Accounting for

Materials

Material Handling Costs

The material handling costs refers to the expense
involved in the purchasing , receiving, storing and
issuing of materials.
There are three possible methods of treatment for this
transaction.
a. Treated as a factory overhead account allocated
to the production indirectly.
b. Added to the costs of materials issued.
c. Added to the cost of purchases.

a. Treated as a factory overhead account allocated to

production indirectly.
Factory Overhead, Control
(Material Handling Costs

xxx
Pxxx)

Vouchers Payable/Sundry Credit

xxx

To record material handling costs incurred.

b. Added to the cost of material issued.

Material handling costs

xxx

Vouchers Payable/Sundry Credit

xxx

To record material handling costs incurred.

Work in Process Mats. (cost plus mat. Handling
costs)

xxx

Stores

xxx

Applied Material Handling Costs

xxx

To record issuance of materials for production

c. Added to the cost of purchases.

Material Handling Costs

xxx

Vouchers Payable/Sundry Credit

xxx

To record material handling costs incurred.

Stores (cost plus mat. handling costs)

xxx

Vouchers Payable

xxx

Applied Material Handling Costs

xxx

To record purchase of materials.

Problem Loren Industries, Inc.

Loren Industries, Inc. had the following data available
Annual estimated purchasing department cost

P 306,000

Annual estimated receiving department cost

204,000

Annual estimated warehousing department cost

408,000

Annual estimated material purchases cost

Annual estimated material consumption cost

10,200,000
9,180,000

During the month of April, records showed the following actual

costs:
Purchasing department costs

P 25,200

Receiving department costs

13,850

Warehousing department costs

36,110

Total (charged to Material Handling Cost)

Purchases (net of allowable discounts)
Direct material

P 75,160
P 485,500
P 75,160

Required:
Prepared summary entries in general journal form to record (1)
actual material handling costs, (2) actual purchases, and (3) actual
cost of materials issued under each of the three possible methods
of treating material handling costs as follows:
a. Charged to factory overhead
b. Added to cost of materials issued (use a single application rate)
c. Added to cost of purchases of materials (use single application
rate)

SOLUTION:
a. Treated as a factory overhead:
(1) Factory Overhead, Control
(Material Handling Costs

75,160
P75,160)

Vouchers Payable/Sundry Credits

To record material handling costs
incurred.
(2) Stores

75,160
485,500

Vouchers Payable

485,500

To record materials purchased.

(3) Work in Process Materials
Stores

390,700
390,700

To record cost of materials issued.

b. Added to cost of materials issued:

(1) Material Handling Costs

75,160

Vouchers Payable/Sundry Credits

75,160

To record material handling costs for

the month of April.
(2) Stores

485,500

Vouchers Payable

485,500

To record purchases of materials.

(3) Work in Process Materials
Stores

429, 770
390,700

Applied Material Handling Costs

To record cost of materials issued.

39,070

c. Added to cost of purchases:

(1) Material Handling Costs

75,160

Vouchers Payable/Sundry Credits

75,160

To record material handling costs for

the month of April.
(2) Stores

529,195

Vouchers Payable

485,500

Applied Material Handling Costs

43,695

To record purchases of materials.

(3) Work in Process Materials
Stores

425,863
425,863

To record issuance of materials.

Multiple Application Rates

Using the same data of Loren Industries, assume the following:
Estimated purchasing department cost (120 purchase order)

P 306,000

Estimated receiving department cost (8,160 kgs)

204,000

Estimated warehousing department cost (17,000 sq. m.)

408,000

Estimated purchases

10,200,000

During the month of April, records showed the following actual

costs:
Purchasing department costs

P 25,200

Receiving department costs

13,850

Warehousing department costs

36,110

Purchases (containing 9 purchase orders; weighing 550 kgs;

and occupying 1,500 sq. m.)

