Controlling and Costing Materials – Questions and Answers:

Questions:

1. List the forms more frequently used in the procurement and use of materials.
2. Should formal purchase requisitions and purchase orders be prepared for the purchase of incidental supplies, services, and repairs? Explain.
3. How is an invoice approved for payment.
4. In an electronic data processing system, the computer replaces the accounting clerk to a great extent. Explain.
5. An invoice of materials shows a total of $5,400; terms: 3/10, n/30. If the purchaser elects to pay the invoices at the end of 30 days. What is the effective interest cost resulting from failure to take the discount?
6. A client who wishes to include as a part of the cost of materials all of the cost of acquiring and handling incoming materials wants to know:
   (a) The principle item that may enter into the cost of materials acquisition and handling.
   (b) The arguments favoring the inclusion of these items as a part of materials is storage.
   (c) The against inclusion of these items as a part of the cost of materials in storage.
7. During periods of rapid increase in materials prices, which costing method might result in a more desirable figure for cost of goods manufactured and sold?
8. To effect an approximate matching of current cost with related sales revenue, the last in, first out (LIFO) method of pricing inventories has been developed.
   (a) Describe the establishment of LIFO and the subsequent pricing procedures when LIFO is applied to units of product with a period inventory system in use.
   (b) What are the general advantages and disadvantages claimed for the last in first out (LIFO) method?
9. The LIFO vs. FIFO controversy has spanned a number of decades. Proponents of each of the inventory procedures ascribe certain merits to each. Identify the inventory procedure, LIFO or FIFO, the which the following features are attributed:
   (a) Matches actual physical flow of goods.
   (b) Matches old costs with new prices.
   (c) Costs inventory at approximate replacement cost.
   (d) Matches new costs with new prices.
   (e) Emphasize the balance sheet.
   (f) Emphasize the income statement.
   (g) Opens doors for profit manipulation.
   (h) Understates the current ratio in a period of inflation.
   (i) Overstates inventory turnover in a period of inflation.
   (j) Gives higher profits in a period of inflation.
   (K) Matches current cost with current revenue.
   (l) Reflects more accurately the profits available to owners.
   (m) Gives lower profits in a period of deflation.
   (n) Results in a procession of costs in the same order as incurred.
10. Does the method of inventory costing have its principle effect on the balance sheet or on the income statement?
11. A company’s own power plant uses coal as the principle fuel. Coal is delivered by rail and stored in an open field close to the powerhouse from which it is fed into furnace by conveyer belts. What method should be used to determine coal consumption during a time period and the coal on hand at the end of the period?
12. At times physical quantities of materials as determined by actual count and inspection do not agree with the figures in materials ledger cards. What may cause such discrepancies? What accounting steps are taken to adjust the differences?
13. In charging out materials, how should the cost of waste, such as scrap in suit and dress factories, be accounted for?
14. Several methods of accounting for scrap materials are discussed in this chapter. Which method could be regarded as most accurate?
15. In the control of materials cost, why is the knowledge that there is excessive waste likely to be of greater than the income derived from the sale of scrap?
16. What procedures should be adopted in order to deal with the following items listed in the materials ledger cards?
    (a) Scrap delivered to the storeroom.
    (b) Return of materials to storage in excess of production requirements.
    (c) Gain or loss in weight through climate conditions while in storage.
    (d) Short lengths of cut material become waste during the productive operations.
    (f) Breakage in the storeroom.
17. In some situations, labor and materials costs incurred on spoiled or defective work are treated as factory overhead. In other cases the cost of perfecting defective work is charged directly to the job. Explain the appropriate use of each accounting treatment.
18. Select the answer which best completes the statement.
    (a) An item of inventory purchased this period for $15 has been written down to its current replacement cost of $10. It sells for $30 with a disposal cost of $3 and normal profit of $12. Which of the following statements is not true? (1) The cost of goods sold of the following year will be understated. (2) The current year’s income is understated. (3) The ending inventory of the current year is understated. (4) Income of the following year will be understated.
    (b) Which of the following statements is true in applying the lower-of-cost-or-market-rule to work in process inventory? (1) The category is an exception, and the rule does not apply. (2) The cost of completing the inventory is added to the cost of disposal, and both are deducted from the estimated sales price when computing realizable value. (3) Market value cannot ordinarily be determined. (4) Equivalent production is multiplied by the sales price.
    (c) The method of inventory costing which most nearly approximates the actual flow of costs and units in most manufacturing situations is : (1) average; (2) first-in, first-out (FIFO); (3) last-in, first-out (LIFO); (4) standard
    (d) If a unit of inventory has declined in value below original cost but the market value exceeds net realizable value, the amount to be used for purposes of inventory valuation is: (1) net realizable value; (2) original cost; (3) market value; (4) net realizable value less normal profit margin.
    (e) When evaluating materials inventory at cost or market, whichever is lower, the term “market” means: (1) net realizable value; (2) net realizable value less a normal profit margin; (3) replacement cost; (4) discounted present value.
    (f) Which statement is not valid as it applies to inventory  costing method? (1) If inventory quantities are to be maintained, part of the earnings must be invested (plowed back) in inventories when FIFO is used during a period of rising prices. (2) LIFO tends to smooth out the income pattern, since it matches the current cost of goods sold with current revenue, and inventories remain at constant quantities. (3) When a firm using LIFO method fails to maintain its usual inventory position (reduces stock on hand below customary levels), there may be a matching of old costs with current revenue. (4) Unlike LIFO, the use of FIFO permits some control by management over the amount of income for a period through controlled purchases.
    (g) If inventory levels are stable or increasing, an argument which is not in favor of the LIFO method is compared to FIFO is: (1) income tax tends to be reduced in periods of rising prices; (2) cost of goods sold tends to be stated at approximately current cost in the income statement; (3) cost assignments typically parallel the physical flow of goods; (4) income tends to be smoothed as prices change over a period of time.
    (h) An inventory costing procedure in which the oldest costs incurred rarely have an effect on the ending inventory is: FIFO; (2) LIFO; (3) conventional retail; (4) average.
    (i) A company’s inventory cost on its balance sheet was lower using FIFO than LIFO. Assuming no beginning inventory, the direction of movement of the cost of purchases during the period was: (1) up; (2) down; (3) steady; (4) undeterminable.

