Accounting for materials of materials in every purchase and

issuance to production through the

Materials – all raw materials and other use of stock cards. Inventory
supplies used in the manufacturing process. records are updated in every
Quality decision - Managers should internal manufacturing transaction.
remember that as materials grade rises so 1. Inventory purchase
generally does price (cost).
When all quantity ad price Inventory
information is available component AP/Cash Xx
quantities are multiplied by unit prices to xx
obtain each component’s total cost 2. Inventory sales

Materials cost = Quantity * Unit AR/ cash Xx

cost Sales Xx
Cost of goods sold Xx
Two systems of inventory recording
Inventory xx
1. Periodic inventory system –
facilitates the physical counting of
materials at the end of an Forms used in production of materials
accounting or production period, 1. Purchase order – a written request
whereby the updated balances of to a supplier for specified goods at
materials is based on the physical an agreed upon price
count.
This form facilitates the purchase of
1. Inventory purchase materials from suppliers to storage

Purchases a. Purchasing department determine

AP/cash Xx materials needed.
xx b. Purchasing department will form
2. Purchase discount and sends it to suppliers
c. The form stipulates the terms of
AP delivery and terms of payment
Purchase disc Xx d. Cost accounting department gets a
xx copy of recording purposes
3. Sales (charging accounts payable)
e. Receiving department gets a blind
Cash/AP Xx copy to notify of an incoming
sales xx delivery (quantity not specified)
The cost of materials issued is not directly
determined. It is indirectly computed:
Raw materials inventory Xx
beg
Add: net purchases Xx
Raw materials available for Xx
use
Less: raw materials (Xx)
inventory end
Materials issued to xx
production
2. Perpetual inventory system –
facilitates recording of movement
 2. Receiving report – when the goods
are ordered and delivered, the
receiving department will unpack
and count them.
a. Quantity ordered is not shown of
the PO received by the receiving
department. This ensures that the
delivered goods are actually
counted.
b. The goods are checked to ensure 4. Inventory stock card – used in
that they are of quality and of the production that record the
right specifications movement of inventory between
c. Receiving department can creates all materials purchases (receipt to
the receiving report storage), usage in production
d. Receiving report is given to the (issuances) and balance after each
purchasing department, accounting activity
department and warehouse
department. Journal entries
1. Purchase of raw materials on
account
Raw materials Xx
inventory
AP/ cash xx

2. Return of inferior materials to

supplier
3. Purchase requisition
form/materials requisition form – AP Xx
is a written form that is used as a Raw materials
basis for the recording of raw inventory xx
materials issuance.
This form facilitates the transfer of 3. Issuance of direct materials to
materials from storage to production. production

a. Someone in the production will fill Work in process inv Xx

out the request form for materials, Raw materials
approved by the production inventory xx
manager.
b. The form will be forwarded to the 4. Return of excess direct materials to
warehouse to be notified of the storage
materials needed
c. The storage clerk releases the Raw materials Xx
materials requested by the inventory
department concerned WOP inv xx
d. Cost accounting department gets a
copy of recording purposes
(charging materials to production) 5. Payment of raw materials
AP Xx
cash xx
 b. Cost of materials issued
Methods of costing materials Periodic method
Produce accurate and meaningful GUIDE:
figures for the goods manufactured and
sold which are to be used by management Manufacturing cost = earliest costs
for control, analysis, and for determination incurred
of the operating income. Ending inventory cost = most recent costs
FIFO Method incurred

First in first out method – based on Ending Inventory Costs: (600 units of EI
the assumption that cost should be charged on Aug 31)
to manufacturing cost or cost of goods sold From Aug 25 purchase
in the order in which incurred. Inventories
are stated in terms of the most recent cost 400 units at P14 P5,600
and expense is charged with the earliest
From Aug 18 purchase
cost incurred
200 units at P15 P3,000
Manufacturing cost = earliest cost incurred
Total 600 units P8,600
Ending inventory cost = most recent cost
incurred
Problem: Beginning Inventory xx

