discount period, “Purchase Discount Loss”
c. When Offered Method
- purchases are recorded at net and the liability is recorded at gross
- difference is charged to “Allowance for Purchase Discount”
- when payment lapsed discount period, “Purchase Discount Loss”

2. Freight-In
o Direct Charging – freight incurred is added to invoice price (debit Materials for freight)
If two or more materials are purchased, freight must be allocated using:
a. Relative Peso Value Method – allocated based of the peso value of items
b. Relative Weight Method – allocated based on weight of items purchased
o Indirect Charging – freight incurred is charged to FACTORY OVERHEAD CONTROL

OTHER DEFINITIONS:

1. Spoiled Units – units that do not meet production standards (sold for salvage value/discarded)
2. Defective Units – do not meet production standards; must be processed further
3. Scrap Material – left over from production; cannot be put back in production but may be usable
4. Waste Materials – left over from production; no further resale value

TWO METHODS FOR ACCOUNTING FOR SPOILED MATERIALS

1. Charged to a Specific Job – used if the spoilage is the job itself

Spoiled Goods xxx
Work in Process xxx

Where:

Spoiled Good and WIP = no. of units spoiled x estimated sales value per unit

2. Charged to All Production – spoilage is considered normal to the process, does not exceed limit
Spoiled Goods xxx
Factory Overhead Control xxx
Work in Process xxx

Where:

Spoiled Goods = no. of units spoiled x estimated sales value/unit

WIP = total cost incurred/charged to spoiled units

Factory OH = loss

TWO METHODS OF ACCOUNTING FOR DEFECTIVE MATERIALS

1. Charged to the specific job

Work in Process xxx
Materials xxx
Payroll xxx
FOH Applied xxx
2. Charged to all Production
FOH Control xxx
Materials xxx
Payroll xxx
FOH Applied xxx

ACCOUNTING FOR SCRAP MATERIALS – spoilage and defective unit

Indication of Efficiency – when amount of scrap exceeds the norm

1. Specific Job
Scrap Materials xxx
Work in Process xxx
2. Not Traceable to Specific Job
Scrap Materials
Miscellaneous Income
3. Recovered from Factory Supplies
Scrap Materials xxx
FOH Control xxx

ACCOUNTING FOR WASTE MATERIAL

1. Allocated to All Jobs

Scrap Materials xxx
FOH Control xxx
2. Allocated to Specific Job
WIP (Job Number) xxx
Accounts Payable xxx

ACCOUNTING FOR BASIC MATERIAL TRANSACTION

1. Purchases of Materials in Advance

Materials xxx
Accounts Payable xxx
2. Emergency Purchases of Direct Material
WIP xxx
Accounts Payable xxx
3. Emergency Purchases of Indirect Material
FOH Control xxx
Accounts Payable xxx
4. Return of Materials to Vendor
Accounts Payable xxx
Materials xxx
5. Issue of Direct Materials
WIP xxx
Materials xxx
6. Issue of Indirect Materials
FOH Control xxx
Materials xxx
7. Return of Excess Materials
Materials xxx
WIP xxx