CLASS-8

17.06.2021 (Thursday)

Cost Accounting
(Acc 233)

Chapter-3: Costing and Control of Materials

Outline:

1. Materials and Classification of materials.

2. Inventory of materials valuation and its objectives.

3. Inventory valuation method

 First-in, first-out (FIFO) method.

 Last-in, first-out (LIFO) method.

4. Problems and Solutions relating to materials valuation methods.

5. Planning materials requirement.

6. Problems and Solutions relating to planning materials requirement.

Ms. Rehana Fowzia, Associate Professor, Business Administration (Accounting), Stamford University Bangladesh.

Materials and Classification of materials

The term “materials”, generally used in manufacturing concerns, refers to raw materials
used for production directly and indirectly. There are two types of materials:

A. Direct materials:

Direct materials refer to the materials which are conveniently traceable to a specific
product. It is the large portion of materials without which manufacture of a product is not
possible. For example: leather-shoes are produced out of leather, butter is produced out of
milk and wooden chair is produced out of wood. Thus, leather, milk and wood are the
direct materials for the manufacture of shoes, butter and chair respectively.

B. Indirect materials:
The term “indirect materials” refers to materials that are needed for the completion of the
product but cannot be identified with any one product and its amount is insignificant. For
example: machines used for production require threads, lubricants, glue etc. These are
indirect materials.

Inventory of materials valuation and its objectives

If all purchases were made at the same price, there would be no problem in costing
materials issued and in inventory valuation. However, purchases of materials made at
different times usually carry different prices and the stores ledger card shows not one but
several prices for the same kind of materials. Therefore, it becomes essential to consider
the price at which it should be charged to production.
There are mainly two objectives of inventory valuation:
 To charge the cost of materials used to production on a consistent and realistic basis.
  To provide a satisfactory basis of inventory valuation.

Inventory valuation method

Several methods are in use concerning the pricing of materials issued from the storeroom.
Mostly used methods of materials costing are as follows:
1) First-in, first-out (FIFO) method

The FIFO method follows the principle that materials received first are issued first. After
the first lot of materials purchased is exhausted, the next lot is taken up for supply.

2) Last-in, first-out (LIFO) method

The LIFO method is based on the principle that materials entering production are the most
recently purchased. The cost of the last lot of materials received is used to price materials
issued until the lot is exhausted, then the next lot pricing is used and so on through
successive lots.

2021: January-1: purchase 100kg @tk10

January-5: purchase 200kg @tk12
January-10: purchase 150kg @tk13
January-15: Issue 400kg

FIFO
Issue : January 15: 100 KG @ TK 10
200KG @TK12
100KG @TK13
LIFO
Issue : January 15: 150 KG @ TK 13
200KG @TK12
50KG @TK10