Unit 13- Accounting For Materials

(theory questions+ Numerical-LIFO/FIFO)

Concept of material:
Simply, material means raw materials which are needed for the
production processes. It means, those items which are needed for the
production of semi-finished or finished goods are called materials or
raw materials.

Wheat Flour Flour Bread

Factory Bakery
Factory
Raw material Semi-finished finished
goods Raw material
goods

The raw materials can be divided into two types:

(1) Direct material
(2) Indirect material

Direct materials: Those materials which are directly involved/needed

into production activities/processes are called direct materials. For
example: flour is a direct material for making bread, wood is a direct
material for making furniture, clothes is a direct material for garment
industry, mustard seed is a direct material for a mustard oil.

Indirect Material: Those materials which indirectly support for the

production of semi-finished or finished goods are called indirect
material. For making an attractive furniture, nails, fevicol (gums),
colors, etc. are needed. For making an attractive shirt in garments,
needles, thread, button, etc. are needed.
Meaning of Material Control:
Simply, material control is the systematic and scientific way of procuring,
storing and supplying to the production department at the lowest possible
cost. The scientific material control system helps to ensure the continue
flow of raw material to the production department without keeping
unnecessary stocks/inventory/material in the store. One of the main
goal/objective of material control is to estimate the total requirement of
material and minimize the cost of production.

Objectives of material control (Needs):

1. Continue supply of material: The main objective of material control
is to supply material to the production department at uniform basis. The
production department need not to be suffered due to lack of material in
the go-down or interruption in production etc. The production department
need to produce goods at any costs.

2. Minimize the wastage:- The another objective of material control is

to estimate the materials required during production process. The
production department should provide scientific data so that the store
keeper can order the materials as per the requirement only. The materials
should not be too less to be ordered; so that the carriage cost remains high
or the materials should not be ordered too much so that the store-
house/warehouse cost remains high. The estimation must be accurate.

3. Minimize the handling cost: There should not be the long distance
between production house and store house. The location of both must be
short or nearer. This helps to minimize the handling costs and also the
materials can be delivered in short period of time.
4. Favorable in price:
Cost Price (CP)
Profit Sales price
Cost of production + =
In the perfectly competitive market, customers are the king. They have multiple of choice.
Therefore, the cost of production must be maintained low so that the sales price can be charged
low as low. For this, the material management techniques should be practiced.

Most probable questions:

1. Differentiate between centralized and decentralized purchasing.

Centralized De-Centralized

Centralized purchasing is the act of placing all the orders by central

purchasing departments in a bulk quantity and provides the materials to
different departments as per their requirements.
Decentralized purchasing is the act of placing all the orders by various
departments or units of the organizations as per their requirements.
Later, the information is given to the purchasing department. Here,
purchasing departments act as a coordinator or supervisor.

2. What is store keeping?

Ans: Store keeping is the process of systematic and scientific way of
preserving materials of the organization so that it can be delivered at the
time whenever and wherever required. The store keeping is directly
related to cost of production, so it must not be too high.
3. What is store control?
Ans: Store control is the act of taking care of materials and their cost from
the stage of purchase to the stage of final consumption. It means, store
control includes procuring, storing and supplying the materials to the
production department at the lowest possible cost.

4. What are the duties and responsibilities of store keeper.

Ans: Following are the duties and responsibilities of store keeper:
a) To receive material formally
b) To regularly review the materials and inspect it,
c) To make an entry in bin card and store ledger,
d) To keep the materials in proper place,
e) To take appropriate measures to protect the materials from theft,
insects, moisture, evaporation, heat and other external hazards etc.
f) To deliver the materials to the production department/ units.

5. What is bin card?

Ans: Bin card is a card which shows the information related to the
quantity of material received, material issued, and balance of materials in
the store. Simply, it is a glance (snap-shot picture) to reveal the
information about the situation of the store.

6. Methods of Inventory valuation:

A. Simple Average Method
B. Weighted average method/ moving average method
C. First in first out (FIFO method)
D. Last in first out (FIFO method)
2. Weighted Average cost Method/ Moving average
method:
𝑪𝒐𝒔𝒕 𝒐𝒇 𝒈𝒐𝒐𝒅𝒔 𝒂𝒗𝒂𝒊𝒍𝒂𝒃𝒍𝒆 𝒇𝒐𝒓 𝒔𝒂𝒍𝒆
𝑾𝒆𝒊𝒈𝒉𝒕𝒆𝒅 𝒂𝒗𝒆𝒓𝒂𝒈𝒆 𝒄𝒐𝒔𝒕 𝒎𝒆𝒕𝒉𝒐𝒅 =
𝑻𝒐𝒕𝒂𝒍 𝒖𝒏𝒊𝒕𝒔 𝒂𝒗𝒂𝒊𝒍𝒂𝒃𝒍𝒆 𝒇𝒐𝒓 𝒔𝒂𝒍𝒆

Concept of FIFO Method:

First IN First OUT
Under FIFO method, the company sells first goods at earliest time.

Concept of LIFO Method:

Last IN first OUT
Under LIFO method, the company sells last received goods and sell
them at first priority.

Common Terms and words used in LIFO & FIFO Method of

Accounting for Materials:
Received (Purchase) +
Return from work order
Return from department
Return from customer/debtors
Return from Vendor
Surplus
Return of surplus from work order
Return to store (store-keeper)
Issued (sold) -
Return to work order
Return to department
Return to customer/debtors
Return to supplier
Deficit/loss/wastage/shortage
Return from Store (Store-keeper)
Chapter : 11 | Accounting for Materials (3 marks)
Inventory System:
A) Perpetual Inventory System
B) Periodic Inventory System (New Course)
Difference between Periodic and Perpetual Inventory System:
Base Periodic Inventory System Perpetual Inventory System

Meaning It is a system of valuating It is a system in which the inventory

inventory in which the inventory account is increased at the time of each
account is updated only at the end purchased and decreased at the time of
of the period. each sales.
Recording Inventory records are updated Inventory records are updated regularly
periodically. in each transactions.
Inventory Inventory control is not possible Inventory control is possible under this
Control under this system. system.
Costs It is simple and less expensive. It is complex and more expensive.