32 Cost Accounting

2 Material Cost

MATERIALS

Meaning of the Word ‘Material’

Material refers to all commodities that are consumed in the process of manufacture. Material can
be defined “anything that can be stored, stacked or stockpiled”
It continues an important part of the cost of production of commodity. They account for nearly
60% of the cost of production of large number of organizations.
Types of Materials
The materials can be categorized into two:
(a) Direct Materials: The materials which can be identified with the individual units, are known as
direct materials’. These materials form part of the finished product. All costs, which are incurred
to obtain direct material, are known as ‘direct material cost.’ Leather used in the manufacture
of shoes and yarn required for production of cloth are examples of direct materials.
(b) Indirect Materials: Indirect materials do not form part of the finished products. Indirect
material cannot be accurately allocated to a particular unit of product. Examples of such materials
are: consumable stores, cotton waste and lubricating oils, required for the maintenance of
machines, etc.
Objectives of Material Control
The following are the main objectives of material control.
(a) All types of raw materials should be available through out. This ensures uninterrupted production
schedule.
(b) There should be no under-stocking, which generally hampers the production process.
(c) There should be no over-stocking, which makes the capital dearer.
Material Cost 33

(d) The purchaser is able make a valuable contribution to reduction in cost by purchasing raw
materials at the most favourable prices.
(e) Purchase of material should be of the right quality consistent with the standards prescribed in
respect of the finished goods.
(f) Proper storage conditions should be provided to different types of raw material in order to
minimize the loss of material.
(g) There should be a system to give complete and up to date accounting information about the
availability of material.
Procedures for Materials Procurement and Use
Although production process and material requirements vary, the cycle of procurement and use
of material usually involves the following steps:
(1) Engineering and planning: Determine the design of the product, the material specification
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.
(2) The production budget: Provides the master plan from which details concerning material
requirements are eventually developed.
(3) The purchase requisition: Informs the purchasing agent concerning the quantity and type of
materials needed.
(4) The purchase order: Contracts for appropriate to be delivered at specified dates to assure
uninterrupted operations.
(5) The receiving report: Certifies quantities received and may report results of inspection and
testing for quality.
(6) The materials requisition: Notifies the storeroom or warehouse to deliver specified time or is
the authorization for the storeroom to issue material to departments.
(7) The materials ledger cards: Record the receipt and the issuance of each class of materials
provide a perpetual inventory record.
Purchase of supplies, services and repairs: The procedure followed in purchasing productive
materials should apply to all departments and division of a business. Purchase requisitions, purchase
orders, and receiving reports are appropriate for accounting department supplies and equipment, the
company cafeteria, the first aid unit, the treasurers office, the building service department and the public
relations, personnel, sales and engineering department, as well as all other departments. If for example,
the accounting department needs new forms printed, a requisition should be sent to the purchasing
department in the usual manner, and a purchase order should be prepared and sent to the printer.
In the case of magazine subscriptions, trade and professional association’s memberships for company
officials, and similar services, the official or department head may send in a requisition in a usual
manner. A requisition, an order, and an invoice for all goods and services purchased are necessity in
properly controlling purchases.
 34 Cost Accounting

Repair contracts on an annual basis for typewriters, calculators, electronic data processing (EDP)
equipment, and some types of factory equipment may be requisitioned and ordered in the usual manner.
In order cases, a department head or other employee may telephone for service and shortly thereafter
may have a machine repaired and back in operation. In such cases, the purchasing agent issues a so-
called blanket purchase order that amounts to approval of all repair and service costs of a specific type
without knowing the actual amount charged. When the repair bill is received, the invoice clerk checks
the amount of the bill with the head of the department where the repairs took place and them approves
the invoices for payment.
Purchase Requisition Form
The purchase requisition originates with (1) stores or where house clerk who observes that quantity
on hand is at a set ordering minimum, (2) a materials ledger clerk who may be responsible for notifying
the purchasing agent when to buy, (3) a works manager who foresees the need for special materials or
unusual quantities (4) a research or engineering department employee who needs materials or supplies of
a special nature, or (5) a computer that has been programmed to produce replenishment advice for the
purchasing department. For standard material, little information other than the stock number may be
needed, and the purchasing agent uses judgment concerning where to buy and the quantity to order. For
other purchase requests, it may be necessary to give meticulous description, blueprints, catalog numbers,
weights, standards, brand names, exact quantities to order, and suggested price. Below is an example of
the purchase requisition:
Example/Sample of purchase requisition form
Purchase Requisition No. 07615
Mo / Day / Yr
To Purchasing Department
Deliver to ———————— Date Required ———————————
Dept No ——————————
Acct. No ——————————
Suggested
Supplier———————————————————————————————————
——————
Qty Item No. Description Unit price Amount
Budget Control
Allowance for Balance Ordered
Period______ Available____ By______
Amt This Approved
Purchase______ By______
Remaining
Balance________
One copy remain with the originating employee, and the original is sent to the purchasing department
for execution of the request.
Material Cost 35

RECEIVING MATERIALS
The function of the receiving department is to: unload and unpack incoming materials; check
quantities received against the shippers packing list; identify goods received with description on the
purchase order; prepare a receiving report; notify the purchasing department of description discovered;
arrange for inspection when necessary; notify the traffic department and the purchasing department of
any damage in transit; and route accepted materials to the appropriate factory location.
Invoice approval is an important step in materials contorl procedure, since it certifies that the
goods have been received as ordered and the payment can be made. The invoice approval information is
often built into a rubber stamp and each invoice is stamped.
The voucher data are entered first in the purchases journal and are posted to the subsidiary records.
They are then entered in the cash payments journal according to the due date for payment. The original
voucher and two copies are sent to the treasurer for issuance of the cheque. The treasurer mails the
cheque with the original voucher to the vendor, files a voucher copy and returns one voucher copy to
the accounting department for the vendors file. Purchase transaction entered in the purchases journal
affect the control accounts and the subsidiary records as shown in the chart below:
General Ledger Control
Transaction Subsidiary Records
Debit Credit
Materials purchased for Materials Accounts payable Entry in the received section in
stock the materials ledger card
Materials purchased for a Work in process Accounts payable Entry in the direct material
particular job or department section of the production or the
job order
Materials and supplies Materials Accounts payable Entry in the received section of
purchased for factory the material ledger card
overhead purposes
Supplies purchased for Material Marketing Accounts payable Entry in the received section of
marketing and administrative expense control the materials ledger card or in
office the proper columns of the
Administrative marketing or administrative
expenses Control expenses analysis sheets
Purchase of service or Factory Overhead Accounts payable Entry in the proper
repairs Marketing expenses account columns of the
control expenses analysis sheet
Administrative
expenses control
Purchase of equipment Equipment Accounts payable Entry on the equipment ledger
card

CORRECTING INVOICES
When the purchase order, receiving report and invoice are compared, various adjustment may be
needed as a result of the circumstances described below.
 36 Cost Accounting

