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● To ensure better quality of materials at the right quantity at right time for efficient
and uninterrupted production of output.
● To maintain the cost of materials at the minimum level.
● To purchase materials at a reasonable price.
● To minimize the handling cost and time in storing and using the materials.
● To provide information to the management about raw materials, their costs and
availability.
● To protect materials against loss by fire, theft and leakage.
● To avoid obsolescence of materials by adopting an appropriate method of
materials issue.
4. What kind of information and data are needed to calculate an order point?
● Usage - The anticipated rate at which the material will be used. This is the
expected daily usage of an item of material
● Lead time - The estimated time interval between the placement of an order and
the receipt of the material
● Safety stock - The estimated minimum level of inventory needed to protect
against running out of stock. Stock outs may occur due to inaccurate estimates of
usage or lead time or other unforeseen events, such as the receipt of damaged
or inferior materials from a supplier or a work stoppage at the supplier’s plant
Stores ledger is either a manual or computer record of the raw materials and production
supplies stored in a production facility responsible for tracking the current quantity of
items received, issued, and on hand while the materials ledger deals with the calculation
of the cost of receipt, cost of the issued materials and cost of the returns. Meaning, the
store ledger keeps the summary of records of materials and the material ledger will be
the one in charge of the valuation of those materials.
6. A company may select an inventory costing method from a number of commonly used
procedures.
Briefly describe each of the following methods.
a. First in, first out - is based on the assumption that cost should be charged to
manufacturing cost or cost of goods sold in the order in which incurred.
Inventories are stated in terms of the most recent costs and expense is charged
with the earliest costs incurred. When a perpetual inventory system is used, a
stock card is used to record the costs assigned to units issued and to cost
relating to the units on hand.
b. Moving Average - when a perpetual inventory system is used, a new weighted
average unit cost is calculated after each new purchase, and this amount is used
to cost each subsequent issuance until another purchase is made.
7. What different methods can be used to account for the sales value of the scrap
materials?
● Crediting to factory overhead control, if the scrap recovered are from factory
supplies
● Crediting Materials, if the scrap would have been able to be recycled
● Credit Work in Process, if the scrap is identified with a specific job
● Credit Miscellaneous, if the scrap recovered are not traceable to a specific job
● Charged to all production – if the reason for the spoilage is normal to the
process and the number doesn’t exceed the limit set by the company. All units
manufactured during the period are charged with an additional cost which is
added to the factory overhead rate. The amount debited to spoiled goods is equal
to the number of units spoiled multiplied by the estimated sales value per unit.
The amount credited to work in process is equal to the total cost charged to the
spoiled unit. The loss is incurred to factory overhead control
10. What are the different methods of accounting for defective units?
● Charged to the specific job – it is the same as spoiled units, if the reason for
the defect is the job itself, the additional costs charged will be incurred to all units
in the job. The amount debited to work in process and credited to materials,
payroll and factory overhead applied.
WIP xxx
Materials xxx
Payroll xxx
Factory Overhead applied xxx
● Charged to all production – if the reason is normal to the process and the
number of defective units doesn’t exceed the normal limit, the additional costs
incurred will be charged to all units being processed during the period. The
amount debited to factory overhead control and credited to materials, payroll and
factory overhead applied.