Cost Accounting (COA) (CM121)

Segment Title Weights

A Cost Accounting Fundamentals 10%

B Cost Accounting Systems/Elements of Cost 20%

C Cost Accounting methods and techniques 45%

D Contemporary cost accounting tools 25%

 Part B: Cost Accounting Systems

Cost Accounting Elements of Costs B1. Costing of

Records as per Material
BCAS

Costing of Costing of
Overhead Labor
 Classification of Materials
Direct
Traceability/ Materials
Purpose Indirect High value
Materials items
Based on Medium
Material value/costs value items
Low value
Control items
purpose
Vital

Based on
Essential
utility

Desirable
 Material
• Material costs include the cost of obtaining the materials and receiving
them within the organization.
• Materials (and stores/supplies) are the basic ingredients that are
transformed into finished goods through the use of labor and factory
overhead in the production process.
• Direct materials are the major costs of a finished product that can be
economically and conveniently traced to that specific product. For example,
wood used in making a furniture, steel used in the manufacture of a car.
• Indirect materials comprise all the other materials or supplies involved in
the production of a product that can not be identified with a specific
product (necessary but relatively insignificant costs). For example, glue used
in the manufacture of furniture and rivets used in the manufacture of a car.
 Objectives of Material Management and Controls
 Assure/ensure uninterrupted supply of required materials as per
requisitions/demands of various work stations.
 Maintain inventory at the optimum level (at the lowest level possible) to
minimize the total costs of carrying and holding materials.
 Procurement of quality materials at the lowest possible prices.
 Facilitate/allow effective control over the use (from handling to put into
machine) of materials to minimize the level of waste.
 Prevent materials from being obsolete, theft etc.
 Objectives of Inventory Management

Ensuring that sufficient

Liquidity
inventory is held so that it does
not run out and disrupt
business

Inventory balancing act

Reducing inventory to the

Profitability
lowest possible amount to
minimize the level of capital
employed to be funded
 Dangers of holding low or high inventories
Costs of high inventory levels Costs of low inventory levels

Incur additional interest cost on the funds tied Stock outs costs for:
up in inventory or the foregone interest that is o Lost contribution
lost from tying up capital in inventory o Production stoppage
o Emergency orders
Extra holding costs for storage High setup/re-order costs

Stores administration cost Lost quantity discounts

Risk of theft/damage/obsolescence Failure to capitalize unexpected opportunities

 Accounting for Materials
Recording material flows:
Ref Dr. Cr.

Purchase of materials Materials/Supplies Dr.

Accounts payable/cash Cr.

Returns to suppliers if Accounts payable/cash Dr.

substandard materials are Materials Cr.
received

Issue of materials from store Work-in-process (direct material) Dr.

Factory/Manufacturing Overhead (Indirect material) Dr.
Materials Cr.

Return of unsuitable Material Dr.

materials from factory to WIP or MFG OH Cr.
store
 An Illustration
• Multiple Choice Question
BDL Co issued Tk 100,000 of material from stores, 25% of were not directly related to production. How
would the transaction be recorded in BDL’s ledger accounts?

A. Debit: Work in Progress TK100,000 Credit: Material Control TK100,000

Account
B. Debit: Material Control Account TK100,000 Credit: Work in Progress TK100,000

C. Debit: Work in Progress 75,000 Credit: Material Control 100,000

Debit: Factory Overheads 25,000 Account

D. Debit: Material Control Account 100,000 Credit: Work in Progress 75,000

Credit: Factory Overheads 25,000
 Material Management and Control in Manufacturing Environment