(1) Some of the materials ordered are not received and are not entered in the invoice. In this case no
adjustment is necessary, and the invoice may be approved for immediate payment. On the
purchase order the invoice clerk will make a notation of the quantity received in place of the
quantity ordered. If the vendor is out of stock or otherwise unable to deliver specified merchandise,
and immediate ordering from other sources may be necessary.
(2) Items ordered are not received but are entered in the invoice. In this situation the shortage is
noted in the invoice and is deducted from the total before payment is approved. A letter to the
vendor explaining the shortage is usually in order.
(3) The seller ships a quantity larger than called for in the purchase order. The purchaser may keep
the entire shipment and add the excess to the invoice, if not already invoiced; or the excess may
be returned or held, pending instruction from the seller. Some companies issue a supplementary
purchase order that authorizes the invoice clerk to pay the over shipment.
(4) Materials of a wrong size and quality, defective parts, and damaged items are received. If the
items are returned, a correction in the invoice should be made before payment is approved. It
may be advantageous to keep damaged or defective shipments if the seller makes adequate
price concessions, or the items may be held subject to the seller’s instructions.
(5) It may be expedient for a purchase to pay transportation charges, even though delivered prices
are quoted and purchases are not made on the basis.The amount paid by the purchaser is
deducted on the invoice, and the paid freight bill is attached to the invoice as evidence of
payment.
Electronic Data Processing System (EDP System) for Materials Received and Issued:
In an electronic data processing system (EDP System), the computer to a great extent replaces the
clerk. Upon receipt of the invoice (the source document), the accounts payable clerk enters the account
distribution on the invoice. The data are then durectly inputted from the invoice to the computer data
bank via a terminal device. The data are edited, audited, and merged with the purchase order and the
receiving order data, both of which have been stored in the purchase order number. Quantities, monetary
values, due dates,terms, and unit prices are matched. When in agreement, the cost data are entered in the
accounts payable computer file with a date for later payment.

COST OF ACQUIRING MATERIALS/MATERIALS ACQUISITION COST

A guiding principle in accounting for the cost of materials is that all costs incurred in entering a unit
of materials into factory production should be included.
Acquisition costs: such as the vendor’s invoice price and transportation charges, are visible costs
of the purchased goods. Less obvious costs of materials entering factory operations are costs of
purchasing, receiving, unpacking, inspecting, insuring, storing, and general and cost accounting.
Applied acquistition costs: If it is decided that the materials cost should include incoming freight
charges and other acquistion costs, and applied rate might be added to each invoice and to each item
instead of charging these costs directly to factory overhead.
Material Cost 37

Stores Records
The records of stores may be maintained in three forms
(1) Bin Cards
(2) Stock Control Cards
(3) Stores Ledger
The first two forms of accounts are records of quantities received, issued and those in balance but
the third one is an account of their cost also. Usually, the account is kept in the forms, the quantitative
in the stores and quantitative cum financial in the cost department.
Bin Cards and Stock Control Cards
These are essential similar, being only quantitative records of stores. The latter contains further
information as regards stock on order. Bin cards are kept attached to the bins or receptacles or quite
near thereto so that these also assist in the identification of the stock. The stock control cards, on the
other hand are kept in cabinets or trays or loose binders.
Swadeshi Company Limited
BIN CARD
Bin Card No. ............... Bin Card No. .....................
Name of the Article...................... Maximum Quantity...................
Code No. ............. Minimum Quantity...................
Store Ledger Folio................. Ordering Quantity...................
Reciepts Issues Balance Goods on Order
Date Goods Quantity Stores Quantity Quantity Date of Remark No. of Quantity Date of
Received Requisition Cheking Date of Goods
Note No. Note No. Order Received

ADVANTAGES OF BIN CARDS

(1) There would be less chances of mistakes being made as entries would be made at the same time
as goods are received or issued by the person actually handling the materials.
(2) Control over stock can be more effective, in as much as comparison, of the actual quantity in
hand at any time with the book balance is possible.
 38 Cost Accounting

Stores Ledger
A modern stores ledger is a collection of cards or loose leaves specially ruled for maintaining a
record of both quantity and cost of stores received, issued and those in stock. It being a subsidiary
ledger to maintain the main cost ledger, it is maintained by a Cost Accountant. It is posted from the
Goods Received Note and the Materials Requisition.
Issuing and Costing Materials into Production
To control the quantity and cost of materials, supplies, and services requires a systematic and
efficient system of purchasing, recording and storing. Equally necessary is a systematic and efficient
procedure for issuing materials and supplies.
Materials Ledger Card – Perpetual Inventory
As purchased materials go through the systematic verification of quantities, prices, physical condition,
and other checks, the crux of the accounting procedure is to establish a perpetual inventory–maintaining
for each type of materials, a record showing quantities and prices of materials received, issued and on
hand.
Materials ledger cards or stock ledger sheets constitutes a subsidiary materials ledger controlled by
the materials are inventory accounts in the general ledger or in the factory ledger.
Stock Ledger Cards commonly show the account number, description or type of material, location,
unit measurement, and maximum and minimum quantities to carry. These cards are the materials ledger
with new cards prepared and old ones discarded as changes occur in the types of materials carried in
stock. The ledger card arrangement is basically the familiar debit, credit, and balance columns under the
description of received, issued, and balance. Following is an example of material ledger card.
Example/Sample of materials ledger cards
Piece or Part No. Reorder
Point__________________
Discription Reorder
Quantity____________________
Maximum Quantity__________
Received Issue Balance
Date Res. Qty Amount Date Res. Qty Amount Qty Unit cost Amount
No. No.

MATERIALS COSTING METHODS

 First-In-First-Out (FIFO) Costing Methods
 Average Costing Methods
 Last-In-First-Out (LIFO) Costing Method
Material Cost 39

 Other Materials Costing Methods—Month end average cost, last purchase price or market
price at date of issue and standard cost.
First-In-Out (FIFO)
This methods assumes that the goods purchased first or manufactured first are issued/sold first.
That is the goods issued or sold currently are those which represent the earliest purchases amongst the
goods held in inventory. This would mean that the goods which remain in stock after the sales, are those
which represent the most recent purchases.
Last-In First-Out (LIFO)
This methods is just the opposite if FIFO methods. This method assumes that the goods issued or
sold out of the inventory are the ones most recently purchased manufactured. Therefore the goods held
in stock represent the earlier purchases productions.

