Module 2: Material Costing, Planning and Control

Materials: - The materials are a major part of the total cost of producing a product and are
one of the most important assets in majority of the business enterprises. Hence the total cost of a
product can be controlled and reduced by efficiently using materials.

The materials are of two types, namely:

(i) Direct materials: The materials which can be easily identified and attributable to the
individual units being manufactured are known as direct materials. These materials also form
part of finished products. All costs which are incurred to obtain direct materials are known as
direct material costs.
(ii) Indirect materials: Indirect materials, on the other hand, are those materials which are of
small value such as nuts, pins, screws, etc. and do not physically form part of the finished
product. Costs associated with indirect materials are known as indirect material costs. Factory
supplies, office supplies and selling supplies are generally termed as stores.

Methods of Purchasing
Purchasing can be broadly classified as centralized and localized purchasing.
(a) Centralized Purchasing: In a large organization, manufacturing units are many. In such
cases centralized purchasing is beneficial. The advantages of centralized purchasing are:
1. Specialized and expert knowledge is available.
2. Advantages arise due to bulk purchases.
3. The cost of purchasing can be reduced and selling price can be lowered.
4. As there is good knowledge of market conditions, greater control can be exercised.
5. When materials have to be imported, it is advantageous to centralize the buying.
6. Economy and ease in compilation and consultation of results.
7. It can take advantage of market changes.
8. Investment in inventories can be reduced.
9. Other advantages include undivided responsibility, consistent buying policies.
Factors to be considered when decision regarding centralization has to be taken are geographical
separation of plants, homogeneity of products, type of material bought, location of supplies etc.

(b) Decentralization of Purchases: The advantages of localized purchasing or

decentralization of purchases are:-
1. Each plant may have its own particular need. This can be given special attention.
2. Direct contact can be established with suppliers.
3. The time lag between indenting and receiving materials can be reduced.
4. Technical requirements of each plant can be ascertained.

Procedure of Purchasing and Receiving Materials:

Purchasing procedure varies with different business firms, but all of them follow a general
pattern in the purchases and receipt of materials and payment obligations. The important steps
may be listed as follows:
1. Purchase Requisition: The initiation of purchase begins with the receipt of a purchase
requisition by the purchasing department. The purchase requisition is prepared by the
storekeeper for regular stock items and by the departmental head for special equipment or
materials not stocked as regular items. The requisition is approved by one or more executives in
addition to one originating the requisition. The requisition is prepared in triplicate, the original
copy is sent to the purchasing department, the second is retained by the storekeeper or executive
initiating the purchase requisition and the third copy is sent to the costing department. The
requisition contains particulars regarding quantity, the quality or material specifications, and the
date by which purchase of material is required.

2. Purchase order: If the purchase requisition received by the purchasing department is in

order, then it will call for tenders and/or quotations from the suppliers of materials. It will send
enquiries to prospective suppliers giving details of requirement and requesting details of
available materials, prices, terms and delivery etc. Quotations will then be compared and will
place order with those suppliers who will provide the necessary goods at competitive price. The
number of copies and routing of purchase orders depend on the procedure followed in the
organization. Normally, the copies of the purchase order will be sent to the supplier, the
department originating purchase requisition, Inspection department, accounting department.

3. Materials inspection note: When materials are delivered, a supplier’s carrier will
usually provide a document called Delivery note or Delivery advice to confirm the details of
materials delivered. When materials are unloaded the warehouse staff check the materials
unloaded with the delivery note. Then the warehouse staff prepares a Materials Receipt Note, a
copy of which is given to the supplier’s carrier as a proof of delivery. After receiving the
materials the inspection department thoroughly inspects whether the quality of material is in
accordance with the purchase order a note called Material Inspection Note, copies of which are
sent to the supplier and stores department.

4. Goods Received Note: One the inspection is completed a Goods. Received Note (GRN)
is prepared by the stores department, and copies of GRN is sent to the Purchasing department
Costing department, Accounts department and Production department; which initiated purchase
requisition. After receipt of GRN from the stores department and invoice from the supplier the
Accounts department will check the purchase order and take necessary steps for making payment
to the supplier.

5. Stores Requisition Note: It is also called Materials Requisition Note. When Production
or other departments requires material from the store is raises a requisition, which is an order on
the stores for the material required for execution of the work order. This note is signed by the
department incharge of the concerned department. It is a document which authorizes the issue of
a specified quantity of materials. It will include the cost centre of job number for which the
requisition is being made. Any person who requires materials from the stores must submit Stores
Requisition Note. The store keeper should only issue materials from stores against such a
properly authorized requisition and this will be entered in the Bin card and Stores Ledger. A
copy of the requisition will be sent to the Costing department for recording the cost or value of
materials issued to the cost centre or job.