• A stock control system (also known as inventory control system) incorporates all the functions
associated with inventory management and maintenance in a manufacturing environment. It
should encompass everything from purchasing, product tracking to storage inputs, shipping and
receiving and re-ordering materials. The purpose of inventory/stock control is to reduce the costs
of holding stock, while ensuring to meet customer demand and making sure that there's enough
material for production. Advanced manufacturing environment should always have a 'safe' amount
of stock so that they're able to react and cover any unforeseen issues.
• Major inventory control methods include the followings:
 EOQ
 Reorder level
 Maximum level
 Minimum level
 Regular usage/normal usage
 Safety stock
 Economic Order Quantity (EOQ)
• Businesses not using JIT inventory management systems rely on EOQ [a
technique used to determine an optimum order quantity for inventory
items] to minimize the total cost of holding and ordering inventory.
• EOQ balances the relevant costs of holding and ordering inventory which
involves:
1. The variable costs of holding/carrying the inventory
2. The fixed costs of placing the order
Holding costs: EOQ model assumes that it costs a certain amount to hold or
carry a unit of inventory for a year [CC ] which is expected to go up with an
increase in the average level of inventory hold.
Ordering costs: A fixed cost incurred every time an order is placed [O],
which is expected to go down with an increase in the quantity ordered each
time.
 Economic Order Quantity (EOQ)
2AO
• EOQ = ; Where, EOQ = Economic Ordering Quantity
CC
A = Annual consumption (units)/usage of materials (or RU= Annual requirements computed as normal
use per day × Working days per year)
O = Cost of placing an order (or CO)
CC= Carrying cost or holding cost of material
(inventory) per unit per annum
(cost per unit × carrying cost percentage)
• EOQ can be calculated using formula or table.
• Tabular method is useful when quantity discounts
are available for bulk purchase.
• Assumptions of EOQ:
1. Demand and lead time are known and constant,
2. Purchase price is constant
3. No buffer inventory is held as it is assumed that
it is not needed since demand and lead time are known with certainty.
 Illustration 1
• A company requires 1,000 units of material X per month, the cost per order
is BDT 30 regardless of the size of the order. The annual carrying (or holding)
costs are BDT 2.88 per unit.
Required:
I. Compute EOQ using formula method.
II. Investigate the total cost of buying the material in quantities of 400, 500, 600, or
800 units at one time. Identify the cheapest option and comment on the
acceptability of result produced by the EOQ model in (I) above.
Sample Answer:
Req (I): Computation of economic order quantity (EOQ):
Annual requirement (A) = 1,000 × 12 = 12,000 units
Carrying cost per unit per annum (CC) = BDT 2.88
Cost per order (O) = BDT 30
2 × 12,000 ×30
EOQ = = 500 units.
2.88
 Req (II) Tabular Method:
Order quantity

400 500 600 800

Average inventory (units) 200 250 300 400

Number of orders per annum = 12,000 ÷ 30 24 20 15

order quantity
Annual holding cost = 576 720 864 1,152
(average inventory × CC)

Annual order cost = (number of orders per 900 720 600 450
annum × cost per order)

Total cost 1,476 1,440 1,464 1,602

Comment: EOQ
 Illustration 2: [Quantity discounts]
ABC Ltd has annual demand of 30,000 kg of material A @ BDT 12 per kg. Ordering cost including transportation
costs are BDT 200 per order, while annual cost of holding one kg of material in stock is estimated to be BDT 1.20
per kg. A 2% discount is available on orders of at least 5,000 kg and 2.5% discount is available if the order
quantity is 7,500 kg or above. It now takes two weeks for an order to be delivered.
Required:
i. Calculate EOQ ignoring quantity discounts
ii. Calculate EOQ assuming that quantity discounts are available.
iii. Calculate how frequently will the company place an order.
iv. Calculate how much inventory will it have on hand when the order is placed.