Weighted Average Method (WAM)

This method assumes that all inventory available are best represented by a weighted average cost.
The average cost of goods held in inventory is recalculated every time a fresh purchase is made and
goods issued or sold out of inventory are priced at such average price till such time as the next lot is
purchased.
Illustration 1
The following transaction took place in respect of a material.
Date Receipt Quantity (Units) Rate (`) Issue Quantity (Units)
02/03/2008 200 2.00 -
10/03/2008 300 2.40 -
15/03/2008 - - 250
18/03/2008 250 2.60 -
20/03/2008 - - 300
Prepare a Stock register as per:
(a) Simple Average Method (b) Weighted Average Method.
Solution
(ICWA, Adapted)
Stock Register (Simple Average Method)
Date Receipts Issues Balance
Qty Rate Amt Qty Rate Amt Qty Rate Amt
02/03/2008 200 2.00 400 - - - 200 - 400
10/03/2008 300 2.40 720 - - - 500 - 1,120
15/03/2008 - - - 250 2.20 550 250 - 570
18/03/2008 250 2.60 650 - - - 500 - 1,120
20/03/2008 - - - 300 2.50 750 200 - 470
 40 Cost Accounting

Stock Register (Weighted Average Method)

Date Receipts Issues Balance
Qty Rate Amt Qty Rate Amt Qty Rate Amt
02/03/2008 200 2.00 400 - - - 200 2.00 400
10/03/2008 300 2.40 720 - - - 500 2.24 1,120
15/03/2008 - - - 250 2.24 560 250 2.24 560
18/03/2008 250 2.60 650 - - - 500 2.42 1,120
20/03/2008 - - - 300 2.42 726 200 2.42 484
Illustration 2
Following purchases were made of pipe 6”.
Receipts Issues
04/06/2008 20 pipes @ ` 15.00 each 20/60/2008 25 pipes
17/06/2008 30 pipes @ ` 14.00 each 05/07/2008 40 pipes
02/07/2008 40 pipes @ ` 14.50 each 31/07/2008 45 pipes
30/07/2008 30 pipes @ ` 13,00 each
On 28th July, 2008
2 pipes issued on 20/06/2008 were received back, out of which one pipe was found damaged on
28th July, 2008 and hand to be discarded.
Stock Register (LIFO Basis)
Date Particulars Receipts Issues Balance
Qty Rate Amt Qty Rate Amt Qty Rate Amt
04/06/2008 Receipts 20 15 300 - - - 20 15 300
17/06/2008 Receipts 30 14 420 - - - 20 15 300
- - - - - - 30 14 420
50 - 720
20 15 300
20/03/2008 Issue - - - 25 14 350 5 14 70
25 - 370
20 15 300
5 14 70
02/03/2008 Receipts 40 14.50 580 - - - 40 14.50 580
65 - 950
05/07/2008 Issue 40 14.50 580 20 15 300
5 14 70
25 - 370
20 15 300
28/07/2008 Returned 2 14 28 5 14 70
2 14 28
Material Cost 41

27 - 398
28/07/2008 Damaged 1 14 14 20 15 300
pipe
Discarded
4 14 56
2 14 28
26 - 384
20 15 300
30/07/2008 Receipts 30 13 390 4 14 56
2 14 28
30 13 390
56 - 774
31/07/2008 Issue 30 13 390
2 14 28
4 14 56 11 15 165
9 15 135
45 - 609

Illustration 3

Mr. Ever-Ready closes his books on 31st Dec.every year. In 2007, stock taking was completed on
26th Dec. and the value of it come to ` 1,46,000. The following transactions took place between 27th
December and 31st December, 2007.
(a) Purchases made during this period amounted to ` 5 000
(b) Sales-dring this period amounted to ` 1 800
(c) Sales Return during the above period ` 250
(d) Purchase Returns during the above period ` 500
(e) The above purchases include goods worth ` 1,500 which were not actually delivered but the
invoice was received and entries made in the purchase book
(f) The average ratio of the gross profit to turnover is 28%.
[CA (Intes), Adapted]
Solution
Computation of the value of stock on 31st December, 2007.
Particular ` ` `
Stock on 26th December,2007 1,46,000
Add:
(a) Purchase after 26th December 2007 5,000
Less: Goods not received 1,500 3,500
 42 Cost Accounting

(b) Sales Return at cost 250

Less: Profit 28% 70 180
3,680
Less: 1,49,680
(a) Cost of goods sold sales 1800
Less: Profit 28% 504 1,296
(b) Purchase Returns 500 1,796
Value of Stock on 31st December, 2007 1,47,884

Illustration 4
From the following data you are required to compile a valued stock card in respect of material
‘Mikytoya’ for the month of April 2007 and value the closing stock by:
(a) Weighted average method (b) First In First Out methnd
April 1 Opening stock 100 units @ ` 15 per unit
April 4 Received 90 units under GRN no. 301 @ ` 16 per unit
April 7 Issued 80 units under Issue note no. 501
April 11 Received 200 units under GRN no. 302 @ ` 17 per unit
April 14 Issued 150 units under Issue note no 502
April 21 Received 20 units under GRN no. 303 @ ` 25 per unit
April 25 Issued 100 units under Issue note no 503
April 27 Received 50 units under GRN no. 304 ` 16 per unit
Solution
Stock Card (Weighted Average Method)
Date Doc. Receipts Issues Balance
April Ref.
1997 Qty Rate Amt Qty Rate Amt Qty Rate Amt
1 100 15 1,500
4 GRN 301 90 16 1,440 190 15.47 2,940
7 IN 501 80 15.47 1,238 110 15.47 1,702
11 GRN 302 200 17 3,400 310 16.46 5,102
14 IN 502 150 16.46 2,496 160 16.46 2,633
21 GRN 303 20 25 500 180 17.41 3,133
25 IN 503 100 17.41 1,741 80 17.40 1,392
27 GRN 304 50 16 800 130 16.86 2,192
360 6,140 330 5,448
Material Cost 43

FIFO Method
Date Doc. Receipts Issues Balance
April Ref.
1997 Qty Rate Amt Qty Rate Amt Qty Rate Amt
1 100 15 1,500
4 GRN 301 90 16 1440 100 15 1,500
90 16 1,440
190 2,940
7 IN 501 80 15 1200 20 15 300
90 16 1,140
110 1,740
20 15 300
90 16 1,140
11 GRN 302 200 17 3400 200 17 1,440
310 5,140
14 IN 502 20 15 300 160 17 2,720
90 16 1,440
40 17 680
150 2,420 160 17 2,720
21 GRN 303 20 25 500 20 25 500
180 3,220
25 IN 503 100 17 1700 60 17 1,020
20 25 500
80 1,520
27 GRN 304 50 16 800 60 17 1,020
20 25 500
50 16 800
130 2,320
360 6,140 330 5,320
Illustration 5
From the data given below, answer the following:
(a) What is the simple average price of the four week’s receipts of material A?
(b) What is the weighted average price of the four week’s receipts of material B?
(c) What is the value of the balance of material A in stock at the close of the fourth week if issues
are priced on LIFO basis?
(d) What is the value of the stock at the end of fourth week with respect to material B if they are
priced on FIFO basis?
44 Cost Accounting

Raw Materials
Received Issued
Weeks A B A B
Kgs. ` Kgs. ` Kgs. Kgs.
1st 250 1,000 1,250 1,690 175 1,500
2nd 300 1,260 1,400 1,960 250 1,200
3rd 200 880 750 1,050 300 1,300
4th 250 960 1,600 2,400 300 1,100
Stores Opening
Stock: A - 200 kgs ` 720
B- 2,000 kgs ` 2,900

