ACCOUNTING FOR MATERIALS

Materials constitute a major portion of the cost of production in a manufacturing concern.

Hence, proper care & control should be taken for purchase, storage & issue of materials in
order to keep the material cost under control.
Purchase of Materials:
➢ It is the duty of the Purchase Department to provide the suitable materials (proper
quality, quantity) to the Production Department as & when required (proper time).
Storage of Materials:
➢ For the purpose of easy location, identification & convenience in issuing each item of
stores is given a distinct name & number.
Issuing of Materials:
➢ No materials should be issued from the store without a proper written authority.
➢ Requests for issuance of materials should be issued to the storekeeper in the prescribed
form. The documents that authorize & records the issuance of materials is known as the
Material Requisition/Material Demand Note.
Bills of Materials
➢ It is an itemized list of all materials required for a service. It gives details of materials
necessary & the quantity of each item.
Bin Card
➢ It is a record of the receipts, issues & closing balances of the items of stores.
Stores Ledger
➢ It is a record of all receipts, issues & balances of materials along with the rates & values.

Economic Order Quantity

➢ It is the order quantity which minimizes the total cost of inventory management.
The inventory management comprises of two costs:
Ordering cost & Carrying cost.
➢ Ordering cost: Ordering costs are costs incurred on placing and receiving a new
shipment of inventories (Communication & transportation cost).
➢ Carrying cost: Carrying costs represent costs incurred on holding inventory in hand
(storage costs)
𝟐∗𝐀𝐧𝐧𝐮𝐚𝐥 𝐔𝐬𝐚𝐠𝐞∗𝐎𝐫𝐝𝐞𝐫𝐢𝐧𝐠 𝐂𝐨𝐬𝐭 𝐩𝐞𝐫 𝐨𝐫𝐝𝐞𝐫
EOQ = √ 𝐂𝐚𝐫𝐫𝐲𝐢𝐧𝐠 𝐂𝐨𝐬𝐭 𝐩𝐞𝐫 𝐮𝐧𝐢𝐭 𝐩𝐞𝐫 𝐨𝐫𝐝𝐞𝐫

No. of purchase orders = Annual Consumption/EOQ

Problem – 1
Calculate the EOQ & the number of purchase orders to be placed in a year of material X from
the following data:
Total annual consumption = 12,000 units
Purchase price of Material X = Re 1/unit
Cost of carrying inventory = 20% p.a.
Ordering Cost = Rs 75 per order
Solution
2∗Annual Usage∗Ordering Cost per order
EOQ = √ Carrying Cost per unit per order

= √[(2 ∗ 12000 ∗ 75)/(Re 1 ∗ 20%)]

= 3,000 units
Hence, the company should place 3,000 units at a time
No. of purchase orders = (Annual Consumption/EOQ)
=12,000/3,000
= 4 purchase orders every year.

Problem – 2
The following data relating to inventory costs have been established for X Ltd.
Orders must be placed in multiples of 100 units.
Requirement for the year are 3,00,000 units
The purchase price per unit is Rs 3
Carrying cost is 25% of the purchase price of goods
Cost per order placed is Rs 20
Calculate the EOQ. How many orders should the company place each year?
Solution
2∗Annual Usage∗Ordering Cost per order
EOQ = √ Carrying Cost per unit per order

= √[(2 ∗ 3,00,000 ∗ 20)/(Rs 3 ∗ 25%)]

= 4000 units
Hence, the company should place 4,000 units at a time
No. of orders should be placed in a year = (Annual Consumption/EOQ)
= (3,00,000/4000)
= 75 purchase orders every year.
Different Levels of Inventory
For the purpose of inventory management & control management fixes various levels of
inventory.
The levels are affected by the following factors:
➢ Usage Rate: It is the speed of consumption of material by the production department.
➢ Re-order Quantity: It is the quantity of material which is ordered each time.
➢ Lead Time: It is the gap between placing an order & receipt of material.

The Different Levels of Inventory:

Maximum Level: This level indicates the maximum quantity of a material that can be held in
stock at a time.
Maximum Level = Re-order Level + Re-order Quantity – (Minimum Usage Rate * Minimum
Lead Time)

Average Level: It is the quantity of stocks which is held by stores department on average.
Average Level = ½ (Minimum Level + Maximum Level)
Average Level = (Minimum Level + ½ Re-order Quantity)

Minimum Level = It is the quantity of material that must be held at all times so that there is
no stoppage of production.
Minimum Level = Re-order Level – (Average Usage Rate * Average Lead Time)]

Re-order Level: It is the level of stock at which point an action for purchase of material is
taken. It is fixed between minimum & maximum level.
Re-order Level = (Maximum Usage rate * Maximum Lead Time)
Re-order Level = Safety Stock + (Maximum Usage Rate * Maximum Lead Time)
Problem – 3
Two materials, X and Y, are used as follows:
Minimum Usage 50 units per week each
Maximum Usage 150 units per week each
Average Usage 100 units per week each
Re-order quantity X: 600 units
Y: 1000 units
Lead Time X: 4 to 6 weeks
Y: 2 to 4 weeks
Calculate for each material: (a) Re-order Level ; (b) Maximum Level ; (c) Minimum Level ;
(d) Average Level
Solution
Re-order Level (Maximum Usage rate * Maximum Lead Time)
X= 150 * 6 = 900 units
Y= 150 * 4 = 600 units

