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Elements of Cost

The document outlines the concept of material control, which involves managing the procurement, storage, and usage of materials to ensure their availability and minimize costs. It details the objectives of material control, including maintaining inventory levels, reducing waste, and ensuring quality, as well as defining purchasing and various methods of pricing material issues such as FIFO, LIFO, and standard price methods. Overall, it emphasizes the importance of effective material management in business operations.

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5 views4 pages

Elements of Cost

The document outlines the concept of material control, which involves managing the procurement, storage, and usage of materials to ensure their availability and minimize costs. It details the objectives of material control, including maintaining inventory levels, reducing waste, and ensuring quality, as well as defining purchasing and various methods of pricing material issues such as FIFO, LIFO, and standard price methods. Overall, it emphasizes the importance of effective material management in business operations.

Uploaded by

karantiwarihelp
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Elements of Cost (Material)

1. What is Material Control?


Ans: Material control is the systematic control and regulation
of the procurement, storage, and usage of materials to
ensure their availability in the right quantity and quality at
the right time and cost.
2. Objectives of Material Control?
Ans: Objectives of Material Control (with Explanation):
i. To ensure continuous availability of materials:
Proper material control ensures that materials are always
available when needed for production, avoiding delays or
stoppages.
ii. To avoid overstocking and understocking:
Overstocking leads to unnecessary capital being tied up
and higher storage costs, while understocking can halt
production. Material control maintains an optimal
inventory level.
iii. To minimize material wastage, theft, and losses:
With proper supervision and systems, material control
helps reduce waste during handling and prevents theft or
misuse of materials.
iv. To maintain quality and proper storage of materials:
Material control ensures that materials are stored under
proper conditions to preserve their quality and usability
over time.
v. To reduce the cost of materials through efficient
purchasing and handling:
By buying in the right quantities, from the right sources,
and managing storage efficiently, material costs can be
significantly reduced.
vi. To maintain accurate records for inventory and cost
control:
Material control involves keeping detailed records of
material purchases, usage, and stock levels, which help in
budgeting, planning, and cost accounting.

3. What is Purchasing?
Ans: Purchasing (Definition):
Purchasing is the process of acquiring raw materials, goods,
or services required for production or business operations at
the right quality, quantity, price, time, and from the right
source.
In simple terms:
Purchasing means buying the right thing, at the right
time, from the right place, at the right price, and in
the right quantity to meet business needs.
4. Methods of Pricing Material Issue?
Ans: 1. FIRST-IN-FIRST-OUT METHOD (FIFO): Under this
method, the materials received first are issued first. So, the
price paid for the earliest lot of materials in hand is taken as
the basis of charging out the materials issued.
2. LAST-IN-FIRST-OUT METHOD (LIFO): Under this
method, the material received in last is issued first. The price
of the latest consignment is taken as base for pricing of
materials. This method requires the maintenance of record of
quantity and value of every receipt of material.
3. SIMPLE AVERAGE PRICE: Simple average price is the
price calculated by dividing the total of purchase price of
materials in hand on the date of issue by the number of prices.
4. Weighted Average Price Method is a method of
valuing material issues where the average price is
calculated by dividing the total cost of materials
purchased by the total quantity purchased.
It gives more importance (weight) to purchases made in
larger quantities and provides a fair and accurate
average price for costing purposes.

5. Replacement Price Method: In the Replacement


Price Method, the material is issued at the current
market price — the price at which the same material
can be replaced or bought again at the time of issue.
It doesn't depend on the price at which the item was
purchased but focuses on how much it would cost if
bought today.

6. STANDARD PRICE METHOD: Under this method, a


standard or a fixed price is used for pricing the issues. A
standard price is fixed after considering all factors
affecting the price such as market conditions, quality to
be purchased and future trend of the prices.

Standard Cost is the predetermined or estimated cost of


manufacturing a product or providing a service under
normal conditions.
It represents how much the cost should be if everything
goes as planned—like materials, labour, and overheads at
expected efficiency and prices.

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