6. Material Transfer Note: If materials are transferred from one department or job to
another within the organization, then material transfer note should be raised. It is record of the
transfer of materials between stores, cost centres of cost units showing all data for making
necessary accounting entries.

7. Material Return Note: If materials received from the stores is not of suitable quality or if
there is surplus material remaining with the department, they are returned to stores with another
called ‘Material Return Note’ evidencing return of material from Department to Stores. A copy
of Material Return Note is sent to the Costing department for making necessary adjustments in
accounts.

Bin Card: A bin card indicates the level of each particular item of stock at any point of time. It
is attached to the concerned bin, rack or place where the raw material is stored. It records all the
receipts of a particular item of materials and its issues. It gives all the basic in information
relating to physical movements. It is record of receipts, issue and balance of the quality of an
item of stock handled by a store.

8. Stores Ledger: Stores department will maintain a record called stores ledger in which a
separate folio is kept for each individual item of stock. It records not only the quantity details of
stock movements but also record the rates and values of stock movements. With the information
available in the stores ledger, it is easier to ascertain the value of any stock item at any pint of
time. The minimum, maximum and re-order levels of stock are also mentioned for taking action
to replenish the stock position.

Inventory Levels:
1. Economic Order Quantity: One important question that is to be answered by the
Purchase Manager is how much to purchase at any one time? In other words, how much quantity
is to be ordered at any one point of time? Whether there are any costs associated with the
ordering quantity apart from the purchase price? It will be noticed that there are costs attached to
the ordering quantity. These costs are of two types, the fi rst is the ordering cost and the other
one is the carrying cost. We will discuss about these costs. Ordering cost is the cost of placing an
order. In other words, it can be said that when an order is placed, the company has to incur
certain costs at the time of order. These costs include costs like handling and transportation costs,
stationery costs, costs incurred for inviting quotations and tenders etc. The more is the frequency
of order, the more are these costs.
On the other hand, there are certain costs that are called as carrying costs. The cost of carrying
the inventory is the real out of pocket cost associated with having inventory on hand, such as
warehouse charges, insurance, lighting, losses due to handling, spoilage, breakage etc, and
another important component of carrying cost is the amount of interest lost due to the investment
in the inventory. Carrying costs will go on increasing if the quantity of material in inventory goes
on increasing.
Both, the carrying costs and the ordering costs are variable costs, however their behavior is
exactly opposite of each other. If orders are more frequent, ordering costs will go on increasing
but as the material ordered will be in less quantity, the carrying costs will decrease. On the other
hand, if number of orders are reduced, the quantity per order will increase and the carrying cost
will increase. The ordering cost will come down due to reduction of number of orders. In this
situation, the most desirable quantity to be ordered is that quantity at which both, the ordering
costs and carrying costs will be minimum. This quantity is called as ‘Economic Order Quantity’.
This quantity can be calculated with the help of the following formula.

U = Annual demand / annual consumption in units

O = Cost of placing and receiving an order
IC = Carrying cost per unit per annum

The Economic Order Quantity is an important concept as it guides the Purchase Manager
regarding the quantity to be purchased of a particular material. However, this concept is based on
some assumptions. These assumptions are as follows.
• The concerned material will be available all the time without any difficulty.
• The price of the material will remain constant.
• Ordering cost and carrying costs are variable.
• Impact of quantity discounts on the prices is negligible.

2. Maximum Level: This is the highest level of material beyond which the inventory of
material is not allowed to rise. Obviously this level is fixed with the objective of avoiding
overstocking. This level is fixed after taking into consideration the consumption of material and
the re-order period.
Mathematically the level is fixed as under.
Maximum Level = Re-order Level + Re-order Quantity – [Minimum Consumption * Minimum
Reorder period]

3. Minimum Level: This level is fixed with the objective of avoiding shortage of material. If
production is held up due to shortage of material, there will be huge loss to the company. In
order to avoid this, the minimum level is fixed. Care is taken that the stock does not fall below
this level. The minimum level is fixed in the following manner.
Minimum Level = Ordering Level – [Average rate of consumption * Re-order period]

4. Re-order Level: This level is fixed for deciding the time of placing an order. If the stock
of materials reaches this level, fresh order is placed so that by the time the material is procured,
the level of material may fall up to minimum level but not below that. This level is fixed in the
following manner.
Re-order Level = Maximum Usage per Period * Maximum Re-order Period

5. Average Level: This level is the average of the maximum and minimum level and
computed in the following manner.
Average Level = Maximum Level + Minimum Level / 2
6. Danger Level: Generally the danger level of stock is indicated below the safety or
minimum stock level. Sometimes, depending on the practices of the firm and circumstances
prevailing, the danger level is determined between the re-order level and minimum level.

