COLLEGE OF ACCOUNTANCY

C-AE22: Cost Accounting and Control

First Semester AY 2021-2022

A. Course Code – Title : C-AE22: Cost Accounting and Control

B. Module No – Title : M05 –Accounting for Materials
C. Time Frame : 1 week (Week 5) – 6 hrs

D. Overview
This learning material deals about concepts and techniques pertaining to
materials accounting and control. You will find out the best time to reorder
materials and avoid stock-out; see and evaluate the documents and procedures for
purchasing, storing and issuing materials. You will also learn how to apply the
different costing methods and the measurement of lower of cost and net realizable
value.

E. Desired Learning Outcomes

At the end of the learning session, you should be able to:
1. Discuss the need for materials control and identify the different
documents and procedures pertaining to materials control
2. Calculate the reorder point and economic order quantity.
3. Determine the cost of goods manufactured, work in process and sold
using different costing methods.
4. Apply the rule of lower of cost or net realizable value.
5. Cite inventory-taking procedures

F. Values Integration
In studying this module, it is hoped that you will be able to develop and manifest the
following UA Core Value/s:

✓ Integrity
✓ Service Orientation
✓ Teamwork
✓ Obedience
✓ Open Communication

G. Interaction/Collaboration
You will be engaging in activities that would make use of:

✓ Google Sheets
✓ Google Forms
✓ Quizizz

H. Content/Discussion

Lesson 1 – Materials Control and Purchasing Procedures

Materials Control

The cost of raw materials is a major part of the manufacturing cost on most
manufacturing companies so a strict control should be implemented in order to minimize
waste, and misuse, and to guard against theft or pilferage.

The requirements for an effective internal control system for materials are:
-Materials of the desired quantity and quality must be available when needed.
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 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

- Correct quantities and types of materials must be on hand at the right time for
production to proceed as schedule.
- Materials must be purchased at the most favorable prices.
- Materials must be protected from loss or theft.
- Risk of spoilage and obsolescence must be minimized.
- Cost of materials handling and storage must be kept to a minimum.

Organization for Materials Control

a) Purchasing Department
This department is charged with the responsibility of placing orders for
materials
with reliable suppliers, with the materials to be made available at the right time
and at the right place. Documents used : Purchase Order

b) Receiving Department
This department is charged with the inspection of incoming shipments and
verification of the quantities received and ordered. Documents used: Delivery
Receipts

c) Storeroom (stockroom)
This department is responsible for protecting materials against physical
deterioration and ensuring that stocks are properly issued. Documents used :
Delivery Receipts, Material Request Form

d) Accounting Department
This department records all transactions in the accounts after documentary
evidences have been supplied by the other departments. Documents used :
Purchase Order, Delivery Receipt and Sales Invoice

e) Cash Department
This department pays all invoices after approval by the accounting department:
Documents used: Voucher

Materials Purchasing Procedures

The purchasing agent is the one responsible in purchasing the materials. He should
buy the materials at the best possible time at the lowest price with the correct quantities.
The purchasing agent will buy the materials once a purchase requisition is received.

Lesson 2: Reorder point and Economic Order Quantity

To determine when an item has reached the level at which it should be reordered,
the
following factors should be considered:

- The frequency at which the materials is used

- Lead time – the length of time it takes for the material to be delivered from the supplier
after an order has been placed
- Safety stock – the minimum levels of materials that should be maintained to ensure that
the company does not run out of materials.

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 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

For example, the reorder point is 200 cans of ink. Jenjen Printers always want to
have at least 100 cans on hand. Since 20 cans are used in production each day and it takes 5 days
to receive an order, the reorder point is computed as follows:

20 cans (daily usage) x 5 days (lead time) 100

Add: Safety Stock 100
Reorder point 200
Economic Order Quantity (ECQ)
The standard quantity to be ordered should reflect the quantity necessary to get the
best price while keeping inventory at an appropriate level to ensure uninterrupted level.

The standard quantity to be ordered should reflect the quantity necessary to get the
best price while keeping inventory at an appropriate level to ensure uninterrupted level.

