Accounting For Materials Cost PDF

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ACCOUNTING FOR MATERIALS COSTACCOUNTING FOR MATERIALS COSTProduction costs are incurred based on expected output.Expected output is based on expected volume.Expected volume is based on sales forecast considering competition, changes in the economy and management’s policies on pricing, credit and sal...

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COST ACCOUNTING AND CONTROL ACCOUNTING FOR MATERIALS COST

ACCOUNTING FOR MATERIALS COST Production costs are incurred based on expected output. Expected output is based on expected volume. Expected volume is based on sales forecast considering competition, changes in the economy and management’s policies on pricing, credit and sales promotions. Effective control of the elements of production cost requires -

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Adoption of procedures geared towards maximum efficiency in the use of funds invested in the manufacturing resources and their recovery upon collection from customers within the shortest period after their conversion into finished goods. The time lag between procurement of materials and labor and start of production, the time period for processing, and the time lag between completion of goods and their delivery to customers are minimized considering changes in the incidental costs.

CONTROL OF PRODUCTION COST -

Refers to seeing to it that the different elements incurred (materials, labor and factory overhead), in total and per unit, are in accordance with plans and Adopting prompt remedial measures in case there are deviations It requires effective control systems for the different elements of production costs.

Benefits of having an effective control of the Elements of Production cost a. Maximizes manufacturing efficiency b. Reduces unit cost c. Enables management to attain desired inventory levels

CONTROL OF MATERIALS COST Requirements for control of materials cost Estimates of materials cost, in total and per unit. -

Requires engineering, planning and routing. Products are designed and manufacturing processes are carefully planned. o Used as basis in determining materials requirements ( in terms of quantity per unit and quality)

Production budget -

Shows the budgeted production volumes, monthly or quarterly o Used as a basis in computing budgeted materials usage o Used as guides in timing materials procurement and estimating incidental costs involved and the desired inventory level of materials

Purchase requisition -

Informs the purchasing agent that materials as indicated therein are needed by the issuing party

Purchase order -

Issued to suppliers stating the specifications, quantities and unit prices for the different items being purchased and all the desired delivery date or dates

Receiving report -

Certifies the quantity of items received and may state the results of inspection and of quality tests

Materials requisition -

Notifies the storeroom or warehouse that materials as specified therein are needed by the issuing party and may state the date the materials are needed

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COST ACCOUNTING AND CONTROL ACCOUNTING FOR MATERIALS COST Materials ledger cards -

The perpetual inventory records for materials showing receipts and issuances for each class thereof and the resulting balances. A card is maintained for each item of materials

Returned materials report -

Shows the materials previously issued and are being returned to the storeroom

Scrap report -

Shows the quantity of scrap materials removed from the factory

Return shipping order -

shows the materials returned or being returned to suppliers in some companies, they also use delivery receipt ( a form used to evidence that goods are brought out from the company compound)

SAMPLE FORMS Silver Corporation Purchase Requisition

No. 0211

To: Purchasing Department Date: _____________ Deliver To: ________________________ Date Required: __________ Job No./ Dept No. ________ Suggested Supplier: _______________ PLEASE ORDER THE ITEMS LISTED BELOW: Quantity Item Description Unit No. Price

Silver Corporation Receiving and Inspection Report No. 532 RECEIVED FROM: ___________________ DATE: _________ PER INVOICE/ DELIVERY RECEIPT NO. ________ PURCHASE ORDER NO. _______ Quantity Description Item No.

Amount

Items Not Accepted:

BUDGET CONTROL Allowance for the period P ______ Ordered by ___________________ Balance available ______ This purchase ______ Approved by Remaining balance ______ ____________________ Silver Corporation Purchase Order

SUPPLIER: _______________________________ DATE: __________

Per Pur. Req. No. _______ Prepared b__________________

Posted by: __________________

Silver Corporation Store Requisition

No. 876

Please deliver the items listed below: Quantity Description

___________________________________________________ Received by: Inspected by: _________________________ ______________________

Item No.