Solution

(LIFO Method)
Material: A
Date Doc. Receipts Issues Balance
Weeks Ref.
Qty Rate Amt Qty Rate Amt Qty Rate Amt
200 3.6 720
200 3.6 720
I 250 4.0 100 250 4.0 1000
450 1720
200 3.6 720
175 4.0 700 75 4.0 300
275 1020
II 300 4.2 1260 200 3.6 720
75 4.0 300
300 4.2 1260
575 2280
200 3.6 720
250 4.2 1050 75 4.0 300
50 4.2 210
325 1230
200 3.6 720
75 4.0 300
III 200 4.4 880 50 4.2 210
200 4.4 880
525 2110
200 4.4 880 200 3.6 720
Material Cost 45

50 4.2 210 25 4.0 100

50 4.0 200
300 1290 225 820
IV 250 3.84 960 200 3.6 720
25 4.0 100
250 3.84 960
475 1,780
250 3.84 960
25 4.0 100
25 3.6 90 175 3.6 630
300 1150
1000 - 4,100 1,025 - 4190

4  4.2  4.4  3.84

(a) Simple Average Price Material " A"   4.11
4

Totalvalue 4100
(b) Weighted Average Price Material “A”  Total Quantity  1000  4.1

(c) Value of Stock FIFO (Material “A’) Basis: 175 x 3.84 = `672

Material B (FIFO Basis)

Date Doc. Receipts Issues Balance
Weeks Ref.
Qty Rate Amt Qty Rate Amt Qty Rate Amt
2000 1.45 2900
I 1250 1.352 1690 2000 1.45 2900
1250 1.352 1690
3250 4590
500 1.45 725
1500 1.45 2175 1250 1.352 1690
1750 2415
500 1.45 725
II 1400 1.4 1960 1250 1.352 744
1400 1.4 1690
3150 4375
500 1.45 725 550 1.325 744
700 1.352 946 1400 1.4 1960
1200 1671 1950 2704
550 1.352 700
1400 1.4 1960
 46 Cost Accounting

III 750 1.4 1050 750 1.4 1050

2700 3754
550 1.352 744 650 1.4 910
750 1.4 1050 750 1.4 1050
1300 1794 1400 1960
IV 1600 1.5 2400 650 1.4 910
750 1.4 1050
1600 1.5 2400
3000 4360
650 1.4 910 300 1.4 420
450 1.4 630 1600 1.5 2400
1100 1540 1900 2820
5000 - 7100 5100 - 7180

1.352 1.4  1.4  1.5

SimpleAverageMethod  1.413
4
Totalvalue 7100
WeightedAverageMethod    1.42
Total Quantity 5000

NEED FOR MATERIALS CONTROL

One of the first step in the installation of cost and management accounting system is planning
the proper control of materials and supplies from the time orders are placed with supplier until they have
been consumed in the plant and office operation or have been sold as merchandise.
Materials represent an important asset and is the largest single item of cost in almost every business;
accordingly the success or failure of a concern may depend largely upon efficient material purchasing,
storage, accounting, utilization and control.
Where materials are not properly controlled, excess stock of some items are likely to occur with a
result unnecessary tying up of capital and loss through deterioration and obsolescence. Shortage of
other materials may arise at the time when they are urgently needed and production will then be delayed.
The purchasing of materials is highly specialized function. By ordering the right quantity and
quality of materials at the most favorable price, and by ensuring that it arrives at the right time, the
efficient buyer is able to make a valuable contribution to the success of a business. The efficient
material control cuts out losses and form of waste that otherwise tend to pass unnoticed. Theft,
misappropriation, deterioration, breakage and additional storage costs can be reduced to a minimum by
proper controls, and much avoidable idle time in the factory will be reduced if materials are available to
meet the demands of the production staff. Finally and most important to the cost accountant, it is
impossible to produce reliable costing information if the records of materials issued are unsatisfactory,
because a cost statement cannot be more accurate than the information on which it is based.
Material Cost 47

REQUIREMENTS OF A SYSTEM OAF MATERIAL CONTROL

The important requirements or essentials of adequate satisfactory system of materials control are
as follows.
(1) Proper Coordination
(2) Competent Purchasing Agent
(3) Use of Standard Forms
(4) Control by Budgeting Materials and Equipment
(5) Storage Location
(6) Operation of Perpetual Inventory
(7) Standards or Level to be Fixed
(8) Storage Control and Issue
(9) Internal Check
(10) Development of Controlling Accounts and Subsidiary Records
(11) Regular Reports
Proper Coordination
Proper coordination of all department involved, in material purchasing, receiving, testing, approving,
storage, issue and accounting is essential.
Competent Purchasing Agent
Centralization of purchasing in a purchasing department under the direct and authority of a competent
trained purchasing agent is also considered essential.
Use of standard Forms
The use of standard form for orders, requisition etc., upon which written and signed instructions
are given are essential for proper control of materials.
Control by Budgeting Materials and Equipment
Use of materials, supplies and equipment budgets so that the economy in purchasing and use of
material can be realized, is important factor for adequate control of materials.

STORAGE LOCATION
Storage of all materials and supplies should be in a designated location properly safe guarded under
supervision and proper planning should be there for storing and issuing of materials.
Operation of Perpetual Inventory
Operation of proper perpetual inventory system should be used so that it is possible to determine at
any time the amount and value of each kind of materials in stock. It also enables the comparison of book
inventory with the result of physical counting.
 48 Cost Accounting

Standards or level to be fixed

A minimum quantity of each item of materials below which point the inventory is not allowed to
drop, and a maximum quantity, above which stock is not carried should be fixed. In the same manner
ordering level and economic order quantity may be determined.
Storage Control and Issue
The proper operation of a system of stores control and issue is introduced so that there will be
delivery of materials upon requisition to departments in the right amount at the time they are needed.
Internal Check
The operation of internal check should be introduced to ensure that transactions involving material
and equipment are checked by reliable and independent officials.
Development of Controlling Accounts and Subsidiar Records
Controlling accounts and subsidiary records reveal summary of detailed materials costs at each
stage of materials receipt and consumption from the storeroom to finished goods.
Regular Reports
Regular report and information should be provided for the management in connection with the
purchase of materials, issues from stock, inventory balances, obsolete stock, goods returned to vendors
and spoiled or defective units.

STOCK CONTROL

Definition and Explanation

The materials purchased by a concern many be classified as stock items which are taken into store
and held until required, or as direct deliveries to the point of consumption. The control of those materials
which are stock items is known as stock control.
The function of stock control is to obtain the maximum stock turnover consistent with the
maintenance of sufficient stocks to meet all requirements. Stock turnover is the ratio by which the cost
of the materials used per annum bears to the average stock of raw materials. Discussion with regard to
the quantity of materials stocked are reached after many consideration such as:
 The availability of capital for the provisions of stocks.
 The storage space available.
 The cost of storage.
 Risk of loss due to fall in prices, deterioration, obsolescence, theft etc.
 Economic order quantities.
 Delivery delays.
For effective control of materials, it is important to decide upon different levels of materials. These
levels are maximum limit or level, minimum limit or level and re-order level or ordering point or ordering
Material Cost 49

level. Maximum, minimum and re-order levels are not static. They must be varied to suit the changing
circumstances. Thus, alteration will take place if the usage of certain materials is increased or decreased.
If the re-order period changes, or if, in the light of a review of capital available, it is decided that the
overall inventory must be increased or decreased.

