FNSACC507A

– Provide Management Accounting Information

MATERIALS COSTING

ACCOUNTING FOR MATERIALS

Inventory Recording System Inventory Costing System
1. Perpetual 1a. F.I.F.O.
1b. Weighted Average
2. Periodic 2a. F.I.F.O.
2b. Weighted Average

* * * * * * *
1. Fast Ferraris Ltd manufactures and sells Ferraris made to order. The company
uses a perpetual inventory system. During the month of May 2012, the company had the
following transactions for ALU104 (which is a special type of aluminum used to make body of
each car):

May No. units Unit cost Total cost
1 Opening balance 1,000 $8.00 $8,000
5 Purchase on credit 600 $8.53 $5,118
9 Issues to JOB120 200
13 Purchase on credit 600 $9.00 $5,400
19 Issues to JOB250 900
22 Issues to JOB340 300
25 Returns to storeroom from JOB340 200
27 Purchase on credit 200 $10.00 $2,000
30 Issues to JOB500 600

1a. PERPETUAL SYSTEM – F.I.F.O. Method

Required:
a. Assuming the unit cost of inventory is assigned using the First‐In, First‐Out method, prepare
an inventory ledger card (stock card) to record these transactions.
b. Prepare a general journal entry to record the total purchases for May 2012.
c. Prepare a general journal entry to record the total issues for May 2012.
d. Prepare a general journal entry to record the return of materials from production to the
storeroom.
e. A physical stocktake was conducted at the end of the month which shows only 540 units of this
material on hand. Prepare a general journal entry to record the cost of any inventory variance.

1b. PERPETUAL SYSTEM – Weighted Average Method

Required:
a. Assuming the unit cost of inventory is assigned using the Weighted Average method, prepare
an inventory ledger card (stock card) to record these transactions.
b. Prepare a general journal entry to record the total purchases for May 2012.
c. Prepare a general journal entry to record the total issues for May 2012.
d. Prepare a general journal entry to record the return of materials from production to the
storeroom.
e. A physical stocktake was conducted at the end of the month which shows only 540 units of this
material on hand. Prepare a general journal entry to record the cost of any inventory variance.

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 FNSACC507A – Provide Management Accounting Information
MATERIALS COSTING

SOLUTION to 1a.
a.
PERPETUAL SYSTEM – F.I.F.O. Method
Date Purchases (+) Issues (‐) Adjustments Balance
May Qty Unit Cost Total ($) Qty Unit Cost Total ($) Qty Unit Cost Total ($) Qty Unit Cost Total ($)
($) ($) ($) ($)
1 1,000 8.00 8,000
5 1,000 8.00 8,000
600 8.53 5,118 600 8.53 5,118
1,600 13,118
9 200 8.00 1,600 800 8.00 6,400
600 8.53 5,118
1,400 11,518
13 800 8.00 6,400
600 8.53 5,118
600 9.00 5,400 600 9.00 5,400
2,000 16,918
19 800 8.00 6,400
100 8.53 853 500 8.53 4,265
600 9.00 5,400
900 7,253 1,100 9,665
22 300 8.53 2,559 200 8.53 1,706
600 9.00 5,400
800 7,106
25 200 8.53 1,706 400 8.53 3,412
STOCK 600 9.00 5,400
RETURN 1,000 8,812
27 400 8.53 3,412
600 9.00 5,400
200 10.00 2,000 200 10.00 2,000
1,200 10,812
30 400 8.53 3,412
200 9.00 1,800 400 9.00 3,600
200 10.00 2,000
600 5,212 600 5,600
31 ‐60 9.00 ‐540 340 9.00 3,060
STOCKTAKE 200 10.00 2,000
ADJUSTMENT 540 5,060
TOTALS PURCHASES & ISSUES 12,518 16,624

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MATERIALS COSTING


b.
Dr Raw materials controls $,12,518
GST paid $1,252
Cr Accounts payable $13,770
To record purchase of raw materials

c.
Dr WIP $16,624
Cr Raw materials control $16,624
To record issue of direct materials to production

d.
Dr Raw materials control $1,706
Cr WIP $1,706
To record return of direct materials from production to storeroom
(NOTE: returns to storeroom are classified as negative issues in the textbook)

e.
Dr COGS $540
Cr Raw materials control $540
To record stocktake adjustment (60 units @ $9.00 ea.)

