ACCOUNTING FOR MATERIALS

Systems of Accounting for Materials

1. Periodic Inventory System

Under this system, the purchase of direct and indirect materials
is recorded in an account entitled “Purchases”. The cost of
materials issued is not directly determined; it is indirectly
computed by deducting the remaining inventory on hand from
the total available for use.

2. Perpetual Inventory System

The purchase of direct and indirect materials is recorded in an
account entitled “materials inventory”. Both the cost of materials
issued and the ending materials inventory can be directly
ascertained after each transaction.
 Material Control

1. Physical Control
➢ Limited access
➢ Segregation of duties
➢ Accuracy in recording

2. Control of the investment in materials

➢ Order point
- Usage
- Lead time
- Safety stock
➢ Economic Order Quantity
 Example:
Daily usage: 500 units
Lead time: 5 days
Safety stock: 1,000 units
What is the order point?

Solution:
500 units (daily usage) x 5 days (lead time) 2,500 units
Safety stock 1,000 units
Order point 3,500 units
 The Economic Order Quantity

EOQ = √2CN/K
Where:
• EOQ = economic order quantity
• C = cost of placing an order
• N = number of units required annually
• K = carrying cost per unit of inventory
Illustrative Problem:

Let’s assume the following:

Number of units of materials required annually 10,000

Cost of placing an order P10.00

Annual carrying cost per unit of inventory P0.80

EOQ = √2CN/K

= √2 (P10) (10,000) / P0.80

= √2 (P200,000 / P0.80

=√250,000

=500 units
 Other Formulas:

• Order size = number of units per order

• No. of orders – 10,000/ order size

• Total order cost = No. of orders x P10 per order

• Average inventory – order size / 2

• Total carrying cost = average inventory x P0.80

• Total order and carrying cost = total order cost + total carrying cost
 Methods of Costing Materials

FIFO Method

FIFO stands for “First-In, First-Out”. It is a method used for cost flow assumption purposes in
the cost of goods sold calculation. The FIFO method assumes that the oldest products in a
company’s inventory have been sold first. The costs paid for those oldest products are the ones
used in the calculation.

A. Weighted average method

When using the weighted average method, divide the cost of goods available for sale by the
number of units available for sale, which yields the weighted-average cost per unit. In this
calculation, the cost of goods available for sale is the sum of beginning inventory and net
purchases. You then use this weighted-average figure to assign a cost to both ending inventory
and the cost of goods sold.

B. Moving average method

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.
Spoiled Units, Defective Units, Scrap Material, and Waste Material
in a Job Order Cost System

1. Spoiled Units – units that do not meet production standards and

are either sold for their savage value or discarded.
2. Defective Units – units that do not meet productions standards and
must be processed further in order to be salable as good units or as
irregulars.
3. Scrap Material – left over from the production process that cannot
be put back into production for the same purpose, but maybe usable
for a different purpose or production processor which maybe sold to
outsiders for a nominal amount.
4. Waste Material- left over from the production process that has no
further use or resale value and may require cost for their disposal.
Accounting for Spoiled Units

1. Charged to specific job

Spoiled goods xx
Work in process xx

2. Charged to all production

Spoiled goods xx
Factory overhead xx
Work in process xx
 Illustrative Problem
Job101 called for the making of 4,000 with these
unit costs:
DM Php 15
DL 13
FOH(includes a P1.00 allowance
For spoiled work 12
Total Php 40

When the order was completed, 200 rejected units,

a normal number, were sold for P18.00 each.
Accounting for Defective Units

1. Charged to specific job

Work in process xx
Materials xx
Payroll xx
Factory overhead applied xx

2. Charged to all production

Factory overhead control xx
Materials xx
Payroll xx
Factory overhead applied xx
 Illustrative Problem
Job102 called for the making of 4,000 with these unit
costs:
DM Php 15
DL 13
FOH(includes a P1.00 allowance
For defective units) 12
Total Php 40

During processing 300 units were found to be defective

and required the following total additional costs:
materials- P2,000; labor- P4,000; and overhead –P2,000.
Accounting for Scrap Material

1. If the scrap recovered can be traced to a specific job

Scrap Materials xx
Work in process xx

2. If the scrap recovered are not traceable to a specific

job
Scrap Materials xx
Miscellaneous Income xx

3. If the scrap recovered are from factory supplies

Scrap Materials xx
Factory overhead control xx
Accounting for Waste Material

1. If the cost of disposing the waste materials

is allocated to all jobs
Factory overhead control xx
Accounts payable xx

2. If the cost of disposing the waste materials is

allocated to a specific job
Work in process inventory(Job #) xx
Accounts payable xx