Augus Inventory 400 P 4,000 Add: net purchases xx

t1 units at P10
Total goods available for sale xx

12 Purchase 600 P 7,200 Less: Ending inventory (xx)

units at P12
Cost of gods sold xx

16 Issue 500 units

Materials, Beg. 4,000
18 Purchase 300 P 4,500
units at P15 Net purchases 17,300
TGAS 21,300
20 Issue 200 units
Materials, End. 8,600
25 Purchase 400 P 5,600 Cost of goods sold 12,700
units at P14

28 Issue 400 units Perpetual method

The inventory on August 31 shows 600 For Perpetual method, use a stock
units at hand. Compute for the following: card since in journal entries, we always
update the “Materials Inventory” account
a. Ending inventory cost
Date Receipt Issued Balance
8/1 400 * 10 = 4,000
8/12 600* 12 = 7,200 400 * 10 = 4,000
600* 12 = 7,200
 8/16 400 * 10 = 4,000
100 * 12 = 1,200 500* 12 = 6,000
8/18 300* 15 = 4,500 500* 12 = 6,000
300* 15 = 4,500
8/20 200*12 = 2,400 300* 12 = 3,600
300* 15 = 4,500
8/25 400* 14 = 5,600 300* 12 = 3,600
300* 15 = 4,500
400* 14 = 5,600
8/28 300*12 = 3,600 200* 15 = 3,000
100*15 = 1,500 400* 14 = 5,600
Cost of materials issued Ending inventory cost
12,700 8,600

Weighted Average method

Is the method used for periodic 21,300
inventory system. This method is based on
Average cost = =12.529
1,700
the assumption that units issued should be
charged at an average cost, such average 1. Ending inventory cost =
being influenced or weighted by the 600 * 12.529 = 7,517.4
number of units acquired at each price. 2. Cost of materials issued for the
month =
TGAS (total materials available for ∏ .)
Average cost = 500 + 200 + 400 = 1,100 *
TUAS (total material unit available for ∏ .) 12.529 = 13,782

Augus Inventory 400 P 4,000

t1 units at P10

12 Purchase 600 P 7,200

units at P12

16 Issue 500 units

18 Purchase 300 P 4,500

units at P15 Moving average method – perpetual
inventory system
20 Issue 200 units

25 Purchase 400 P 5,600

units at P14

28 Issue 400 units

 Date Receipt Issued Balance
8/1 400* 10 = 4,000
8/12 600* 12 = 7,200 1,000 *11.2 = 11,200
8/16 500*11.2 = 5,600 500*11.2 = 5,600
8/18 300*15 = 4,500 800*12.625 = 10,100
8/20 200*12.625 = 2,525 600*12.625 = 7,575
8/25 400*14 = 5,600 1,000*13.175 = 13,175
8/28 400*13.175 = 5,270 600*13.175 = 7,905
Cost of materials issued Ending inventory cost
= 13,395 = 7,905

Control Procedures When an inventory reaches the minimum

level, an order is placed to increase the
Total cost of a finished product = amount inventory to a maximum level
spent for materials, direct labor, and a
share in the factory overhead. Determination of the minimum and
maximum level requires the quantitative
It is necessary to adopt a cost techniques
control system for each element
Two-bin method
Efficient purchasing, management,
and investment in materials depend on an Used for materials that are
accurate forecast of sales and production inexpensive
schedules.
 Bin#1 – the quantity of materials =
Forecast – helps determine when to order the time an order is received and
materials the time when the next order will
be placed
Controlling inventory – accomplished by  Bin#2 – the quantity of materials =
scheduling production the time it takes for ordering and
Order cycle method delivery to be completed + safety
stock
Materials on hand are reviewed on
a regular or periodic cycle. The cycle
length depends on the type of material
being reviewed.
Essential materials = shorter review cycle Automatic order system