Unit Price

Approved by _________________________

TO: STORES DEPARTMENT FROM: ______________________________ REQUESTED BY: ______________________ CHARGE TO __________________________ Please issue the following items: Quantity Description Item No.

No. 154 Date: ___________

Unit Cost

Amount

Received the above items. Approved by: ______________________ _____________________ Signature Date: _________________ Posted by _________________ Code: ______________________

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COST ACCOUNTING AND CONTROL ACCOUNTING FOR MATERIALS COST

PURCHASE OF, AND PAYMENT FOR MATERIALS a. When did the stores clerk or department head issues a purchase requisition? -

When the balance of an item that is carried in stock reaches the critical level or When a department requisitions items that are not yet carried in stock

b. Purchase requisition is sent to the accounting department for the corresponding account number before it is sent to the purchasing department. c.

Purchasing department canvasses prices among suppliers and issues a purchase order to the chosen supplier so that delivery may be effected.

d. A copy of the purchase order is forwarded to the receiving and inspection department to inform them of what deliveries are to be expected. e.

The supplier delivers the goods to the company thru the latter’s receiving and inspection department and provides it with a copy of his invoice.

f.

The receiving and inspection department issues a receiving and inspection report after checking whether the goods so received are in accordance with specifications per purchase order.

g. A copy of the receiving and inspection report goes with the materials received to the materials or stores department so that the storekeeper may know how many and what kind of materials have been received and whether they tally with what he actually receives. h.

The original copy of the receiving and inspection report and the advance copy of the supplier’s invoice are forwarded to the accounting department so that they can be matched with the purchase order in processing payment.

i.

Another copy of the receiving and inspection report is sent to the purchasing department (to inform them of the deliveries made by the supplier.) - this copy is subsequently forwarded to the stores or materials ledger clerk in the accounting department for posting to stock cards.

j.

The supplier, upon receipt of payment, surrenders the original copies of his invoice and of the purchase order. - these are attached to the voucher, stamped as already paid and are then filed. * in some companies, they require original copies of the vendor’s invoice and of the purchase order before payment is processed.

Contracts for Repairs, Subscriptions and Purchase of Supplies – the procedure describe earlier for purchase of materials is also observed in acquiring other items. -

These may be supplies for the offices, sales department, engineering department, cafeteria, and medical and dental clinics.

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COST ACCOUNTING AND CONTROL ACCOUNTING FOR MATERIALS COST -

Annual contracts for repairs and subscriptions for journals and periodicals are to be covered by requisitions also. In case of short-notice or emergency repairs, the purchasing department may issue a blanket purchase order without specifying the amount. o Upon receipt of the bill, the amount thereof is verified with the head of the department in which repairs were made.

ISSUANCE OF MATERIALS AND SUBSEQUENT RETURNS Issuance of materials – covered by stores( or materials ) requisition. -

It is both a request for issuance and receipt for items so issued because an acknowledgement blank is provided therein. The form should clearly state the department or job to be charged and is accomplished in quadruplicate providing: o two copies for the accounting department – for the bookkeeper and the materials ledger clerk who enters the contents thereof to the ledger cards. o the storeroom and o a file copy for the requisitioning department.

Recording requisitions -

Inasmuch as many requisitions are made every month, it would be impractical to make a journal entry for each. Instead, they may be summarized monthly so that only one journal entry is made each month for requisitions. Another alternative – use of a special journal – the requisitions journal. ( illustrated below) Requisitions summary may have the same columns with the exception of the post reference column for the sundry accounts. o If a requisitions journal is used, it is part of the books of accounts and must be registered with the Bureau of Internal Revenue. REQUISITIONS JOURNAL

Date

Req. Job or No. Account No.

Description

Credit Materials

Debit Work in Process

Factory Overhead Control

Selling Expenses Control

General and Adm. Exp. Control

Sundries Account Post Amount Title Ref.

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COST ACCOUNTING AND CONTROL ACCOUNTING FOR MATERIALS COST ISSUANCE OF MATERIALS: REQUISITIONS JOURNAL AND FLOW OF WORK Date

Req. No.