Inventory Control: One of the important aspects of the overall material management is
the inventory control. It is necessary to avoid the overstocking as well as under stocking. For
ensuring this, maximum level, minimum level, re-orders level is fixed. Besides this it is essential
to take care of the material lying in the stock. There is huge investment made in the materials and
if proper care is not taken, there will be severe loss. Even though records are maintained in the
stores regarding the receipts and issues, they should be periodically verified with the physical
stock so that chances of errors and frauds are minimized. For inventory control, the following
methods are used.

A. Perpetual Inventory System: Perpetual Inventory system means continuous stock

taking. CIMA defines perpetual inventory system as ‘the recording as they occur of receipts,
issues and the resulting balances of individual items of stock in either quantity or quantity and
value’. Under this system, a continuous record of receipt and issue of materials is maintained by
the stores department and the information about the stock of materials is always available.
Entries in the Bin Card and the Stores Ledger are made after every receipt and issue and the
balance is reconciled on regular basis with the physical stock. The main advantage of this system
is that it avoids disruptions in the production caused by periodic stock taking. Similarly it helps
in having a detailed and more reliable check on the stocks. The stock records are more reliable
and stock discrepancies are investigated and appropriate action is taken immediately.

B. ABC System: In this technique, the items of inventory are classified according to the value
of usage. Materials are classified as A, B and C according to their value. Items in class ‘A’
constitute the most important class of inventories so far as the proportion in the total value of
inventory is concerned. The ‘A’ items constitute roughly about 5-10% of the total items while its
value may be about 80% of the total value of the inventory. Items in class ‘B’ constitute
intermediate position. These items may be about 20-25% of the total items while the usage value
may be about 15% of the total value. Items in class ‘C’ are the most negligible in value, about
65-75% of the total quantity but the value may be about 5% of the total usage value of the
inventory. The numbers given above are just indicative, actual numbers may vary from situation
to situation. The principle to be followed is that the high value items should be controlled more
carefully while items having small value though large in numbers can be controlled periodically.

C. Just in Time Inventory: This is the latest trend in inventory management. This principle
envisages that there should not be any intermediate stage like storekeeping. Material purchased
from supplier should directly go the assembly line, i.e. to the production department. There
should not be any need of storing the material. The storing cost can be saved to a great extent by
using this technique. However the practicality of this technique in Indian conditions should be
verified before practicing the same. The benefits of Just in time system are as follows,

o Right quantities are purchased or produced at right time.

o Cost effective production or operation of correct services is possible.
o Inventory carrying costs are eliminated totally.
o The stores function is eliminated and hence there is a considerable saving in the stores cost.
o Losses due to breakage, wastage, pilferage etc are avoided.

D. VED Analysis: This analysis divides items into three categories in the descending order of
their criticality as follows.
• ‘V’ stands for vital items and their stock analysis requires more attention. The reason is that if
these items are not available, the resulting stock outs will cause heavy losses due to stoppage of
production. Thus these items are required to be stored adequately to ensure smooth operation of
the plant.
• ‘E’ means essential items. Such items are considered essential for efficient running but without
these items, the system will not fail. Care must be taken to see that they are always in stock.
• ‘D’ stands for desirable items, which do not affect production immediately but availability of
these items will lead to more efficiency and less fatigue.
• Thus VED analysis can be very useful to capital intensive process industries. As it analyses
items based on their importance and it can be used for those special raw materials which are
difficult to procure.

E. FSND Analysis: Age of the inventory indicates the duration of inventory in the
organization. It shows the moving position of inventory during the year. This analysis divides the
items of inventory into four categories in the descending order of their usage rate as follows.
I] ‘F’ stands for fast moving items and stocks of such items are consumed in a short span of time.
Stock of fast moving items must be observed constantly and replenishment orders be placed in
time to avoid stock out position.
II] ‘N’ means normal moving items and such items are exhausted over a period of time, i.e. say
one year. The order levels and quantities for such items should be on the basis of a new estimate
of future demand to minimize the risks of a surplus stock.
III] ‘S’ indicates slow moving items, existing stock of which would last for two years or so.
These items must be reviewed carefully before eliminating them.
IV] ‘D’ stands for dead stock which means that there will not be any further demand for the
same. It is necessary to identify these items and if there cannot be any alternative use for the
same, should be eliminated.

