ch02 - Chapter 2 Chapter Accounting for Materials Learning...

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Unformatted text preview: Chapter 2 Chapter Accounting for Materials Learning Objectives Learning Recognize the two basic aspects of Recognize material control. material Specify internal control procedures for Specify materials. materials. Account for materials and relate Account materials accounting to the general ledger. ledger. Learning Objectives Learning Account for inventories in a just-in-time Account system. system. Account for scrap materials, spoiled Account goods, and defective work. goods, Effective Cost Control Effective Specific assignment of duties and Specific responsibilities. responsibilities. A llist of individuals who are authorized to ist approve expenditures. approve An established plan of objectives and goals. Regular reports showing the differences Regular between goals and actual performance. between A plan or corrective action designed to prevent plan unfavorable differences from recurring. unfavorable Follow-up procedures for corrective measures. Physical Control of Materials Physical Limited access to materials storage Limited areas. areas. Segregation of duties. Accuracy in recording. Controlling the Investment in Materials Materials Maintaining the appropriate level of raw Maintaining materials is one of the most important objectives of materials control. objectives Inventory of sufficient size and diversity must Inventory be maintained. be Management must determine working capital Management needs in determining inventory levels. needs Adequate planning and control is required. Order Point Order A minimum level of inventory should be minimum 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 Order should be ordered. should Order Point (cont.) Order The following items need to be taken into The consideration when ordering: consideration Usage – anticipated rate at which the material will be used. Lead time – estimated time interval between the placement of Lead an order and the receipt of material. an Safety stock – estimated minimum level of inventory needed to Safety protect against stockouts. protect (Daily usage X Lead time) + Safety stock = Order point Economic Order Quantity (EOQ) (EOQ) The optimal quantity to order at one time. Minimizes the total order and carrying costs Minimizes over a period of time. over Ordering costs may include the salaries and wages Ordering of purchasing personnel, communication costs, and materials accounting and record keeping. materials Carrying costs are the costs that a company may Carrying 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 EOQ Order Quantity Order C = Cost of placing Cost an order an N = Number of units Number required annually required K = Carrying cost per Carrying unit of inventory unit EOQ = 2CN K Materials Control Procedures Materials Materials Control Personnel Purchasing Agent – employee who does the buying Purchasing of raw materials. of Receiving Clerk – employee who is responsible for Receiving the receipt of incoming shipments. the Storeroom Keeper – employee who has charge of Storeroom the materials after they have been received. the Production Department Supervisor – employee who Production is responsible for the operational functions within the department. the Control During Procurement Control When the order point is reached the When procurement process begins. procurement Supporting documents are essential to Supporting maintaining control during the procurement process. procurement Documents Common to the Procurement Process 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 Issuance Materials Requisition Prepared by the authorized factory Prepared personnel to withdraw materials from the storeroom. storeroom. Returned Materials Report Describes the materials being returned to Describes the storeroom and the reason for the return. the Materials Accounting Materials The materials accounting system must The be integrated with the general ledger. be Purchases are recorded as debits to Purchases materials in the general ledger. materials Materials account is supported by a Materials subsidiary stores (or materials) ledger in which there is an individual account for each item. each Determining the Cost of Materials Issued Materials In selecting the method to be used, the In company should review their accounting policies and the federal and state tax regulations. regulations. The flow of materials does not dictate the flow The of costs. of Flow of materials – the order that materials are Flow issued for use in the factory. issued Flow of costs – the order in which unit costs are Flow assigned to materials. assigned Cost Flow Methods Cost First – In, First – Out Method (FIFO) Assumes that materials used in production are Assumes 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 Assumes 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 Material 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 The 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 All materials returned to stock are recorded on a summary of materials issued and returned form. returned Accounting Transactions Accounting Purchase of materials from vendor. Materials XX Accounts Payable Accounts XX Materials issued to production. Work in Process Materials Materials XX XX Accounting Transactions (cont.) (cont.) Payment to vendor for invoice. Accounts Payable XX Cash Cash XX Transfer finished work to finished goods. Finished Goods Work in Process Work XX XX Accounting Transactions (cont.) (cont.) Sale of finished goods on account. Accounts Receivable XX Sales Sales Cost of Goods Sold XX XX Finished Goods Inventory Finished XX Collection of cash from customer. Cash Accounts Receivable Accounts XX XX Just-In-Time (JIT) Materials Control Control Materials are delivered to a factory Materials immediately prior to their use in production. production. Reduces inventory carrying costs. Reducing inventory levels through JIT Reducing may increase processing speed. may Backflush accounting is the accounting Backflush system used by JIT systems. system Accounting for Scrap Work Accounting Scrap may be Scrap considered waste materials from the production process. These are materials that can not be used in the production process. process. Journal entry if the value of Journal scrap is relatively high scrap Scrap Materials XX Scrap Revenue Scrap Cash XX XX Scrap Materials Scrap XX Journal entry if the value of Journal scrap is unknown. scrap Cash Scrap Revenue Scrap XX XX Spoiled and Defective Work Spoiled Spoiled work has imperfections that Spoiled 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 Defective correctable. The extra costs are either charged to the job or Factory Overhead. charged ...
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This note was uploaded on 10/16/2011 for the course ACCT ACTN taught by Professor Vanderbeck during the Spring '11 term at Abu Dhabi University.

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