Sample Answer:
Req (i): Computation of economic order quantity (EOQ):
Annual requirement (A) = 30,000 kg
Carrying cost per unit per annum (CC) = BDT 1.22
Cost per order (O) = BDT 200
2 × 30,000 ×200
EOQ = = 3,162 units.
1.20
 Req (ii)
Order quantity
3,162 5,000 7,500 10,000
Average inventory (units) 1581 2,500 3,750 5,000
Number of orders per annum = 30,000 ÷ 9.48 or 10 6 4 3
order quantity
Annual holding cost = 1,897 3,000 4,500 6,000
(average inventory × CC)
Annual order cost = (number of orders per 2,000 1,200 800 600
annum × cost per order)
Total cost 3,897 4,200 5,300 6,600
Savings on quantity discount 0000 30,000×12×2%= 30,000×12×2.5%= 30,000×12×2.5%=
(7,200) (9,000) (9,000)
Net savings 4,200-3,897= 303 - 5,300-3,897= 6,600-3,897= 2,703 -
7,200= 6,897 1,403 -9,000= 9,000= 6,297
7,597
COMMENT: A further cost savings can be made on 7,500 kg purchased on each order.
 Req (ii) Alternative Approach
Compare the total costs at each level and choose the lowest total costs as the best order level. The total cost will be
made up of the total purchasing costs (net of discounts), the holding or carrying costs and the ordering costs.

Order size 3,162 5,000 7,500 10,000

Total purchase costs (30,000 × 12) 360,000 360,000 360,000 360,000
Discount 0 (7,200) (9,000) (9,000)
Annual holding cost 1,897 3,000 4,500 6,000
Annual order cost 2,000 1,200 800 600
Total cost 363,897 357,000 356,300 357,600
COMMENT: A further cost savings can be made on 7,500 kg purchased on each order.

Req (iii):
Number of orders if adopts EOQ policy = 30,000 ÷ 3,162 = 9.487 or 10
Number of days between two consecutive orders = 365 days ÷ 9.487 = 38 days 365 ÷ 10 = 37 days
Number of orders if adopts discount policy = 30,000 ÷ 7,500 = 4; Number of days between two orders = 365 ÷ 4 = 91 days
Req (iv):
Inventory should have on hand when the order is placed = 30,000 ÷ 52 × 2 = 1,154 kg
 Other formulas to monitor and control inventory levels
• Safety stock = (Maximum use per day – Normal use per day) × lead time
• Reorder point or level= Normal Lead time usage + Safety Stock
• Normal Maximum Inventory= Safety stock+ Economic order Quantity
• Absolute maximum Inventory = Normal maximum inventory + [(Normal use per day - Minimum
use per day) × lead time]
• Minimum level = Re-order level - (Normal consumption x Normal re-order period).
• Safety stock level = Ordering level – (Average rate of consumption × Re-order period) OR
• (Maximum rate of consumption - Average rate of consumption) × Lead time
• Ordering level = Minimum level + Consumption during time lag period. OR
• Maximum consumption x Maximum re-order period. OR
• Maximum consumption x Lead time + Safety Stock
 December 2020
ABC Manufacturing Co. Ltd. provides you with the following information pertaining to one of
its raw materials:
Normal use per day.............................................................. 400 units
Maximum use per day.......................................................... 600 units
Minimum use per day .......................................................... 100 units
Working days per year........................................................... 250 days
Lead time............................................................................... 8 days
Cost of placing one order........................................................ Tk.20.00
Cost per unit of material......................................................... Tk.2.50
Carrying cost percentage......................................................... 10%

