Meaning of Material

Amity School of Business

• The Institute of Chartered Accountants of India define
inventory as:
“tangible property held; for sale in the ordinary course of
business or; in the process of production for sale or; for
consumption in the production of goods and services for sale,
including maintenance supplies and consumable other than
machinery spares.”

1
Objectives of Materials Issue Control
Amity School of Business

 Every issue must be authentically authorised.

 Proper accounting of every authorised issue.
 Proper pricing of material.
 Proper charging of material cost to product, process or job.

2
 Methods of pricing materials
Amity School of Business

Cost price methods

Periodic weighted average
 Specific Price. price.
 First in First out. Moving simple average.
 Last in First out. Moving weighted average
 Base Stock. price.
 Highest in First out.
Notional price methods
 Next in First out. Current Standard Price.
Inflated Price.
Average cost price methods Replacement price.
 Simple average price.
 Weighted average price.
 Periodic simple average
price. 3
 Amity School of Business

At Cost or Actual Price Method

 Specific cost method: Adopted where special types of material
are bought for the execution of a job or contract.
 The materials to be issued to jobs are identified with the
invoices prices and if any handling and inspection costs are to be
incurred such expenses are also included to constitute issue
prices.
 The materials which are thus priced is commonly known as
special material as they specifically purchased at the instance of
customers.

4
 First-In, First-Out Method (FIFO)
Amity School of Business

 Material received first is issued first.

 Assigns the cost of the previous accounting period’s equivalent
units in beginning work in progress inventory to the first units
completed and transferred out of the process.
 Assigns the cost of equivalent units worked on during the
current period first to complete beginning inventory, next to
start and complete new units and finally in units to ending work
in progress.
 It follows that units costs are apportioned to cost of production
according to their chronological order of receipts.

5
 Advantages of FIFO
Amity School of Business
 As material are issued a actual cost but not on estimates, unrealised
profit or loss will not arise.
 The value of closing stock will reflect current market price.
 For physical issue of materials, this method gives correct cost of
material consumed.
 It is easy to understand and simple to operate.

6
 Disadvantages of FIFO
Amity School of Business

 Issue prices do not reflect current market price and so does the
cost of production.
 Two similar jobs cannot be compared as difference rates of
material are used to execute the jobs.
 During the period of falling prices cost of production will
remain high.
 During the period of inflation, it will lead to lower cost of sales
and higher profits.

Suitability : Where there is fast stock turnover or prices remain

reasonably stable.
7
 Last In First Out (LIFO)
Amity School of Business

 Material received at last are issued first.

 The cost of goods sold and the value of closing inventory
is determined only after the final lot of goods is received.
 The use of inventory is valued on the basis of the inverse
sequence of receipts.

8
 Advantages of LIFO
Amity School of Business

 All issues are priced at actual cost no unrealised profit or loss is

derived.
 Issue price reflect the current market price and hence the cost
of production also conforms to the current market price.
 It is possible to fix the current market price.
 Because of inflation in the cost of production the reduced profit
margin results in savings in tax.

9
 Disadvantages of LIFO
Amity School of Business

 Two similar jobs cannot be compared because of charging

different rates of material to different material.
 The closing stock does not reflect current market price. This
may not be accepted by income tax authorities.
 Cannot be operated when the invoice price does not reach
before issues are to be priced.

Suitability: Easy to operate where purchases are made less

frequently, price remain unstable.
10
 Amity School of Business

Base Stock Method (Minimum Stock): Used by concerns as a

safety measures to ensure continuity in production.
 Works under the assumption that a certain minimum
quantity of materials have to be set aside which will be used
during emergency period.
 The minimum stock is treated as Base Stock.
 Materials in excess of base stock is issued either on the basis
of FIFO or LIFO principle.

11
 Highest in first out (HIFO)
Amity School of Business

 A variation of LIFO method.

 Issues are priced at the highest rates of material in stock
irrespective of dates of purchases.
Purpose:
 To charge with the highest rate of materials to the current cost of
production.

Impact :
 Cost of production overstated.
 Profit understated.
 Closing stock is understated.

