Illustration:: Method of Costing Materials

Transactions:
January 1 - Beginning balance, 100 units @ P10.00 - P 1,000.00
3 - Purchased materials in cash, 300 units @ P10,00, P 3,000.00
5 - Issued materials to production, 250 units
6 - Purchased materials on credit, 500 units @ P9.00, P 4,500.00
10 - Issued materials to production, 300 units
15 - Issued materials to production, 200 units
20 - Return from factory, from Jan. 6 purchases, 50 units
21 - Return to supplier the 50 units return by factory due to defects.
25 - Purchased materials on credit, 500 units @ 10.00, P 5,000.00
27 - Issued materials to production, 300 units
28 - Issued materials to production, 200 units.
30 - Purchased materials on account, 450 units @ P11.00, P 4,950.00

FIFO COSTING: Perpetual Inventory System

Material: Stock No.:

Received Issued Balance
Date Particulars Qty. Unit Price Total Qty. Unit Price Total Qty. Unit Price Total
Jan. 1 Beginning balance 100 units P 10.00 P 1,000.00
Jan. 3 Purchases 300 units P 10.00 P 3,000.00 300 units P 10.00 P 3,000.00
Jan. 5 Issued to production 250 units P 10.00 P 2,500.00 150 units P 10.00 P 1,500.00
Jan. 6 Purchases 500 units P 9.00 P 4,500.00 150 units P 10.00 P1,500.00
500 units P 9.00 P 4,500.00
.Jan . 10 Issued to production 150 units P 10.00 P 1,500.00
150 units P 9.00 P 1,350.00 350 units P 9.00 P 3,150.00
Jan. 15 Issued to production 200 units P 9.00 P 1,800.00 150 units P 9.00 P 1,350.00
Jan 20 Return from factory, Jan.6 pur. 50 units P 9.00 P 450.00 200 units P 9.00 P 1,800.00
Jan. 21 Return to supplier, Jan. 6 purhase 50 units P 9.00 P 450.00 150 units P9.00 P 1,350.00
Jan. 25 Purchases 500 units P 10.00 P 5,000.00 150 units P 9.00 P 1,350.00
500 units P 10.00 P 5,000.00
Jan. 27 Issued to production 150 units P 9.00 P 1,350.00
150 units P 10.00 P 1,500.00 350 units P 10.00 P 3,500.00
Jan 28 Issued to production 200 units P 10.00 P 2,000.00 150 units P 10.00 P 1,500.00
Jan, 30 Purchases 450 units P 11.00 P 4,950.00 150 units P 10.00 P 1,500.00
450 units P 11.00 P 4,950.00

Summary: FIFO ( Perpetual Inventory)

Materials purchased 1,700 units P 17,000.00
Material issued 1,200 units P 11,550.00
Materials, end 600 units P 6,450.00
MOVING AVERAGE: Perpetual Invenotry System

Material: Stock No.:

Received Issued Balance
Date Particulars Qty. Unit Price Total Qty. Unit Price Total Qty. Unit Price Total
Jan. 1 Beginning balance 100 units P 10.00 P 1,000.00
Jan. 3 Purchases 300 units P 10.00 P 3,000.00 400 units P 10.00 P 4,000.00
Jan. 5 Issued to production 250 units P 10.00 P 2,500.00 150 units P 10.00 P 1,500.00
Jan. 6 Purchases 500 units P 9.00 P 4,500.00 650 units 9,23 P 6,000.00
Jan 10 Issued to production 300 units P 9.23 P 2,769.00 350 unit P 9.23 P 3,231.00
Jan. 15 Issued to production 200 units P 9,23 P 1,846.00 150 units P 9.23 P 1,385.00
Jan. 20 Return from factroy 50 units P 9.23 P 460.00 200 units P 9.23 P 1,845.00
Jan. 21 Return to supplier, Jan. 6 purhase 50 units P 9.23 P 460.00 150 units P 923 P 1,385.00
Jan 25 Purchases 500 units P 10.00 P ,5000.00 650 units P 9.82 P 6,385.00
Jan. 27 Issued to production 300 units P 9.82 P 2,946.00 350 units P 9.82 P 3,439.00
Jan. 28 Issued to production 200 units P 9.82 P 1,964.00 150 units P 9.82 P 1,475.00
Jan 30 Purchases 450 units P 11.00 P 4,950.00 600 units P 10.71 P 6,425.00

Summary: Moving Average ( Perpetual inventory )

Materials purchased 1,700 units P 16,990.00
Materilas issued 1,200 units P 11,565.00
Materials, end 600 units P 6,425.00