Pricing of Issues
One of the important aspects of issue control is of pricing of the issues. Material is issued to
production and it is necessary to find out the consumption value of the material. However the
question is that at what price the issue is to be charged. Obviously the answer is that the issues
should be priced at the same price at which they are purchased. But it is not practical as it is
virtually impossible to identify the material issued. Hence it is necessary to price the issues by
using certain methods. The various methods of pricing of issues are given below.
1. First In First Out:- As per this method, material received first is issued first. Thus the
material in stock at the beginning of a period is issued firstly and then the issues are made
according to the dates of purchases made. This method is quite logical as the sequence of issue is
as per the dates of purchases. However the consumption value will be as per the purchases made
earlier and hence the latest price may not be charged to the consumption. In case of rising prices
it will result in charging lower prices while in case of falling price it will result in charging
higher prices to the material consumption. The closing stock will be shown at the latest prices as
the material purchased towards the end of the period will remain the stock.

2. Last In First Out [LIFO]:- The assumption under this method is that the material which
is purchased last is issued first to the production. Therefore the issue should be charged at the
latest prices. The main advantage of this method is that the issues are priced at the latest prices
and hence consumption value is also the latest. This will make the product cost more realistic.
However, the inventory valuation will be at the older price as material in balance will be from
the earlier batches of purchases. Valuation of inventory according to this method is not accepted
for inventory valuation in the preparation of financial statements.

3. Highest in First Out [HIFO]:- Under this method, the materials with highest prices are
issued first, irrespective of the date upon which they are purchased. The basic assumption is that
in fluctuating and inflationary market, the cost of material are quickly absorbed into product cost
to hedge against risk of inflation. As the issues are shown at highest prices, the product costs
tend to be on the higher side and hence this method is not suitable in competitive environment.

4. Simple Average Cost Method: - Under this method, the issues are charged at the
average price of the material purchased without taking into consideration the quantities involved
in the same. For example, if materials are purchased in three batches at prices of Rs.18, Rs.19
and Rs.23, the issue will be charged at the average price of the three prices, i.e. Rs.18 + Rs.19 +
Rs.23 = Rs.60/3 = Rs.20. This method is not very popular because it takes into consideration the
prices of different batches but not the quantities purchased in different batches. In the periods of
price fluctuations this method is useful but if fluctuations are too wide, the method may not be
useful.

5. Weighted Average Method: - This method takes into consideration the prices as well as
the quantities of materials purchased. Thus weighted average is computed after each receipt by
dividing the total amount by the total quantity. The issue is charged at prices arrived at according
to this calculation. For example, if three consignments of materials are purchased at prices of
Rs.10, Rs.12 and Rs.11 and the quantities involved are respectively 1,000, 1,200 and 1,400. The
weighted average price will be calculated as shown below.
Rs.10*1,000 + Rs.12*1,200 + Rs.11*1,400 = Rs.10,000 + Rs.14,400 + Rs.15,400 = Rs.39,800 /
3,600 = Rs.11.05. The subsequent issue will be charged at this price. The main advantage of this
method is that it evens out the price fluctuations and reduces the number of calculations to be
made.
6. Periodic Average Cost Method:- Under this method, instead of recalculating the
simple or weighted average cost every time there is a receipt, periodic average is computed. The
average may be calculated for the entire period. The price may be calculated as given below.
Cost of Opening Stock + Total Cost of all receipts / Units in Opening Stock + Total Units
received during the period.

7. Standard Cost Method: - Under this method, material issues are priced at a
predetermined standard issue price. Any difference between the actual purchase price and the
standard price is written off to the Costing Profit and Loss Account. Standard Cost is a
predetermined cost and if it is set accurately, it can be very effective. However revision of
standard cost at regular intervals is required.

8. Replacement Cost [Market Price]:- The replacement cost is the cost at which material
identical to that is to be replaced could be purchased at the date of pricing of the issues as distinct
from the actual cost price at the date of purchase. The replacement price is the price of replacing
the material at the time of the issue of materials or on the date of valuation of closing stock. This
method is not acceptable for standard accounting practices as it reflects the price, which has not
been paid actually.

9. Next In First Method: - Under this method, the price quoted on the latest purchase order
or contract is used for all issues until a new order is placed. Thus this method is a variation of the
Replacement Cost Method.
 Material Control

Detection of Slow Moving and Non-Moving or Obsolete Materials: It is essential for any business
unit to detect slow moving and non-moving or obsolete materials. Obsolete materials become useless
or obsolete due to change in the product, process, design or method of production. Obsolete materials
are different from slow moving materials and non-moving materials. Slow moving materials move
at a slow rate. In the case of slow moving materials as well as non moving materials, capital remains
blocked unnecessarily and also cost of storing continue to be incurred of these materials are kept in
the store in excess of the requirements. Management should make proper investigations into slow
moving and obsolete materials and try to minimize the capital investments in the same. It is necessary
to have an efficient Management Information System which will enable to generate regular reports
to examine the situations relating to these stocks so that the non-moving and obsolete stocks can be
disposed off in time.

