CHAPTER 1: INTRODUCTION TO COST ACCOUNTING

Financial, Managerial and Cost Accounting

Financial Accounting

 is the use of accounting information for reporting to external parties (external use).
 is based on historical transactions data.
 the information provided by financial accounting is usually presented in the form of financial
statements, tax returns and other formal reports.
 the information may also be used internally to provide a basis for financial analysis by
management.

Managerial Accounting

 focuses on the needs of parties within the organization rather than interested parties outside of
the organization.
 information commonly addresses individual or divisional concerns rather than those of the
enterprise as a whole.
 the information must be current/forecasted, quantitative/qualitative,
monetary/nonmonetary, and timely.
 the data are futuristic, and some costs are not recorded on the accounting books of the
organization.
 Managerial Accounting is not separate and distinct from Accounting. The financial accounting
data are used in the managerial accounting system.
 There is no requirement or legislation that mandates the format or use of managerial
accounting.

Financial Accounting vs Managerial Accounting

Cost Accounting

 is the intersection between financial and managerial accounting.

Cost accounting information is needed/used by both financial and managerial.

1) External users such as stockholders, creditors and various regulatory boards

- for credit and investment decisions.

2) Internal users - for planning and controlling

Merchandising vs. Manufacturing

1) Merchandising Company

- company normally buys a product that is ready for resale when it is received.

- nothing needs to be done to the product to make it saleable.

(except for special package or display)

Merchandising
Merchandising vs. Manufacturing

2.) Manufacturing Company

 company take raw materials and transform them into something else desired by the end
consumer.
Manufacturing

Uses of Cost Accounting Data

Information produced by a cost accounting system provides basis for :

1. Determining product cost

2. Planning and controlling operations

Determining Product Costs

  Cost accounting procedures help management in gathering the data needed to determine
product costs thus generate meaningful financial statements and other reports.
 Cost procedures must be designed to permit the computation of unit costs as well as total
product costs.

Unit cost information is also useful in making a variety of important marketing decisions.

1. Determining the selling price of a product

2. Meeting competition
3. Bidding on contracts
4. Analyzing profitability

Planning and Control

PLANNING

 is the process of establishing objectives or goals for the firm and determining the means by
which the firm will attain them.
 cost accounting helps in the development of plans by providing historical costs and serve as
basis for projecting data for planning.
 management can analyze trends and relationships among such data as an aid in estimating
future cost and operating results and in making decision regarding the acquisition of additional
facilities, changing in marketing strategies and obtaining additional capital.

PLANNING - can be divided into three (3) components ;

1) Strategic Planning

- concerned with setting long range goals and objectives to determine the overall direction of the
company.

2) Tactical Planning

- concerned with plans for a shorter range and emphasizes plans to achieve the strategic goals.

3) Operations Planning

- relates to the day-to-day implementation of tactical plans and it emphasizes the coordination of major
factors of production (materials, labor, facilities).

CONTROLLING

 is the process of monitoring the company’s operations and determining whether the objectives
identified in the planning process are being accomplished.

Two (2) Basic Product Costing System

JOB-ORDER COSTING

 a system of allocating costs to groups of unique product. (Heterogeneous)

 it is applicable to the production of customer specified product. (Special Order)
 each job becomes a cost center for which costs are accumulated.
 job cost sheet is needed to keep track of all unfinished jobs (WIP) and finished jobs (FG).

PROCESS COSTING

 a system of allocating costs to continuous process of the same or similar goods. (Homogeneous)
 since there is no need to determine the costs of different groups of products because the
product is uniform, each processing department becomes a cost center.

JOB-ORDER COSTING vs PROCESS COSTING

PROCESS COSTING

 Homogeneous units pass through a series of similar processes.

 Costs are accumulated by processing department.
 Unit costs are computed by dividing the individual departments’ costs by the equivalent
production.
 The cost of production report provides the detail for the
 Work-in-Process account for each department.

JOB-ORDER COSTING

 Heterogeneous or unique jobs are worked during a time period.