Description

Credit Materia ls

Work in Proces s

Debit FOHC – Indirect Materials

Sundries

Amount

F

Material – X Received

1997

D

May 5 9 15 20 27 28

551 552 553 554 555 556 557

Job No. 225 Job No. 223 For Machine Shop Job No. 226 Job No. 224 Shipping Supplies Factory office supplies Total for the month

7,000 4,500 1,200 6,800 3,500 2,500 800

7,000 4,500

26,300

21,800

1,200

(15)

(14)

(21)

Q

Issued

Am t.

D

1,200

Selling Expenses – Shipping supplies FOH – Factory Off. Supplies

31 21

2,500 800

4,200

Received D Q Amt.

Issued D Q

Amt.

5/5

2,800

Amt.

5/1

6,000

5/5

1,800

Balance D Q 5/1 5/5

Amt. 4,500 1,700

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Job Order Cost Sheet No. 551

For Job 225 Materials X Material Y

Q

May 31 Req. Jr. 21,800

STORES REQUISITION For : Carpentry Dept. Date: 5/5

D

Material – Y

3,300

Work in Process

Balance Amt.

5/5

6,800 3,500

Materials 15 May 31 Purchases May 31 Req. V.R. 31,000 Jr. 26,300

Q

Job No. 225 For Stock – 20 computer tables Started : 5/4

4,200 2,800 7,000

Direct Cost 5/5

Materials

Direct Cost

Labor

Factory Overhead

7,000

GENERAL LEDGER ACCOUNTS AND SUBSIDIARY RECORD ENTRIES -

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Based on the procedure given for acquisitions, issuances and returns, the transactions are analyzed as to their effects on general ledger accounts and the corresponding subsidiary records per illustration below. In the given illustration, the stores account instead of the materials account is used so that acquisitions of items that go to the storeroom are debited to the account. Accounts Payable may also be used despite the use of vouchers in processing payment if said account appears in the chart of accounts.

STORES LEDGER CARDS AND BIN CARDS Stores Ledger Cards -

The perpetual records of the different items in the storeroom. Items received and issued for each class are posted to the corresponding card and the resulting balance must be equal to the inventory for said item. The total of all balances per stores ledger cards must therefore be equal to the inventory in the storeroom as of the same date. o To be assured of this, the balances per stores ledger cards are compared with the physical inventory on chosen dates during the accounting period.  if there is a difference between the balance per books and the inventory per physical count, the possible cause thereof is determined.  If a difference still exists after eliminating significant causes, the balance per books is adjusted by a corresponding debit or credit to factory overhead (inventory adjustment)

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COST ACCOUNTING AND CONTROL ACCOUNTING FOR MATERIALS COST Bin cards or bin tags -

Those attached to storage bins, shelves, racks or other containers of items in the storeroom showing the movement of stock in said containers. Not part of the accounting records but are useful in controlling flow of materials. Balances per bin cards must be equal to the balances per materials or stores ledger cards.

BIN TAG STOCK NO. ________

MAXIMUM ____

LOCATION ________

MINIMUM ____

DESCRIPTION ____________________________ Date

Received

Issued

Balance

Remarks

COSTING METHODS FOR REQUISITIONS These methods are related to the flow of costs and not necessarily to the actual flow of materials or finished goods. If only the materials were acquired at the same cost all year round, then valuation of materials inventory end, will not be a problem because the value can be computed by simply multiplying the units on hand and the unit cost. The same can be said for the finished because if the units were produced at the same cost all year round, the value at the end of the period can be computed by multiplying the finished goods on hand by the cost to produce each unit. The different methods are used because the materials are acquired at different costs during the year. Average cost for: Perpetual inventory system refers to moving average Periodic inventory system refers to weighted average 

o

FIFO method  Based on the assumption that cost should be charged to manufacturing cost or cost of goods sold in the order in which incurred  Inventories are stated in terms of the most recent costs and  Expense is charged with the earliest costs incurred  Average method – discussed in detail in financial accounting  Weighted average method o 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. o Inventory at the end is computed by multiplying the weighted average cost per unit by the units on hand.  Moving average method o 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. The FIFO method is used in illustrating the use of the 5-column stock card and the average method is used in emphasizing adjustments to average unit costs brought about by returns on the next page.