2 x annual requirements x cost of an order

EOQ =
√ Cost ¿
carry a single item ¿

If Jenjen printers’ cost is P108, the cost to carry an item in inventory is P75; and if
the company requires 5,000 cans of ink during the year, the EOQ is computed as follows:
2 x 5,000 x 108
EOQ =
√ 75
1,080,000
=
√ 75

= √ 14,400
= 120

The determination of the total cost to order and carry materials at various order sizes is shown
below:
Order Number of Total Cost Average Total Cost to Total Costs to
size Orders to order Inventory Carry (Average Order and
(5,000 order size (P108 x No. (Order Inventory x Total Cost to
rounded) of orders) Size/2) P75) Carry
80 62 6,696 40 3,000 9,696
100 50 5,400 50 3,750 9,150
120 42 4,536 60 4,500 9,036
140 36 3,888 70 5,250 9,138
160 31 3,348 80 6,000 9,348
In this illustration, you may notice that as the order size increases, the total cost to order decreases
and the total carrying cost increases, vice-versa. The EOQ is the point at which the total cost is at a
minimum which is 120 cans.

CONTROL PROCEDURES
Inventory represents a major investment to a firm so adequate control procedures are
necessary. Five control procedures are commonly used as follows
a) Order cycling – Materials are reviewed on a regular cycle, and orders are placed to
maintain desired inventory level.
b) Min-max method – Minimum and maximum inventory levels are determined.
Reordering is done when the minimum level is reached.
c) Two-bin method – this is use for inexpensive items. The second bin provides
coverage until the order is received.

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 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

d) ABC plan – used with wide variety of items having difficult values. The more
expensive items receive more frequent review and closer monitoring
A items – most expensive items, usually few on hand
B items – moderately priced items and moderate quantity on hand
C items – inexpensive items, generally kept in large quantities
e) Automatic order system – order is automatically placed when the inventory reaches
predetermined level. This system works best when used with computer.
Lesson 3. Inventory Costing Method
 First in, first out (FIFO) method – under this method the first materials purchased are
the first materials to be used. The materials on hand are assumed to be the last one
purchased.
 Last in, first out (LIFO) method – under this method, the last materials purchased are
the first materials to be used. Then the materials on hand are assumed to be the first
one purchased
 The moving average method – in this method all the costs are commingled, and an
average cost is computed with each new purchase and assigned to materials issued and
on hand.
Illustration
Assume the following transactions relating to Material IJ-4, ink jet:
May 1 The beginning balance on hand is 150 units, costing P150 each
6 150 units are purchased under Purchase Order 08 at P155 each
10 180 units are issued for use per Requisition 10.
21 150 units are purchased on Order 9 for P156
23 160 units are issued for use on Requisition 16
25 10 units are returned to the storeroom as noted on Returned Materials Report 3.
These units had been issued on May 10 for use on Requisition 10.
First In, First Out Method
The materials ledger card shows the transactions relating to Materials IJ-4 are
recorded under the FIFO method.
MATERIALS LEDGER CARD
(FIFO Cost Method)
MATERIAL Ink Jet REORDER POINT 150
NUMBER IJ-4 REORDER QUANTITY 150
DATE REF RECEIVED ISSUED BALANCE
UNITS PRICE AMOUNT UNITS PRICE AMOUNT UNITS PRICE AMOUNT
May 1 Bal 150 150 22,500
6 PO-8 150 155 23,250 150 150 22,500
150 155 23,250
10 R10 150 150 22,500
30 155 4,659 120 155 18,600
21 PO-9 150 156 23,400 120 155 18,600
150 156 23,400
23 R16 120 155 18,600
40 156 6,240 110 156 17,160
25 RM3 (10) 155 (1,550) 10 155 1,550
110 156 17,160
The following should be noted in the Materials Ledger Card above:
 The price for each issue is individually computed
 The issue of 180 units on May 10 includes all 150 units from the beginning inventory (150
units at P150 each) plus 30 units purchased on May 6 (30 units at P155 each)
 The issue of 160 units on May 23 includes the remaining 120 units from on May (120 units
at P155) plus 40 units purchased on May 21 (40 units at P156 each)

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 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

