ACCOUNTING FOR

MATERIALS
 I. Opening Prayer
 II. Announcements
 III. Overview of the topic
 IV. Discussion
LEARNING OUTCOMES :
1) Discuss the need for material control
2) Perpetual vs Periodic Accounting System
3) Identify the different documents and procedures pertaining to materials control
4) Calculate the reorder point and economic order quantity
5) Determine the cost of goods manufactured and sold using the Average and
FIFO costing
6) Apply the rule of cost or net realizable value whichever is lower
MATERIALS :
CONTROLLING AND COSTING OF MATERIALS
1) Storing of Materials
 The storeroom supervisor is responsible for the protection and identification
of materials.
• Each type of materials is assigned a number indicating the type of materials and
its location.

• Materials are stored in a systematic manner in bins, on racks or on shelves.

• Attach to each bin or rack is a bin tag, an informal record showing the quantities
of the materials received, issued and on hand at all times.
MATERIALS :
CONTROLLING AND COSTING OF MATERIALS
2) Issuance of Materials
Materials Requisition
 Materials requisition is needed in order for storeroom personnel to issue the
materials for use. Materials requisition is prepared in duplicate by the
department head. The requisition indicates the quantity, material number,
description, and job number to which the materials are to be charged.
 Upon receipt of the materials requisition, the storeroom supervisor issues the
materials and makes the necessary notations on the requisition. One copy is
filed as a receipt, and the second copy is given to the storeroom clerk.
MATERIALS :
CONTROLLING AND COSTING OF MATERIALS
2) Issuance of Materials
Materials Ledger
 Materials ledger card is kept for each type of material on hand and serves as a
perpetual inventory record. The material ledger serves as a perpetual inventory
record.
 It is a subsidiary ledger which is verified and should be equal with the Materials
account in the general ledger at the end of the accounting period.
 The storeroom clerk computes and records the cost of the materials issued at
the Issued section of materials ledger card, computes the new quantity on hand
and records it in the Balance section.
MATERIALS :
CONTROLLING AND COSTING OF MATERIALS
2) Issuance of Materials
Job Cost Sheet
 The cost clerk will then post the information from the requisition to the Materials
section of job cost sheet. Only direct materials incurred for the job are posted.
MATERIALS :
CONTROLLING AND COSTING OF MATERIALS
2) Issuance of Materials
Materials Returned to Storeroom
 Returned materials report is prepared in duplicate and shows the materials
returned because of requisitioning too many materials, withdrawing wrong
materials or other reasons.
 The report may be filled out by the department that originally requisitioned the
materials or by the storeroom supervisor.
MATERIALS :

Read the Books for the Business Papers Used to

Support Material Transactions

1) Purchase Requisition
2) Purchase Order
3) Receiving Report
4) Materials Requisition Slip
MATERIALS :
Accounting for Materials
1) Periodic Inventory System
2) Perpetual Inventory System
MATERIALS :
Periodic vs Perpetual Inventory System
MATERIALS :
Periodic vs Perpetual Inventory System
MATERIALS :
Periodic vs Perpetual Inventory System
MATERIALS :
Material Control
There are two (2) basic aspects of materials control;
1) Physical control or safeguarding of assets
2) Control the investment in materials
MATERIALS :
Physical Control of Materials
• Materials must be controlled from the time the order is placed with the vendor
until they shipped to customers in the finished form.
• Effective control of materials involves ;
1) Limited Access – authorized personal access storage
2) Segregation of Duties – purchasing, receiving, storage & use
3) Accuracy in Recording – quantity and cost and valuation
MATERIALS :
Controlling the Investment in Materials
• One of the objective of materials control is maintaining proper balance of
materials on hand.
• An inventory of sufficient size must be maintained, but the size should not be
excessive in relation to the production needs.
• This factors should be considered in determining the investment in materials:
1) How many units should be ordered?  Economic Order Quantity
2) When order should be placed?  Reorder Point
MATERIALS :
Economic Order Quantity
• In determining the quantity to be ordered, the cost of placing an order
(ordering cost) and the cost of carrying inventory (carrying cost) must be
considered.
• Hence, EOQ is the purchase order which results in the minimum total
inventory cost.
• Inventory Cost = Ordering Cost + Carrying Cost
MATERIALS :
Economic Order Quantity
• Factors to consider in determining ordering costs
1) Salaries & wages of employees engaged in purchasing, receiving and inspecting
materials.
2) Communication costs associated with ordering, such as telephone, postage and
forms of stationery.
3) Materials accounting and record keeping
MATERIALS :
Economic Order Quantity
• Factors to consider in determining carrying cost
1) Materials storage & handling costs
2) Interest, insurance and property taxes
3) Loss due to theft, deterioration or obsolescence.
4) Records and supplies associated with the carrying of inventories
MATERIALS :
Economic Order Quantity
• Formula Method
MATERIALS :
Economic Order Quantity
Illustration: Solution :
Assume a local gift shop is attempting to determine
  EOQ =
how many sets of wine glass to order. The store feels  
it will sell approximately 800 sets in the next year at a EOQ =
price of P18 per set. The wholesale price that the  
store pays per set is P12. EOQ =
Cost of carrying one set of wine glasses are estimated  
at P1.50 per year while ordering costs are estimated EOQ = 163 units per order
. at P25.