Answers:

1. The more frequently used forms in the procurement and use of materials are: purchase requisition, purchase order, receiving report, materials requisition, bill of materials, scrap report, returned materials report, materials ledger card, and summary of materials used.
2. Fir these incidental purchases, the same procedure apply as for productive materials. At times a blanket purchase order is issued to cover repetitive services such as typewriter repairs. However, for responsibility control purposes, a purchase order is advisable even though this type of form might add more paperwork.
3. The invoice should be routed to the accounting department immediately upon receipt. A copy of the purchase order and a copy of the receiving report with an inspection report attached thereto should be compared by the accounting clerk. When the invoice is found to be correct in all aspects or has been adjusted for errors or rejects, the accounting clerk approves the invoice, attaches it to the underlying documents, and sends these papers to another clerk for the preparation of the voucher.
4. In an electronic data processing (EDP) system, the data from the purchase order, receiving report, and the invoice are entered into the computer, which matches them and enters the cost data into the accounts payable file or prints out a check for payment.
5. Failure to make payment on the 10th day and paying 20 days later results in an effective interest cost of 54% [(360days/20days) × 3%] or for a more exact computation: [(3%/97%) × (365/20)] = 56.44%
6. (a) The usual items that would be included in materials acquisition and handling cost in addition to invoice costs, commissions, duties, etc., are costs of purchasing, transportation, receiving, inspection, insurance, and storing.

You may also be interested in other useful articles from “controlling and costing materials” chapter:

1. Purchases of productive material
2. Purchases of supplies, services, and repairs
3. Materials purchasing forms
4. Receiving materials
5. Invoice approval and data processing
6. Correcting invoices
7. Electronic data processing (EDP)  for materials received and issued
8. Cost of acquiring materials
9. Storage and use of materials
10. Issuing and costing materials into production
11. Materials ledger card – perpetual inventory
12. First-in-First-Out (FIFO) Costing Method
13. Average Costing Method
14. Last-in-First-Out (LIFO) Costing Method
15. Other Methods-Month end average cost, last purchase price or market price at date of issue, and standard cost
16. Inventory valuation at cost or market whichever is lower
17. American Institute of Certified Public Accountant (AICPA) cost or market rules
18. Adjustments for departures from the costing method used
19. Inventory pricing and interim financial reporting
20. Transfer of materials cost to finished production
21. Physical inventory
22. Adjusting Materials Ledger Cards and Accounts to Conform to Inventory Accounts
23. Scrap and waste
24. Spoiled goods
25. Defective work
26. Discussion Questions and Answers about Controlling and Costing Materials

Other Related Accounting Articles:

• Electronic Data Processing System (EDP System) for Materials Received and Issued
• Controlling and Costing Materials
• Flow of Costs
• Income Comparison of Variable and Absorption Costing
• Definition and Explanation of Process Costing System
• Direct Materials Price Variance
• Cost Classifications on Financial Statements
• Effect of Change in Fixed Cost, Sales Price and Sales Volume on Contribution Margin and Profitability
• Advantages and Disadvantages of Absorption Costing System
• Absorption Costing Definition