 The 10 excess units returned to the storeroom on May 25 are priced at P155 because they
relate to the issue of May 10 and are assumed to be part of the group of 30 units. The job
finally will be charged only with the costs that would have been charged if the correct
quantity had been issued on May 10 (150 units at P150 each + 20 units at P155 each).
 Of the 120 units on hand on May 15, all except 10 units returned are priced at the most
recent cost, P156 per unit.
Last in, First Out
MATERIALS LEDGER CARD
(LIFO Cost Method)
MATERIAL Ink Jet REORDER POINT 150
NUMBER IJ-4 REORDER QUANTITY 150
DATE REF RECEIVED ISSUED BALANCE
UNITS PRICE AMOUNT UNITS PRICE AMOUNT UNITS PRICE AMOUNT
May 1 Bal 150 150 22,500
6 PO-8 150 155 23,250 150 150 22,500
150 155 23,250
10 R10 150 155 23,250
30 150 4,500 120 150 18,000
21 PO-9 150 156 23,400 120 150 18,000
150 156 23,400
23 R16 150 156 23,400
10 150 1,500 110 150 16,500
25 RM3 (10) 150 (1,500) 10 150
110 150 18,000
The following should be noted in the Materials Ledger Card
 The issue of 180 units in May 10 consists of the 150 units purchased on May 6 (150
units at P155 each) plus 30 units from the beginning inventory (30 units at P150 each).
 On May 23, the issue of 160 units consists of the 150 units purchased on May 21 (150
units at P156 each) plus 10 units from the beginning inventory (10 units at P150 each)
 The 10 excess units returned to the storeroom on May 25 relate to the issue of May 10
and are assumed to be part of 30 units (the oldest). Thus the job finally will be charged
only with the costs that would have been charged if the correct quantity had been
issued (150 units at P155 each + 20 units at P150 each)
 All the 120 units on hand on May 25 are priced at the earliest cost, P150 per unit.

Moving Average Method

Under this method, the units cost of each new purchase are added to the balances already
on hand when the purchase is received and a new average cost per unit is computed.

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 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

MATERIALS LEDGER CARD

(LIFO Cost Method)
MATERIAL Ink Jet REORDER POINT 150
NUMBER IJ-4 REORDER QUANTITY 150
DATE REF RECEIVED ISSUED BALANCE
UNITS PRICE AMOUNT UNITS PRICE AMOUNT UNITS PRICE AMOUNT
May 1 Bal 150 150.00 22,500.00
6 PO-8 150 155.00 23,250.00 300 152.50 45,750.00
10 R10 180 152.50 27,450.00 120 152.50 18,300.00
21 PO-9 150 156.00 23,400.00 270 154.44 41,700.00
23 R16 160 154.44 24,710.40 110 154.44 16,988.40
25 RM3 (10) 152.50 (1,525.00) 120 154.27 18,512.40
The following should be noted in the Materials Ledger Card above:
 The 180 units issued on May 10 are priced at P152.50 per unit (the unit price
appearing in Balance section on the line above).
 The 160 units issued on May 23 are priced at 154.44 per units (P16,988.40 divided
by 270 units)
 The 10 excess units returned to the storeroom on May 25 are priced at P152.50 the
price on May 10.
 The 120 units remaining in stock on May 25 valued at P154.27, the current average
price.

Lesson 4. Valuation of Cost or Net Realizable Value

Net Realizable Value – refers to the estimated selling price in the ordinary course of business less
the estimated cost of completion and cost to sell the product. PAS No. 2 provides that inventories
shall be measured at the lower of cost and net realizable value.

Lower of Cost or Net Realizable Value by Item

The cost and net realizable value of each item in inventory are determined. The basis of valuation is
identified for each item and multiplied for the lower of cost or net realizable value.
Description Quantity Cost/unit NRV/ unit Valuation Lower of
Basis Cost or NRV
Material X 100 P100 P110 Cost P10,000
Material Y 200 150 120 NRV 24,000
Inventory valuation P34,000

Lower of Total Cost or Total NRV

This method of valuation calculates the total cost and total NRV of the entire inventory and
the lower of this total is used as the inventory valuation.
Description Quantity Cost/unit NRV/unit Total Cost Lower of
Cost or NRV
Material X 100 P100 P110 P10,000 P11,000
Material Y 200 150 120 30,000 24,000
P40,000 P35,000
Inventory valuation P35,000

APPLICATION OF THE RULE OF COST OR NET REALIZABLE VALUE, WHICHEVER IS LOWER

There are two approaches used when perpetual inventory system records are kept.
1. Each materials ledger card is adjusted to show the new unit values
2. A valuation account is set up to reduce the total value of the inventory to net realizable
value. The individual ledger cards are not change and continue to reflect cost.