 Costs are accumulated by individual jobs.
 Unit costs are determined by dividing the total costs on the job costs sheet by the number of
units on the jobs.
 The job cost sheet provides the details for the Work-in-Process account.

CHAPTER 2

COST – CONCEPTS ANDCLASSIFICATIONS

Classification of Costs

I. COST CLASSIFIED AS TO RELATION TO A PRODUCT

A. Manufacturing/Product costs B. Non-manufacturing/Period costs

1) Direct materials 1) Marketing & selling expense

2) Direct labor 2) General & administrative expense

3) Factory overhead

Direct Materials
  are the basic ingredients that are transformed into finished products through the use of labor
and factory overhead in the production process.
 are those that can be traced to the finished product can they form part of the product.

Examples :

DM Finished Product

Iron Steel

Flour Bread Wood Table and Chairs

Direct Materials

are materials that become part of a finished product and can be conveniently and economically traced
to specific products.

in some cases, however, even though materials becomes part of a finished product, the expense of
actually tracing the cost of a specific material is too great. Hence, this minor materials are accounted for
as indirect materials (FOH).

Examples :

Nails in furniture

Bolts in automobiles

Rivets in airplanes

Direct Labor

 represents the amount of wages to those working directly on the product.

 the labor costs usually associated with manufacturing including ;

* Machine operators

* Support personnel

* Maintenance workers

* Managers and supervisors

* People who handle, inspect and store materials

Direct Labor

 tracing the labor costs directly to individual products is difficult, to help overcome this problem ;

1) Direct labor costs – wages of machine operators and other workers involved in actually shaping the
product.

2) Indirect labor costs (FOH) – labor costs for production related activities that cannot be conveniently
and economically traced to end products.
* Machine helpers, supervisors and other support personnel

* Payroll related costs such as payroll taxes, group insurance, sick pay, vacation and holiday pay and
other fringe benefits.

Factory Overhead

 the third manufacturing cost element is a catchall for manufacturing costs that cannot be
classified as direct materials or direct labor costs.
 are a varied collection of production-related costs that cannot be practically or conveniently
traced directly to end products.
 is also called manufacturing overhead, factory burden or indirect manufacturin costs.

Examples :

Indirect materials & supplies – nails, rivets, lubricants and small tools etc.

Indirect labor – truck drivers’ wages, maintenance, inspection labor etc.

Indirect factory costs – building maintenance, machinery maintenance, factory taxes, property
insurance, depreciation of PPE, rent & utility etc.

Prime Costs & Conversion Costs

Marketing or Selling Expenses

 include all costs necessary to secure customer orders and get the finished product or service
into the hands of the customer.

Examples :

* Advertising

* Sales salaries and commissions

* Shipping

* Expenses related to finished goods warehouses

* Sales Travel
Administrative or General Expenses

 include all executive, organizational and clerical expenses that cannot logically be included
under either production or marketing.

Examples :

* Executive compensation

* General accounting

* Secretarial

* Public relations and similar expenses.

Income Statement Presentation :

Classification of Costs

II. COST CLASSIFIED AS TO VARIABILITY / BEHAVIOR

1) Variable costs

2) Fixed costs

3) Mixed costs

Fixed Cost

 Items of cost which remain constant in total, irrespective of the volume of production.
 Cost per unit decreases as volume increases, and increases as volume decreases. (inverse
relationship)
Fixed Cost

 may classified into 2 categories depending on the ability of the management to influence the
levels of these costs in the short-term.

1) Committed fixed costs

- costs that represent relatively long-term commitments on the part of management as a result of past
decision.

Example : Depreciation of Equipment

2) Managed fixed costs (discretionary, programmed or planned fixed costs)

 costs that are incurred on a short-term basis and can be more easily modified in response to
changes in management objectives.