Less essential materials = longer review Used by companies that have a

cycle computerized system

Common technique for small items is the
90-60-30 day method
When inventory drops at 60-day
supply, an order will be placed for a 30-
day supply.
Min-Max method
Used in the assumption that
materials have minimum and maximum
level
An order is automatically placed when the
level of inventory reaches a predetermined
order point quality
It is possible to periodically recomputed
the optimum investment in inventory and
thus revise the quantity to be purchased,
with the use of computer.
ABC plan
Used by companies with large
number of materials, each with a different
value. a systematic way of grouping
materials according to their value and
determine the degree of control that each
group requires.
 Group A = High value items –
more sophisticated method such as
automatic system
 Group B = Medium value items –
combination of A and C
 Group C = Low value items –
simplest method such as the min-
max method or two bin method.
Physical control of materials
Inventories should be protected
from unauthorized use or theft as it
represents a significant portion of a
company’s current assets.
1. Limited Access – only authorized
personnel should have access to
the warehouse. Issuance of
materials for production should be
properly
approved
documented and
2. Segregation of duties – C. A. R. E.
3. Accuracy in recording
a. Inventory records – should
be able to determine
inventory quantities on
hand upon request
b. Cost records – should
provide the data for the
valuation of inventory for
the preparation of the FS.
Materials inventory management
The central issue in inventory
management is to maintain an optimum
investment in inventories that considered a
risk reward relationship.
In inventory management, we need to
consider the following trade-off:
1. Overinvesting in inventory avoids
shortages but incurs cost
2. Underinvesting in inventory saves
on cost but increases the risk of
shortages
Main questions in material inventory
management:
1. How many units should be
ordered?
2. When to make the order?
Economic Order Quantity (EOQ)
The ideal order quantity a
company should purchase to minimize
inventory cost such as holding cost, and
order cost. The model assumes that
demand, ordering, and holding cost all
remains constant.
The order size for an inventory
item that results in the lowest total
inventory cost for a period. The lowest
total cost for an inventory occurs when the
size of an inventory is large enough so that
the cost of ordering that quantity of
inventory is equal to the cost of carrying it.
√ 2∗annual demand∗cost per order
annual carrying cost per unit
2 = constant
Annual demand = annual number of units
required
Cost per order = ordering cost: cost of
placing and receiving orders
Annual carrying cost per unit = carrying
cost
Cost related when raw materials are
purchased from suppliers:
o Ordering cost
o Carrying cost
Cost related when raw materials are
produced by the entity itself:
o Set-up cost (cost of preparing
equipment and facilities)
o Carrying cost
Problem:
Keme Company requires 40,000
units for its signature product Devil Judge.
The units will be used evenly throughout
the year. The cost to place one order is
P100 while the cost to carry the inventory
for one year is P2 per unit.
Required:
1. Determine the optimal order
quantity (EOQ)
2. How many and how often orders
should be placed within a year?
3. Determine the average inventory in
units
4. Determine the annual inventory
carrying costs
5. Determine the annual inventory
ordering costs
√
2∗40,000∗100
2 your supplier).
(1.) EOQ = 2,000
(2.) If the EOQ is 2,000 units and the
annual requirement is 40,000
units…
Orders per year = 40,000 / 2,000
Orders per year = 20
Time interval per day = 360 / 20 = 18
The entity shall order 2,000 units every
18 days
(3.) Average inventory = EOQ / 2
2,000 / 2 = 1,000 units
Why do we use EOQ/2 for Average
Inventory?
This is the simple average formula:
(Beg Inv + End Inv)/2
We should assume that at the end of the
period, all inventory will be sold, hence the
simple average formula will be converted
to:
(EOQ + 0) / 2
(4.) Carrying cost = Average EOQ
inv. * carrying cost per unit
Carrying cost = 2,000 / 2 * 2
Carrying cost = 2,000
(5.) Ordering cost = orders per day *
cost per order
Ordering cost = 20 * 100
Ordering cost = 2,000
Total inventory cost = Carrying cost +
ordering cost
Total inventory cost = 2,000 + 2,000 =
4,000
Reordering point (Just in time) method
This is when goods would arrive
just in time when your inventory runs out.
But this has cons (you are highly reliant on
Reordering point uses the concept of lead
time.
1. Normal/average lea time – refers
to the usual delay in the receipt of
ordered goods
2. Maximum lead time – this adds to
normal time a reasonable
allowance for further delay
Problem:
EWAN purchases 7,200 units of product
butterfly every year. EWAN works 360
days per year. The normal purchase lead
time is 10 working days while maximum
lead time is 15 days.
Required:
(a) Safety (buffer) stock
(b) Reorder point
Average daily demand:
7,200 / 360 = 20
Safety stock =
(maximum lead – normal lead) * average
daily demand
(15-10) = 5 *20 = 100
*Increasing safety stock increases carrying
cost. This will have an implication on the
average inventory formula:
(EOQ / 2 ) + Safety Stock
Reordering point =
max lead time * average usage per unit of
time
15 * 20 = 300 units
When your inventory reaches 300 units,
you still have 15 days (max number of
days before you receive the next inventory
