Material Cost

Materials form a major part of the total cost and

constitutes one of the most important items of asset of
any entity.

A material cost can be

-Direct material cost;
eg : Timber used in manufacturing a chair, milk and
cream used in preparing ice cream, iron used in making
an iron almirah.

-Indirect material cost;

eg : pins, clips, oil, grease
Material Costing : Objectives

Purchase of material at competitive

prices,
Minimize investment in inventories,
Avoid over or under stocking to
ensure continuous flow for
uninterrupted production,
Minimum handling cost and time.
Computation of Material Cost
Particulars Amount
Cost of Purchase XXX
Add:
Taxes
Carriage Inward
Freight
Duties XXX

Less:
Rebates
Trade Discount
Refundable Duty
Returnable Packing Material XXX

Material Cost XXXX

Material control procedures
Purchase Purchase
department

Goods
Receipt Receiving
Department

Storage Stock Taking Stores

Department

Issue Production
Department
 Inventory Management
Inventory in a company includes stock of raw
materials, work-in-progress, finished & semi-
finished products, spare components and
by-products, etc.
Inventory control is an important feature of
cost accounting system.
Methods of stock valuation
First-in-first-out(FIFO)
Last-in-first-out(LIFO)
Weight average cost (WAVCO)
First-in-first-out (FIF0)
This method assumes that the first stock
to be received is the first to be sold
The cost of materials used is based on
the oldest prices
The closing stock is valued at the most
recent prices
Last-in-first-out (LIFO)
This method assumes that the last stock to
be received is the first to be sold
Therefore, the cost of materials used is
based on the most recent prices
The closing stock is valued at the oldest
prices
Weight average cost (WAVCO)
This method assumes that the cost of
materials used and closing stock are
valued at the weighted average cost
Economic Order Quantity(EOQ)
EOQ is the size of the order which
contributes towards maintaining the
stocks of material at the optimal level
and at a minimum cost.
The formula

EOQ= 2*O*Q
C

Where,
EOQ = Economic Order Quantity
O = order cost per order
Q = Annual quantity required in units
C = Carrying cost per unit per annum
Example
The annual consumption of a part X is 5000
units. The procurement cost per order is $10
and the cost per unit is $0.5. The storage and
carrying cost is 10% of the material unit cost.

Required:
Calculate the EOQ
Solution
O= $10 , Q= $5000, C= $0.5*10%

EOQ= 2 O Q
C

EOQ= 2*5000*10
0.5*10%

= 1414 UNITS
 Depreciation
The monetary value of an asset decreases over time
due to use, wear and tear or obsolescence. This
decrease is measured as depreciation.
Depreciable property can be either tangible or intangible

Conditions to be satisfied:
It is used in business or held for the production of income.
It must be expected to last for more than one year. In
other words, it must have a useful life that extends
substantially beyond the year it was placed in service.
Methods of Depreciation

Straight Line Method (SLM)

Written Down Value Method
(WDV) or Diminishing Balance
Method (DBM)
Straight Line Method (SLM)
Depreciation = (Cost - Residual value) / Useful life

Example
On April 1, 2011, Company A purchased an equipment at the cost of
$140,000. This equipment is estimated to have 5 year useful life. At
the end of the 5th year, the salvage value (residual value) will be
$20,000. Calculate the depreciation expenses for 2011, 2012 and
2013 using straight line depreciation method.

Solution:
Depreciation = ($140,000 - $20,000) x 1/5 = 24000 per annum

For 2011 = 24000 *9/12= $18000

2012 = $24000
2013 = $24000
Written Down Value Method (WDV)
Depreciation = Book value x Depreciation rate
Book value = Cost - Accumulated depreciation
Example:
On 1st January, 2004, a merchant purchased plant and machinery costing $25,000.
It has been decided to depreciate it at the rate if 20 percent p.a. on the written
down value method. Calculate depreciation the first three years.
Solution:

Year Book Value Dep @ 20% WDV

2004 25000 5000 20000
2005 20000 4000 16000
2006 16000 3200 12800
 Material Losses
Input- Output = Material Loss

Forms:
Waste : Lost during handling, storing or production
-Normal : unavoidable and inevitable
-Abnormal : Over normal Limits

Scrap :Process waste (having some saleable value) due to faulty,

inefficient, improper production or breakdown of machinery

Spoilage : Units that fail to qualify the required standard of quality

Defects : Units that fail to qualify the required standard of quality but
can be rectified.
 Accounting for Material Losses
Form Treatment

Normal Abnormal Other

Waste Added to Product Cost

Transferred to
Scrap - Costing Profit and Cost- Realisable
Loss Account Value= Costing P&L

Spoilage Part of Cost

Defectives If identified with specific Not identifiable

order add transfer to factory
overheads
CA Pooja Shrivastava