RE-ORDER LEVEL OR ORDERING POINT OR ORDERING LEVEL

Definition and explanation

This is that level of materials at which a new order of supply of materials is to be placed. In other
words, at this level a purchase requisition is made out. This level is fixed somewhere between maximum
and minimum levels. Order points are based on usage during time necessary to requisition an order, and
receive materials, plus an allowance for protection against stock out.
The order point is reached when inventory on hand and quantities due in are equal to the lead time
usage quantity plus the safety stock quantity.
Formula of Re-order Level or Ordering point
The following two formulas are used for the calculation of re-order level or point.
[Ordering point or re-order level = Maximum daily or weekly or monthly usage x Lead
time ]
The above formula is used when usage and lead time is known with certainty therefore, no safety
stock is provided. When safely stock is provided then the following formula will be applicable:
[Ordering point or re-order level = Maximum daily or weekly or monthly usage x Lead
time + Safety stock]
Examples: 1
Minimum daily requirement 800 units
Time required to receive emegency supplies 4 days
Minimum daily requirement 600 unit
Time required for refresh supplies One month (30 days)
Calculate ordering point or re-order level
Calculation
Ordering point = Ordering point or re-order level = Maximum daily or weekly or monthly × Lead
time
= 800 × 30
= 24,000 unitts
 50 Cost Accounting

Example: 2
Two types of materials are used as follows:
Minimum usage 20 units per week each
Maximum usage 40 units per week each
Noramal usage 60 units per week each
Re-order period or lead time
Material A 3 to 5 weeks
Material B 2 to 4 weeks
Calculate re-order point for two types of materials
Calculation
Ordering point re-order level = Maximum daily or weekly or monthly usage ×
A: 60 × 5 = 300 units
B: 60 × 4 = 240 units
(1) For Apex company the average daily usage of a materials is 100 units, lead time for procuring
materials is 100 units. Lead time for procuring materials is 20 days and the average number of
units per order is 2000 units. What is the record level for the company?

MINIMUM LIMIT OR MINIMUM LEVEL OF STOCK

Definition and Explanation

The Minimum level or minimum stock is that level of stock below which stock should not be
allowed to fall. In case of any item falling below this level, there is danger of stopping of production and,
therefore, the management should give top priority to the acquisition of new supplies.
Formula
Minimum level or minimum limit can be calculated by the following formula:
[Minimum limit or level = Re-order level or ordering point – Average or normal usage x
Normal re-order period]
Or the formula can be written as :
[Minimum limit or level = Re-order level or ordering point – Average usage for Normal
period]
Example
Normal usage 100 units per day
Maximum Usage 130 units per day
Minimum Usage 70 units per day
Re-order period 25 to 30 days
Material Cost 51

Calculate : Minimum limit or level

To calculate minimum limit of materials we must calculate re-order point or re-order level first.
Calculation
Ordering point or re-order level = Maximum daily or weekly or monthly usage x Maximum re-
order
= 130 × 30
= 3,900 units
Minimum limit or level = Re-order level or ordering point – Average or normal usage x Normal re-
order period
= 3900 – (100 × 27.5)
1150 units
(925 + 30)/2
DANGER LEVEL OF MATERIALS OR INVENTORY STOCK

Definition and Explanation

Some enterprise also calculate danger level. When this level of stock is reached, then emergency
steps are taken by the management to acquire material supplies.
When danger level is reached, the try is made to purchase materials from the nearest possible
source or place so that the workers and plant and machinery may not remain idle due to shortage of
material supplies.
Formula
Danger level can be calculated by the help of the following formula
[Danger level = Average daily requirement x Time required to get emergency supply]
Example
Normal usage or average requirement 700 units per day
Maximum usage 800 units per day
Minimum Usage 600 units per day
Re-order period 25 to 30 days
Time required to receive emergency supplies 4 Days
Calculate danger level.
Calculation
Danger level = Average daily requirement x Time requirement to get emergency supply
= 700 × 4
= 2800 units
 52 Cost Accounting

STOCK LEVELS
Setting of various stock levels is one of the techniques of inventory control. The main purpose of
setting various stock levels is to avoid the situation of understocking and overstocking. These levels are
not permanent but need revision according to the changes in the factors which determine these levels.
Maximum Stock Level
(1) Meaning Maximum Stock Level is that level of stock above which the stock in hand
should not normally be allowed to exceed. It is the largest quantity of a particular
material which may be held in the store at any time.
(2) Objective The objective of fixing the maximum stock level is to avoid the costs of
over-stocking such as - Cost of storage, cost of investment in stock, Cost of
insurance, risk of obsolescence etc.
(3) Factors This level is fixed after considering the following factors:
(a) Re-order Level
(b) Re-order Quantity
(c) Minimum Rate of Consumption
(d) Minimum Re-order Period
(e) Availability of Working Capital
(f) Availability of Storage space
(g) Extra Cost of Storage
(h) Extra Cost of Insurance
(i) Risk of obsolescence and deterioration
(j) Supply of Imported Materials
(i) Price Fluctuations
(4) Formula Maximum Stock level is computed with the help of following formula:
Maximum Level = Re-order Level + Re-order Quantity
- (Minimum Rate of Consumption × Minimum Re-order Period)
Average Stock Level
(1) Meaning Average Stock Level indicates the average stock held by the organisation.
(2) Formula This level of stock may be computed by using any one of the following formula:
Average Inventory Level = Minimum Level + 1/2 Re-order Quantity
OR

MaximumLev el  MinimumLev el

2
Material Cost 53

DEFINITION AND EXPLANATION

Economic order quantity (EOQ): Is that size of the order which gives maximum economy in
purchasing any material and ultimately contributes towards maintaining the materials at the optimum
level and at the minimum cost
In order words, the Economic order quantity (EOQ) is the amount of inventory to be ordered at
one time for purposes of minimizing annual inventory cost.
The quantity to order at a given time must be determined by balancing two factors: (1) the cost of
possessing or carrying materials and (2) the cost of acquiring or ordering materials. Purchasing larger
quantities may decrease the unit cost of acquisition, but this saving may not be more than offset by the
cost of carrying materials in stock for a longer period of time.

THE CARRYING COST OF INVENTORY MAY INCLUDE

 Interest on investment of working capital
 Property tax and insurance
 Storage cost, handling cost
 Deterioration and shrinkage of stocks
 Obsolescence of stocks.

FORMULA OF ECONOMIC ORDER QUANTITY (EOQ)

The different formulas have been developed for the calculation of economic order quantity (EOQ).
The following formula is usually used for the calculation of EOQ.