ACCOUNTING ENTRIES FOR MATERIALS TRANSACTIONS

Normal and Actual Cost system: FIFO - Perpetual Inventory System

January 3 Materials P 3,000.00
Cash P 3,000.00
#
5 Work in process 2,500.00
Materials 2,500.00
#
6 Materials 4,500.00
Account payable 4,500.00
#
10 Work in process 2,850.00
Materials 2,850.00
#
15 Work in process 1,800.00
Materials 1,800.00
 #
20 Materials 450
Work in process 450
#
21 Account payable 450
Materials 450
#
25 Materials 5,000.00
Account payable 5,000.00
#
27 Work in process 2,850.00
Materials 2,850.00
#
28 Work in process 2,000.00
Materials 2,000.00
#
30 Materials 4,950.00
Account payable 4,950.00
#
NOTE: 1. Purchase of Indirect materials is also debited to Materials account.
2. Issuance of indirect materials to factory: Factory overhead control is debited and Materials is credited.
under normal cost system.
Freight-in = transportation charge incurred in connection with the purchase of materials.
g
Method of recording freight-in:
Direct charging - the freight incurred is added to the invoice price of materials purchased.
Materials P xxx
Cash/Account payable P xxx
#
Indirect charging - the freight incurred is added/charged to factory overhead control account.
Factroy overhead control P xxx
Cash/Account payable P xxx
#

Methods of allocating costs of freigh-in charges:

1. Relative weight or ( quantity ) method
2. Relative peso value method

Illustration: Data gathered from Sales invoices dated January 10, 2018 for materials purchased on credit from Skyway Mfg. Company is given below:
Material Quantity Price / unit Total
X 300 units P 10.00 / unit P 3,000.00
Y 500 units P 9.00 / unit 4,500.00
 Z 450 units P 11.00 / unit P 4,950.00
Total 1250 units P 12,450.00
Freight charge 600
Total Costs P 13,050.00

Required: 1. Compute the allocations of freight charges using

a. relative weight method
b. relative peso value method
2. Accounting entries to record the purchased on credit of materilas using
a. Direct charging method
b. Indirect charging method
3. Entries in the Materials inventory stockcards ( with zero beginning balances )assuming the company is using direct charging method and
applying the relative weight ( quantity ) method

Solution:
1. Relative weight method
Materials Quantity Freight allocation Cost Total Cost Unit cost
X 300 units P 144. P 3,000.00 P 3,144.00 P 10.48
Y 500 units 240 4,500.00 4,740.00 9.48
Z 450 units 216 4,950.00 5,166.00 11.48
1,250 units P 600.00 P 12,450.00 P 13,050.00
Allocations:
300/1250 x P 600.00 = P 144.00
500/1250 x P 600.00 = P 240.00
450/1250 x P 600.00 = P 216.00

2. Relative peso value method

X 300 units P 144.578 P 3,000.00 P 3,144.578 P 10.48
Y 500 units 216.868 4,500.00 4,716.87 9.43
Z 450 units 238.554 4,950.00 5,188.55 11.53
1,250 units P 600.00 P 12,450.00 P 13,050.00
Allocations:
P 3,000/P 12,450.00 x P600.00 = P 144.578
P 4,500/P12,450.00 x P600.00 = P 216.868
P 4,950/P 12,450.00 x P600.00 = P 238.554

3. a Direct charging method:

Materials P 13,050.00
Account payable P 13,050.00
#
b. Indirect charging method:
Materilas P 12,450.00
 Factroy overhead control P600.00
Account payable P 13,050.00
#

Material inventory stock cards:

Material X.
Received Issued Balance
Date Particulars Quantity Unit Price Total Quantity Unit Price Totla Quantity Unit price Total
January 10,2018 Purchased 300 units P 10.48 P 3,144.00 300 units P 10.48 P 3,144.00

Material Y:
January 10,2018 Purchased 500 units P 9.48 P 4,740.00 500 units P 9.48 P 4,740.00

Material Z:
January 10,2018 Purchased 450 units P 11.48 P 5,166.00 450 units P 11.48 P 5,166.00

DISCOUNTS
1. Trade discount - is a price or percentage reduction from a published list price offered to generate sales, that is, to encourage customer to purchase in large quantity.
Trade discount is deducted from the list price and only the difference called the invoice price ( or gross sales price ) will be the basis for invoicing and recording.
2. Cash discount - is a price or percentage reduction from the invoice price offered to encourage prompt or early payment by customers.
Cash discounts are recorded by the buyer as deduction to the cost of materials.
When materials are purchased on credit, terms and conditions of payment depends at times on the practice in the industry.

Two methods of recording acquisition of Materials on credit taking into consideration trade and cash discount.
1. Gross method - materials and account payable recorded at gross
2. Net method - materials and account payable are recorded at net.
Illustration:
March 1, 2016 - Purchased raw materials from Banahaw Mfg. Company,P 50,000.00, terms: 20 and 10, 2/10, n/30.
1. Gross method
Date Particulars debit credit
March 1,2016 Materials P 36,000.00
Account payable P 36,000.00
To record purchase of
materials on credit.
#
March 10, 2016 Account payable P 36,000.00
Materials P 720.00
Cash P35,280.00
To record payment within the
discount period.
#
March 30,2016 Account payable P 36,000.00
 Cash P 36,000.00
To record payment beyond
the discount period.
#

2. Net method:
March 1, 2016 Materials P 35,280.00
Account payable P 35,280.00
To record purchase of
materials on credit
#
March 10, 2016 Account payable P 35,280.00
Cash P 35,280.00
To record payment
witin the discount period.
#
March 30,2106 Account payable P 35,280.00
Discount lost P 720.00
Cash P 36,000.00
To record payment beyond
the discount period.
#
Note: When the account is not paid with the credit period,the account is called past due account. Past due accounts at times are charged with interest, penalties or surcharges..