Cost Accounting Chapter 2 Flashcards
Materials control
includes physical control of materials and control over the investment in materials.
Effective physical control of materials
1) Involves limiting the access to stored materials 2) segregating the duties of employees who handle materials and materials reports 3) establishing an accurate recording system for materials purchases and issues 4) Only authorized personnel should be permitted in material storage areas 5) procedures for moving materials into and out of these areas should be well established
The following functions of materials control should be segregated to minimize opportunities for employee misappropriation:
Purchasing Receiving Storage Use recording
To ensure the accurate recording of purchases and materials issues
a) Inventory records should document the determination of inventory quantities on hand, and b) Cost records should provide the data needed to assign a cost to inventories to be used in the preparation of financial statements.
Order point →
The point at which the predetermined minimum level of inventory is reached, requiring the item to be ordered, is called the Calculating the order point is based on the following:
Usage
—The anticipated rate at which the materials will be used.
Lead time
—The estimated time interval between placing the order and receiving the materials ordered.
Safety stock
The estimated minimum level of inventory needed to protect against stockouts.
The order point can be calculated as follows:
(Expected Daily Usage × Lead Time) + Safety Stock
Economic order quantity (EOQ) →
The optimal quantity of materials to order at one time is the order size that minimizes the total costs of placing orders and of carrying inventory in stock.
**The economic order quantity is the point where total order costs equal total carrying costs, unless there is a provision for safety stock.
EOQ Formula -
Order costs →
include purchasing, receiving and inspection salaries and wages, communication costs, and record keeping.
Carrying costs →
include::: storage and handling interest insurance, and property taxes on inventories; losses due to theft, spoilage, or obsolescence.
Annual order costs decrease when order size increases
while annual carrying costs increase with increases in order size.
Materials control personnel include:
(a) purchasing agent who is responsible for purchasing the materials needed at the most economical price
(b) receiving clerk who is responsible for supervising incoming shipments of material;
(c) storeroom keeper who is responsible for storing and maintaining the goods received
(d) production department supervisor who is responsible for supervising the operations of a particular department and who prepares or approves material requisitions.
purchasing agent
who is responsible for purchasing the materials needed at the most economical price
receiving clerk
who is responsible for supervising incoming shipments of material;
storeroom keeper
who is responsible for storing and maintaining the goods received
Production department supervisor
who is responsible for supervising the operations of a particular department and who prepares or approves material requisitions.
The supporting documents used in the procurement process include:
(a) Purchase requisition
(b) Purchase order
(c) Vendor’s invoice
(d) Receiving report
(e) Debit-credit memorandum
return shipping order.
Purchase requisition →
which is prepared by the storeroom keeper to notify the purchasing agent that additional materials should be ordered
Purchase order →
which is prepared by the purchasing agent describing the materials ordered, stating terms and prices, and fixing the date and method of delivery
Vendor’s invoice→
which the purchasing agent compares to the purchase order to verify description of materials, price, terms of payment, method of shipment, and delivery date
Receiving report →
which is prepared by the receiving clerk who counts and identifies the materials received and records the shipper, the date of receipt, the materials received, and the number of the purchase order identifying the shipment
Debit-credit memorandum→
which is prepared when the type, quantity, or quality of goods ordered differs from that which was shipped and adjustments must be made to the vendor’s invoice.
If goods are to be returned, the purchasing agent will prepare a return shipping order.
materials requisition →
Materials should not be issued from the storeroom without written authorization in the form of a properly approved materials requisition. It should identify the specific job or department to which the materials are issued.
Returned materials report →
Returned materials should be accompanied by a returned materials report. Occasionally materials are returned to the storeroom because, for example, more materials were requisitioned than were actually needed for production or perhaps the wrong type of material was issued.
All purchases of material should be recorded in the general ledger as a
debit to Materials.
The materials account is a control account supported by →
Subsidiary materials ledger.
The individual accounts in the materials ledger are designed to show →
The quantity of each material on hand and its cost.
