lesson 2 acctg for materials Flashcards
basic objective of cost accounting
cost control
3 elements of cost accounting
material, labor, and expense
substance that forms part of or composed of a finished product
material
refers to the commodities supplied to an undertaking for the purpose of consumption in the process of manufacturing
material
all commodities consumed in the process of manufacturing
material
2 types of material
direct material
indirect material
one or more items that are either physically transformed into a usable product or that become part or component of that product
direct material
one or more items that are essential to carry out a production or manufacturing process, but they don’t physically become the part of product or a component of it
indirect material
cost of materials used to manufacture a product or provide a service
material cost
material cost constitutes ?? of the total cost
40%-80%
systematic control over purchasing, storing, and consumption of materials
material control
providing the right quantity of material of the right quality at the right time and place at the minimum cost
material control
objectives of material control
to enable uninterrupted production
to ensure requisite quality of materials
to minimize wastage
to fix responsibility
to provide information
techniques of material control
ABC technique
VED analysis
inventory levels
economic order quantity (EOQ)
technique that will have a significant impact on overall inventory cost, while also providing a mechanism for identifying different categories of stock that will require different management and controls
ABC technique
A items
very tight control and accurate records
B items
less tightly controlled and good records
C items
simplest controls possible and minimal records
VED analyis stands for
vital, essential, and desirable
it categorizes stock under three heads based on its importance and necessary for an organization for production or any of its other activities
VED analysis
category that includes inventory which is necessary for production or any other process in an organization. the shortage of items under this category can severely hamper or disrupt the proper functioning of operations
vital category
least important category and their unavailability may result in minor stoppages in production or other processes.
desirable category
quantity which must always be maintained in hand.
minimum level
factors that are considered while deciding minimum stock level
lead time
rate of consumption
nature of material
re-ordering level
quantity of materials beyond which a firm should not exceed its stocks
maximum level
level below which stocks should not fall in any case
danger level
when the quantity of materials reaches a certain level then fresh order is sent to procure materials again.
re-ordering level
it is fixed between minimum level and maximum level
re-ordering level
ideal order quantity a company should purchase to minimize inventory costs such as holding costs, shortage costs, and order costs
economic order quantity
EOQ was developed in 1913 by
Ford W. Harris
its goal is to identify the optimal number of product units to order
economic order quantity
EOQ formula
square root of the quantity of 2SD over h
steps in material control
purchase requisition
selection of suppliers
purchase order and follow-up
receipt of materials
inspection and testing of materials
return of rejected materials
passing invoices for payment
formal request by the head of the department or other authorities
purchase requisition
source of supply has to be selected. it is where a purchase dept maintains a list of suppliers for each type of material
selection of suppliers
form used by purchasing dept authorising the suppliers to supply the specified materials at a price and terms stated therein
purchase order and follow-up
it is where the receiving dept performs the functions of unpacking the goods received and verify their quantities and conditions
receipt of materials
step wherein the goods are passed to laboratory which will provide a report on the quality of goods
inspection and testing of materials
it is where materials received are damaged or are not in accordance with the specifications, theses are usually returned to the supplier
return of rejected materials
it is where the invoices are received by the purchasing dept, the process of assembling the business paper concerned with each purchase and preparation of vouchers begins
passing invoices for payment
methods of pricing material issues
first in first out method
last in first out method
simple average cost method
weighted average cost method
under this, method materials are issued out of stock in the order in which they were first received into stock. first material to come into stores will be the first material to be used.
first in first out method
advantages of FIFO
easy to understand
good store keeping practice
less clerical cost
acceptable under standard accounting practice
consistent and realistic practice in valuation of inventory and finished stock
disadvantages of FIFO
a. no certainty that materials which have been in stock longest will be used
b. possibility of errors
c. when the prices rise, production cost is understated
d. in inflationary market, there is a tendency to underprice material issues
in deflationary market, there is a tendency to overprice such issues
e. more than one price has to be adopted
f. cost comparison difficult
most recent purchase will be the first to be issued
last in first out method
advantages of LIFO
a. represent the current market value
b. simple to understand
c. more realistic since material cost is charged at more recent price
d. pricing of issues will be at a more recent current market price
e. minimizes unrealized inventory gains and tends to show the conservative profit figure and provides a hedge against inflation
disadvantages of LIFO
a. not acceptable in preparation of financial accounts
b. not intended to represent the true physical flow of materials from the stores
c. more than one price
d. renders cost comparison between jobs difficult
e. involves more clerical work and sometimes valuattion may go wrong
f. in times of inflation, valuation of inventory under this method will not represent the current market prices
under this method all the materials received are merged into existing stock of materials, their identity being lost
simple average cost method
calculated without any regard to the quantities involved. it is arrived at by adding the different prices paid during the period for the batches purchased by dividing the number of batches
simple average cost method
method where the issue price is recalculated every time after each receipt taking into consideration both the total quantities and total cost while calculating weighted average price. the issue price calculate rarely represents the actual purchase price
weighted average cost method