2 * A * Cp
Ch
 A = Demand for the year
 Cp = Cost to place a single order
 Ch = Cost to hold one unit inventory for a year
 *=X
Example
Pam runs a mall order business for gym equipment. Annual demand for the Trico Flexers is
16,000. The annual holding cost per unit is ` 2.50 and the cost to place an order is ` 50.
Calculate economic order quantity (EOQ)
Calculation

2 * 16,000 * $50
 800 units per order
$2.50
 54 Cost Accounting

Underlying Assumption of Economic order Quantity:

 The ordering cost is constant
(2) The rate of demand is constant
 The lead time is fixed
(4) The replenishment is made instantaneously, the whole batch is delivered at once.
Illustration 6
Data relating to slotted angles in a steel furniture manufacturing unit is as follows:
(i) Annual consumption 12 tonnes.
(ii) Unit cost ` 100 per kilo.
(iii) Storage/carrying cost 12%
(iv) Procurement cost ` 20 per order.
Calculate
(a) E.O.Q. per order in kilos.
(b) Annual procurement cost.
(c) Annual carrying cost.
Solution
where
A = Annual consumption
0 = Ordering cost per order
P = Unit cost
i = Carrying cost in percentage

2  12,000  20
EOQ 
12
100 
100

4,80,000

12

 40,000

EOQ = 200 units (kgs.) per order

Note: 1 Ton =1,000 kgs.
Material Cost 55

Annual Size of Number of Procurement Holding Combined

Requirement Order Order Cost Cost Cost
1 12
(1) (2) (3) (3)× ` 20 = (4) (2)   100 
2 100
 (5) (4) + (5) = (6)

12,000 50 240 4,800 300 5,100

12,000 100 120 2,400 600 3,000
12,000 200 60 1,200 1,200 2,400
12,000 400 30 600 2,400 3,000
12,000 500 24 480 3,000 3,480

Illustration 7
Data relating to slotted angles in a steel furniture manufacturing unit is as follows:
Half yearly demand 1,000 units.
Ordering cost ` 62.50 per order.
Inventory carrying cost ` 2 per unit.
Calculate
(a) EOQ per order in units.
(b) Annual procurement cost.
(c) Annual carrying cost.
from the above data.
Solution
where
A = Annual requirement
O = Ordering cost per unit
C = Carrying cost per unit
2  1,000  2  62 .50
EOQ 
2

2,50 ,000
EOQ 
2

 1,25,000
EOQ = 353.55 units per order
 56 Cost Accounting

Illustration 8
From the following information calculate the EOQ of a particular component:
Annual Demand 1,250 units
Ordering Cost ` 40 per order
Inventory Carrying Cost Re. 1 per unit
EOQ = 316.00 units per order
Illustration 9
From the following information calculate the EOQ of a particular component:
Annual Demand 2,500 units
Ordering Cost ` 200 per order
Inventory Carrying Cost ` 0.50 per unit
Solution

2AO
EOQ 
C

2  2,500  4  200

0.50

40,00,000

0.50

 80,00,000

 2.828..43 units per order

QUESTIONS FOR SELF-PRACTICE

(I) Theoretical Questions

(1) (a) What is Materials Control?
(b) State its main objectives.
(c) Explain its important requirements.
(2) Explain the concept of ‘ABC Analysis’ as a technique of inventory control.
(3) Explain and state the factors to be considered in fixing the following:
(a) Minimum Level
(b) Maximum Level
(c) Re-order Level
Material Cost 57

(4) Give the meaning and specimen of each of the following in a system of Stores Accounting
(a) Purchase Requisition
(b) Material Requisition
(c) Material Transfer Note
(d) Material Returned Note
(e) Bill of Materials
(f) Bin Card
(g) Stores Ledger
(5) (a) What is FIFO Method? Give illustrations,
(b) What are its advantages?
(c) What are its disadvantages?
(d) What are its implications in the periods of rising and falling prices?
(6) (a) What is LIFO Method? Give Illustration,
(b) What are its advantages?
(c) What are its disadvantages?
(d) What are its implications in the periods of falling price?
(7) Compare the FIFO and LIFO methods of stock valuation with special reference to their effect
on pricing of issues of goods, valuation of closing stock and profits during a period of rising
prices.
(8) (a) What is Weighted Average Price Method? Give Illustration.
(b) What are its advantages?
(c) What are its disadvantages?
(9) Write short notes on the following.
(a) Base Stock Method
(b) Replacement Price Method
(c) Specific Price Method
(d) Standard Cost Method
(10) State how you would treat the following in cost records :
(a) Pricing of materials returned to stores and
(b) Pricing of materials returned to suppliers.
(c) Shortage of Materials during physical verification
(11) Enumerate the factors which influence the selection of a particu!ar method of pricing the issues
of materials from stores.
58 Cost Accounting

(12) How would you deal the following in Cost Accounts :

(i) Carriage inwards on raw materials.
(ii) Cost of handling materials.
(13) What do you mean by Waste, Scrap, Spoilage and Defectives? How are these treated in Cost
Accounts?
(14) Distinguish between the following:
(a) Purchase Requisition and Purchase Order
(b) Purchase Requisition and Material Requisition
(c) Material Requisition and Bill of Materials
(d) Material Requisition and Material Transfer Note
(e) Material Transfer Note and Material Returned Note
(f) Bin Card and Stores Control Card
(g) Bin Card and Stores Ledger
(h) Perpetual Inventory System and Continous Stock Taking
(i) Material Control and Inventory Control
(j) Re-order Level and Re-order Quantity
(k) FIFO and LIFO
(I) Simple Average Method and Weighted Average Method
(m) Waste and Scrap
(n) Spoilage and Defectives
(15) Write short notes on the following :
(a) ABC Analysis
(b) Economic Order Quantity
(c) Perpetual Inventory System
(d) Continous Stock Taking
(e) Re-order Level
(f) Re-order Quantity
(g) Maximum Level
(h) Minimum Level
(i) Stores Turnover
Material Cost 59

(II) Practical Questions

Economic Order Quantity
(1) Calculate the economic order quantity and the number of orders to be placed in a year in each
of the following cases:
Case (a) Case (b) Case (c) Case (d)
Annual Consumption 1,00,000 units ` 1,60,000 3600 units 5,20,000
Cost of placing an order ` 50 ` 200 ` 40 ` 100
Annual Carrying Cost 8% 25% 5% 6.5%
Price per unit of material ` 20 ` 40 ` 64 ` 200
[Ans: (a) 2500 units, 40, (b) 400 units, 10 (c) 300 units, 12 (d) 200 units 13]
(2) Calculate the economic order quantity and the numbers of orders to be placed in a year in each
of the following cases:
Case (a) Case (b) Case (c) Case (d)
Quarterly Consumption ` 5,00,000 1000 units ` 57,600 650 units
Ordering Cost per order ` 50 ` 200 ` 40 ` 100
Semi-Annual Carrying Cost 4% 12.5% 2.5% 3.25%
Price per unit of material ` 20 ` 40 ` 64 ` 200
[Ans: (a) 2500 units, 40 (b) 400 units, 10 (c) 300 units, 12 (d) 200 units, 13]
[Hint. Calculate Annual Consumption and Annual Carrying Cost]
(3) Calculate Economic Order Quantity from the following information:
Annual Consumption 1,00,000 units
Carrying Cost 8 of Average Stock
Per unit Cost ` 20
Ordering Cost ` 50 per order
[Ans: 2500 units]
(4) What do you understand by Economic Order Quantity? Find out the Trom the following: Annual
usage ` 1,60,000 @ ` 40 per unit: Cost of placing and receiving one order ` 200: Annual
carrying cost: 25 of inventory value.
[Ans: 400 units]
(5) A company manufactures a product having monthly’demand of 2,000 units. For one unit of
finished produd 2 kgs of a particular raw material item is needed. The purchase price of the
material is ` 20 per kg. The ordering cost is ` 120 per order and the holding cost is 10 per
annum. Calculate:
(i) Economic Order Quantity (EOQ), and
(ii) Annual cost of purchasing and storage of the raw material at that quantity.
[Ans: (i) 2400 kg. (ii) ` 4,806]
60 Cost Accounting