Problems and Solutions – Material Control

1. From the following figures relating to two components X and Y, compute Reorder Level, Minimum
Level, Maximum Level and Average Stock Level.

Particulars Component X Component Y

Maximum consumption per week 75 units 75 units
Average consumption per week 50 units 50 units
Minimum consumption per week 25 units 25 units
Reorder period 4 to 6 weeks 2 to 4 weeks
Reorder quantity 400 units 600 units

Solution: The computation of various levels is shown below.

A] Reorder Level = Maximum Consumption  Maximum Reorder Period
Component X = 75 units  6 weeks = 450 units
Component Y = 75 units  4 weeks = 300 units.
B] Minimum Level = Reorder Level – Average Consumption  Average Reorder Period
Component X = 450 units – [50 units  5 weeks] = 200 units
Component Y = 300 units – [50 units  3 weeks] = 150 units
C] Maximum Level = Reorder Level + Reorder Quantity – [Minimum Consumption  Minimum
Reorder Period]
Component X = 450 units + 400 units – [25 units  4 weeks] = 750 units
Component Y = 300 units + 600 units – [25 units  2 weeks] = 850 units
D] Average Level = ½ [Maximum Level + Minimum Level]
Component X = ½ [750 units + 200 units] = 475 units

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 Cost and Management Accounting

Component Y = ½ [150 units + 850 units] = 500 units

2. From the following particulars, compute Economic Order Quantity
Annual consumption = 8, 10, 000 units
Order placing and receiving costs: Rs.10 per order
Annual stock holding stock: 20% of consumption
2×U×O
Solution: Economic Order Quantity =
IC
2 × 8, 10, 000 × 10
= 0.2
= Rs.9, 000
3. A manufacturer purchases 800 units of a certain component p.a. @ Rs.30 per unit from outside supplier.
The annual usage is 800 units, order placing and receiving cost is Rs.100 per order and cost of holding
one unit of the component for one year is Rs.4. Calculate the Economic Order Quantity by tabular
method. Also calculate the number of orders to be placed per year.
Solution: The following table is prepared to compute the Economic Order Quantity.
Annual Number Units Average Carrying cost Order placing Total annual
Consumption of orders per Inventory @ Rs.4 per unit and receiving costs
p.a. order Units on average cost @ Rs.100
inventory per order
800 1 800 400 Rs.1600 Rs.100 Rs.1700
2 400 200 800 200 1000
3 267 133 532 300 832
4 200 100 400 400 800*
5 160 80 320 500 820
6 133 67 268 600 868
* The total annual cost of Rs.800 is the lowest when number of orders placed are 4 in a year. This
means that the quantity per order of 200 [4 orders per year] is the Economic Order Quantity.
4. After inviting tenders, two quotations are received as follows.
Supplier A: Rs.2.20 per unit
Supplier B: Rs.2.10 per unit plus Rs.2000 fixed charges irrespective of the units ordered.
Calculate the order quantity for which the purchase price per unit will be the same. Considering all
factors regarding production requirements and availability of finance, the purchase officer wants to
place an order for 15, 000 units. Which supplier should he select?
Solution:
The difference between the prices quoted by the supplier is Rs.0.10 per unit as regards to the variable
costs while the difference between the fixed costs is Rs.2000. The quantity of purchase where the
purchase price per unit will be the same can be calculated with the help of the following formula.
Desired purchase quantity = Difference in the fixed cost/Difference in the variable cost
= Rs.2000 / Rs.0.10 = 20, 000 units.

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 Material Control

Thus the purchase cost will be the same if the number of units ordered is 20, 000. If more than 20, 000
units are ordered, supplier B should be selected while for orders of less than 20, 000 units, supplier A
should be selected.
For order of 15, 000 units, supplier A should be selected. This can be proved as shown below.
Supplier A: Total Cost = 15, 000 units  Rs.2.20 per unit = Rs.33, 000
Supplier B: Total Cost = 15, 000 units  Rs.2.10 per unit = Rs.31, 500 + Rs.2000 fixed cost = Rs.33, 500
units.
5. From the following particulars in respect of a material, compute the Economic Ordering Quantity by
preparing a table.
Ordering Quantities Price Per Kg. [Rs.]
Less than 250 6.00
250 and less than 800 5.90
800 and less than 2000 5.80
2000 and less than 4000 5.70
4000 and above 5.60