Required:
1) Determine the Economic Order Quantity for the
set of wine glass.
2) Determine the annual inventory cost if it orders
at EOQ, at 170 units and 160 units.
MATERIALS :
Economic Order Quantity
Illustration: Solution :
Assume a local gift shop is attempting to determine
how many sets of wine glass to order. The store feels
it will sell approximately 800 sets in the next year at a
price of P18 per set. The wholesale price that the
store pays per set is P12.
Cost of carrying one set of wine glasses are estimated
at P1.50 per year while ordering costs are estimated
. at P25.

Required:
1) Determine the Economic Order Quantity for the
set of wine glass.
2) Determine the annual inventory cost if it orders
at EOQ, at 170 units and 160 units.
MATERIALS :
Reorder Point
• is the minimum unit quantity a specific product reaches to trigger inventory
replenishment. Reorder points give businesses time to restock a product
before the item is out of stock and they are unable to fulfill orders.
• the predetermined minimum level of inventory on hand that will trigger you to
place an order.
• calculation of order point is based on the following data.
1) Usage – anticipated rate at which the materials will be used.
2) Lead Time – estimated time interval between the placement of an order.
3) Safety Stock – estimated minimum level of inventory needed to protect
against running out of stock.
MATERIALS :
Reorder Point
Reorder Point (ROP) = Lead Time Usage + Safety Stock

• Lead time is the number of days between when you place a purchase order with your
manufacturer or supplier for a product and when you receive the product. 

Lead Time Usage = Average Daily Usage x Lead Time

.

• Safety Stock is the extra “just in case” inventory you keep on hand to anticipate
variability in demand or supply.

Safety stock = (Max daily orders x Max lead time) – (Ave daily orders x Ave lead time)

Safety stock = (Max daily orders x Max lead time) – Reorder Point w/o SS
MATERIALS :
EOQ & Reorder Point
Illustration: Solution :
The following inventory information and relationship for
the Baguio Corporation are available.
1) Orders can be placed only in multiple of 100 units
2) Annual unit usage is 300,000 (assume 50-week year)
3) The carrying costs is 30% of the purchase price
4) The purchase price is P10 per unit
5) The ordering cost is P50 per order
6) The desired safety stock is 1,000 units (this does not
. include delivery stock.
7) Delivery time is 2 weeks
( )
Required:
1) Determine the optimal EOQ level.
2) How many orders will be placed annually?
3) At what inventory level should a reorder be made?
MATERIALS :
EOQ, Reorder Point (w/ Safety Stock)
Question :
Fruitcake specialists sells 36,000 fruit cakes annually. Annual carrying costs are P5 per fruit cake and the ordering costs
are P100 per order. The firm has decided to maintain a safety stock of one month’s sales or 3,000 fruitcakes. The
delivery time per order is 5 days. Assume a 365-day year.

Required:
1) What is the EOQ?
2) What is the Average Inventory?
3). How many orders should be placed each year?
4) What is the Total Inventory Cost?
5) What is the Reorder Point?
MATERIALS :
Methods of Costing Materials
• the common method of costing materials issued and finished goods sold are;
1) First-in, First-out (FIFO)
2) Average cost
- Weighted Average (Periodic)
- Moving Average (Perpetual)
MATERIALS :
First-in, First-out (FIFO)
• 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 – recent prices
Cost of goods sold – earliest cost
 Solution :

MATERIALS :
FIFO
Illustration:
Given the information below, compute for the
ending inventory and cost of goods sold using
the FIFO Method.
MATERIALS :
Average Method (Weighted Average)
• used for periodic inventory system.
• this method is based on the assumption that units issued should be charged at
an average cost, such average being influenced or weighted by the number of
units acquired at each price.
 Solution :

MATERIALS :
Weighted Average
Illustration:
Given the information below, compute for the
ending inventory and cost of goods sold using
the Weighted Average Method.
MATERIALS :
Average Method (Moving Average)
• used for perpetual inventory method.
• a new weighted average cost is calculated after each new purchase, and this amount
is used to cost each subsequent issuance until another purchase is made.
 Solution :

MATERIALS :
Moving Average
Illustration:
Given the information below, compute for the
ending inventory and cost of goods sold using
the Moving Average Method.
MATERIALS :
Special Problems in Materials Accounting
I. Discount
1)Trade Discounts
- generally given in terms of percentage (15%,10%, 5%)
- are used to convert single price list into series of price lists for different types
of middleman.
- are not recorded in the accounting books because purchases are recorded
net of trade discount.
MATERIALS :
Special Problems in Materials Accounting
I. Discount
2) Cash Discounts
- granted to customer to motivate them to pay promptly.
- expressed in terms of discount rate/discount period, n/30. (2/10, n/30)
MATERIALS :
Special Problems in Materials Accounting
I. Discount
MATERIALS : Illustration :

Cash Discounts
MATERIALS : Illustration :

Cash Discounts
MATERIALS : Illustration :

Cash Discounts