Material in cost accounting

30. Apr 2018

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Material in cost accounting

  1. material CONTROL DR. MOHAMED KUTTY KAKKAKUNNAN Associate Professor P.G. Dept of Commerce NAM COLLEGE KALLIKKANDY Kannur –Kerala – India
  2. MATERIAL • The basic requirement for production process • Often the most important element of cost • “material means any commodity or substance which is processed in a factory in order to be converted into finished product” Classification of Materials  Raw material – the basic material supplied in crude form to be used for production  Components – finished parts made out of raw material which are assembled to make finished products  Tools – appliances used in manufacturing operations  Spare parts- used for maintenance of plant, machinery etc  Consumable stores- items used for smooth running of machines like lubricants, oil, cotton wastes, rags, etc
  3. Materials are the physical commodities used in the manufacture of the finished product The starting point from which the first operations start Direct and Indirect Material Direct materials are those materials which form part of the finished product. Direct material can be conveniently and accurately allocated to a particular cost unit Indirect materials are those materials which cannot be conveniently and accurately allocated to particular unit of the product. These materials are not treated as a part of the product
  4. MATERIAL CONTROL • Materials account for a major part of cots (60%) • Maximum profit - Proper control of material cost is essential cost control and const reduction • “a system which ensures that right quality of material is available in the right quantity at right time and place with right amount of investment” • “a comprehensive framework for the accounting and control of material cost designed with the object of maintaining material supplies at a level so as to ensure uninterrupted production but at the same time minimizing investment of funds”
  5. MATERIAL CONTROL “is a systematic control over the purchasing, storing and using of material so as to have the minimum possible cost of materials” Control is to exercised at each stages of material handling (dealing) Three important stages of material control Purchases control Stores control Issue control
  6. Aspects of Material Control Two aspects- 1. Accounting aspect – related with maintaining documentary evidence of movement of materials at every stage right from the time of sales and production budgets are approved to the point when the materials are purchased and actually used in production operations 2. Operational aspects – is concerned with the maintenance of material supplies at a level so as to ensure that materials is available for use in production as and when required by maintaining minimum investment in material
  7. Need (Objectives of Material Control) 1. To ensure continuous availability of right quality of material, in the right quantity at the right time 2. To ensure that there is no excessive investment in materials 3. To ensure materials are purchased at right or reasonable prices 4. To ensure minimum wastage of materials at different stages of handling materials
  8. Need (Objectives of Material Control) Contd.. 5. To ensure that there is no risk of spoilage and obsolescence 6. To ensures ready information about different aspects of materials, by maintaining proper records on the movement of materials 7. To prevent fraud and misappropriation of materials 8. To ensure right amount is paid to the suppliers
  9. Essentials of Materials Control 1. Proper co-ordination and co-operation among different departments involved in purchasing, storing, issue and use of materials 2. Centralized purchasing 3. Proper scheduling, classification and codification of materials 4. Proper inspection at the time of receipt 5. Should use standard forms
  10. Essentials of Materials Control(contd..) 6. Proper storage facilities to prevent losses 7. Perpetual inventory system shall be used 8. Proper internal check system for materials 9. Set different level for materials (minimum, maximum, re-order) 10.Set economic ordering quantity to minimize ordering and carrying costs of materials 11.Maintain adequate record to ensure minimum wastage of materials and to provided ready information
  11. Purchases Control • Material – major part of financial commitment • Control has to start from purchases onwards • Separate department for purchases – Purchases Department • Purchases Manager, Supply Manager, Chief Buyer etc.
  12. Need for a Separate Purchases Department “To ensure continuous availability of required quality of material, to avoid held up of production and loss in production and at the same time reduce the ultimate cost of the finished product” 1. To make continuous flow of materials (uninterrupted production) 2. Purchase competitively and wisely 3. Purchase in reasonable quantities and minimize investment in materials minimum 4. Purchase proper quality of materials (reduce wastage) 5. Develop good supplier relationship so as to get supplies at reasonable prices
  13. Organization of Purchasing Department Centralized vs. decentralized • Centralized purchasing department means that all the purchase functions are routed through one department • Requirements of all other departments for different kinds of materials are met (purchased) by the department
  14. Advantages of Centralized Purchasing Department • Benefits of Large-scale purchases • Can appoint specialized staff • Better control on purchase is possible • All records are kept in one central place. Thus, ready information is available • Can frame and implement uniform purchase policies and procedures • Avoids duplication of efforts in case of decentralized purchasing • Proper co-ordination and co-operation of different department • Also beneficial to the supplier/vendor since he has to deal only with one department
  15. Disadvantages of Centralized Purchasing • May causes delay in getting material • Branches situated at different places cannot take advantage of localized purchasing • Chances of misunderstanding between the purchasing department and the department which requires the materials • Requires high initial cost to set a spate centralized purchasing department
  16. Functions of Purchase Department Functions are to address and answer the following questions • What to purchase? • When to purchase? • Where to purchase? • How much to purchase? • At what price to purchase? Purchase department has to answer and decide
  17. Purchase Procedures A. Receiving purchase requisitions B. Exploring the sources of supply and choosing the supplier C. Preparation and execution of purchase orders D. Receiving and inspecting materials E. Checking and passing of bills for payment
  18. 1. Purchase Requisitions or Indenting For Materials Initiates to purchase materials on the basis of requisitions received form the concerned department requiring materials A form used as a formal request to the purchasing dept to purchase materials Prepared by the store keeper for regular stock of materials and the departmental head for special materials Contains details regarding, quality, quantity and other description of materials
  19. 2. Exploring the sources of supply and choosing the suppliers • Answers “from whom to purchase materials?” • Invite quotations by issuing tenders • Open tender method - invites quotations from many parties by giving advertisement in the press and is followed when the purchase is in large quantities and values • Limited tender method - quotations are invited from limited number of suppliers familiar and famous in supplying materials • Single tender quotation is invited from sole supplier • On receipt of the quotations, the department prepares a comparative statement of quotations for selecting the supplier
  20. 3. Purchase order After selecting the supplier, the department issues a purchase order “a written authorization to the supplier to supply the particular material or materials” -an evidence of the contract, biding the supplier and the buyer- supplier has to supply materials as per the order, and the buyer has to pay the amount mentioned therein, if conditions are fulfilled 4. Receiving and inspecting materials Material inspection note – on completion of inspection, the receiving clerk enter the details in Stores or Goods Received Note 5. Checking and passing bills for payment
  21. Material Abstract An analytical statement prepared periodically on the basis of the various material requisition notes, returned notes and transfer notes. • Shows the value of materials consumed in each job at a glance. • Shows the total amount of material to be debited to each job and overheads.