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Introduction to material costing

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Materials are the components that makes up the item (product/service)

Direct Materials are all materials becoming part of the product (unless used in negligible amount and/or having negligible cost) Indirect Materials are all other materials apart from direct material e.g. consumable stores

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Raw Materials: are goods purchased to be incorporated into the making of the product Work In Progress (WIP): is a term used to represent an intermediate stage between the raw material stage and the finished goods stage. Finished Goods: are products ready for sale or despatch.
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Requisition Purchase Requisition Purchase Order

Suppliers may give the organisation trade discounts; this may be of two (2) types:

A trade discount - volume of trade A cash or settlement discount - prompt payment

If VAT is payable, discounts are deducted from the cost of the goods before VAT is calculated and added on the invoice.

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Goods Delivery Note (GDN) Goods Received Note (GRN) Payment to supplier
But if the sales invoice is thought to be incorrect, the supplier is notified of any discrepancies.

The supplier will usually issue a credit note

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A code is a system of words, letters, figures or symbols used to represent an item. Reasons why we need to code and classify materials/stock held in stores are as follows.
Ambiguity is avoided Time saving since describing an item can be timeconsuming. Correct materials can be accurately identified saving production time. Computerised processing is made easier
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Stock taking is where we physically count stock that we have on hand at certain date we then compare it against the balance shown in the stock records.

When there are any discrepancies between actual stock on hand against balance of stock shown on record, then such differences are investigated and appropriate corrective action taken.
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Periodic Stock Taking This is a process where by all stock items are physically counted and valued at a set point in time, usually at the end of an accounting period CIMA official

Continuous Stock Taking This is the process of counting and valuing selected items at different times on a rotation basis CIMA official

So that each item is checked at least once a year. Valuable items or items with high turnover could be checked more frequently.

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The document that an organisation uses for the recording of material stocks is known as the Perpetual Inventory System. A perpetual inventory system is a stock recording system, which records materials received, material issued from stores and the balance of materials at the end of each period

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Two types of perpetual inventory system are the:

Bin Cards
Records quantities

Store Ledger Cards

Records both the quantities and values

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Material stocks can be valued in four main ways namely: FIFO (First In, First Out) Method LIFO (Last In, First Out) Method Weighted Average Method Periodic Weighted Average Method

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