Example :

* Advertising

* Research & development

* Costs of training of employees

Variable Costs

 these are items of cost which vary directly, in total, in relation to the volume of production.
 Cost per unit is constant within a relevant range.
Mixed Costs

 items of cost with fixed and variable components. two (2) types of mixed costs ;

1) Semi-variable costs

2) Step costs

Semi-variable Costs

 the fixed portion of semi-variable cost usually represents a minimum fee formaking a particular
item or service.
 the variable portion is the cost changed for actually using the service.

Electricity :

Flat fee (Fixed) P250 for 100kwh

Variable P25 per kwh

Step Costs

 the fixed part of step costs changes abruptly at

various activity levels because
 these costs are acquired in indivisible portions.

Segregating Variable and Fixed Costs

 there are different methods in segregating mixed costs into fixed and variable
components.

1) High-Low Method

2) Least Square Method

High-Low Point Method

 the fixed and variable elements of the mixed costs are computed from two (2) data
points based on
 Point 1 – high point
 Point 2 – low point

Understanding the cost formula :

HIGH-LOW POINT METHOD

The controller of SUREDEAD Hospital would like to come up with a cost formula

that links Admitting Department costs to the number of patients admitted during the

month. The admitting department costs and the number of patients during the past

nine months

Required : Compute for the following ;

 Variable cost per unit (b)

 Fixed cost (a)
 Monthly cost function (cost formula)
 Department estimated cost assuming 12
patients will be admitted.
Least Square Method

 three (3) formulas to be used in least-square method are

Classification of Costs

III. COST CLASSIFIED AS TO RELATION TO MANUFACTURING DEPARTMENT

1) Direct departmental charges

 costs that are immediately charged to particular manufacturing department(s) that incurred the
costs since the costs can be conveniently identified or associated with the department(s) that
benefited the said costs.

2) Indirect departmental charges

 costs that are originally charged to some other manufacturing department(s) or account(s) but
are later allocated or transferred to another department(s) that indirectly benefited from said
costs.

IV. COST CLASSIFIED TO THEIR NATURE

1) Common costs

 cost of facilities or services employed in two or more accounting period, operations,

commodities, or services.
 this costs are subject to allocation.

- Example :

If 2 departments are occupying the same building, the depreciation is a common cost subject to
allocation based on floor area occupied.

2) Joint costs

 cost of materials, labor and overhead in the manufacture of 2 or more products at the same
time.
 a major difficulty inherent to joint costs is that they are indivisible and they are not specifically
identifiable with any of the products being simultaneously produced.
 this costs are subject to allocation.
 Examples :

DM, DL and FOH incurred to manufacture 2 products up to the split-off point.

V. COST CLASSIFIED AS TO RELATION TO AN ACCOUNTING PERIOD

1) Capital expenditures

- expenditure intended to benefit more than 1 (>1) accounting period and is recorded as
asset.
- the allocation of the cost to the different accounting period is :

* Depreciation of fixed tangible assets

* Amortization of intangible assets

* Depletion of wasting assets

2) Revenue expenditures

- expenditure that will benefit current period only and is recorded as an expense.

VI. COSTS FOR PLANNING, CONTROL AND ANALYTICAL PROCESS

1) Standard costs

2) Opportunity costs

3) Differential costs

4) Relevant costs

5) Out-of-pocket costs

6) Sunk costs

7) Controllable costs

PLANNING, CONTROL AND ANALYTICAL PROCESS

 Standard costs predetermined costs for DM, DL and FOH.

 they are established by using information accumulated from past experience.
 it is a cost chosen by the managerial accountant to serve as the benchmark in the budgetary
control system.
Opportunity costs

 the benefit given up when one alternative is chosen over the another.
 are not usually recorded in the accounting system, however, they should be considered when
evaluating alternatives for decision-making.

Marco is employed with a company that pays him a salary of P20,000 a month.

He is thinking of leaving the company and returning to school.

* Opportunity cost is the foregone salaries required to be given up (P240,000) for seeking further
education.

Differential costs

cost that is present under one alternative but is absent in whole or in part underanother alternative.

1) Incremental costs

- increase in cost from one alternative to another.

2) Decremental costs

- decrease in cost from one alternative to another.

 can be either fixed or variable.