Maximum Level Re-order Level + Re-order Quantity – (Minimum Usage Rate *

Minimum Lead Time)
X= 900 + 600 – (50 * 4) = 1300 units
Y= 600 +1000 – (50 * 2) = 1500 units

Minimum Level Minimum Level = Re-order Level – (Average Usage Rate * Average
Lead Time)
X= 900 – (100 * 5) = 400 units
Y= 600 – (100 * 3) = 300 units

Average Level ½ (Minimum Level + Maximum Level)

X= ½ (400 + 1300) = 850 units
Y= ½ (300 + 1500) = 900 units

Problem – 4
Two materials, A and B, are used as follows:
Minimum Usage 30 units per week each
Maximum Usage 90 units per week each
Average Usage 60 units per week each
Re-order quantity A: 500 units
B: 800 units
Lead Time A: 3 to 5 weeks
B: 2 to 4 weeks
Calculate for each material: (a) Re-order Level ; (b) Maximum Level ; (c) Minimum Level ;
(d) Average Level

Solution
Re-order Level (Maximum Usage rate * Maximum Lead Time)
A= 90 * 5 = 450 units
B= 90 * 4 = 360 units
 Maximum Level Re-order Level + Re-order Quantity – (Minimum Usage Rate *
Minimum Lead Time)
A= 450 + 500 – (30 * 3) = 860 units
B= 360 + 800 – (30 * 2) = 1100 units

Minimum Level Minimum Level = Re-order Level – (Average Usage Rate * Average
Lead Time)
A= 450 – (60 * 4) = 210 units
B= 360 – (60 * 3) = 180 units

Average Level ½ (Minimum Level + Maximum Level)

A= ½ (210 + 860) = 535 units
B= ½ (180 + 1100) = 640 units

Different Methods of Pricing Materials

The materials issued to production department must be charged to the respective department.
The price at which materials are charged varies from organization to organization depending
upon the method of pricing.
Out of the different methods used for pricing of raw material, the most popular ones are:
❖ FIFO
❖ LIFO
❖ Weighted Average Method
FIFO:
Under this method materials purchased first are issued first. Materials from the second lot will
be issued only when the first lot is exhausted.
Under this method production is charged with the cost of the earlier consignment.
(Example – Perishable goods: Food companies)
LIFO:
Under this method materials that are purchased last are issued to the production first.
The cost of the last lot of materials received is used to price requisition until the lot is exhausted.
(Example – Stone, brick companies)
Weighted Average Method
Under this method, one divides the cost of goods available for sale by the number of units
available for sale, which yields the weighted-average cost per unit.
This method is used when inventory items are so intertwined that it becomes difficult to assign
a specific cost to an individual unit.
(Example – Gas & Petroleum)

Problem – 5
The following are the details supplied by X Co. in respect of its raw materials for December,
2018:
Date Receipts Issues
Units Price per unit Units
(Rs.)
7.12.18 1000 6.00 -
10.12.18 - - 2500
15.12.18 2000 6.50 -
31.12.18 - - 2200
Additional Information:
a) There is an opening stock of 2000 units costing Rs. 5/-
b) At the month end, there was shortage of 100 units
Prepare a stores ledger recording the given transactions of December, 2018 under FIFO &
LIFO method.
Solution:
STORES LEDGER (FIFO)
Date Receipts Issues Balance
December Quantity Rate Amount Quantity Rate Amount Quantity Rate Amount
2018 (kgs) (Rs.) (Rs.) (kgs) (Rs.) (Rs.) (kgs) (Rs.)
1 - - - - - - 2,000 5.00 10,000
7 1,000 6.00 6,000 - - - 2,000 5.00 10,000
1,000 6.00 6,000
10 - - - 2,000 5.00 10,000 500 6.00 3,000
500 6.00 3,000
15 2,000 6.50 13,000 - - - 500 6.00 3,000
2,000 6.50 13,000
31 - - - 500 6.00 3,000
1,700 6.50 11,050
100 6.50 650 200 6.50 1,300
 STORES LEDGER (LIFO)
Date Receipts Issues Balance
December Quantity Rate Amount Quantity Rate Amount Quantity Rate Amount
2018 (kgs) (Rs.) (Rs.) (kgs) (Rs.) (Rs.) (kgs) (Rs.)
1 - - - - - - 2,000 5.00 10,000
7 1,000 6.00 6,000 - - - 2,000 5.00 10,000
1,000 6.00 6,000
10 - - - 1,000 6.00 6,000
1,500 5.00 7,500 500 5.00 2,500
15 2,000 6.50 13,000 - - - 500 5.00 2,500
2,000 6.50 13,000
31 - - - 2,000 6.50 13,000
200 5.00 1,000
100 5.00 500 200 5.00 1,000

Problem – 6
The following are the details supplied by X Co. in respect of its raw materials for January,
2018:
Date Receipts Date Issues
Jan, 2018 Units Price per unit (Rs.) Jan, 2018 Units
6 450 25.00 3 600
12 600 24.50 8 500
15 50 [Return – (issued on Jan 3)] 13 250
22 350 26.00 24 300
28 500 27.00 27 500
- - - 31 300
Additional Information:
a) There is an opening stock of 1000 units costing Rs. 24/- per unit
b) On January 9th, there was shortage of 15 units
Prepare a stores ledger recording the given transactions of January, 2018 under LIFO method.