The annual demand for the material is 4000 kg. Stock holding costs are 20% of the material cost per
annum. The ordering and receiving costs are Rs.10 per order.
Solution:
The following table is prepared to work out the Economic Order Quantity.
Statement showing comparative annual total cost at different ordering quantities

Particulars Order Size Order Size Order Size Order Size Order Size
200 units 250 units 800 units 2000 units 4000 units
Number of orders * 20 16 5 2 1
Value per order ** Rs.1200 Rs.1475 Rs.4640 Rs.11, 400 Rs.22, 400
Average inventory *** Rs.600 Rs.738 Rs.2320 Rs.5700 Rs.11, 200
Ordering cost **** Rs.200 Rs.160 Rs.50 Rs.20 Rs.10
Holding cost # Rs.120 Rs.148 Rs.464 Rs.1140 Rs.2240
Annual cost of Rs.24, 000 Rs.23, 600 Rs.23, 200 Rs.22, 800 Rs.22, 400
material ##
Total cost ### Rs.24, 320 Rs.23, 908 Rs.23, 714 Rs.23, 960 Rs.24, 650
* Number of orders = Total annual consumption/quantity per order
** Value per order = Price  Order quantity
*** Ordering cost = Rs.10  number of orders
# Holding cost = 20% of average inventory [Average inventory = order quantity/2]
## Annual cost of materials = Annual demand  price per unit
### Total Cost = Annual cost of materials + Holding cost + Ordering cost.
#### EOQ = 800 units, where the total cost is minimum

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 Cost and Management Accounting

6. From the following information, prepare Store Ledger using First In First Out [FIFO], Last In First Out
[LIFO] and Weighted Average Method of pricing the issues
December 1st: Balance in hand 1000 units @ Rs.1 each.
December 15th: Received 3000 units costing Rs.3, 300
January 12th: Received 2000 units costing Rs.2400
January 30th: Issued 2000 units
February 17th: Issued 3400 units.
Solution:
First In First Out Method (FIFO):
Store Ledger

Date Particulars Ref. Receipts Issue Balance

No.
Dec.1st Opening Balance 1000 units @ Re.1 = Rs.1000
Dec.15th Receipts — 3000 4000 units
units Rs.4300
Rs.3300
Jan.12th Receipts — 2000 6000 units
units Rs.6700
Rs.2400
Jan.30th Issue — 2000 units 4000 units
1000 units @ Re.1 Rs.4600
per unit = Rs.1000
1000 units @ Rs.1.10
= Rs.1100
Feb.17 Issue — 3400 units 600 units
2000 units @ Rs.1.10 Rs.720
= Rs.2200
1400 units @ Rs.1.20
= Rs.1680

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 Material Control

LAST IN FIRST OUT: [LIFO]

Store Ledger

Date Particulars Ref. Receipts Issue Balance

No.
Dec.1st Opening 1000 units @ Re.1 = Rs.1000
Balance
Dec.15th Receipts — 3000 units 4000 units Rs.4300
Rs.3300
Jan.12th Receipts — 2000 units 6000 units Rs.6700
Rs.2400
Jan.30th Issue — 2000 units @ Rs.1.10 = 4000 units Rs.4500
Rs.2200
Feb.17 Issue — 3400 units 600 units Rs.600
2000 units @ Rs.1.20 =
Rs.2400
1000 units @ Rs.1.10 =
Rs.1100
400 units @ Re.1 =
Rs.400

WEIGHTED AVERAGE METHOD

Store Ledger

Date Particulars Ref. Receipts Issue Balance

No.
Dec.1st Opening 1000 units @ Re.1 = Rs.1000
Balance
Dec.15th Receipts — 3000 units 4000 units Rs.4300
Rs.3300 Rate per unit = Rs.4300/4000 =
Re.1.075
Jan.12th Receipts — 2000 units 6000 units Rs.6700
Rs.2400 Rate per unit = Rs.6700/6000 =
Re.1.11
Jan.30th Issue — 2000 units @ 4000 units Rs.4480
Rs.1.11 = Rs.2220 Rate per unit = Rs.4480/4000 =
Re.1.11
Feb.17 Issue — 3400 units @ 600 units Rs.706
Rs.1.11 = Rs.3774

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 Cost and Management Accounting