When materials receipts and issues are posted to the materials ledger accounts
the balance is extended after each entry so that it may be determined when stock is falling below minimum requirements.
first-in, first-out (FIFO) →
the materials issued are costed at the earliest prices paid for the materials in stock, and the ending inventories are costed at the most recent purchase prices (LIFO)
The FIFO method is simpler and less expensive clerically and fairly depicts profits under stable price conditions.
Last-in, first-out (LIFO) →
method of costing, the materials issued are costed at the most recent purchase prices, and the ending inventories are costed at the prices paid for the earliest purchases (FIFO).
Under conditions of rising prices, the LIFO method is sometimes selected→ because the higher priced materials are charged against the increasingly higher sales revenue, resulting in a more representative earnings picture and a lower income tax liability.
Moving average method →
an average unit price is computed each time a new lot of materials is received, and the new unit price is used to cost all issues until another lot is received and a new unit price is computed.
**Many companies have adopted the middle-of-the-road position represented by the moving average method, especially now that computer programs do the computations.
summary of materials issued and returned→
All materials issued to production and those returned to stock during a period are recorded on a summary of materials issued and returned.
At the end of the period, the summary provides the information necessary to record the cost of materials.
The total cost of direct materials requisitioned is recorded by →
Work in Process XXX
Materials XXX
The total cost of indirect materials requisitioned is recorded by→
(appropriate) factory overhead account XXX
Materials XXX
Unused materials returned from the factory to the storeroom are recorded by→
(direct materials)
Materials XXX
Work in Process XXX
(indirect materials)
Materials XXX
Factory Overhead XXX
Any materials returned to vendors should be recorded by →
Accounts Payable XXX
Materials XXX
just-in-time inventory (JIT) system, (AKA) lean production system →
significantly reduces inventory-carrying costs by requiring that raw materials be delivered only when they are ready to be used and by eliminating inventory buffers of raw materials between manufacturing cells.
work centers and manufacturing cells
Many manufacturing functions that were performed in individual departments in a traditional manufacturing system **are combined into work centers and manufacturing cells in a JIT system. **
throughput time→
the time that it takes a unit of product to make it through the manufacturing process, and increase velocity,
A JIT system can significantly reduce
throughput time,
velocity→
the speed with which units are produced in the system.
Scrap or waste materials may result from the production process.
If the expected sales revenue from scrap is small, no entry is made for the scrap material until it is sold.
Revenue from scrap is expected to be substantial and the market value is known, then you want the Scrap inventoried:
Scrap Material XX
Scrap Revenue XX
Scrap at time of sale Sold for Cash:
Cash XX
Scrap Revenue
OR Work in Process,
OR Factory Overhead
(depending on whether or not the scrap can be identified with a specific job or department. )
Scrap at time of sale Sold On account:
Accounts Receivable XX
Scrap Revenue
OR Work in Process,
OR Factory Overhead
(depending on whether or not the scrap can be identified with a specific job or department. )
Spoiled units →
are imperfect units of the primary product and have a defect that cannot be economically corrected.
The spoiled goods should be recorded in an inventory account at the expected sales value
If charging the loss due to spoilage to a specific job
Spoiled Goods Inventory XX
Work in Process (JOB NAME) XX
If charging the unrecovered costs of spoilage to factory overhead.
Spoiled Goods Inventory XX
Factory Overhead XX
Work in Process XXXX
Defective units
have an imperfection that is considered correctable at an additional cost. When defective work results from regular production, the costs of correcting the defects are charged to factory overhead, but when defective work results from special orders, the rework cost is charged to the order.
When the cost of the defects results from regularly produced goods.
Factory Overhead XXXX
Materials XX
Payroll XX
Factory Overhead XX
When the defects result from a specific order.
Work in Process XXXX
Materials XX
Payroll XX
Factory Overhead XX
Transfer of scarp to inventory
Scrap materials XXX
Factory Overhead XXX
In JIT (Backflush) Requisitioned raw materials into production
NO ENTRY
In JIT (Backflush) Completed and sold all units
No Entry
