MATERIAL COST

WHAT IS MATERIAL COST & MEANING OF

MATERIAL COST
1) Material cost is the significant constituent of the total cost of any product.
2) It constitutes 40% to 80% of the total cost. The percentages may differ from industry
to industry. But for manufacturing sector the material costs are of greatest
significance.
3) Inventory also constitutes a vital element in the Working Capital. So it is treated as
equivalent to cash. Therefore the analysis and control on Material Cost is very
important.
4) The direct materials are the materials whose cost can be attributed to a cost object in
an economically feasible way.
5) Indirect materials are the materials whose cannot be diretly attributed to a particular
cost object.
 OBJECTIVES OF
MATERIAL COST
• To make continuous availability of materials
so that there may be uninterrupted flow of MATERIAL
materials for production. Production may
not be held up for want of materials
• To purchase requisite quantity of materials
to avoid locking up of working capital and to PURCHASE
minimise risk of surplus and obsolete stores STORAGE ISSUE
& RECEIPT
• To purchase proper quality of materials to
have minimum possible wastage of
materials
• To make purchase competitively and wisely CONTROL
at the most economical prices so that there
may be reduction of material costs
REQUISTITES OF MATERIAL CONTROL SYSTEM
1. Coordination and cooperation between the various departments concerned viz
purchase, receiving, inspection, storage, issues and Accounts and Cost departments
2. Use of standard forms and documents in all the stages of control
3. Classification, coordination, standardization and simplification of materials
4. Planning of requirement of material
5. Efficient purchase organization
6. Budgetary control of purchases
7. Planned storage of materials, physical control as well as efficient book control
through satisfactory storage control procedures, forms and documents
8. Appropriate records to control issues and utilization of stores in production
9. Efficient system of Internal Audit and Internal Checks
10. System of reporting to management regarding material purchase, storage and
utilization
 BILL OF MATERIAL
• Bill of Material is a complete schedule of
parts and materials required for a particular SPECIMEN OF BILL OF MATERIAL
order prepared by the Drawing Office and
issued by it together with necessary blue
prints of drawings. For standard products,
printed copies of Bill of Material are kept
with blank spaces for any special details of
modification to be filled in for a particular
job/order.
• The schedule details everything, even to
bolts and nuts, sizes and weights.
• The store-keeper can draw up a programme
of material purchases and issue for a given
period.
• It provides a quantitative estimate of budget
of material required for a given job, process
or operation which might be used for control
purposes.
 MATERIAL REQUISITION NOTE
1. Material Requisition is a document issued by a department in
charge requesting the Storekeeper to issue certain materials to a
job or standing order number. SPECIMEN OF MATERIAL REQUISITION
2. It is an important document as it authorises issue of materials from NOTE
stores and thereby should be authenticated by appropriate
authority.
3. It forms the basis of crediting the Marginal Account in the stores
ledger as the materials are taken out on the strength of such
documents.
4. The corresponding debit to work-in-progress account or Job
Account for standing order number is also made on the basis of
such documents.
5. This document enables the Accounts Department to value the
issue of the materials to find out the cost of materials issued. The
storekeeper uses this department to check total item wise issues
made by him during a certain period by adding up the details of
issue from this document.
 PURCHASE REQUISITION
1. A purchase requisition is a form filled out by an employee ,
requesting that the purchasing department obtain certain
goods or services. SPECIMEN OF PURCHASE REQUISITION
2. The form includes information about the nature and
amount of the items to be acquired, and when they are
needed. In some organizations, the department manager
must also sign the purchase requisitions being created by
his staff, to indicate that they have been authorized.
3. By doing so, a company can avoid making unnecessary
purchases. The form is then sent to the purchasing
department, which acquires the requested items; this is
done with a purchase order, which is a legally binding
document that is sent to the applicable supplier
ADVANTAGE OF PURCHASE REQUISITON