order). Therefore, you should already order
when your inventory level reaches 300
only.
This all refers to TIMING. There will be
no overlapping of old inventory, hence you
will have no carrying costs. As you will
also receive inventory JIT, you will also
not incur any stock out costs.
Alternative formulas:
Reordering point = Delivery time stock +
safety stock
Delivery time stock = Normal lead time *
average usage per unit of time
DTS = 10 * 20 = 200
Reordering point = 200 + 100 = 300
Accounting for labor
Labor – the physical and mental effort
expanded in manufacturing a product
Principal labor cost – wages paid to
roduction workers
Wages – payments made on an hourly,
daily, piecework basis
Salaries – fixed payments made regularly
for managerial or clerical services
1. Basic wages of workers
2. Overtime pay
3. Bonuses for exemplary
performance
4. SSS, PHIC, HDMF dues
(employer share)
5. Medical benefits
Kinds of labor
o Direct labor – cost of traceable
work done to transform raw
materials to finished goods. This is
debited to the Work in process
account
o Indirect labor – cost of work not
directly traceable to the production
of the product but is still related to
the production process. This is
debited to the Factory overhead
account
Payroll process and basic payroll
calculations
Wages plans
1. Hourly rate plan – a determinate
rate per hour is set for each
employee.
Total wage = rate per hour * no. of
hours worked
2. Piece rate plan – earnings are
calculated by multiplying the
employee’s output by the rate per
piece.
Total wage = rate per piece * no. of outputs
produced
3. Modified wage plan – combines
both piece and hourly rate plan. An
example would be to set a
minimum hourly wage that will be
paid even if a quota established is
not met. An additional payment
will be given when the quota is
exceeded.
Controlling labor cost – maintaining labor
record is the responsibility of the time-
keeping and payroll departments:
a. Time-keeping department –
accounts for the spent by
employees in the factory (clock
cards, time tickets, production
reports)
 b. Payroll department – computes Add: other taxable income xx
each employee’s gross earnings,
withholdings and deductions, and Add: other non-taxable income xx
net earnings to be paid. (payroll Gross pay xx
records, employee’s earning
records, payroll summaries)
2. Compute for taxable income (basis
Payroll process for withholding tax)
Payroll – a calculation of all employee’s Gross pay xx
compensation, statutory contributions,
taxes, deductions, and net payment for a Less: SSS EE Contribution
certain time period. The formula to present (xx)
is called payroll register.
Less: PHIC EE Contribution
1. Employee’s work is recorded in a (xx)
time ticket (hourly rate) or
Less: HDMF EE Contribution
production report (piece rate)
(xx)
2. Time ticket and production report
is sent to payroll on a daily basis Less: Other non-taxable income
3. Pay rates and gross earnings are (xx)
entered. Payroll register, payslip
and payroll report is made. The Taxable income xx
report is the sent to accounting
4. Cost accountants charge the labor 3. Compute for the total deductions
cost to be appropriate jobs,
department or factory overhead. SSS EE Contri xx
Payslip – a document that explains the PHIC EE contri xx
components of an individual’s pay for a
certain time period. It is a personal version HDMF EE Contri xx
of a payroll. Withholding tax xx
Other deductions xx
Total deductions xx
4. Compute for the net pay using all
earnings deducted by all
deductions.
Gross pay xx
Less: total deductions (xx)
Net pay xx
Computation of payroll
Special considerations
1. Compute for the gross pay by
getting the total of all earnings When jobs are rushed, overtime
pay is normally encountered to cover the
Basic pay xx extra hours the worker has rendered.
Less: lates and absences a. Normally overtime premium –
(xx) charged to factory overhead
b. Rushed job – charged to
Add: overtime xx production
Nigh shift differential – a special premium 4. On a special holiday at the same
(night shit differential) paid for workers time rest day = 537 / 8 *1.1 *1.5
working between 10:00pm – 6:00am. The 5. On a regular holiday = 537 /8 *1.1
whole pay is charged to factory overhead *2
6. On a regular holiday at the same
Idle time – the time workers have no work time rest day = 537 /8 *1.1 *2.6
to perform due to temporary changes in
production setup. Statutory contributions
a. Normally – charged to factory 1. SSS contribution (based on gross
overhead pay)
b. Due to negligence or inefficiency –
loss and no longer an expense
Work done on special days:
Assume an employee receives a daily wage
rate of P537. How much is his pay in a
day:
1. Rest day = 537 * 1.3 (30%)
2. Special holiday = 537 * 1.3
3. Special day at the same rest day =
537 * 1.5
4. Regular holiday = 537 * 2
5. Regular holiday and rest day = 537
* 1.3* 2
Overtime
Assume an employee receives daily wage
rate of 537. How much is the hourly rate of
overtime
1. An ordinary day = 537 /8 * 1.25
(25%)
2. On a rest day = 537 / 8*1.3*13
3. On a special holiday = 537 /8 2. Philhealth (basic pay)
*1.3*1.3
4. On a special holiday at the same
time rest day = 537 / 8*1.5*1.3
5. Regular holiday = 537 /8 *2*1.3
6. On a regular holiday at the same
time rest day = 537/8 *2.6*1.3
Night differential (10% addition)
Assume that an employee receives a daily
wage rate of 537. How much is the hourly
night differential pay
1. An ordinary day = 537 /8 *1.1
2. On a rest day = 537/8 *1.1*1.3
3. On a special holiday = 537 /
8*1.1*1.3
 3. Pagibig (max 100 pesos) cash 23,779.12