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 FNSACC507A – Provide Management Accounting Information
MATERIALS COSTING


SOLUTION to 1b.
a.
PERPETUAL SYSTEM – Weighted Average Method
Date Purchases (+) Issues (‐) Adjustments Balance
May Qty Unit Cost Total ($) Qty Unit Cost Total ($) Qty Unit Cost Total ($) Qty Unit Cost Total ($)
($) ($) ($) ($)
1 1,000 8.00 8,000

5 600 8.53 5,118 1,600 8.20 13,120

(note 1)
9 200 8.20 1,640 1,400 8.20 11,480

13 600 9.00 5,400 2,000 8.44 16,880

19 900 8.44 7,596 1,100 8.44 9,284

22 300 8.44 2,532 800 8.44 6,752

25 200 8.44 1,688 1,000 8.44 8,440

STOCK RETURN

27 200 10.00 2,000 1,200 8.70 10,440

30 600 8.70 5,220 600 8.70 5,220

31 ‐60 8.70 ‐522 540 8.70 4,698

STOCKTAKE
ADJUSTMENT

TOTALS PURCHASES & ISSUES 12,518 16,988

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MATERIALS COSTING


b.
Dr Raw materials controls $12,518
GST paid $1,252
Cr Accounts payable $13,770
To record purchase of raw materials

c.
Dr WIP $16,988
Cr Raw materials control $16,988
To record issue of direct materials to production

d.
Dr Raw materials control $1,688
Cr WIP $1,688
To record return of direct materials from production to storeroom
(NOTE: returns to storeroom are classified as negative issues in the textbook)

e.
Dr COGS $522
Cr Raw materials control $522
To record stocktake adjustment (60 units @ $8.70 ea.)

NOTE 1:
WA Unit Cost = Value B/F + Value Purchases / Qty B/F + Qty Purchases
= $8,000 + $5,118 / 1,000 + 600
= $13,118 / 1,600
= $8.20

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MATERIALS COSTING

2. Enigma Ltd manufactures and sells custom‐made wooden puzzles via their online
store. The company uses a periodic inventory system. During the month of March 2012, the
company had the following transactions for PINE205 (which is a type of wood used to make
puzzles for children):

March No. units Unit cost Total cost
1 Opening balance 1,100 $8.00 $8,800
5 Purchase on credit 600 $8.50 $5,100
13 Purchase on credit 600 $9.00 $5,400
27 Purchase on credit 200 $10.00 $2,000

A physical stocktake was conducted at the end of the month which shows 500 units of this
material on hand.

2a. PERIODIC SYSTEM – F.I.F.O. Method

Required:
a. Assuming the unit cost of inventory is assigned using the First‐In, First‐Out method, prepare
an inventory ledger card (stock card) to record these transactions and calculate the total cost of
materials issued.
b. Prepare a general journal entry to record the total purchases for March 2012.
c. Prepare a general journal entry to record the total issues for March 2012.

2b. PERIODIC SYSTEM – Weighted Average Method

Required:
a. Assuming the unit cost of inventory is assigned using the Weighted Average method, prepare
an inventory ledger card (stock card) to record these transactions and calculate the total cost of
materials issued.
b. Prepare a general journal entry to record the total purchases for March 2012.
c. Prepare a general journal entry to record the total issues for March 2012.