Required:
Calculate the following: (i) Economic order quantity; (ii) Safety stock; (iii) Reorder point; (iv)
Normal Maximum inventory; (v) Absolute maximum inventory; (vi) Average normal
inventory.
 Model solution
(i) Economic order quantity:
=√(2 𝑋 𝑅𝑈 𝑋 𝐶𝑂) ÷ ( 𝐶𝑈 𝑋 𝐶𝐶%) =√{2 𝑋 (400 𝑋 250)𝑋 𝑇𝐾 20} ÷ (𝑇𝑘 2.50 𝑋 10%)= √40,00,000÷ 0.25=
√160,00,000= 4,000
(ii) Safety Stock= Maximum use per day-Normal use per day= 600 units-400 units = 200 units x 8 days lead
time = 1,600
(iii) Reorder Point= Normal Lead time usage (400 units x 8 days)+ Safety Stock (1,600 units)= 4,800 units
(iv) Normal Maximum Inventory= Safety stock+ Economic order Quantity= 1,600 units+ 4,000 units= 5,600
units
(v) Absolute maximum Inventory:
Normal maximum inventory [Req.(4)] ………........................................ 5,600
Normal use per day...........................................400
Minimum use per day.......................................100
300 x 8 days= 2,400
8,000
(vi) Average normal inventory:
Safety stock......................................................................................1,600
Economic order quantity÷2=4,000÷2...............................................2,000
3,600
 June 2020
• From the following particulars determine the EOQ.
Ordering Quantities (Tons) Price per ton (Tk.)
Less than 100 ……………..……………………….=10.00
Between 100 and 199 ………………………….=9.90
Between 200 and 499 ………………………….=9.80
Between 500 and 999…………………………..= 9.70
Between 1,000 and 1,999 …………………….=9.60
Between 2,000 and above ……………………=9.50
• Additional Information:
(i) Annual Consumption of materials = 2,000 tons
(ii) Carrying Cost 10%
(iii) Ordering Cost Tk. 5 per order
 June 2021
ABC Company sells a number of products to many restaurants in the area. One product is a
special meat cutter with a disposable blade. Blades are sold in a package of 12 at Tk. 20 per
package. It has been determined that the demand for the replacement blades is at a
constant rate of 2,000 packages per month. The packages cost the company Tk. 10 each
from the manufacturer and require a three-day lead time from date of order to date of
delivery. The ordering cost is Tk. 1.20 per order, and the carrying cost is 10% per annum.
The company uses the economic order quantity formula.
Required:
(i) Compute the economic order quantity.
(ii) Compute the number of orders needed per year.
(iii) Compute the cost of ordering and of carrying blades for the year.
(iv) Determine the date on which the next order should be placed, assuming that there is
no reserve (safety stock) and that the present inventory level is 200 packages. (360 days = 1
year)
(v) Discuss the difficulties that most firms would have in attempting to apply the EOQ
formula to their inventory problems.
 Inventory System-Periodic vs. Perpetual System
A periodic inventory system is a form of inventory valuation where the inventory account is updated at the end of an
accounting period rather than after every sale and purchase.
The method allows a business to track its beginning inventory and ending inventory within an accounting period.
This system visualizes physical stock verification at a fixed date/period during the year. Generally, under this system the activity takes
place at the end of the accounting period or a date close to such date. Usually the system is opened in the following manner: -
1. A period of 5/7 days, depending on the magnitude of the work is chosen during which all the items under stock are verified
physically and such period is known as ‘cut-off’ period. During this period there are no movements of stock items and neither
‘receipts’ nor are ‘issues permitted.
2. The items are physically counted/measured depending on their nature and are noted down in records which are signed by the
auditors if they are present in stock verification.
3. The bin cards balances are also checked and initiated. Generally, the physical balances and bin card balances of various items
should be same unless shortage/excesses are there or the recording/ balancing in the cards are incorrect.
4. After the physical verification is completed work sheets are countersigned by the go down supervisors and the stock verified.
5. Thereafter reconciliation statement is prepared item wise where the physical balances and bin card balances are different.
6. Then the balance as per bin cards and as per stores ledger is also compared and necessary adjustments are made to show the
correct position of stock at the year end.
7. Finally the shortages/excess statement is prepared by the concerned departments and are placed before the higher management
for their approval for adjustments.