3. charge factory payroll to

production, assume that 3,000
indirect labor
Work in process iv 7,000
Factory overhead 3,000
Selling and admin exp 20,000
payroll 30,000

4. journalize the employer’s share in

Journalizing Statutory contributions statutory deductions. Assume the
o Employer’s share (ER) –will
go to factory overhead
o Employee’s share (EE) – will
go to work in process ff:

Problem Factory overhead 931.70

Selling and admin exp 1,285.00
Sir JC pays his employees every two SSS premium payable ER 1,766.80
weeks. Monday, May 1 is the beginning of Philhealth contri payable 250.00
a new payroll period. The following ER 200.00
payroll summary is prepared by the payroll Pagibig contri payable ER
department.
5. Payment of withholding tax to BIR
Withholding tax payable 4,812.58
cash 4,812.58

6. Remittance of statutory
contributions
SSS premium payable ER 1,766.70
Philhealth contri Payable 250.00
ER 200.00
Pagibig contri payable ER 833.30
SSS premium payable EE 375.00
Philhealth contrib payable 200.00
1. Record pay roll account EE 3,625.00
Pagibig contri payable EE
cash
Pay roll 30,000
Withholding tax payable 4,812.58
SSS Premium payable EE 833.30
Philhealth contrib payable 375.00
EE 200.00
Pagibig contri payable EE 23,779.12
Salaries and wages payable

2. Distribute pay to workers

Salaries and wages payable 23,779.12