If the material handling costs are to be added to the cost of

purchase s using separate application rates, the journal
entries would be:
(1) Material Handling Costs - Purchasing
Material Handling Costs - Receiving
Material Handling Costs - Warehousing

25,250
13,850
36,110

Vouchers Payable

75,160

To record material handling costs for

the month of April.
(2) Stores

558,200

Vouchers Payable

485,500

Applied Mat. Handling Costs Purchasing

22,950

Applied Mat. Handling Costs Receiving

13,750

Applied Mat. Handling Costs - Warehousing

36,000

To record purchases of materials for

the month of April.

Forms and Reports

1. Bill of Materials

8. Scrap Material Slip (SMS)

2. Purchase Requisition

9. Stores Requisition Journal

3. Purchase Order (PO)

10. Stores Ledger Card

4. Receiving Report (RR)

11. Inventory Over and Short

Report

5. Returned Purchase Report

(RPR)
6. Stores Requisition (SR)
7. Returned Material Slip (RMS)

1. Bill of Materials
The bill of materials is a formal listing of the quantity and
description of materials that would be needed for the completion
of a particular job. This form is prepared by the planning or
production department and a copy is sent to the storeroom
department or warehouse for them to check the availability of
said materials.

2. Purchase Requisition
The purchase requisition is a request prepared by the
storeroom department to the purchasing department
listing down the quantity and description of materials
either to replenish the present stock on hand or to
acquire new stocks if not available in the warehouse.
It should have a serial number.
One copy goes to the purchasing agent, and the other
copy goes to the storeroom keeper.

3. Purchase Order (PO)

Upon receipt of purchase requisition, the purchasing
department fills up the purchase order addressed to a
specific supplier. The purchase order authorizes the
supplier to make shipment of the specified quantity and
description of materials at the agreed price and terms of
purchases. A copy of the purchase order is sent to the
receiving department so that it may know what items
are expected to arrive. If quantities are omitted from this
copy, it is called blind receiving report. The receiving
department expected to fill in the quantities received,
and return same to the purchasing department.

4. Receiving Report (RR)

The receiving report is the form prepared by the
receiving department showing the quantity and
description of materials, including comments on the
condition of materials received. All description must tally
with the purchase order descriptions. A copy of the
receiving report is sent to the storeroom department.
This copy serve as the source document for an entry in
the stores ledger card. Another copy is sent to the
accounting department for comparison with the
suppliers invoice before a voucher is prepared.

5. Returned Purchase Report

(RPR)
The returned purchased report is prepared when
damaged or defective materials are received. These
items must be returned to the supplier immediately.
A copy is sent to the purchasing department, accounting
department and storeroom department.

6. Stores Requisition (SR)

This form is authorizes the issuance of materials and
indicates the purpose for which the materials are to be
used. The requisition may be prepared by the production
department.
One copy is sent to the accounting department and
other one to storeroom department.

7. Returned Material Slip (RMS)

The returned material slip is prepared for the excess
materials previously issued to the production
department but returned to the storeroom department.
One copy is sent to the accounting department and to
the storeroom department.

8. Scrap Material Slip (SMS)

The scrap material slip is similar in form to a receiving
report. It is prepared by the production department for
remnants or fragments of materials which have been
recovered or accumulated in the production area. If the
scrap is little or no value, no records are necessary until
they are sold. The scrap material if saleable or still
usable is usually valued at estimated market value.

9. Stores Requisition Journal

The stores requisition journal is a book of original entry
It is a chronological record of all materials and supplies
requisitioned as evidenced by the store requisition slips.
Excess materials returned to storeroom and supported
by returned material slips are also reflected (in negative
entries).

10. Stores Ledger Card

A stores ledger card is a subsidiary ledger kept and
maintained by the storeroom department.
Each kind of material handled in the storeroom is
provided with a stores ledger card.
Two distinct functions:
To provide costs that are needed for the pricing
requisitions and cost of inventory balances.
To reveal inventory shortages or overages when
compared with the physical counts.

 It may be expanded to give more information for better

control. Three additional columns are often included as
follows:
On Order column
On Reserve column
Free Quantity column

11. Inventory Over and Short

Report
The inventory over and short report is prepared after
physically counting units of materials on hand and
comparing these quantities with those indicated by the
stores ledger cards.