The periodic inventory system is ideal for smaller businesses that maintain minimum amounts of inventory. The physical inventory
count is easy to complete, small businesses can estimate the cost of goods sold figures for temporary periods.
 Perpetual Inventory
• It represents a system of records maintained by the stores in department. It in fact comprises of: Bin Cards, and
Stores Ledger.
• Bin Card maintains a quantitative record of receipts, issues and closing balances of each item of stores. Separate
bin cards are maintained for each item. Each card is filled up with the physical movement of goods i.e. on its receipt
and issue. Like bin cards, the Stores Ledger is maintained to record all receipt and issue transactions in respect of
materials. It is filled up with the help of goods received note and material requisitions.
• A perpetual inventory is usually checked by a programme of continuous stock taking. Continuous stock taking
means the physical checking of those records (which are maintained under perpetual inventory) with actual stock.
Perpetual inventory is essentially necessary for material control. It incidentally helps continuous stock taking.
• The main advantages of perpetual inventory are as follows:
(1) Fixation of the various levels and check of actual balances in hand with these levels assist the Storekeeper in
maintaining stocks within limits and in initiating purchase requisitions for correct quantity at the proper time.
(2) A systematic review of the perpetual inventory reveals the existence of surplus, dormant, obsolete and slow-
moving materials, so that remedial measures may be taken in time.
(3) Physical stocks can be counted and book balances adjusted as and when desired without waiting for the entire
stock-taking to be done.
(4) Discrepancies are easily located and thus corrective action can be promptly taken to avoid their recurrence.
(5) Quick compilation of Profit and Loss Accounts (for interim period) due to prompt availability of stock figures.
Maintenance of General Ledger and Subsidiary Ledger
 Methods of Pricing Issues FIFO, LIFO, Average
The important operation of the inventory management is inventory valuation through stores register.
Inventory valuation under-pricing is being executed through the following various methodologies:
1. First in First out (FIFO)
2. Last in First out (LIFO)
3. Weighted Average Method (WAM)

1. First in First out (FIFO)

The material which is first issued from the earliest consignment on hand and priced at the cost at which that
consignment was placed in stores. The materials which are received at first to be issued first. This is the
method suitable for the trend of falling prices in the market.
2. Last in First out (LIFO)
Under this method, the issues are made at the price of latest consignment. The current cost of the jobs/work
orders are denominated only in terms of the price of the latest consignment. During the rising prices, this is
considered to be a most suitable method.
3. Weighted average method
While computing the average price in this method, the total costs and total quantities are taken into
consideration. After each purchase it is considered by summing the cost of this purchase to the cost of stock in
hand and quantity received to the stock in hand. To reach at the value the total cost is divided by the total
quantity. This method reduces the number of calculations and avoids price fluctuations and gives an
acceptable figure for stock.
 Valuation of Closing Inventory for BS
• IAS 2 outlines acceptable methods of determining cost:
1. specific identification (inventory items that are not interchangeable),
2. first-in first-out (FIFO) [For items that are interchangeable] or
3. weighted average cost [For items that are interchangeable]
Note that the LIFO formula, which had been allowed prior to the 2003 revision of IAS 2, is no
longer allowed.
Also note that the same cost formula should be used for all inventories with similar
characteristics as to their nature and use to the entity. For groups of inventories that have
different characteristics, different cost formulas may be justified.

• IAS 2 requires inventories to be measured/reported at the lower of

cost and (market) net realizable value (NRV).
• NRV is the estimated selling price in the ordinary course of business, less the estimated cost of
completion and the estimated costs necessary to make the sale.
 Return of Materials
• Valuation of Materials Returned to the Vendor: Materials which do not meet quantity, dimensional
and other specifications and are considered to be unfit for production are usually returned to the vendor. These
materials can be returned to the vendor before they are sent to the stores. In case materials reach store and are
noticed to be of sub-standard quality, then also they can be returned to vendor. The price of the materials to be
returned to vendor should include its invoice price plus freight, receiving and handling charges etc. Strictly
speaking, the materials returned to vendor should be returned at the stores ledger price and not at invoice price.
But in practice invoice price is only considered, the gap between the invoice price and stores ledger price is
charged as overhead. In Stores ledger the defective or sub-standard materials are shown in the issue column at
the rate shown in the ledger, and the difference between issue price and invoice cost is debited to an inventory
adjustment account.
• Valuation of Materials Returned to Stores: When materials requisitioned for a specific job or work-in
progress are found to be in excess of the requirement or are unsuitable for the purpose, they are returned to the
stores. There are two ways of treating such returns.
(1) Such returns are entered in the receipt column at the price at which they were originally issued, and the
materials are kept in suspense, to be issued at the same price against the next requisition.
(2) Include the materials in stock as if they were fresh purchases at the original issue price.
• Valuation of Shortages during Physical Verification: Materials found short during physical
verification should be entered in the issue column and valued at the rate as per the method adopted, i.e., FIFO
or any other recorded at the original price but a new price has to be calculated for further issues.
 Illustration 1
Prepare a Stores Ledger Account from the following information adopting FIFO method of pricing of issues of
materials.

