Material Cost Accounting

Summary:

The Material Cost Accounting note discusses material cost control in manufacturing. Materials are classified as direct, indirect, finished/component parts, stores, and inventory. The objectives of material control are to avoid under/over-stocking, minimize waste, and ensure proper quality. Essential requirements include proper coordination, centralized purchasing, inventory control, and internal audit. Techniques for inventory control include the ABC technique, stock levels, economic order quantity, perpetual inventory system, accurate purchase and storage of materials, inventory turnover ratio, and fixation of material cost standards. The note also explains inventory systems and methods of pricing material issues, including FIFO, LIFO, simple average, and weighted average.

Excerpt:

Material Cost Accounting

Material
It refers to all commodities consumed in the process of manufacturing.

Material cost
The cost of commodities supplied to an undertaking.

Classification of Materials
Materials may be classified as follows:

• Direct materials
• Indirect materials
• Supplies
  • Supplies are indirect materials used in production which do not become part of the finished product
• Finished /component parts may be purchased or produced within an organization and assembled with the product. e.g. automobiles
• Stores: these include raw materials component parts, tools, maintenance materials, consumable stores, work in progress, finished goods, etc.
• Inventory: it is the combination of stock of raw materials, work in progress, and finished stock.
• Inventory /material control: it refers to control over purchases, storage, and consumption of materials and determining the optimum level for each item of inventory.

Objectives of material control:

• No understocking
• No overstocking
• Minimum wastage
• Economy in purchasing
• Proper quality of materials
• Information about materials
• Material reports to management

Essential requirements /Principles of inventory control:

• There should be proper coordination and cooperation between various departments dealing with materials
• There should be a centralized purchasing department
• There should be proper classification and codification of materials
• Material requirements should be properly planned
• There should be a perpetual inventory system
• Adequate records should be introduced
• There should be well-designed related to the storage of all materials
• The various stock levels should be fixed
• The purchase of materials should be controlled through budgets
• There should be an efficient system of internal audits and internal check