Material Cost Final 97 Slides

MATERIAL COST.
Copyright © Wondershare Software

INTRODUCTION:
• The term material refers to all commodities

consumed in the process of manufacturing.
• Material represents an important asset and is the
largest single item of cost in almost every
manufacturing unit.

Classification Of Material:
1. Direct materials.
2. Indirect materials.
3. Supplies.
4. Finished or component parts.
5. Stores.
6. Inventory.

Inventory Or Material Control:
It is defined as “safe guarding of companies

property in the form of materials by a proper system
of recording and also to maintain them at the
optimum level considering operating requirements
and financial resources of the business.”

Objectives:
• No under stocking.
• No overstocking.
• Minimum wastage.
• Economy in purchasing.
• Proper quality of materials.
• Information about materials.
• Material report to management.

Essential Requirements Or Principle Of
Inventory Control.
• Proper coordination and cooperation.
• Competent and expert purchase manager.
• Classification and codification of materials.
• Proper planning.
• Inventory system should be updated.
• Adequate records should be produced.
• Internal audit and internal check.

• Well planned supervision.
• Stock levels should be fixed for each item of
materials.
• Budget controlled.
• Reporting.

Techniques Of Inventory Control.
1. ABC technique.
2. Stock levels.
3. Economic Order Quantity.
4. Purchase of materials.
5. Storage of materials.
6. Documents authorizing movements of materials.
7. Inventory systems.
8. Methods of pricing material issues.

1. ABC Technique.
• ABC technique is a value based system of

material control.
• In this technique of selective control, materials are
analyzed according to their value so that costly
and more valuable materials are given greater
attention and care.
• All items of materials are classified according to
their value i.e.

i. ‘A’ Items :- These are high value items which
may consist of only in small percentage of the
total items handled.
ii. ‘B’ items :- these are medium value materials
which should be under the normal control
procedures.
iii. ‘C’ items :- these are low value materials which
may represent a very large number of items.
These materials should be under the simple and
economic methods of control.

Category % of total value % of total quantity Type of control
A 70 10 Strict control
B 25 30 Moderate control
C 5 60 Loose control
Total 100% 100% 100%
In the given table it is shown that 10 % of total

quantity accounts for as much as 70% of the total
value. These are a category items which need very
strict control because of their high cost significance.
• The second type of items represents 30% of the
total quantity but account for 25% of the total
value. These are B items which need routine type
of control.
• The items representing 60% of the total quantity

account for 5% of the total value. These C items
are kept under simple physical controls.

• The rules regarding purchasing, storing and
issuing of various categories of items should
be framed according to their value and
importance.

2. Stock Levels.
• One of the major objectives of a system of
material control is to ensure that there is no
“under stocking and overstocking.”
• A scientific approach to achieve these objectives
to adopt a system of stock levels is:
1. maximum level.
2. minimum level.
3. re-order level.
4. danger level.
5. average stock level.
Maximum Level:
• The maximum stock level is the level above which

stocks should not normally be allowed to rise.
• It is the maximum quantity of a material that may be
held in store.
• The following factors are considered while fixing
this level
1. Rate of consumption of the material.
2. Storage space available.
3. Amount of capital needed and available.

1. Risk of obsolescence and deterioration.
2. Cost of storage.
3. Insurance costs.
4. Bulk purchases of seasonal materials.
5. Re-order quantity for the material.
Formula:-
Maximum level= re-order level + re-order quantity
–(Minimum consumption * minimum re-order
period)
Minimum Level:
• Minimum level is that level below which stock

should not normally be allowed to fall.
• In case any item of material falls below this
level, there is a danger of stoppage in production
and top priority should be given to the purchase
of new materials.

• Factors to be considered:-
1. Rate of consumption of material.
2. Time required to obtain delivery of the new
materials.
3. Re-order level.
• Formula:-
• Minimum level= re-order level-(normal
consumption * normal re-order period)

Re-order Level:
• This is that level of material at which a new order

for material is placed.
• It is at this level that purchase requisition is made
out.
• This level is above minimum level but below
maximum level.

• Factors to be considered-
1. Rate of consumption of material.
2. Minimum level.
3. Lead time or delivery time i.e., the time normally
taken from the time of raising purchase
requisition to receipt of materials.

Formula:-
Re-order level = (maximum consumption *
maximum re- order period)

Danger level:
This is a level at which normal issues of materials

are stopped and urgent action is taken for purchase
of materials so that production is not interrupted due
to shortage of materials.
Formula:-
Danger level = average or normal consumption *
maximum re-order period for emergency purchases.