12
 Amity School of Business

Next in first out (NIFO)

 Issues are priced at the purchased rates of material yet to arrive.
 Material are issued at the price at which the new order has been
placed. This price will hold good for all future issues until a next
order is placed.

13
 Computed Actual Cost
Amity School of Business

Simple average price method

 In simple average method, issue price of materials are fixed at
average unit price. Simple average is an average of price without
considering the quantities involved.
 The average price is calculated by dividing the total of the rates
of the materials in the stores by the number of rates of prices.
 Simple average price = Total unit prices of material in stock
Number of purchases

14
 Weighted Average Method
Amity School of Business

ICAI says that…..

 A price which is calculated :
Total Cost of material in the stock
Total quantity of material in stock
 It takes into account both the quantity and price of material in
the store for determining the issue price.
 It is superior to simple average because it recovers the cost
price of materials from production.
 When the perpetual inventory system is used, the weighted
average method is called the Moving Average method.

15
 Advantages of Weighted Price Method
Amity School of Business

 Easy to operate.
 In case of high fluctuations in price and quantities purchase lots.
 Issue price is not calculated every time, a requisition slip is
delivered.
 Recovers cost of material from production.
 Closing stock reflects a fair value.

16
 Disadvantages of Weighted Average Price
Amity School of Business

 Calls for many calculations when purchases are made

frequently.
 Issue rate has to be calculated each time when a new purchase is
made.

17
 Standard Price
Amity School of Business

 Issues are based on a standard price for a specific period.

 Basic standard price: The ideal standard price fixed for
long periods so as to help towards planning.
 Current standard price: The basic standard price which
has been adjusted to provide permanent changes in cost on
account of prevailing trends in market.

18
 Inflated Price
Amity School of Business

 Some material are subject to natural wastage such as :

material lost due to loading and unloading .
 In such cases , the material are issued at an inflated price
so as to recover the cost of the natural wastage of
material from the production.
 In this way the total cost of material is recovered.
 Inflated price = Cost of material + Cost of contingencies
and other costs.

19
 Market Price/ Replacement Price
Amity School of Business
 Materials are issued at the price at which they can be
replaced.
 In other words, at the market price prevailing on the date
of issue.

 Areas of application:
 Material purchased in advance for use in large quantities.
 Anticipation of economic/ profitable use.

20
 Choice of Methods
Amity School of Business

 Extent of price fluctuations.

 Frequency of receipt and issue of materials.
 Impact on profit are analysed.
 The suitability of the different methods to value
inventory is examined.
 Managerial policy regarding the valuation of closing
stock.
 The material should reflect the current market price of
the material.

21
 Methods of Costing
Amity School of Business

• Job costing
• Process costing
• Batch costing
• Contract costing
• Unit or Single costing
• Operations costing
 JOB COSTING Amity School of Business

• A method of cost accounting whereby cost is

compiled for a specific quantity of product,
equipment repair or other service
• Examples: printers, machine tool making
industries, furniture making concerns, interior
decorations, tailoring, painting, automobile
repair shop
 Features of Job Costing Amity School of Business

• Dissimilar in nature
• Production intermittent not continuous
• Undertaken against customer’s orders
• Industries need not incur selling and distribution
expenses
• Each job treated as a cost unit
• Work-in-progress differs from period to period
according to the number of jobs in hand.
 BATCH COSTING Amity School of Business

• A form of specific order costing

where similar articles are manufactured in groups or
batches either for sale or use within the undertaking
• When articles are produced in a group or
large number of articles is produced in one
setting of the machines or tools because
these articles are of the similar nature, design,
colour or size
• Examples: bakery products, hardware, readymade
garments, drugs & pharmaceuticals, shoe
manufacture
 CONTRACT COSTING Amity School of Business

• A variation of job costing applied in

those undertakings which are engaged
in constructional and repair work.
• Variation of job costing – difference lies in the
size of the order received
• Examples: Builders, civil engineering
contractors, road repairing concerns,
dams & bridge constructional concerns
 Features of Contract Costing Amity School of Business