March 1, 2022 Opening Balance 500 tons @ 200

3. Issue 70 tons
4. Issue 100 tons
5. Issue 80 tons
13. Purchased from suppliers 200 tons @ 190
14. Returned from Department X 15 tons.
16. Issued 180 tons
20. Purchased 240 tons @195
24. Issue 300 tons
25. Purchased from supplier 320 tons @ 200
26. Issue 115 tons
27. Returned from Department Y 35 tons
28. Purchased from supplier 100 tons @ 200
 Illustration 2
On 1 January Mr P started a small business selling a special yarn. He invested his savings of TK 40 000 in the business
and during the next six months the following transactions occurred:
Date of receipt Yarn purchasesquantity Totalcost (TK) Date of issue Yarn sales quantity Totalvalue(TK)
(box) (box)
13 Jan 200 7 200 10 Feb 500 25 000
8 Feb 400 15 200
11 Mar 600 24 000 20 Apr 600 27 000
12 Apr 400 14 000
15 June 500 14 000 25 June 400 15 200
The yarn is stored in premises Mr P has rented, and the closing stock of yarn, counted on 30 June, was 500 boxes.
Other expenses incurred, and paid in cash, during the six-month period amounted to TK 2300.
Required:
a) Calculate the value of the material issues during the six-month period, and the value of the closing stock at the
end of June, using the following methods of pricing:
i) first in, first out;
ii) last in, last out;
iii) weighted average (calculations to two decimal places only).
b) Calculate and discuss the effect each of the three methods of material pricing will have on the reported profit of
the business, and examine the performance of the business during the first six-month period. (Adapted from
ACCA)
• (a) (i) FIFO: 2100 boxes were purchased and 1500 boxes were issued to production, leaving a balance of 600
boxes. Actual closing stock is 500 boxes, resulting in a stock loss of 100 boxes. The closing stock will be
valued at the latest purchase price: TK 28 per unit (TK 14 000/500). Closing stock valuation = TK 14 000
(500 × TK 28) Cost of sales (including stock loss) = TK 60 400 (Total purchase cost (74 400) – (14 000)
Date Issue Cost(TK)

10/2 400 units 15 200

100 units at TK 7200/200 3 600
18 800
20/4 400 units 14 000
200 units at TK 24 000/600 8 000
22 000
25/6 400 units at TK 14 000/500 11 200
30/6 100 units (stock loss) at TK 14 000/500 2 800
Total cost of issues 800

Note
• If the question does not require you to prepare a stores ledger account, you are recommended for the FIFO
method to follow the approach shown in this answer. First calculate the closing stock in units. With the FIFO
method the closing stock will be valued at the latest purchase prices. You can calculate the cost of sales as
follows:
• Cost of sales = Opening stock + Purchases – Closing stock
 Req iii)

Receipts Issues Balance Weighted

average
Total Total issue
Quantity cost Quantity cost Quantity Cost price
Date (boxes) (TK) Date (boxes) (TK) (boxes) (TK) (TK)
13/1 200 7 200 200 7 200 36.00
8/2 400 15 200 600 22 400 37.33
10/2 500 at 18 665 100 3 735 37.33
TK 37.33
11/3 600 24000 700 27 735 39.62
12/4 400 14 000 1 100 41 735 37.94
20/4 600 at 22.764 500 18 971 37.94
TK 37.94
15/6 500 14 000 1 000 32 971 32.97
25/6 400 at 13 188 600 19 783 32.97
TK 32.97
30/6 100 at 3 297 500 16 486 32.97
TK 32.97
57 914
 (b) Profit calculations
FIFO LIFO Weighted
(TK) (TK) average (TK)

Sales 67 200 67 200 67 200

Cost of sales and stock loss (60 400) (54 800) (57 914)
Other expenses (2 300) (2 300) (2 300)
Profit 4 500 10 100 6 986