Average Stock Level:
Formula
Average stock level=
minimum level + maximum level
2

3. ECONOMIC ORDER QUANTITY .
• Re-order quantity is the quantity to be ordered

whenever materials are to be purchased.
• By setting this quantity the buyer is saved the task
of re-calculating how much he should buy each
time he orders.
• Re-order quantity is sometimes known as
Economic Order Quantity.

• Ordering Cost: It mainly includes cost of
stationery, salaries of those engaged in receiving
and inspecting, salaries of those engaged in
preparing the purchase orders etc...
• Cost Of Storage Or Cost Of Carrying Inventory:
This includes cost of storekeeping, risk of
obsolescence, deterioration and wastage of
materials, evaporation etc...

Formula:-
EOQ = √2.A.O/C
A= annual consumption
O= ordering cost per order
C= carrying cost of one unit i.e. carrying cost % *
cost of one unit

4. PURCHASE OF MATERIALS.
1. Just In Time (JIT) Purchases:-

2. Centralized And Decentralized Purchasing.
Advantages Of Centralized Purchasing:

i. Concentration in one department.
ii. Initiation of Firm policy.
iii. Standardization.
iv. Better control.

Disadvantages:
i.Higher administration costs.
ii.Suitability.
Procedure
The procedure of purchasing materials varies
from one business to another, depending upon its
size, conditions and ideas.

A. Purchase requisition.
B. Selection of supplier.
C. Purchase order.
D. Receipt of materials.
E. Inspection of materials.
F. Returns to supplier.
G. Approval of invoices and payment.

A. Purchase Requisition:
• Purchase requisition may be received from:

1. Storekeeper.
2. A departmental head.
3. Plant engineer.
• Purchase requisition should be received only
from certain authorized persons in the
organization. Everybody cannot be allowed to
requisition purchases.

• Purchase Requisition is used as a formal request
to the purchasing department for the purchase of
the material.

B. Election Of Supplier:
• The purchase department analyses each of the

purchase requisitions received before making
arrangements for the purpose.
• It usually maintains a suitable record of the
different sources of supply and of various
quotations.

• Factors considered:
1. Terms of payment.
2. Dates of delivery and reliability of various
suppliers in the past.
3. Invitation of tenders.

C. Purchase Order:
• Purchase order is a written authorization to the

supplier to supply the specified materials at a
price and terms mentioned therein.
• Purchase order is a legal contract between the
parties concerned, the authority to sign purchase
orders should be restricted to selected responsible
officers.

PURCHASE ORDER
Supplier …………… Order No

……………….
Date required…………… Date …………................
Requisition No…………..
Quantity Description Code No. Rate Rs.

To be delivered at …… (place) For ABZ

co.ltd
On……………………. (Date)
………………
Terms of payment ………….. Purchase

manager Copyright © Wondershare Software
• 5 copies of purchase order are prepared by large
concerns. They are supplied to:
1. The supplier.
2. The receiving department.
3. The accounts department.
4. The department which initiated Purchase
Requisition.
5. Retained in the Purchasing Department for
reference purpose..

D. Receipt of materials:
• This department unpacks the goods and verifies

their quantity and condition.
• The quantity is checked against the copy of the
purchase order and the supplier’s advice note.
Thereafter a Goods Received Note is prepared.
• Goods Received Note is prepared in triplicate and
sent as follows:

1. First copy to purchasing department.
2. Second copy accompanying the goods to the
department or stores to which goods are sent.
3. Third copy retained in receiving department.

GOODS RECEIVED NOTE
Supplier……….. No………..
……….. Date received………….
……….. Purchases order No………
Quantity Description No. of packages gross weight

Received by
………….

Inspection
Quantity passed Quantity rejected Reasons for rejection
Date ………..

Inspector Date
……………. ………….

E. Inspection of materials:
• Large manufacturing companies may also have

separate Inspection and Testing Departments to
test the quality of materials purchased.
• The results of the tests are intimated to the
authorities by means of Testing Reports.

F. Returns To Supplier:
• Where goods received are not of the type ordered

or are damaged or are not satisfactory, these may
be returned to the supplier immediately.
• A debit note is forwarded to the supplier. If the
supplier accepts the claim, he signifies his
acceptance by the issue of a credit note.