• Work executed in the premises of contractee

and not in factory premises
• Most contracts involve longer duration for
completion
• Expenses chargeable to contracts are direct in
nature
• Each contract undertaken treated as a cost unit.
• Payment received depends on stage
of completion
 Process Costing Amity School of Business

• A system for applying costs to like products that

are mass produced in continuous fashion
through a series of production steps called
processes
• Application – in continuous or mass production
industries
• Examples: Oil refineries, fertilizers,
breweries, dairy, chemical, sugar, paper,
soap
 Features of Process Costing Amity School of Business
• Factory divided into various processes which perform a
certain limited operation
• Finished products uniform in all respects such as shape,
size, weight, quality, colour, chemical content
• Output of one process is the input of the subsequent
process
• Not possible to distinguish finished products while they
are in the stage of processing
• Common to incur normal loss & wastage
• Usually a single product plant
• Continuous and large scale production.
 Single or Output or Unit Costing Amity School of Business

• Used in industries where production consists of

a single product or a few varieties of the same
product with variations in size, shape, quality etc
• Examples: Brick Works, Sugar Mills, Steel,
Cement industries
 Operating or Service Costing Amity School of Business

• Cost of providing a service – operating cost

• Method of cost ascertainment used in those
undertakings engaged in providing services like
transport, electricity
• These undertakings do not manufacture tangible
products
 Features of Service Costing Amity School of Business

• Uniformity of service to all

• Service undertakings do not produce any
tangible goods. Instead they render service to
the public
• Cost unit may be simple
or composite
 Cost Unit in Operating Costing Amity School of Business

• Simple cost unit –

Transport – per kilometre or
per mile
Water Works – per 1000 litres
• Composite cost unit -
Electricity – per kilowatt hour
Transport – per passenger km or per tonne km
Hospital – per patient day
Cinema – per seat per show or per man show
Hotel – per room day
 Features of Service Costing Amity School of Business

• Uniformity of service to all

• Service undertakings do not produce any
tangible goods. Instead they render service to
the public
• Cost unit may be simple
or composite
 Cost Unit in Operating Costing Amity School of Business

• Simple cost unit –

Transport – per kilometre or
per mile
Water Works – per 1000 litres
• Composite cost unit -
Electricity – per kilowatt hour
Transport – per passenger km or per tonne km
Hospital – per patient day
Cinema – per seat per show or per man show
Hotel – per room day
 BIN CARD VS STORE Amity School of Business

LEDGER
• Bin Card: A document that records the
status of a good held in a stock room. A
typical retailing business with a large stock
room will use a bin card to record a
running balance of stock on hand, in
addition to information about stock
received and notes about problems
associated with that stock item.

36
 Amity School of Business

• The most important bin card number is the

current items in stock. As items are pulled
from storage to fill sales, the bin card is
updated. The card may also reveal the
inventory level at which you need to
reorder. Reorder quantity, unit price and
order lot sizes are also often included on
bin cards. In essence, the card reveals the
inventory status of a given product at any
moment. 37
 Store Ledger Amity School of Business

• Difference Between Bin Card and Stores

Ledger
• Bin Card implies a document which
records the quantity of material received
by, issued to and remained in stores.
Conversely, Stores Ledger is a ledger
account (accounting record), that
maintains the record of the transit of goods
in and out, the stores, both in quantitative
and monetary terms. 38
 Amity School of Business

BASIS FOR COMPARISON BIN CARD STORES LEDGER

Meaning Bin Card implies a quantity record of the receipts, Stores ledger alludes to a subsidiary ledger, that
issue and balance of materials in stores. keeps track of each and every transaction relating
to materials in the stores.

What is it? It is a recording document. It is an accounting record.

Responsibility Storekeeper Cost accounting department

Location Kept inside the stock room. Kept outside the stock room.

Details Contains quantitative details only. Contains both quantitative and monetary details.

Interdepartmental transfer Are not shown in bin card. Indicated in stores ledger.

Entries Entries are posted when transaction takes place. Entries are posted after transaction took place.

Recording Transactions are recorded individually. Summarized transactions are recorded.

39