ACC116-Chapter 2
ACC116-Chapter 2
Accounting (ACC116)
CHAPTER 2
MATERIALS
Definition
Materials are basic raw materials and parts that
have been purchased and are available for
conversion into finished goods.
Classification of Materials
Raw materials must be available and must be acquired before production can begin
Have to be ordered, received, stored, issued and controlled continuously
Materials are classified as direct materials or indirect materials:
EFFECT INEFFICIENT
MATERIALS CONTROL
• Waste due to theft, obsolescence
• Production delays & others.
Material management
Efficient purchasing
M Control of material quality Saving in
A Effective stores control material
T Determining appropriate issue
E price
R Timely report Reduction in
Keeping records and systematic cost
I
accounting
A Reducing loss of material
L Applying cost management Increase in
techniques – JIT etc. profit
Materials Purchasing Procedure
Sources of demand: storekeeper, departmental heads
Material checked and inspected and goods received notes (GRN) prepared
Material and GRN sent to store. Invoice, GRN and inspection report sent to
purchasing department
REASONABLE PRICE : while purchasing it is seen that it is purchased at low prices. But
quality should not be sacrificed at the cost of lower price. Choose suppliers that offer an
appropriate balance between quality, price and delivery
MINIMUM WASTAGE : There should be minimum possible wastage of materials while these
are being stored in warehouse or used in factory. It should be allowed up to certain level
known as normal wastage.
The control of material is very important because investment in materials are high:
To reduce costs
To avoid wastage
Material Control system, con’t..
How to proper control the material?
Reorder level :the amount at which new stock is ordered. 300 items are ordered and it takes two weeks lead
time for ordered stock to arrive. There is always a buffer stock of 100 items held just in case deliveries
are held up or there is an unexpected large order.
Maximum stock level : the largest amount of items to be stored on site (500).
Minimum stock level : the lowest amount of items to be stored on site (100).
Reorder level
The level between the maximum & minimum stock levels. At this level a
request for new supplies will be made.
Formula:
Formula:
(Max. consumption +
Min. consumption) / 2
Maximum Stock Level
The maximum quantity of material that should ever be held.
It is fixed after considering:-
◦ The rate of consumption;
◦ The time required to obtain supplies;
◦ The economic order quantity (EOQ);
◦ The risks of loss, deterioration and obsolescence; and
◦ Storage space.
Formula:
Firm may end up paying an idle labour force due to the production hold-ups.
Organisation can lose its important customer, as they fail to meet customer’s
order.
&
orders quantity increase, orders quantity increase, EOQ : optimal order size that
carrying cost increase carrying cost increase, minimize total cost
ordering cost decrease (carrying and ordering stock)
1. Formula/ Equation Method
The Economic Order Quantity (EOQ) can be derived by using formula below:
D = total Demand for material during a given period or annual quantity used
O = Costs of ordering and receiving an order /cost per order
C = the annual cost of carrying one unit of material
EOQ is the optimal order size that minimizes carrying costs and
ordering costs, which make up total costs of stock.
Carrying/Holding costs are variable costs that include:
◦ Storage costs (rent, lighting, heating, air conditioning)
◦ Insurance
◦ Handling cost Total carrying cost) x C
◦ Rates (tax on property)
◦ Depreciation
◦ Obsolescence
√( )
◦ The cost per unit is RM8 2(12 𝑥 1000)(350)
◦ Estimated storage cost are 15% per annum 𝐸𝑂𝑄=
0.15 𝑥 8
Answer:
D = 1000 units per month
O = RM350 per order
C = 15% x RM8
Total carrying cost) x C
Example;
Determine the total cost for the previous example;
Items Formula
No of order for stock in a year (times) D/Q
Average Stock (unit) Q/2
Total Ordering costs (annually) (RM) D/Q x O
Total Carrying/Holding/Storage costs (annually) Q/2 x C
(RM)
Total Cost (RM) (Q/2) x C + (D/Q) x O
D= Total annual Demand (D)
Q= Order Quantity (Q)
O= Cost per Order (O)
C= Carrying Cost per unit (C)
Example:
Tapa Trading is a successful business making and selling cakes to the
customers at Kuching, Sarawak. The demand for cakes is expected to
increase from year to year and the firm needs a proper material system to
buy its main ingredients including the flour.
By using tabulation method, identify the EOQ with the number of order given are 250
times, 125 times, and 50 times. Currently, the purchase price for the flour is RM6.00
per kg.
Solution:
o Annual requirement, D= 2,500 kg + 5,000 kg + 5,000 kg = 12,500 kg per annum
o The ordering cost, O= RM2.50
o The storage cost, C= RM4.00 per holding
EOQ
3. Graphical Method
This method depends on the tabulation method for the data to the plotted on
the graph
250
Total cost
200
Total storage cost
150 EOQ
50
Order
0 100 200 300 400 500 Quantity
(Unit)
EOQ using graphical method
Problem of Material Pricing
❖When store department issued material to production department, the
issues must be valued or priced because it will affects the cost of the
products produced by the production.
• Unrealised profit and loss does not arise •Difficult and expensive to be
since it is an actual cost system. Ie. Cost administered.
of issue is equal to cost of purchase.
•Stock value is presented fairly at current •Difficult to compare cost between jobs
market value. due to different materials issue price.
•Avoid obsolescence as materials that are •Effect on inflation may result in the price
received first are issued first. to be under or over stated.
•Result in profit ratio be more stable •Difficult to compare cost between jobs.
years after years (accounting information
will be more reliable).
•Induce obsolescence.
•Not realistic
i.e. Assumes physical issue principle to
be opposite of that actual flow.
c. Weighted Average Method
ADVANTAGES DISADVANTAGES
•Less complicated as in FIFO & LIFO. •Does not represent actual buying price.
•Effect on product cost is between FIFO •Issue price may not reflect current
& LIFO. economic values.