Unformatted text preview: Chapter 2
Accounting for Materials Learning Objectives
Learning Recognize the two basic aspects of
material Specify internal control procedures for
materials. Account for materials and relate
materials accounting to the general
ledger. Learning Objectives
Learning Account for inventories in a just-in-time
system. Account for scrap materials, spoiled
goods, and defective work.
goods, Effective Cost Control
Effective Specific assignment of duties and
responsibilities. A llist of individuals who are authorized to
approve An established plan of objectives and goals. Regular reports showing the differences
between goals and actual performance.
between A plan or corrective action designed to prevent
unfavorable differences from recurring.
unfavorable Follow-up procedures for corrective measures. Physical Control of Materials
Physical Limited access to materials storage
areas. Segregation of duties. Accuracy in recording. Controlling the Investment in
Materials Maintaining the appropriate level of raw
materials is one of the most important
objectives of materials control.
objectives Inventory of sufficient size and diversity must
be Management must determine working capital
needs in determining inventory levels.
needs Adequate planning and control is required. Order Point
Order 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.
cost Order point is the point at which an item
should be ordered.
should Order Point (cont.)
Order The following items need to be taken into
consideration when ordering:
consideration Usage – anticipated rate at which the material will be used. Lead time – estimated time interval between the placement of
an order and the receipt of material.
an Safety stock – estimated minimum level of inventory needed to
protect against stockouts.
protect (Daily usage X Lead time) + Safety stock = Order point Economic Order Quantity
(EOQ) The optimal quantity to order at one time. Minimizes the total order and carrying costs
over a period of time.
over Ordering costs may include the salaries and wages
of purchasing personnel, communication costs, and
materials accounting and record keeping.
materials Carrying costs are the costs that a company may
incur in storing materials. These 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.
supplies Calculating EOQ
Calculating EOQ = Economic
Order C = Cost of placing
an N = Number of units
required K = Carrying cost per
unit of inventory
unit EOQ = 2CN
K Materials Control Procedures
Materials Materials Control Personnel Purchasing Agent – employee who does the buying
of raw materials.
of Receiving Clerk – employee who is responsible for
the receipt of incoming shipments.
the Storeroom Keeper – employee who has charge of
the materials after they have been received.
the Production Department Supervisor – employee who
is responsible for the operational functions within
the Control During Procurement
Control When the order point is reached the
procurement process begins.
procurement Supporting documents are essential to
maintaining control during the
procurement Documents Common to the
Procurement Purchase requisition – the form used to notify the
purchasing agent that materials are needed.
purchasing Purchase order – requisition that gives the purchasing
agent authority to order the materials.
agent Vendor’s invoice – invoice from the vendor that
should be compared to the purchase order.
should Receiving report – form that the receiving clerk uses
to count and identify the materials received.
to Debit-Credit memorandum – document that is used
when the shipment of materials does not match the
order and the invoice.
order Control During Storage and
Issuance Materials Requisition Prepared by the authorized factory
personnel to withdraw materials from the
storeroom. Returned Materials Report Describes the materials being returned to
the storeroom and the reason for the return.
the Materials Accounting
Materials The materials accounting system must
be integrated with the general ledger.
be Purchases are recorded as debits to
materials in the general ledger.
materials Materials account is supported by a
subsidiary stores (or materials) ledger in
which there is an individual account for
each Determining the Cost of
Materials In selecting the method to be used, the
company should review their accounting
policies and the federal and state tax
regulations. The flow of materials does not dictate the flow
of Flow of materials – the order that materials are
issued for use in the factory.
issued Flow of costs – the order in which unit costs are
assigned to materials.
assigned Cost Flow Methods
Cost First – In, First – Out Method (FIFO) 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.
the Last – In, Last – Out Method (LIFO) 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.
costed Cost Flow Methods (cont.)
Cost Moving Average Method Material issued and the ending inventory are
costed at the average price. This 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.
be Accounting Procedures
Accounting The purpose of materials accounting is to
provide a summary from the general
ledger of the total cost of materials
purchased and used in manufacturing.
purchased All materials issued during the month and
materials returned to stock are recorded
on a summary of materials issued and
returned Accounting Transactions
Accounting Purchase of materials from vendor.
Materials XX Accounts Payable
Accounts XX Materials issued to production.
Work in Process
XX Accounting Transactions
(cont.) Payment to vendor for invoice.
Accounts Payable XX Cash
Cash XX Transfer finished work to finished goods.
Work in Process
XX Accounting Transactions
(cont.) Sale of finished goods on account.
Accounts Receivable XX Sales
Cost of Goods Sold XX
XX Finished Goods Inventory
Finished XX Collection of cash from customer.
XX Just-In-Time (JIT) Materials
Control Materials are delivered to a factory
immediately prior to their use in
production. Reduces inventory carrying costs. Reducing inventory levels through JIT
may increase processing speed.
may Backflush accounting is the accounting
system used by JIT systems.
system Accounting for Scrap Work
Accounting Scrap may be
materials from the
These are materials
that can not be used
in the production
process. Journal entry if the value of
scrap is relatively high
Scrap Materials XX Scrap Revenue
XX Scrap Materials
Scrap XX Journal entry if the value of
scrap is unknown.
XX Spoiled and Defective Work
Spoiled Spoiled work has imperfections that
cannot be economically corrected. The
loss can be treated as part of the cost of
the job or charged to Factory Overhead.
the Defective work has imperfections that are
correctable. The extra costs are either
charged to the job or Factory Overhead.
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- Spring '11
- Accounting, Supply chain management terms, Materials Control Personnel