Differential costs

IVON Corp. is thinking about changing its marketing method from distribution through retailers to direct
sale.
Relevant costs

 a future cost that changes across the alternatives.

Out-of-pocket costs

 cost that requires the payment of money (or other asset) as a result of their incurrence.

Sunk costs

 refers to money that has already been spent and which cannot be recovered.
 are excluded from future business decisions because the cost will remain the same regardless of
the outcome of a decision.

Suppose a firm has just paid P250,000 for a special purpose machine.

Since the cash outlay has been made, the P250,000 is a sunk cost.

Controllable costs

 a cost is considered controllable at a particular level of management if that level has the power
to authorize the costs.

Example :

* Depreciation of warehouse facilities controllable by Sales Manager

* Advertising program controllable by Marketing Manager

CHAPTER 3 COST ACCOUNTING CYLCE

Inventory Accounts
Materials Inventory
 also known as Materials Inventory Control account, is made up of the balances of
materials and supplies on hand.
 this account is maintained in as much as the Merchandise Inventory account, the main
difference is the way costs of items in inventory are assigned.

Elements of Manufacturing Cost

Manufacturing or Production costs are classified into three basic elements :

1) Direct Materials

2) Direct Labor

3) Factory Overhead

Work in Process Inventory

 all manufacturing costs elements (product costs) enter into accounting for Work in Process
Inventory.

Finished Goods Inventory

 FG account has the same characteristics of the Merchandise Inventory account, however, the
accounting procedures for debit side is different.
* All costs debited to FG account represent transfers from WIP account.

* The balance of FG account at the end of accounting period is the cost of products completed but
unsold.

Manufacturing Cost Flow

Cost of Goods Sold

 Cost of Goods Manufactured is used in place of Purchases

 Finished Goods Inventory is used in place of Merchandise Inventory

Statement of Cost of Goods Manufactured and Sold

 a special manufacturing statement which is used to support the cost of goods sold figure in the
income statement.

Merchandising Firm
Manufacturing Firm

Standard vs Normal vs Actual Costing

Factory Overhead is computed under normal costing a predetermined overhead rate (POHR).

 FOH Control account - is used to monitor the actual factory expenses and
 FOH Applied account - is used to record the predetermined FOH.

Illustration :

The Noeled Products Company is a small, newly organized company that manufactures dining tables and

chairs. The company products are sold to jobbers or wholesale distributors, who in turn sell them to
retailers.

The basic steps in the company’s manufacturing process are as follows ;

1) Lumber is cut to size for table tops, legs, seats, arms and backs

2) The individual pieces of cut lumber are painted in various bright colors.

3) The individual pieces are assembled into tables and chairs

The beginning Statement of Financial Position of the current year (2019) is presented as

Service Firm

Illustration :

The Magic glass is engaged in cleaning glass walls

and windows of high rise buildings. The company
incurs service overhead of P200,000 per month.
Magic glass has 50 workers who work 200 hours
each per month.
In addition, they spend P180,000 on gasoline of
their trucks. Advertising and other marketing
expenses amount to P115,000. Administrative costs
are P150,000 per month.
The workers are paid P150 per hour. Revenues for
the month amounted to

P4,450,000. All purchases, labor costs and revenues are on cash basis.
CHAPTER 6 JOB ORDER COSTING

Process Costing

 a system of allocating costs to continuous process of the same or similar goods. (cereal, refining
of petroleum, production of ice cream)
 used when a large volume of similar products are manufactured
 costs are accumulated for a time period – (week or month)
 costs are assigned to departments or processes for a specified period of time

JOB ORDER COSTING

 The procedure keeps the costs of various jobs or contracts separate during their manufacture or
construction.
 It presupposes the possibility of physically identifying the jobs produced and of charging each
with its own cost
 Costs are assigned to each job or batch
 Important feature: Each job or batch has its own distinguishing characteristics
 Objective is to compute cost per job
 Measures costs for each job completed – not for set time periods

Two jobs: Animated Film and Action Thriller

Job Order Cost Sheet

 A summary sheet were cost of each job order produced for a given customer or the cost of each
job to be placed in stock is recorded.
 Design to collect the cost of materials, labor and factory overhead applicable to a specific job.