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 FNSACC507A – Provide Management Accounting Information
MATERIALS COSTING

SOLUTION to 2a.
a.
PERIODIC SYSTEM – F.I.F.O. Method
March Qty Unit Cost ($) Total ($)
1 Opening balance 1,100 8.00 8,800
Add:
5 Purchase on credit 600 8.50 5,100
13 Purchase on credit 600 9.00 5,400
27 Purchase on credit 200 10.00 2,000
Cost of materials available for use 2,500 21,300
Less:
31 Closing balance 200 10.00 2,000
300 9.00 2,700

Cost of materials issued 2,000 16,600

The value of the closing inventory balance of 500 units was determined as shown above because
under the F.I.F.O. method, it is assumed that the earlier items of stock are consumed first.
Therefore, the closing stock is made up of the most recent inventory purchases.

b.
Dr Raw materials controls $,12,500
GST paid $1,250
Cr Accounts payable $13,770
To record purchase of raw materials
($ value of cost of materials available for use LESS $ value of opening balance)

c.
Dr WIP $16,600
Cr Raw materials control $16,600
To record issue of direct materials to production

Please note;
Under the periodic system, there are no entries for:
 Material returns from the factory to the storeroom
 Stocktake adjustments (stock shortages or surpluses)
These transactions have to be treated as part of material issues because records are not
maintained for every inventory movement.

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 FNSACC507A – Provide Management Accounting Information
MATERIALS COSTING


SOLUTION to 2b.
a.
PERIODIC SYSTEM – Weighted Average Method
March Qty Unit Cost ($) Total ($)
1 Opening balance 1,100 8.00 8,800
Add:
5 Purchase on credit 600 8.50 5,100
13 Purchase on credit 600 9.00 5,400
27 Purchase on credit 200 10.00 2,000
Cost of materials available for use 2,500 21,300
Less:
31 Closing balance 500 8.52 4,260
(note 2)
Cost of materials issued 2,000 17,040

b.
Dr Raw materials controls $,12,500
GST paid $1,250
Cr Accounts payable $13,770
To record purchase of raw materials
($ value of cost of materials available for use LESS $ value of opening balance)

c.
Dr Work in progress $17,040
Cr Raw materials control $17,040
To record issue of direct materials to production

Please note;
Under the periodic system, there are no entries for:
 Material returns from the factory to the storeroom
 Stocktake adjustments (stock shortages or surpluses)
These transactions have to be treated as part of material issues because records are not
maintained for every inventory movement.

NOTE 2:
WA Unit Cost = Value B/F + Value Purchases / Qty B/F + Qty Purchases
= $8,800 + $12,500 / 1,100 + 1,400
= $21,300 / 2,500
= $8.52

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MATERIALS COSTING

Activity Notes

Did you notice…?

PERPETUAL INVENTORY SYSTEM
Similarities:
Purchase values remain unchanged.
Differences:
Under the F.I.F.O. method, you have to apply this method’s allocation rule when
working out the value of material issues, whereas under the W.A. method, you
have to work out the weighted‐average unit cost each time materials are
purchased and the unit cost has changed. This new per unit cost is the one you
then use to work out the value of any materials issued to production thereafter.

PERIODIC INVENTORY SYSTEM
Similarities:
The opening balance and the purchase values remain unchanged.
Differences:
The part that changes in each case is the closing balance.
Under the F.I.F.O. method, the closing balance is calculated by applying the
F.I.F.O. method’s allocation rule BACKWARDS (because under this method, it is
assumed that the earlier items of stock are consumed first and closing stock is
made up of the most recent inventory purchases).
Under the W.A. method, the closing balance is calculated by multiplying the
closing inventory count by the weighted‐average unit cost.

Under the periodic system, there are no entries for:
* Material returns from the factory to the storeroom
* Stocktake adjustments (stock shortages or surpluses)
These transactions have to be treated as part of material issues because
records are not maintained for every inventory movement. Basically stock
variances due to e.g. theft, damages etc. are impossible to determine under the
periodic inventory system. The cost of materials issued is not directly
determined and any variances that may have been detected using a perpetual
inventory system form part of the closing stock calculation under a periodic
inventory system. Material usage (units and dollars) =
Op. balance
+ Purchases
= Materials avail. for use
– Cl. Balance
Therefore, it is impossible to determine whether a stock difference occurred
during the period.