G. Approval Of Invoices And Payment:
• The supplier’s invoice should be checked before

payment is made.
• The various documents like copies of purchase
requisition, purchase order, GRN , inspection
report should be checked against each other to
ensure that the quantity, price, carriage, packing
and discounts have been charged correctly.

• If everything in the invoice is found to be correct,
a voucher authorizing payment is prepared and
payment is made accordingly.

Valuation Of Materials Purchased:
a. Quantity discount.
b. Trade discount.
c. Cash discount.
d. Sales tax and other levels.
e. Transport charges.
f. Cost of containers.

5. PROPER STORAGE OF
MATERIALS
• Store keeping.
• Stores records.

Store keeping
• In large manufacturing companies major part of

investment is represented by stocks. Hence it is
necessary for a good store keeping running the
business.
• Trained and experienced personnel should be in
charge of stores department.
• The stores function involves both safeguarding
the materials as well as maintaining up to date
stores records.

Objectives:
•Economical usage of storage space.

•Protection of materials against fire and theft.
•Protection of materials against detritions.
•Immediate location of materials required.
•Up to date stores records.
•Facilitating perpetual inventory.
•Speedy receipts and issue of materials.
•Avoiding overstocking and under stocking.

Functions and duties of store keeper:
•Maintaining materials.
•Record maintenance.
•Counter checking the deliveries.
•Issuing against authorized store requisitions.
•Prohibiting unauthorized persons.
•Advising management.

Stores organization
• There are two types –

1. Central stores – ideal to receive and issue all
materials.
2. Departmental sub stores – in large factories and
organizations there are various departments where
central stores do not play a role.

Codification of material
In order to avoid length and ambiguity in

description and names of materials, a symbol may
be assigned to each item of material which is known
as code. The codes can be either numerical or
alphabetical symbols.

Advantages:
•Ambiguity in description is avoided.
•Clerical effort is reduced.
•Secrecy is maintained.
•Coding is essential.
•Each item is identified.

They are of 2 types
1. Perpetual inventory records – these records

show movement of stores that is receipt of
materials, issue of materials to production
department and also current balance in stock.
Bin card and stores ledgers are two types of
inventory records.

2. Documents – they are used to authorize
movement of materials into and out of stores.
These documents include received note, bill
of materials, materials requisition note, materials
return note etc.

BIN CARD: (STOCK CARD)
• A bin is a container in which material is kept.

Separate bins are maintained by the store keeper
for each item of material in store.
• The bincard shows the details of receipts and
issues of materials and the balance in stock at any
time.
• This record is of immense help to the store
people in controlling the stock position.

• A bin card is attached to the bin, drawer or
another container in which material is stored.
• An entry is made at the time of each receipt or
issue and the new balance in the stock is
calculated.
• All these entries of receipts and issues are
supported by documents such as goods received
note, materials received note etc.

• A bincard is a quantitative record of receipts,
issues and closing balances of material items in
store but it does not contain information about the
prices of the material.

A specimen of bincard is give below
General purpose bins

ABZ co. Ltd
BIN CARD
Bin no……….. Minimum level………
Description……….. Re- order level………
Code no …………….. Re- order quantity………
Stores ledger folio ………….
Date Receipts Issues Balance Stock

verification
Ref. NO Quantity Ref. NO Quantity Quantity Date Initials


Two bin system
• In this system two bins are maintained for each
item of store.
• One bin constitutes the main or the regular bin
form which materials are issued and the other bin
contains the maximum stock from which issues
are made in stock in the regular bin is exhausted.
• The idea of two bin system is to provide automatic
information about reaching minimum stock level
so that issue materials for regular production are
stopped.
Stores ledger
• This ledger is maintained in the cost accounting

department.
• The stores ledger records all receipts and issue
transactions in respect of materials.
• Separate ledger folios are maintained in the stores
ledger for each item of material.

STORES LEDGER
ACCOUNT
Date Receipts Issues Balance
Ref Qty Rate amt Ref Qty Rate amt Ref Qty Rate amt


6. DOCUMENTS AUTHORISING
MOVEMENT OF MATERIALS
Goods received note

•The store keeper uses this document for posting on
the receipt side of the bincard.
Stores requisition note
•It is a document which is used to authorize and
record the issue of materials from stores.
•The store keeper should issue materials on the
presentation of duly authorized stores requisition
note.

• It should be appreciated that this is a key
document. It is used for the purpose of –
a) Authorizing the store keeper to issue the material.
b)Providing a written record of usage of materials.