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COST ACCOUNTING AND CONTROL ACCOUNTING FOR MATERIALS COST Inventory adjustment When inventory per physical count is different from balances per materials ledger cards (the total of w/c must be equal to the balance per general ledger), the latter are adjusted to make the balances equal to the former. - An addition is shown either in the “received” column or in the “issued” column but negative and vice-versa. In making the entry, the corresponding debit or credit is to factory overhead – inventory adjustment

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THE FIVE-COLUMN STOCK CARD - In the five-column stock card, the columns ordered and reserved are added to facilitate materials management. o These additional columns do not affect the balance but are reminders that some units have already been ordered although not yet received and that some have been reserved but not yet issued. - To illustrate the use of the five-column stock card, the following data are given on Silver Corporation’s raw material item 605, one-inch concrete nail, (with minimum and maximum balances of 150 and 400 kilos respectively, reorder quantity of 200 kls. And located in bin no. 455) for March, 2014. 2014 March 1 Inventory: 80 kgs. @ P 5 120 kgs. @ 6 3 Purchase order no. 653 for 200 kgs. at P 4.50 4 Reservation for 90 kgs. for job 786 per requisition no. 850. 5 Received 50 kgs. (P.O 653) per receiving and inspection report 026. 7 Issued 70 kgs. for job 786 per requisition 850. 9 Ordered 200 kgs. per P.O. No. 659 at P 5.70. 14 Issued the 20 kgs. reserved for job 786 per requisition 850. 19 Receiving and inspection report 035: balance ordered per P.O. 653. 22 Returned 20 kgs. to supplier for P.O. 653 per return shipping order 081. 25 Received 10 kgs. returned from job 786 per returned materials report 017. 27 Received 80 kgs. (P.O. 659) per receiving report No. 042. 30 Reserved 100 kgs. for job 75 per requisition no. 895. 31 Issued 125 kgs. for job 797 per requisition 910.

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COST ACCOUNTING AND CONTROL ACCOUNTING FOR MATERIALS COST

Returns. - Returns to suppliers are shown in the received column as negative and at the unit cost at which they were recorded upon purchase. - Returns to storeroom are shown in the issued column as negative and at the unit cost used upon their issuance. Practices differ in extending the latter to the balance column. They may be shown is such a way that they are the first to be issued depending on the assumed flow of cost. This means that under FIFO, the returns are to be shown ahead of the others while under LIFO, they are to be shown as the last. AVERAGE COSTING METHOD: ADJUSTMENT ARISING FROM RETURNS - When the average costing method is in use and there are returns to suppliers, the average unit cost may be different from the acquisition cost of the materials being returned. o The difference is treated as a debit or credit to factory overhead (inventory adjustement). o Per illustration on the previous page, the return of 20 units on March 22 is posted to the stock card at the average unit cost P 4.9542. However, the purchase unit cost was P 4.50 only so that the P. 4542 difference gives rise to a debit to factory overhead of P 9.00 (or 20 units x P .4542) as shown in the following entry. Vouchers Payable ( 20 units x P 450) P 90 Factory Overhead (Inventory Adjustment) 9 Materials P 99 - Returns to storeroom of previously issued materials may give rise to adjustment in average unit cost. In the given example, the return to storeroom of 10 units on March 25 is posted at the assigned unit cost of P 5.38. The adjusted average unit cost is computed as follows: Balance, March 22 ( 290 units @ P 4.9542) P 1,437 Add: Return to storeroom, March 25 ( 10 x P 5.38) 54 Total P 1,491 Divide by 300 units Adjusted average unit cost P 4.97 / 4.8684 to be exact.

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COST ACCOUNTING AND CONTROL AC...