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 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

Second approach or the allowance method is preferably used because the write down and
reversal of write down is clearly identified.

Illustrative Problem – Allowance Method

Assume the following data for 2019, the first year of operations and 2020:
Dec. 31, 2019 Dec. 31, 2020
Inventory at Cost, per Materials Ledger Card P360,000 P420,000
Inventory at Net Realizable Value 348,000 416,000

On December 31, 2019, an adjusting entry is made to set up the valuation account for
P12,000, the difference between the inventory cost and NRV, as follows:

2019
Dec.3 Loss on Inventory Write-down 12,000
1
Allowance for Inventory Write-down 12,000
Loss resulting from decline in NRV of inventory

The Loss on Reduction of Inventory to NRV account is treated as an addition to cost

of goods sold on the income statement. The Allowance for Inventory Write-down account is
shown in the balance sheet as a deduction from inventory account.

Continuing our illustration, at the end of 2019, the allowance account of P12,000
should be reduced to P4,000 which is the difference of the cost of P420,000 and P416,000
NRV. To reduce the allowance account to P4,000, the following adjustment is made
2020
Dec.3 Allowance for Inventory Write-down 8,000
1
Recovery from Inventory Write-down 8,000
To record the recovery resulting from adjustment
of allowance account.

Lesson 5. Inventory Taking Procedures

1. Prepare serially numbered inventory tags in advance for each material and for each
shelf, or a bin in which the material is stored.
2. Attach the tag to the materials to be inventoried
3. Count, weigh, or measure each material. Record the count and date on the inventory
tag. This count is often made several days before the official inventory date. Receipts
and issues after the count are recorded on the inventory tag to reflect the current
balance on hand.
4. Prepare inventory sheet in advance. The materials to be inventoried are listed in the
sheets, usually in the same order as they are physically stored. The material number,
description, location, and unit cost are entered. This information is taken from the
materials ledger card.
5. On the inventory date, count, weigh or measure each material and record the count
on the inventory sheet. This count sheet is completely independent from the first
count, which was recorded on the inventory tag.
6. Compare the count (or balance) shown on the inventory tag with the count on the
inventory sheet. Difference if any, are immediately reconciled so that the inventory
sheet contains an actual count.

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 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

7. Compare the actual count shown on the sheets with the balances shown on the
material ledger cards.
8. Extend entries on the inventory sheet. The extensions are totaled, and the complete
inventory is summarized.
9. Double-check all inventory computations
10. Prepare a report of inventory shortages and overage
11. The materials ledger cards are corrected to show the actual count and value
12. The general ledger accounts are adjusted to show the actual inventory valuation.

I. Assessment of Learning/ Progress Check

Exercise 1
Winner Co., predicts that it will use 200,000 lb of materials during the year. It anticipates
that it will costs P25 to place each order. The annual carrying cost per pound is P10.
a. Determine the most economical order quantity, using the EOQ formula
b. Determine the total annual cost and carrying cost at this level.

Exercise 2
The Papa Manufacturing Company uses perpetual inventory system in controlling its
materials. Data relating to Material X-5 during March 2018 are given below:
March 1 Balance, 1,000 units at P125 each
5 Issued 400 units, Requisition 091
9 Received 600 units at P140 each, Purchase Order 016
13 Issued 850 units, Requisition 094
22 Received 200 units at P145 each, Purchase Order 023
29 Issued 250 units, Requisition 098
Required:
Enter the beginning balance on a materials ledger card for each of the two-inventory costing
methods; FIFO and moving average. Record each of the transactions on each of the material
ledger cards. For the moving-average costing method, round-off the unit costs to the two
decimal places.

J. References
Guerrero, Pedro P., (2018) Cost Accounting: Principles and Procedural Application,
2018 Edition, Manila, Philippines: GIC Enterprises & Co., Inc.

De Leon, Norma D., De Leon, Ellery D., & De Leon, Guillermo M, Jr., (2019) Cost
Accounting and Control 2019 Edition, Manila, Philippines: GIC Enterprises & Co., Inc.

Vanderbeck, Edward J. & Mitchell, Maria R., Principles of Cost Accounting 17 th Edition,
Taguig City, Philippines: Cengage Learning Asia Pte Ltd (Philippine Branch).

Modules prepared by : Angeli L. Rosani

Reviewed/updated by : Elizabeth B. Boneo

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