• A separate requisition may be prepared for each
item of material or a single requisition may be
prepared to cover the issuance of a number of items.
• The stores requisition note may be prepared in
duplicate or triplicate.
• The original copy is passed to the stores department
while the duplicate is retained by the department
requisitioning materials.
• The stores requisition note is used for making
entries in bincard, stores ledgers etc...

STORES REQUISITION NOTE
Materials required for job No……….. No…………
Department………….. Date………..
Quantity Description Code No. Cost office

Rate Amount
Rs Rs

Bin No…………………. Issued by………..
Stores ledger folio……………. Received by………..
Priced by…………..

Bill of material
It is a special form of stores requisition note which
is generally used by departments having standard
material requirements or a comparatively fixed list
of materials

BILLS OF MATERIAL
No…………
Job orders No………… Date…………….
Item No Quantity Description Code No. For Cost office

Rate Amount
Rs Rs

Prepared by………….. Date Issued ………..
Checked by……………. Storekeeper……….

Advantages of using bill of materials are:
•Saves time and promotes efficiency.
•Avoids delay in production.
•Risk of errors is reduced.
•Costing of jobs become easier and speedier.

• Material return note
• When materials issued are in excess of
requirements, the unused materials are returned to
stores together with a material return note.
• When materials are received back in the store,
these should be placed in appropriate bins and
entries made in the bincard.

MATERIALS RETURN NOTE
Department……… No…………
Credit Job No………… Date…………….
Quantity Unit Description Code For Cost office

Rate Amount
Rs Rs

Bin No……………… Date Issued ………..
Stores ledger folio……… Storekeeper……….
Authorized by…………

• Materials transfer note
• Materials may have to be sometimes transferred
from one job to another.
• This may be either because excess materials were
issued to a job or surplus materials are directly
transferred to another job or because materials
issued to a less urgent job are transferred to a
more urgent job.

• When such transfers are not permitted, the surplus
materials are returned to the stores and then reissued
to another job.
• This results in extra transport costs.
• Thus when materials are bulky such transport costs
may be heavy which can be avoided if direct
transfers are permitted.
• For a transfer of materials a material transfer note is
used.

MATERIALS TRANSFER NOTE
From job No…………. No…………
To Job No………… Date…………….
From department To Department………
Quantity Unit Description Code For Cost office

Rate Amount
Rs Rs

Bin No……………… Date Issued ………..
Stores ledger folio……… Storekeeper……….
Authorized by…………

Materials abstract (materials issued analysis sheet)
All material requisitions, material written notes and
material transfer notes are analyzed periodically by
the cost accounting department to ascertain the
material cost of each job. This is done on a
document known as material abstract.

MATERIALS ABSTRACT
Month or week ending………
Stores requisition No. Job No. Total Indirect

for overheads

jobs

Total

7. INVENTORY SYSTEM
• There are mainly 2 inventory systems –

1. Periodic inventory system
• Under this system stocking is undertaken at the
end of the accounting year.
• As the stock taking involves verifying the
physical quantities of stores in hand, some stores
temporarily suspend plant operations when this is
done.

• This is because it is rarely feasible to take stocks
while production continues.
• Thus the annual stock taking should be
organized well in advance to minimize
production holdups.

2. Perpetual inventory system
•The periodic inventory system has certain serious
disadvantages which perpetual inventory system
overcomes.
•Under this system current balance of stores is
always shown in records, any receipt being added to
an issues being deducted from the balance after each
transaction.
•The records used for perpetual inventory are
bincard and stores ledger.
Steps in perpetual inventory system
1.Reconciliation of bincard and stores ledger account
2.Continuous stock taking
Advantages of perpetual inventory system
• Avoids long and costly work
• Avoids dislocation and production.
•Profit and loss account and balance sheet can be
easily prepared.

• Moral check on staff.
• Continuous internal check.
• Early detection of errors.
• Manages working capital.
• Detailed and reliable.

Material losses
Losses are classified into 2 categories:

1.Normal loss
•Loss by evaporation in case of liquid materials.
•Loss due to breaking the bulk.
•Loss due to loading and unloading of materials.

2. Abnormal loss
•Theft or pilferage.
•Breakage.
•Fire accident, flood etc.
•Use of inaccurate weighing instruments.
•Improper storage of materials.

Control of material losses
Steps to be taken to control losses of materials

•Proper storage condition
•Materials should be issued on FIFO basis.
•Periodic checking of weighing machines.
•Systematic procedure to be developed.
•Specialized equipment should be employed.
Waste and scrap are forms of material losses.