The purchase cost per box is TK 36 (Jan.), TK 38 (Feb.), TK 40 (March), TK 35 (April) and TK 28 (June).
• The use of FIFO results in the lowest profit because prices are falling and the higher earlier prices are charged
to production, whereas with LIFO the later and lower prices are charged to production. The use of the weighted
average method results in a profit calculation between these two extremes. There are two items of concern
regarding the performance of the business:
• There was a large purchase at the highest purchase price in March. This purchase could have been delayed
until April so as to take advantage of the lower price. The stock loss has cost over TK 3000. This should be
investigated. A materials control procedure should be implemented.
 Recording Materials as per BCAS-24
BCAS: 24-Material costs deal with the principles and methods of classification, measurement and assignment of material cost, for
determination of the cost of product or service, and the presentation and disclosure in cost statements. The objective of this standard is
to bring uniformity and consistency in the principles and methods of determining the material cost with reasonable accuracy.
Principle of valuation of receipt of materials:
The material receipt should be valued at purchase price including duties and taxes, freight inwards, insurance, and other expenditure
directly attributable to procurement (net of trade discounts, rebates, taxes and duties refundable or to be credited by the taxing
authorities) that can be quantified with reasonable accuracy at the time of acquisition.
Finance costs incurred in connection with the acquisition of materials shall not form part of material cost.
Self-manufactured materials shall be valued including direct material cost, direct employee cost, direct expenses, factory overheads,
share of administrative overheads relating to production but excluding share of other administrative overheads, finance cost and
marketing overheads. In case of captive consumption, the valuation shall be in accordance with Cost Accounting Standard 27.
Spares which are specific to an item of equipment shall not be taken to inventory, but shall be capitalized with the cost of the specific
equipment. Cost of capital spares and/or insurance spares, whether procured with the equipment or subsequently, shall be amortized
over a period, not exceeding the useful life of the equipment.
Principle of valuation of issue of material
Issues shall be valued using appropriate assumptions on cost flow e.g. First In First Out, Last In First Out, Weighted Average Rate. The
method of valuation shall be followed on a consistent basis.
Where materials are accounted at standard cost, the price variances related to materials shall be treated as part of material cost.
Any abnormal cost shall be excluded from the material cost.
Material cost may include imputed costs not considered in financial accounts. Such costs which are not recognized in financial
accounts may be determined by imputing a cost to the usage or by measuring the benefit from an alternate use of the resource.
The material cost of normal scrap/ defectives which are rejects shall be included in the material cost of goods manufactured. The
material cost of actual scrap / defectives, not exceeding the normal shall be adjusted in the material cost of good production. Material
Cost of abnormal scrap /defectives should not be included in material cost but treated as loss after giving credit to the realizable value
of such scrap / defectives.
Indirect materials may be grouped under major heads like tools, stores and spares, machinery spares, jigs and fixtures, consumable
stores, etc., if they are significant.
Assignment of costs – Materials
Assignment of material costs to cost objects: Material costs shall be directly traced to a Cost object to the extent
it is economically feasible and /or shall be assigned to the cost object on the basis of material quantity consumed
or similar identifiable measure and valued.
Where the material costs are not directly traceable to the cost object, these may be assigned on a suitable basis
like technical estimates.
Assignment of costs – Direct Expenses
Where a material is processed or part manufactured by a third party according to specifications provided by
the buyer, the processing/ manufacturing charges payable to the third party shall be treated as part of the
material cost.
Wherever part of the manufacturing operations / activity is subcontracted, the subcontract charges related to
materials shall be treated as direct expenses and assigned directly to the cost object.
Assignment of costs– Indirect materials
The cost of indirect materials shall be assigned to the various Cost objects based on a suitable basis such as
actual usage or technical norms or a similar identifiable measure.

Recording and reporting

Direct Materials shall be classified in the cost statement under suitable heads. E.g. Raw materials, Components,
Semi finished goods and Sub-assemblies.
Direct Materials shall be classified as Purchased - indigenous, imported and self-manufactured.
Indirect Materials shall be classified in the cost statement under suitable heads.