The use of purchase requisitions makes it much easier to
control expenditures within a business. It also creates
documentation for who asked for and then authorized a
purchase, in case there are later squabbles about which
department should be charged for a purchase.
 PURCHASE ORDER
• Purchase Order (PO) is a request made in writing to SPECIMEN OF PURCHASE ORDER
selected supplier to deliver goods of requisite quality,
quantity, (as per the purchase requisition) at the prices,
terms and conditions agreed upon. It is a commitment on
the part of the purchaser to accept the delivery of goods
contained in the Purchase Order if the terms included
therein, are fulfilled.
• Purchase Order contains the following details :- (a)
Purchase Order No; (b) PO Date; (c) Supplier Name and
Address; (d) Material Code; (e) Material description; (f)
Grade & Other particulars of the material; (g) Quantity to
be supplied; h) Price; i) Place of delivery; j) Taxes; k) Terms
of Payment (Credit period) .....et
• Usually a purchase order is made in five copies, one each
for suppliers, Receiving/Stores Department, Originating
Department, Accounts Department and filing.
• Thus we see that all the departments concerned with the
materials are informed fully about all the details of every
purchases and it becomes easier for everyone to follow up
on any relevant matter
 RECEIPTS AND INSPECTION OF MATERIAL
1. The stores department will receive the material after the SPECIMEN OF RECEIPTS AND INSPECTION OF
gate entry. It will compare the quantities received with MATERIAL
the PO Quantity. It is a valuable document as it forms the
basis of accounting entry in the stores ledger and stock
records. It is the document basis for quality control
department to carry inspection of the material in warded.
2. It also forms the basis of payments to be made to the
supplier in respect of the materials supplied by him.
Suppliers invoices are checked with goods received notes
which such for actual receipt of the goods supplied by the
supplier.
3. One copy of such note is also sent to Inspection
Department who after inspection of materials approves
the note for Stores Department to receive the materials.
4. Outstanding Goods Received Notes which are not linked
with supplier’s bills enable the Accounts Department to
estimate at the year end the liability for goods purchased
for which supplier’s bills not received.
 ECONOMIC ORDER QUANTITY (EOQ)
• The total costs of a material usually consist of Buying Cost + Total Ordering Cost + Total Carrying CosT
• EOQ is the order quantity that minimizes the total inventory carrying cost and ordering cost.
• Ordering cost are the cost incurred on obtaining additional inventories. They are cost incurred on
communicating the order , transportation cost etc.
• Carrying cost represent the cost incurred on holding inventory in hand. They include the opportunity cost
of money held up in inventories, storage cost , spoilage costs etc.
EOQ= 2 CARRYING
COST
C
Where A = annual usage units EOQ
cost
B = ordering cost per order
ORDERING
C = annual carrring cost of one unit COST

quantity
 MATERIAL TRANSFER NOTE
• Material Transfer Note is a document used for transferring the material from one department to other department or one
site to other site or one job to other job. The need for Material Transfer Note arises under the following conditions:
1. Great urgency for such materials as normal procedure for requisitioning the materials may result in delay in completion
of the job.
2. Where two jobs are being executed side by side or very near to each other and stores department is situated at a great
distance, adoption of normal procedure for requisitioning the materials may mean unnecessary expenditure in handling
and transportation, especially in cases of heavy materials
3. Frequent shifting of materials (for returning to stores and for re-issue) may result in wastage or breakage.
4. If the goods are of perishable nature (e.g. Vegetable or Fruits) and refrigeration may not keep them fresh for a long
time.
• Procedure to be followed to transfer the material
(a) Transferring supervisor will prepare a Material Transfer Note giving all the details of the materials transferred and will
send this note to the supervisor of the job to which materials being transferred.
(b) Transferee supervisor will sign the note in token of receipt of the materials and send it back to the transferring supervisor.
(c) This note will then be send to Cost Office where necessary entries will be passed and respective job accounts debited and
credited