STOCK TURNOVER RATIO
STR= cost of materials consumed during the period

Average stock of materials during the period
STR is an indicator of the rate of consumption. A

high STR indicates fast moving materials and low
ratio indicates slow moving materials.
This will enable the management to avoid keeping
capital locked up in undesirable items of materials.

8. METHODS OF PRICING
MATERIAL ISSUES
Important methods of pricing material
FIFO
This method is based on the assumption that materials
which are purchased first are used first. It uses the price
of the first batch of materials purchased for all units
from this batch have been issued. After the first batch is
fully issued, the price of the next batch received
becomes the issued price. Upon this batch also fully
used, the price of the still next batch is used for pricing
and so on.

Advantages:
•Realistic assumption
•Actual cost
•Closing stock valuation
•Simple and easy
Disadvantages:
•Materials are not charged at the current market prices.
•Unfair results
•Increased possibility of errors

LIFO:
This method is just reverse of FIFO. It is based on
the assumption that last purchases of materials are
issued first and earlier receipts are issued last. LIFO
method uses the price of the last batch received for
all issues until all units from this batch have been
issued.

Advantages:
•Materials are charged at current market prices.
•Actual cost
•Income-tax saving
Disadvantages:
•Stock value does not represent its current value.
•Not realistic
•Complicated calculations and increase of clerical errors

Simple average price
It is calculated by adding all the different prices and
dividing by the number of such prices. It does not
take into account quantities of materials while
computing average price.
Advantages:
•Simple to understand
•Easy to operate.

• Disadvantages:
• Materials are not charged out at actual cost.
• Unscientific method and unsatisfactory results.

Weighted average price
This method gives due weight to the qualities held
at each price when calculating the average price.
The weighted average price is calculated by
dividing the total cost of material in stock from
which the material to be priced could have been
drawn by that total quantity of material in that stock.

Advantages:
•Evens out the effect of widely varying prices of
different purchases.
•Reduces the work of making calculations.
•No unrealized profit or loss arises

Disadvantages:
•More calculation is required when the receipts are
numerous
•Materials are not issued at the current market prices
•Issue prices generally run to a number of decimal
points.

PRESENTED BY
MAHAVEER 08D0208
SACHIN 08D0212
FAIZAN 08D0236
GHOUSE 08D0237
MIRZA 08D0242
PONNANNA 08D0263
LIKHITHA 08D0272
NANDA 08D0281

THANK YOU

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MATERIAL COST.

Copyright © Wondershare Software

• The term material refers to all commodities

Copyright © Wondershare Software

Copyright © Wondershare Software

It is defined as “safe guarding of companies

Copyright © Wondershare Software

Copyright © Wondershare Software

Copyright © Wondershare Software

Copyright © Wondershare Software

Copyright © Wondershare Software

• ABC technique is a value based system of

Copyright © Wondershare Software

Copyright © Wondershare Software

Total 100% 100% 100%

In the given table it is shown that 10 % of total

• The items representing 60% of the total quantity

Copyright © Wondershare Software

Copyright © Wondershare Software

• The maximum stock level is the level above which

Copyright © Wondershare Software

• Minimum level is that level below which stock

Copyright © Wondershare Software

Copyright © Wondershare Software

• This is that level of material at which a new order

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Copyright © Wondershare Software

Copyright © Wondershare Software

This is a level at which normal issues of materials

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Copyright © Wondershare Software

• Re-order quantity is the quantity to be ordered

Copyright © Wondershare Software

Copyright © Wondershare Software

Copyright © Wondershare Software

1. Just In Time (JIT) Purchases:-

Advantages Of Centralized Purchasing:

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Copyright © Wondershare Software

Copyright © Wondershare Software

• Purchase requisition may be received from:

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Copyright © Wondershare Software

• The purchase department analyses each of the

Copyright © Wondershare Software

Copyright © Wondershare Software

• Purchase order is a written authorization to the

Copyright © Wondershare Software

Supplier …………… Order No

Date required…………… Date …………................

Quantity Description Code No. Rate Rs.

To be delivered at …… (place) For ABZ

Terms of payment ………….. Purchase

Copyright © Wondershare Software

• This department unpacks the goods and verifies

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Copyright © Wondershare Software

Quantity Description No. of packages gross weight

Copyright © Wondershare Software

• Large manufacturing companies may also have

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• Where goods received are not of the type ordered

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