7. The following is the summary of the receipts and issues of material in a factory during December
2007. Prepare Store Ledger according to First In First Out Method.
December 2007
1. Opening balance 500 units @ Rs.25 per unit
3. Issue 70 units
4. Issue 100 units
8. Issue 80 units
13. Received from supplier 200 units @ Rs.24.50 per unit
14. Returned to store 15 units @ Rs.24 per unit
16. Issue 180 units.
20. Received from supplier 240 units @ Rs.24.75 per unit
24. Issue 304 units.
25. Received from supplier 320 units @ Rs.24.50 per unit
26. Issue 112 units
27. Returned to store 12 units @ Rs.24.50 per unit
28. Received from supplier 100 units @ Rs.25 per unit
It was revealed that on 15th there was a shortage of five units and another on 27th of 8 units.
Solution:
First In First Out Method

Date Particulars Ref. Receipts Issue Balance

No.
Dec Qty. Rate Amount Qty. Rate Amount Qty. Rate Amount
1 Balance b/d 500 25 12, 500
3 Issue 70 25 1750 430 10, 750
4 Issue 100 25 2500 330 8250
8 Issue 80 25 2000 250 6250
13 Purchases 200 24.50 4900 450 11, 150
14 Returned 15 24.00 360 465 11, 510
15 Shortage 5 25 125 460 11, 385
16 Issue 180 25 4500 280 6885
20 Purchases 240 24.75 5940 520 12, 825
24 Issue 304 * 7479 216 5346
25 Purchases 320 24.50 7840 536 13, 186
26 Issue 112 24.75 2772 424 10, 414
27 Shortage 8 24.75 198 416 10, 216
27 Returns 12 24.50 294 428 10, 510
28 Receipts 100 25.00 2500 528 13, 010
* Issue of 304 units on 24th January is priced as per the following details.

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 Material Control

 Out of 500 units from the opening balance, 435 units have been issued so far on different dates
from 3rd January to 16th January and hence balance 65 units are available.
 65 units will be priced at Rs.25 each, so the value will be Rs.1625
 Next 200 units will be priced at Rs.24.50 each, value will be Rs.4900
 Next 15 units will be priced at Rs.24 each, value will be Rs.360
 Balance 24 units will be priced at Rs.24.75 each, value will be Rs.594
 Total value will be Rs.1625 + Rs.4900 + Rs.360 + Rs.594 = Rs.7479, this value is shown in the issue
column against the quantity.
8. The Store Ledger Account for Material X in a manufacturing concern reveals the following data for
the quarter ended on 30th September

Date Particulars Receipts Issue

Quantity Price Rs. Quantity Price Rs.
July 1 Balance b/d 1, 600 2.00
July 9 Receipts 3, 000 2.20
July 13 Issue 1, 200 2.556
Aug. 5 Issue 900 1.917
Aug. 17 Receipts 3, 600 2.40
Aug. 24 Issue 1, 800 4.122
Sept. 11 Receipts 2, 500 2.50
Sept. 27 Issue 2, 100 4.971
Sept. 29 Issue 700 1.656

Physical verification on September 30th revealed an actual stock of 3, 800 units. You are required to,
[a] Indicate the method of pricing employed above.
[b] Complete the above account by making entries you would consider necessary including
adjustments, if any, and giving explanations for such adjustments.
Solution:
[a] The verification of the value of issues applied in the problem shows that Weighted Average
Method has been followed. This is clear from the following example.
 On July 1st, the balance b/d is 1,600 @ Rs.2.00, the value is Rs.3200
 On July 9th, receipts are 3000 units @ Rs.2.20, the value is Rs.6600
 The total of these two will be 4600 units and the value is Rs.9800
 The rate per unit will be Rs.9800/4600 units = Rs.2.13
 The same rate has been charged to the issues on July 13th of 1200 units.
 The same methodology has been used for the subsequent issues.

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[b] The complete store ledger is shown below.

Date Particulars Receipts Issues Balance

Qty Rate Amount Qty Rate Amount Qty Rate Amount
July 1 Balance b/d 1600 2.00 3200 1600 2.00 3200
July 9 Receipts 3000 2.20 6600 4600 2.13 9800
July 13 Issues 1200 2.13 2556 3400 2.13 7244
Aug. 5 Issues 900 2.13 1917 2500 2.13 5327
Aug. 17 Receipts 3600 2.40 8640 6100 2.29 13,967
Aug. 24 Issue 1800 2.29 4122 4300 2.29 9845
Sept. 11 Receipts 2500 2.50 6250 6800 2.37 16,095
Sept. 27 Issue 2100 2.37 4971 4700 2.37 11,124
Sept. 29 Issue 700 2.37 1656 4000 2.37 9468
Sept. 30 Issue# 200 2.37 473 3800 2.37 8995

# The closing stock given in the example is 3800 units. However after the issue on September 30th, the
closing stock comes to 4000 units. This means that there is a shortage of 200 units, which is charged at
the issue price of Rs.2.37.
9. The following transactions in respect of Material Y occurred during the six months ended
30th June 2007.

