JPIAA-U
COST ACCOUNTING AND
CONTROL
Accounting for Materials
Overview of the Handouts:
Materials Control
Methods of Costing Material
Special Problems in Material Accounting
Accounting for Spoiled Units
Accounting for Defective Units
I. MATERIALS CONTROL
Two basic aspects are:
1. Physical Control of Materials
a. Limited access – authorized
personnel access only
b. Segregation of duties – purchasing,
receiving, storage, use & recording
c. Accuracy in recording – quantity &
cost valuation
2. Controlling the Investment in
Materials
a. Economic Order Quantity (EOQ) –
the optimal quantity to order at one
time
-minimizes the total cost of placing
an order and cost of carrying over a
period of time
Ordering Costs – salaries & wages
(purchasing, receiving & inspection),
communication costs, &
recordkeeping
Carrying Costs – storage &
handling costs, interest, insurance,
taxes, loss, & recordkeeping
EOQ Formula:
b. Order Point – the point at which the
stock for an item should be
replenished
Order point is based on the ff. data:
Usage – anticipated rate at which
the material will be used
Lead time – time between the order
replacement & receipt of material
Safety stock – minimum level of
inventory needed to protect against
stockouts
ACCTCOSTCON – Accounting for Materials
Reorder Point Formula:
II. METHODS OF COSTING MATERIAL
1. First-in, First-out (FIFO) - inventories
are reported using the recent prices, and
expenses are charged using the recent
cost incurred.
2. Last-in, First-out (LIFO) – materials
issued are assumed to be taken from
the most recent purchase prices
3. Average Method
a. Weighted average method – used
for periodic inventory system
b. Moving average method – used
for perpetual inventory method
-new average cost is calculated
after each new purchase
III. SPECIAL PROBLEMS IN MATERIAL
ACCOUNTING
1. Discounts
a. Trade Discounts – generally given
in terms of percentage & not
recorded on the books
b. Quantity Discounts – discounts
from volume purchases
c. Cash discounts – granted to
motivate the customers to pay
2. Freight-In
a. Direct charging – added to the
invoice price
b. Indirect charging – charged to
Factory Overhead Control account
Accounting for Materials - Basic
Transactions
1. Purchase of materials in advance of use
Materials xxx
Accounts Payable xxx
2. Emergency purchase of direct materials
Work in Process xxx
Accounts Payable xxx
3. Emergency purchase of indirect
materials
Factory OH-C xxx
Account Payable xxx
4. Return of materials to vendor
Accounts Payable xxx
Materials xxx
 box. The wholesale price that the store
5. Issuance of direct materials

JPIAA-U
pays per box is P10.
Work in Process xxx Cost of carrying one box is estimated at
Materials xxx P2 per year while ordering costs are
6. Issuance of indirect materials estimated at P20.
Factory OH-C xxx
Materials xxx Required:
7. Return of excess materials 1) Determine the Economic Order
Materials xxx Quantity for the boxes.
Work in Process xxx 2) Determine the annual inventory cost if
it orders at EOQ, at 115 units and 120
IV. ACCOUNTING FOR SPOILED UNITS units.
Spoiled units – unacceptable units discarded
or sold for it salvage value Answers:
1. Charged to the specific job (2)(700)(20)
1. EOQ = √ = 118 units per order
Spoiled Goods xxx 2
Work in Process xxx Ordering Costs (700/118x20) =118.64
2. Charged to all production Carrying Costs (118/2x2) =118.00
Spoiled Goods xxx Total Costs 234.64
Factory OH-C xxx 2. @ 115 units
Work in Process xxx Ordering costs (700/115*20) =121.74
Carrying costs (115/2*2) =115.00
V. ACCOUNTING FOR DEFECTIVE UNITS Total costs 236.74
Defective units – unacceptable but @ 120 units
correctable units and can be sold as good units Ordering costs (700/120*20) =116.67
or irregulars Carrying costs (120/2*2) =120.00
1. Charged to specific job Total costs 236.67
Work in Process xxx
Materials xxx Problem 2
Payroll xxx Using the FIFO method, calculate the
Factory OH-A xxx ending inventory and cost of goods sold
2. Charged to all production based on the information below.
Factory OH-C xxx
Materials xxx
Payroll xxx
Factory OH-A xxx

Questions
1. is a form prepared by the Answers:
purchasing agent and sent to the vendor
to obtain materials.
Answer: Purchase Order

2. The is a systematic way of

grouping materials into separate
classification and determining the degree
of control that each group requires.
Answer: ABC Plan

3. In , rates should be computed

from the good output or from the normal
input, not the total input.
Answer: Normal Spoilage

Problem 1
Assume that a local shoe store is trying to
figure out how many boxes to order.
The store feels it will sell approximately 700
boxes in the next year at a price of P15 per

ACCTCOSTCON – Accounting for Materials