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Accounting for Materials

Ê
 
  

O ñecognize the two basic aspects of

material control.
O Specify internal control procedures for
materials.
O Account for materials and relate
materials accounting to the general
ledger.
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O Account for inventories in a just-

just-in-
in-time
system.
O Account for scrap materials, spoiled
goods, and defective work.
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O Specific assignment of duties and
responsibilities.
O A list of individuals who are authorized to
approve expenditures.
O An established plan of objectives and goals.
O ñegular reports showing the differences
between goals and actual performance.
O A plan or corrective action designed to prevent
unfavorable differences from recurring.
O Follow
Follow--up procedures for corrective measures.
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O Êimited access to materials storage
areas.
O Segregation of duties.
O Accuracy in recording.
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O Maintaining the appropriate level of raw
materials is one of the most important
objectives of materials control.
O Inventory of sufficient size and diversity must
be maintained.
O Management must determine working capital
needs in determining inventory levels.
O Adequate planning and control is required.
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O A minimum level of inventory should be

determined for each type of raw material,
and inventory records should indicate the
cost and quantity of items on hand.
O Order point is the point at which an item
should be ordered.
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O he following items need to be taken into

consideration when ordering:
O Usage ± anticipated rate at which the material will be used.
O Êead time ± estimated time interval between the placement of
an order and the receipt of material.
O Safety stock ± estimated minimum level of inventory needed to
protect against stockouts.
O (Daily usage X Êead time) + Safety stock = Order point
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O he optimal quantity to order at one time.
O Minimizes the total order and carrying costs
over a period of time.
O Ordering costs may include the salaries and wages
of purchasing personnel, communication costs, and
materials accounting and record keeping.
O Carrying costs are the costs that a company may
incur in storing materials. hese costs may include
materials storage and handling costs, interest,
insurance, and property taxes, loss due to theft,
deterioration, or obsolescence, and records and
supplies associated with carrying inventory.
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O uOQ = uconomic
Order Quantity
O C = Cost of placing
an order uOQ =
2CN
O N = Number of units
required annually K
O K = Carrying cost per
unit of inventory


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O Materials Control Personnel
O Purchasing Agent ± employee who does the buying
of raw materials.
O ñeceiving Clerk ± employee who is responsible for
the receipt of incoming shipments.
O Storeroom Keeper ± employee who has charge of
the materials after they have been received.
O Production Department Supervisor ± employee who
is responsible for the operational functions within
the department.
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O Œhen the order point is reached the
procurement process begins.
O Supporting documents are essential to
maintaining control during the
procurement process.
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O 2

 
 ± the form used to notify the
purchasing agent that materials are needed.
O 2


± requisition that gives the purchasing
agent authority to order the materials.
O º 
   ± invoice from the vendor that
should be compared to the purchase order.
O ñ  


± form that the receiving clerk uses
to count and identify the materials received.
ë



  ± document that is used
O ë

when the shipment of materials does not match the

order and the invoice.
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O Materials ñequisition
O Prepared by the authorized factory
personnel to withdraw materials from the
storeroom.
O ñeturned Materials ñeport
O Describes the materials being returned to
the storeroom and the reason for the return.


 

O he materials accounting system must

be integrated with the general ledger.
O Purchases are recorded as debits to
materials in the general ledger.
O Materials account is supported by a
subsidiary stores (or materials) ledger in
which there is an individual account for
each item.
  
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O In selecting the method to be used, the
company should review their accounting
policies and the federal and state tax
regulations.
O he flow of materials does not dictate the flow
of costs.
O Flow of materials ± the order that materials are
issued for use in the factory.
O Flow of costs ± the order in which unit costs are
assigned to materials.
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O First ± In, First ± Out Method (FIFO)

O Assumes that materials used in production are
costed at the prices paid for the oldest materials and
the ending inventory is costed at the prices paid for
the most recent purchases.
O Êast ± In, Êast ± Out Method (ÊIFO)
O Assumes that materials used in production are
costed at the prices paid for the most recently
purchased prices, and the ending inventory is
costed at prices paid for the earliest purchases.
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O Moving Average Method

O Material issued and the ending inventory are
costed at the average price. his average
unit price is computed every time a new lot
of materials is received and it continues to
be used until another lot is purchased.
 
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O he purpose of materials accounting is to

provide a summary from the general
ledger of the total cost of materials
purchased and used in manufacturing.
O All materials issued during the month and
materials returned to stock are recorded
on a ÷


 
÷
÷÷  
   
.
 
.
 
"

 

O Purchase of materials from vendor.

Materials XX
Accounts Payable XX

O Materials issued to production.

Œork in Process XX
Materials XX
 
"

 

O Payment to vendor for invoice.
Accounts Payable XX
Cash XX

O ransfer finished work to finished goods.

Finished Goods XX
Œork in Process XX
 
"

 

O Sale of finished goods on account.
Accounts ñeceivable XX
Sales XX
Cost of Goods Sold XX
Finished Goods Inventory XX

O Collection of cash from customer.

Cash XX
Accounts ñeceivable XX
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O Materials are delivered to a factory
immediately prior to their use in
production.
O ñeduces inventory carrying costs.
O ñeducing inventory levels through JI
may increase processing speed.
O Backflush accounting is the accounting
system used by JI systems.
 
 
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O Scrap may be O Journal entry if the value of

scrap is relatively high
considered waste Scrap Materials XX
materials from the Scrap ñevenue XX

production process. Cash XX

Scrap Materials XX
hese are materials
O Journal entry if the value of
that can not be used scrap is unknown.
in the production Cash XX
process. Scrap ñevenue XX
 
  
$%
O Spoiled work has imperfections that
cannot be economically corrected. he
loss can be treated as part of the cost of
the job or charged to Factory Overhead.
O Defective work has imperfections that are
correctable. he extra costs are either
charged to the job or Factory Overhead.