(6) P Ltd. is engaged in the manufacture of Industrial Pumps of standard description. The company
used about 75,000 valued per year for its production and the usage is fairly constant at 6,250
valves per month. The valves cost ` 1.50 per unit when bought in quantities and the carrying
cost is estimated to be 20 a average inventory investment on the annual basis. The cost to place
an order and process the delivery ` 18. It takes 45 days to receive delivery from the date of an
order and a safety stock of 3,200 valves desired.
You are required to determine:
(i) The most economical order quantity; and
(ii) The reorder point
[Ans: EOQ-3000 units, ROL - 12, 575 unit]
(7) YPS Ltd. has received on offer of quantity discounts on its order of materials as under:
Price per tonne (`) Tonnes Nos.
1,200 Less than 500
1,180 500 and less than 1,000
1,160 1,000 and less than 2,000
1,140 2,000 and less than 3,000
1,120 3,000 and above
The annual requirement for the materials is 5,000 tonnes. The ordering cost per order is ` 1,200
and the carrying cost is estimated at 20% per annum.You are required to compute the most
Economic Order Quantity presenting the relevent information in a tabular form.
[Ans: EOQ-1000 Tonne]
(8) The purchase department of your organisation has received an offer of quantity discounts on
its orders of materials as under:
Pnce per tonne (`) Tonnes
1,400 Less than 500
1,380 500 and less than 1,000
1,360 1,000 and less than 2,000
1,340 2,000 and less than 3,000
1,320 3,000 and above.
The annual requirement of the material is 5,000 tonnes. The delivery cost per order Is ` 1,200
and the annual stock holding cost is estamated at 20 percent of the average inventory. The
purchase Department wants you to consider the following purchase options and advise which
among them will be thw most economical ordering quantity, presenting the relevent information
in a tabular forms. The purchase quantity options to be considered are 400 tonnes, 500 tonnes,
1,000 tonnes, 2,000 tonnes and 3,000 tonnes.
[Ans: 1,000 tonnes]
Material Cost 61

Stock levels
(9) The following data pertain to material X:
Supply period 4 to 8 months
Consumption rate: Maximum 600 unite per month
Minimum 100 units per month
Normal 300 units per month
Yearly 3,600 units
Storage costs are 5 cf stock value.
Ordering Costs are B 400 per order.
Price per3,600 units unit of materials ` 64.
Calculate
(i) Re-order level;
(iii) Maximum stock level; and
(10) In manufacturing its product Z. a company uses two types of raw materials A and B in respect
of which the following information is supllied:
One unit of Z requires 10 kg. of A and 4 kg. of B materials. Price per kg, of A material is ` 10
and that of B ` 20 Reoder quantities of A and B materials are 10,000 kg. and 5,000 kg. Re-order
quantities of A and B materials are 8,000 kg. and 4,750 kg. respectively. Weekly production
varies from 175 units to 225 units fveraging 200 units. Delivery period of A material is 1 to 3
weeks and B material 3 to 5 weeks.
Compute (i) Minimum Stock level of A.
(ii) Maximum Stock level of B.
(11) X Ltd provides the following information in respect of material ‘X’:
Supply period : 5 to 15 days
Rate of Consumption
Average : 15 units per day
Maximum : 20 units per day
Yearly : 5,000 units
Ordering costs are ` 20 per order
Purchase price per unit is ` 50
Storage costs are 10 of unit value
Compute (i) Reorder level (ii) Minimum Level (iii) Maximum Level
[Ans: (i) 300 units (ii) 150 units (iii) 450 units Hint Re-order Quantity 200 units]
62 Cost Accounting

(12) From the following information, calculate (a) Economic order quantity and (b) Total Annual
Carrying and Ordrringcost at that quantity (c) Re-order level, (d) Minimum level, (e) Maximum
level, (f) Average Stock (g) Danger level
Rate of Usage: 5 kg. per unit of finished product. Weekly production of finished product varies
from 50 units to 150 units
Purchase price of input unit ` 20.
Annual carrying cost 6.5
Ordering cost per order ` 100
Lead time : 3 weeks to 7 weeks, For emergency purchase 2 weeks.
[Ans: (a) 2,000 units (b) ` 2,600 (c) 5,250 units (d) 2,750 units (e) 6,500 units (f) 4,625
units or 3,750 units (g) 1,000 units
Preparation of Stores Ledger
(13) From the following information prepare Stores Ledger Account per FIFO method:
Jan. 1 Opening Stock 200 pieces @ ` 2 each
5 Purchases 1000 pieces @ ` 2.20 each
10 Purchases 150 pieces @ ` 2.40 each
20 Purchases 180 pieces @ ` 2.50 each
2 Issues 150 pieces
7 Issues 100 pieces
12 Issues 100 pieces
28 Issues 200 pieces
[Ans: Stock 80 units @ ` 2.50]
(14) Prepare Stores Ledger as per First In First Out Method of Pricing of Issue of Materials:
Units Rate
April 1 Opening balance 1,000 `5
3 Received 5,000 `6
4 Issued 3,000
6 Issued 2,000
8 Received 3,000
9 Issued 2000 `5
The weekly physical stock taking on April 7, showed as shortage of 100 units.
[Ans: Stock 1,900 units @ ` 5 of ` 9,500]
Material Cost 63

(15) Prepare a Store Ledger Account on the basis of LIFO method.