MAJOR SOURCE DOCUMENTS FOR JOB ORDER COSTING

 Job Order Cost Sheet

 Material Stock card
 Finished Goods Stock card
  Factory Overhead Control Cost Record
 Material Requisition, Time Ticket and Clock Card

ACCOUNTING PROCEDURES FOR MATERIALS

1. Purchase of Materials and supplies

2. Issuance of materials and supplies

Purchase of Materials and supplies

The entry to record the purchase of materials is:

Materials XX

Accounts Payable XX

an entry is made on the stock card under the Received Section

The entry to record the return of materials to the vendor is:

Accounts Payable XX

Materials XX

an entry is made on the stock card under the Received Section enclosed in parenthesis to indicate
reduction in quantity

2. Issuance of materials and supplies

The entry to record the issuance of direct materials is:

Work in Process XX

Materials XX

an entry is made on the stock card under the Issued Section and also on the cost sheet

- Materials

The entry to record the issuance of indirect materials is:

Factory Overhead Control XX

Materials XX

an entry is made on the stock card under the Issued Section and also on overhead analysis sheet
The material control account may be summarized as follows:

MATERIALS

-Inventory beginning - Cost of direct materials

-Purchase of materials issued

-Freight in (using direct charging) -Cost of indirect materials issued

-Cost of excess materials returned to supplier

-Cost of materials returned

return from factory

ACCOUNTING PROCEDURES FOR LABOR

 Collection of payroll data, computation of earnings, calculation of payroll taxes, and payment of
wages
 Distribution and allocation of labor costs to jobs, departments, and other cost classification

The entry to record the payroll and the incurrence of liability is

Payroll XX

Withholding Tax Payable XX

SSS Premium Payable XX

Phil health Contribution Payable XX

Accrued Factory Payroll XX

The entry to distribution of payroll:

Work in Process XX DL

Factory Overhead Control XX IL

Payroll XX

The entry to record the payment of payroll:

Accrued Factory Payroll XX

Cash XX
 PAYROLL

-total wages and salaries -total payroll during the

earned by factory personnel payroll period at the same time

during the payroll period debiting work in process for direct

labor and overhead for indirect labor

ACCOUNTING PROCEDURES FOR FACTORY OVERHEAD

Two accounts used:

Factory overhead control

-used to accumulate actual overhead incurred

Factory overhead applied

-used to accumulate estimated factory overhead to production

For factory overhead applied to production, a predetermined rate is used and this is computed using any
of the following as a base:

 Units of production
 Direct material cost
 Direct labor hours
 Direct labor cots
 Machine hours

As items in the factory overhead control account are incurred, the Factory Overhead Control Account is
debited. (Actual)

The entry when applied factory overhead entered on the job order sheet :

Work in Process XX

Applied Factory OverheadXX

if the closing of book is to be done monthly

End of the month:

Applied Factory Overhead XX

Under/over applied Overhead XX

Factory Overhead Control XX

End of the year:

Cost of Goods Sold XX

Under/over applied OverheadXX

End of the year:

Applied Factory Overhead XX

Cost of Goods Sold XX

Factory Overhead Control XX

Total variance is computed as follow:

Actual Factory Overhead XXX

Less: Applied Factory Overhead XXX

Variance XXX
WORK IN PROCESS

-controlling account used to record the flow of the element of cost through the factory during a given
period.

WORK IN PROCESS

The journal entry to record the cost of the jobs completed is:

Finished Goods XX

Work in Process XX

When finished goods are delivered to customers, the sales and the cost of goods sold are recorded as
follows:

Accounts Receivable XX

Sales XX

Cost of Goods Sold XX

Finished Goods XX

When finished goods are delivered to customers, the sales and the cost of goods sold are recorded as
follows:

Cost of Goods Sold XX

Work in Process XX
FINISHED GOODS

A controlling account used to record the flow of the cost of goods completed andtransferred to the
finished goods storeroom during the period.