Month Purchased [Units] Price Per Unit Rs. Issued [Units]

January 200 25 Nil
February 300 24 250
March 425 26 300
April 475 23 550
May 500 25 800
June 600 20 400

Required: The Chief Accountant argues that the value of closing stock remains the same, no matter
which method of pricing of material issues is used. Do you agree? Why or why not? Detailed Stores
Ledgers are not required.
Solution:
 On observation of the transactions, it is clear that from January to May, the number of units
purchased and number of units issued is the same and hence there is no closing stock as such. In
June, there is a purchase of 600 units and issue of 400 units. Valuation of closing stock will be at
Rs.20, which is the purchase price, irrespective of the method of pricing of issues is concerned.
 However, if it is decided to value the closing stock at the end of each month, the values will be
different according to different methods.

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 Material Control

10. ABC Ltd. provides you the following information. Calculate the cost of goods sold and ending inventory
applying the Last In First Out method of pricing raw materials under the Perpetual Inventory and
Periodic Inventory Control System.

Date Particulars Units Per Unit Cost Rs.

January 1 Opening Stock 200 10
January 10 Purchases 400 12
January 12 Withdrawals 500 ---
January 16 Purchases 300 11
January 19 Issues 200 ---
January 30 Receipts 100 15

Also explain the difference in profits if any.

Solution: The following statement is prepared to show the cost of goods sold and inventory valuation
under both the methods.

Particulars Perpetual Inventory Method Periodic Inventory Method

Units X Rate = Amount Rs. Units X Rate = Amount Rs.
I] Cost of goods sold/ 400  12 = 4, 800 100  15 = 1, 500
withdrawn or issued –
100  10 = 1, 000 300  11 = 3, 300
12th January
5, 800 300  12 = 3, 600
200  11 = 2, 200 700 units = 8, 400
On 19th January
Total Rs.8, 000
II] Ending Inventory 100  10 = 1, 000 100  12 = 1, 200
100  10 = 1, 000 200  10 = 2, 000
100  15 = 1, 500 300 units = 3, 200
300 units = 3, 500

Reasons for the difference: The cost of good sold/ issued/withdrawn is more under Periodic Inventory
System as compared to Perpetual Inventory System. Hence the profit under the former will be less as
compared to the latter. It can also be said that the lesser is the amount of ending inventory lesser will
be the profits.
11. From the following details, prepare Store Ledger under Simple Average Method of pricing the issues.
January 2007
1st: Received 500 units @ Rs.20 per unit
10th: Received 300 units @ Rs.24 per unit
15th: Issued 700 units
20th: Received 400 units @ Rs.28 per unit

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 Cost and Management Accounting

25th: Issue 300 units

27th: Received 500 units @ Rs.22 per unit
31st: Issued 200 units.
Solution:
Store Ledger

Date Receipts Issue Balance

Particulars
January Qty. Rate Amount Qty. Rate Amount Qty. Amount
1st Receipts 500 20 10, 000 500 10, 000
10th Receipts 300 24 7, 200 800 17, 200
15th Issue 700 22 * 15, 400 100 1, 800
20th Receipts 400 28 11, 200 500 13, 000
25th Issue 300 26 # 7, 800 200 5, 200
27th Receipts 500 22 11, 000 700 16, 200
31st Issue 200 25 ^ 5, 000 500 11, 200

* The rate of issue is computed by taking the simple average of the rates of Rs.20 and
Rs.24, i.e. Rs.22
# The rate is computed by taking the simple average of the rates of Rs.24 and Rs.28, i.e. Rs.26. The
earlier rate of Rs.20 is not taken into consideration as the material quantity has been issued and is
not there in the stock on 15th January.
^ The rate is computed by taking the simple average of the rates of Rs.28 and Rs.22, i.e. Rs.25.

Question Bank

Material Control
A] Essay Type
1. What do you understand by ‘Material Control’? What are the essentials of an efficient material
control system?
2. Explain the role played by ‘Material Control’ in cost control and cost reduction.
3. Describe briefly the functions of each of the following departments with regard to material
control.
A] Stores Purchase B] Stores receiving and inspection department C] Store keeping department
D] Production department and E] Stock control department
4. Indicate the reasons why the purchase department should function as a separate department and
state the advantages of a centralized purchase function.
5. What is a purchase requisition? Give a specimen form of purchase requisition and state the
information contained therein.

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