Jan 1 Opening Stock 220 units @ ` 9.00 each
4 Purchased 540 units @ ` 9.10 each
5 Issued 280 units
10 Purchased 180 units @ ` 8.90 each
16 Issued 160 units
18 Purchased 340 units @ ` 10.20 each
25 Issued 200 units
[Ans: Stock 640 units for ` 5,952]
(16) The following are the figures about the receipt and issue of materials in Z Ltd. during January:
Jan. 1 Received 500 units @ ` 2.00 each
18 Received 350 units @ ` 2.10 each
19 Issued 600 units
24 Received 600 units @ ` 2.20 each
25 Issued 450 units
26 Received 500 units @ ` 2.30 each
29 Issued 510 units
(17) From the following receipts and issues of material during the month of January, prepare stores
ledaer account according to LIFO method:
Jan. 1 Received 250 units @ ` 10 per unit.
5 Received 250 units @ ` 11 per unit.
8 Issued 300 units.
10 Received 400 units @ ` 12 per unit.
13 Issued 250 units.
20 Received 100 units @ ` 11 per unit.
28 Issued 400 units.
On 1st January, stocking hand was 200 units valued @ ` 9 per unit.
[Ans: Stock 200 units @ ` 9 and 300 @ ` 10, Total ` 4 800]
(18) Prepare Stores Ledger from the following using Weighted Average method of Pricing:
F eb 1. Opening Stock 200 units costing ` 2,000
Receipts Issues
3 300 units @ ` 12 Feb 2 100 units
5 100 units @ ` 16 4 200 units
8 200 units @ ` 13 7 200 units
9 100 units
The physical verification on 6th February, revealed a shortage of 10 units.
[Ans: Stock 290 units @ ` 13]
64 Cost Accounting

(19) The following transactions took place in respect of a material item:

Date Receipts Issue
Quantity (units) Rate (`)
March 2 200 2.00
10 300 2.40
15 250
18 250 2.60
20 200
Prepare a priced Ledger Sheet, pricing the issues at-
(a) Simple average rate:
(b) Weighted average rate.
[Ans: Stock (a) 300 units or ` 720, (b) 300 units of ` 726]
(20) The Stores Ledger of a manufacturing company recorded for material R-17 for April the following
information:
Date Receipts Issues
Qty. Value Qty. Value
(Units) (`) (Units) (`)
April 4 100 160
6 40 120
12 70 140
16 50 100
20 40 240
26 90 270
(a) State the method of pricing that was employed in the Stores Ledger, and
(b) Complete the Stores Ledger as per the method followed.
[Ans: (a) Weighted Average Method (b) Stock 70 units @ ` 726 @ 3]
(III) [A] Objective Questions
(I) State with Reasons Whether the Following Statements are True or False.
(1) Purchase order is an order to Stores Department to issue materials.
(2) EOQ is that quantity which is most economical to order.
(3) EOQ is also called as re-order quantity.
(4) Investment in inventory should be optimised by maintaining low stock levels.
(5) Direct materials is the materials which can be directly related to the cost centre.
(6) The stock in hand may exceed the maximum stock level.
Material Cost 65

(7) Stock levels are fixed up for inventory control.

(8) In no case, material should go below minimum level.
(9) The objective of scientific purchasing is to procure materials of good quality.
[Ans. True: (2, 3, 4, 5, 7). False: (1, 6, 8, 9) ]
(II) Match the Following
Group A Group B
(1) Scientific Purchasing (i) A request to supply
(2) Purchase Order (ii) Purchasing materials of good quality
(3) Delivery Note (iii) Acknowledgement of goods delivery
(4) Maximum Level (iv) The level fixed beyond the stock cannot be stored
(5) Minimum Level (v) The level below which inventory is not allowed to go
[Ans: (1 - ii), (2 – i), (3 – iii), (4 – iv), (5 – v) ]
(III) Multiple choice questions. Select the right answer.
(1) The most important element of cost is
(i) Material
(ii) Labour
(iii) Overheads
(2) The function of Purchase Department is
(i) Purchase of materials
(ii) Sale of scrap
(iii) Production of goods
(3) Purchase order is a
(i) Request to the supplier to supply materials
(ii) Request to the supplier to verify the stock
(iii) Acknowledgement of goods
(4) Goods received note is normally prepared in
(i) Six copies
(ii) Five copies
(iii) Four copies
(5) Stock levels are fixed to
(i) Control inventory
(ii) Purchase material
(iii) Control cost of scrap
66 Cost Accounting

(6) Maximum level indicates

(i) Maximum inventory to be kept
(ii) Minimum inventory to be kept
(iii) Average inventory to be kept
(7) EOQ is
(i) Economical size of order
(ii) Economical size of production
(iii) Economical size of production
(8) EOQ is also known as
(i) Economic size of order
(ii) Economic order to be placed
(iii) Maximum level of stock to be fixed
(9) Minimum inventory level is
(i) Minimum stock to be maintained
(ii) Maximum stock to be maintained
(iii) Average stock to be maintained
[Ans. (1 - i), (2 - i), (3 - i), (4 - i), (5 - i), (6 - i), (7 - i), (8 - i), (9 - i) ]
(III) [B] Objective Questions
(I) State whether the following statements are true or false.
(1) FIFO Method of pricing of materials results in higher profits.
(2) Valuation of closing stock is the same under FIFO and LIFO Method.
(3) Bin Card is the same as stores ledger.
(4) LIFO and Market Price Method are not same.
(5) If a company wans to maximise net income, it would select FIFO Method.
(6) LIFO Method of pricing issues is useful during the perod of inflation.
(7) Weighted Average Method of pricing issues involves additing different prices and dividing by
the number of such prices.
(8) Under FIFO Method, materials purchased first are deemed to be issued last.
(9) Under LIFO Method, materials purchased last are deemed to be issued first.
[Ans. True: (1,4, 5, 6, 9). False: (2, 3, 7, 8) ]
Material Cost 67

(II) Match the Following

Group A Group B
(1) FIFO (i) Last In First Out
(2) LIFO (ii) Average of the prices
(3) Weighted Average (iii) Movement of materials
(4) Stores Ledger (iv) First In First Out
(5) FIFO (v) Cost is understated
(vi) Shows real income in times of rising prices
[Ans. (1 - iv), (2 - i), (3 - ii), (4 - iii), (5 - vi) ]
(III) Multiple Choice Questions. Select the Right Answer.
(1) Issue of materials during a period of time is priced at the latest purchase cost under
(i) FIFO
(ii) LIFO
(iii) Simple Average
(iv) Weighted Average
(2) Stores Department maintains a record in which a separate folio is maintained for each item
(i) Stores Ledger
(ii) Bin Card
(iii) Stock Register
(iv) Bill of Materials
(3) In times of rising prices, the pricing of issues will be at a more recent current market prices in
(i) FIFO
(ii) Weighted Average
(iii) LIFO
(iv) Simple Average
(4) The inventory is valued at the most recent market prices and it is near to the valuation based on
replacement cost in
(i) FIFO
(ii) LIFO
(iii) Weighted Average
(iv) Base Stock Method
(5) According to the method of pricing, issues are close to current economic values
(i) UFO
(ii) FIFO
(iii) Highest In First Out Price
(iv) Weighted Average Price
68 Cost Accounting

(6) In the method of pricing, cost lag behind the current economic values
(i) LIFO
(ii) FIFO
(iii) Replacement Price
(iv) Weighted Average Price
(7) When price fluctuate widely, the method that will smooth out the effect fluctuations is
(i) Simple Average
(ii) Weighted Average
(iii) FIFO
(iv) LIFO
(8) In the method, the charge to production is not at actual cost
(i) Weighted Average
(ii) Standard Price
(iii) Replacement Price
(iv) All of these
[Ans: (1 – ii), (2 – i), (3 – iii), (4 – i), (5 – i), (6 – ii), (7 – ii), (8 – iv) ]

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