COST OF GOODS SOLD

An account used to accumulate the cost of finished goods disposed through sale tocustomers
CHAPTER 5

JUST-IN-TIME AND BACKFLUSH ACCOUNTING

Just-in-Time

 Just-in-Time (JIT) Purchasing is the purchase of materials or goods so they are delivered just as
needed for production or sales
 Originated in Japan (primarily by Toyota and Kawasaki) means that raw materials are received
just in time to go into production
 manufactured parts are completed just in time to be assembled into products;
 and products are completed just in time to be shipped to customers.
 It reduces or eliminates the need for the warehouse, cost o handling, shrinkage, and investment
costs.
 maintains small inventory levels
 Production process is used by the companies which wait for the receipt of customer orders
before beginning production such as: custom furniture manufacturers, custom shipbuilders and
custom homebuilders.
Five Key Elements

 Must rely on few suppliers who make frequent deliveries in small lots
 Must improve product flow lines; individual flow line for separate product
 Must reduce setup time through employee training/automation or Flexible Manufacturing

System (FMS) – computer-integrated manufacturing

 Must develop a system of total quality control (TQC).

 Must develop flexible work force

JUST-IN-TIME (JIT) COSTING differs from traditional costing

 JIT costing combines the accounts for raw materials and work in process
 Direct labor is considered as minor cost time; no separate account for direct labor. Direct labor
and FOH are charged to Conversion Cost/COGS account
 FOH is not applied to production until they are completed. When products are completed, labor
and OH is added to COGS.

Illustration:

Assume that TRAMS Co. manufactures cellular telephone and uses a JIT production system.

The following transactions occurred during the year:

1. Trams Purchased P170,000 of raw materials

2. All materials purchased were requisitioned for production

3. Trams incurred direct labor costs of P80,000

4. Actual FOH amounted to P122,000

5. Trams applied conversion costs P202,000 (including DL of P80,000)

6. All telephones were completed and sold

1. Trams Purchased P170,000 of raw materials

Traditional Costing JIT Costing

Materials P170,000 Raw Materials in Process P170,000

Accounts Payable P170,000 Accounts Payable P170,000

2. All materials purchased were requisitioned for production

Traditional Costing JIT Costing

Work in Process P170,000

Materials P170,000 No entries

3.Trams incurred direct labor costs of P80,000

Traditional Costing JIT Costing

Work in Process P80,000 Conversion Cost P80,000

Accrued Payroll P80,000 Accrued Payroll P80,000

4. Actual FOH amounted to P122,000

Traditional Costing JIT Costing

Factory Overhead P122,000 Conversion Cost P122,000

Miscellaneous Accounts P122,000 Miscellaneous Accounts P122,000

5. Trams applied conversion costs P202,000 (including DL of P80,000)

Traditional Costing JIT Costing

Work in Process P122,000

FOH Applied P122,000 N/A

6. All telephones were completed and sold

Traditional Costing JIT Costing

Finished Goods P372,000 Cost of Goods Sold P372,000

Accounts Payable P372,000 Raw Materials in process P170,000

Cost of Goods Sold P372,000 Conversion Cost P 202, 000

Finished Goods P372,000

Backflushing

 backflush costing or backflush accounting

 shortened version of the traditional method of accounting for cost to simplify and reduce the
number of events that are measured and recorded
 no detailed tracking of the cost of work in process
 inventories are not adjusted during accounting period
 adjustments are made at the end of the period eliminates some accounting steps
CHAPTER 7 ACCOUNTING FOR MATERIALS

Materials Control

 The cost of raw materials is a major part of the manufacturing cost on most manufacturing
companies so a strict control should be implemented in order to minimize waste, and misuse,
and to guard against theft or pilferage.