Solution
 STORES LEDGER (LIFO)
Date Receipts Issues Balance
January Quantity Rate Amount Quantity Rate Amount Quantity Rate Amount
2018 (kgs) (Rs.) (Rs.) (kgs) (Rs.) (Rs.) (kgs) (Rs.)
1 - - - - - - 1,000 24.00 24,000
3 - - - 600 24.00 14,400 400 24.00 9,600
6 450 25.00 11,250 - - - 400 24.00 9,600
450 25.00 11,250
8 - - - 450 25.00 11,250
50 24.00 1,200 350 24.00 8,400
9 - - - 15 24.00 360 335 24.00 8,040
12 600 24.50 14,700 - - - 335 24.00 8,040
600 24.50 14,700
13 - - - 250 24.50 6,125 335 24.00 8,040
350 24.50 8,575
15 50 24.00 1,200 - - - 385 24.00 9,240
350 24.50 8,575
22 350 26.00 9,100 - - - 385 24.00 9,240
350 24.50 8,575
350 26.00 9,100
24 - - - 300 26.00 7,800 385 24.00 9,240
350 24.50 8,575
50 26.00 1,300
27 - - - 50 26.00 1,300
350 24.50 8,575
100 24.00 2,400 285 24.00 6,840
28 500 27 13,500 - - - 285 24.00 6,840
500 27.00 13,500
31 - - - 300 27 8,100 285 24.00 6,840
200 27.00 5,400
12,240
Problem – 7
The following are the details supplied by X Co. in respect of its raw materials for November,
2018:
Date Receipts Issues
November Units Amount Units
2018 (Rs.)
10 500 3,500 -
15 - - 1,200
20 1,000 8,000 -
30 - - 1,100
Additional Information:
a) There is an opening stock of 1000 units amounting Rs. 6,000
b) At the month end, there was shortage of 50 units
Prepare stores ledger recording the given transactions of December, 2018 under Weighted
Average.

Solution:
STORES LEDGER (Weighted Average)
Date Receipts Issues Balance
November Quantity Rate Amount Quantity Rate Amount Quantity Rate Amount
2018 (kgs) (Rs.) (Rs.) (kgs) (Rs.) (Rs.) (kgs) (Rs.)
1 - - - - - - 1,000 6.00 6,000
10 500 7.00 3,500 - - - 1,500 6.33 9,500
15 - - - 1,200 6.33 7,596 300 6.34 1,904
20 1,000 8.00 8,000 - - - 1,300 7.61 9,904
30 - - - 1,100 7.61 8,371 200 7.67 1,533
30 - - - 50 7.67 385 150 7.67 1,150
Problem – 8
With the following details supplied by KD Co. in respect of its raw materials for November,
2018, prepare stores ledger recording the given transactions of November, 2018 under
Weighted Average.:
Date Receipts Issues
November 2018 Units Price p.u. (Rs.) Units
1 2000 (opening stock) 5.00 -
3 - - 1,500

4 4,500 6.00 -
8 - - 1,600
9 100 (Return by Production - issued on Nov 3) - -
16 2,400 6.50 -
19 200 (Return to suppliers received on Nov 4) - -
20 1,000 7 -
24 - - 2,100
27 1,200 7.50 -
29 - - 2800
Solution:
STORES LEDGER (Weighted Average)
Date Receipts Issues Balance
November Quantity Rate Amount Quantity Rate Amount Quantity Rate Amount
2018 (kgs) (Rs.) (Rs.) (kgs) (Rs.) (Rs.) (kgs) (Rs.)
1 - - - - - - 2,000 5.00 10,000
3 - - - 1,500 5.00 7,500 500 5.00 2,500
4 4,500 6.00 27,000 - - - 5,000 5.90 29,500
8 - - - 1600 5.90 9,440 3,400 5.90 20,060
9 100 5.00 500 - - - 3,500 5.87 20,560
16 2,400 6.50 15,600 - - - 5,900 6.12 36,160
19 - - - 200 6.00 1,200 5,700 6.13 34,960
20 1,000 7.00 7,000 - - - 6,700 6.26 41,960
24 - - - 2100 6.26 13,146 4,600 6.26 28,814
27 1,200 7.50 9,000 - - - 5,800 6.52 37,814
29 - - - 2800 6.52 18,256 3,000 6.52 19,558