Controlling and Costing Materials:
After studying this chapter you should
be able to:
Effective materials management is essential
in order to (1) provide the best service to customers, (2) produce at
maximum efficiency, and (3) manage inventories at predetermined levels to
stabilize investments in inventories.
Successful materials management
requires the development of a highly integrated and coordinated system
involving sales forecasting, purchasing, receiving, storage, production,
shipping, and actual sales. Both the theory of costing materials and
inventories and the practical mechanics of cost calculations and record
keeping must be considered.
Costing materials present some important,
often complex, and sometime highly controversial questions concerning the
costing of materials used in production and the cost of inventory remaining
to be consumed in a future period. In financial accounting, the subject is
usually presented as a problem of inventory valuation; in
the primary problem is the determination of the cost of various materials
consumed in production and a proper charge to
cost of goods sold.
discussion of materials management in this chapter deals with:
materials procurement and use.
Materials costing methods.
Cost of materials in inventory at the end
of a period.
Costing procedures for scrap, spoiled
goods, and defective work
Summary of materials management
Although production processes and materials
requirements vary, the cycle of procurement and use of materials usually
involves the following steps:
- Engineering and planning
determine the design of the product, the materials specifications, and the
requirements at each stage of operations. Engineering and planning not
only determine the maximum and minimum quantities to run and the
bill of materials for given products and quantities but also cooperate in
developing standards where applicable.
production budget provides the master plan
from which details concerning materials requirements are eventually
- The purchase requisition informs
the purchasing agent concerning the quantity and type of materials needed.
- The purchase order contracts for
appropriate quantities to be delivered at specified dates to assure
- The receiving report certifies
quantities received and may report results of inspection and testing for
- The materials requisition notifies
the storeroom or warehouse to deliver specified time or is the
authorization for the storeroom to issue material to departments.
- The materials ledger cards record
the receipt and the issuance of each class of materials and provide a
perpetual inventory record.
Accounting procedures for materials
procurement and use involve forms and records necessary for general ledger
financial accounting as well as those necessary for costing a job, process
or department, and for maintaining
perpetual inventories and other
statistical summaries. The purchase requisition, purchase order, receiving
report, materials requisition,
bill of materials, scrap report, returned
materials ledger cards, and summary of materials used are
some of the forms used for materials control under a cost system. The
purchases journal, the cash payments journal, the general journal, and the
general ledger control accounts are also used.
The discussion here is not based on any
particular type or size of industry. It is, rather a general description of
the accounting and controlling procedure involved in the procurement and use
of materials. To understand the detailed procedure of purchasing, receiving
stocking, and using materials (materials procurement and use) click on the following
The ultimate objective in
cost accounting is
to produce accurate and meaningful figures. These figures can be used for
purposes of control and analysis and eventually matched against revenue
produced in order to determine
net operating income.
After the unit cost and total cost of
incoming materials are entered in the received section of a
materials ledger cards, the next step is to cost these materials as they move either from
storeroom to factory as
materials or from storeroom to marketing and administrative expense
accounts as supplies. The more common methods of costing materials issued
and inventories are:
Average Costing Method
(LIFO) Costing Method
Other Methods-Month end average
cost, last purchase price or market price at date of issue, and standard
These methods relate to assumptions as to
flow of costs. The physical flow of units may coincide with the method of
cost flow, though such a condition is not a necessary requirement. Although
this decision deals with materials inventory, the same costing methods are
also applicable to
work in process (WIP) and
When the cost basis is used in costing
inventories for financial statements and income tax returns, the sum total
materials ledger cards must agree with the general ledger materials
control account which, in turn, is the materials inventory figure on the
balance sheet. Unless a shift from the cost basis is made in valuing the
year end inventory, the method used for costing materials issued is the
method used for assigning dollars to inventory.
Generally, manufacturing operations cannot
escape the occurrence of certain losses or output reduction due to scrap,
spoilage, or defective work management and the entire personnel of an
organization should cooperate to reduce such losses to a minimum. As long as
they occur, however, they must be reported and controlled.
Discussion Questions and Answers
about Controlling and Costing Materials
Materials managers are constantly confronted
with these problems and requirements:
- Inventories account for a large portion of
the working capital requirements of most businesses. This fact makes
materials or inventory management a major problem requiring constant
attention by all three management levels (top, middle and low).
- At present, the problem of materials
management has become even more acute due to market conditions and
- Effective materials management and
materials control is found in an organization in which individuals have
been vested with responsibility for, and authority over, the various
details of procuring, maintaining, and disposing off inventory. Such a
person or persons must have the ability to obtain, coordinate, and
evaluate the necessary facts and to take actions when and where needed.