CONTROL PROCEDURES

 keeps costs at a minimum level with smooth and uninterrupted plant production schedule
 its major function is to keep expenditures within the limits provided by the preconceived plan

The following concepts should be employed in an inventory control system:

1. Inventory – result of purchasing raw materials, and applying labor and FOH to raw materials
2. Reduction of Inventory – result of normal use and also finding alternative uses for scrapping
unneeded items
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)

Organization for Materials Control

Purchasing Department

 This department is charged with the responsibility of placing orders for materials with reliable
suppliers, with the materials to be made available at the right time and at the right place.

Receiving Department

 This department is charged with the inspection of incoming shipments and verification of the
quantities received and ordered.

Storeroom (stockroom)

 This department is responsible for protecting materials against physical deterioration and
ensuring that stocks are properly issued.

Accounting Department

 This department records all transactions in the accounts after documentary evidences have
been supplied by the other departments.

Cash Department

 This department pays all invoices after approval by the accounting department
 Commonly Used Control Procedure

1. Order Cycling - materials are reviewed on a regular cycle, and orders are placed to maintain
desired inventory level.
2. Min-max Method - minimum and maximum inventory levels are determined. Reordering is
done when the minimum level is reached.
3. Two-bin Method - this is use for inexpensive items. The second bin provides coverage until the
order is received.
4. Automatic Order System - order is automatically placed when the inventory reaches
predetermined level. This system works best when used with computer.
5. ABC Plan - used with wide variety of items having difficult values. The more expensive items
receive more frequent review and closer monitoring

A items – most expensive items, usually few on hand

B items – moderately priced items and moderate quantity on hand

C items – inexpensive items, generally kept in large quantities

Basic Aspects of Materials Control

1. Physical Control of Materials – safeguarding assets

 Limited Access
 Segregation of Duties
 Accuracy in Recording

2. Control of the Investment in Materials

-maintaining proper balance of materials on hand

-inventory of sufficient size must be maintained

Materials Control

ECONOMIC ORDER QUANTITY

 purchase order which results in the minimum total inventory cost. In determining the quantity
to be ordered, the cost of placing an order and the cost of carrying inventory must be
considered.

Factors to be considered in determining ordering costs

 Salaries and wages (purchasing, receiving, inspecting)

 Communication cots for ordering (telephone, postage, forms of stationery)
 Materials accounting and record keeping
Factors to be considered in determining carrying costs

 Materials storage and handling costs

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

METHODS OF COMPUTING ECONOMIC ORDER QUANTITY

TABULAR METHOD

 Total ordering costs and total carrying costs vary inversely.

Total Carrying Cost Total Order Cost

Greater Inventory greater lower

on Hand
Small Inventory on lower (more orders greater
Hand to place)

Materials Control

ORDER POINT

 Point at which an item should be ordered

 occurs once predetermined minimum level of inventory on hand is reached

Calculation of Order Point:

Usage – anticipated rate at which the materials will be used

Lead Time – estimated time interval between placement of order and receipt of material

Safety Stock – estimated minimum level of inventory needed to protect against running out

Example:

Assume that expected daily usage of an item o material is 100 units, the anticipated lead time is 4 days.

expected daily usage of material = 100 units

anticipated lead time = 4 days

estimated safety stock = units Solution:

100 ( daily usage) x 4 (lead time) 400

When the inventory level of materials is reduced to 400 units, an order should be placed for 500 units

(the EOQ)
BUSINESS PAPERS USED TO SUPPORTMATERIAL TRANSACTIONS

Purchase Requisition

 written request sent to inform the purchasing department of a need for materials

Purchase Order

 written request to a supplier (serially numbered)

 supplier’s authorization to deliver goods and submit a bill

Receiving Report

 When goods ordered are delivered, the receiving department will unpack and count them

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

First-in, First-out (FIFO)

 under this method the first materials purchased are the first materials to be used. The materials
on hand are assumed to be the last one purchased.

Last in, first out (LIFO) method

 under this method, the last materials purchased are the first materials to be used. Then the
materials on hand are assumed to be the first one purchased

The moving average method

 in this method all the costs are commingled, and an average cost is computed with each new
purchase and assigned to materials issued and on hand.