Topics Covered:
Initiating Material Cost Accounting,
Valuation of Materials Received,
Accounting for Material Issues
In the cost accounting section, accounting entry for material is initiated when the supplier’s invoice and goods received note from the stores arrives in the section. Goods received note is the confirmation that materials have been taken on charge or posted in the records of the stores.
Purchase invoice book is a book of original entry for the accounting purchase of materials in the cost accounting records. For each invoice, the accounts to be debited and credited are analyzed in this book. The debits can be to accounts in Stock Ledger, accounts in Cost Ledger, accounts in Fixed Assets Ledger, or accounts in General Ledger. The credits are to the accounts in the Creditors Ledger (Suppliers Ledger) or Cash. Based on these journal entries, various accounts in the ledgers are posted and totals are posted in various control accounts.
Valuation of Materials Received
Invoice price as billed by the supplier is the value of the material received against that invoice and goods received note. The account of that item is to be debited with the invoice value. But, there are certain items on the invoice for which alternative accounting practices exist.
a. Cash discount: Cash discount is discount allowed by the supplier for payment of the invoice amount before a specified date. If all bills are paid before the specified date as a policy by the company, such discount may be deducted from the invoice amount and the net amount is taken as the value of material received. But if on certain invoices it is taken and on certain invoices it is not taken, then procedure is to account for the material at the invoice value only. Discounts are accounted for separately and a Store Adjustment Account is used to accumulate the discounts received and the amount is may be charged to overhead or to the Profit and Loss Account. If a separate Costing Profit and Loss Account is prepared, it is charged to it.
b. Transport charges: When transport cost is born by the supplier, there is no accounting issue. When transport expenses are paid separately, they should be accounted for in a journal entry and then added to the invoice value of the material. When several items are received in one consignment, allocating that cost to many items may not be practicable. Then transport charge is accounted for as overhead. Some companies predetermine a transport cost rate for each type of material and add to the invoice amount of the material in valuation. The difference between such allocated amount for a period and the actual cost incurred in transportation is taken to overhead cost or adjusted to Profit and Loss Account or the Costing Profit and Loss Account as per the company’s accounting policy.
c. Other amounts billed: the supplier separately charges several items apart from the price like excise duty, sales tax, and handling charges. These expenses are added to the value of material received whenever they can be directly allocated to the particular materials. Costs which cannot be allocated have to be charged to overhead costs. d. Receiving, inspection, storage, material accounting, and purchased department costs: Normally these costs are not identified with value of material received. The accounting for these expenses or costs is important from inventory management point of view. Inventory carrying cost and ordering cost which are two important inputs for decision making in determining economic order quantities are determined using these items of cost. If some companies want to charge these costs to materials, they have to predetermine allocation rates of each of these items of costs.
e. Apportionment of joint purchase costs: A lot material containing various quality levels may be purchased. But in the stores, the quality levels are segregated and issued for appropriate jobs. In this instance, each quality level of the material is to be valued separately. But invoice amount is for the whole lot. In this case, the current market prices or the recent available market prices are taken as the base and the total value of the lot is ascertained. Any difference is distributed to the market value of various grades pro rata. Any common items of incidental expenditure if significant and practical is also allotted pro rate based on the invoice value of the items involved.
f. Extra quantity received gratis: If any extra quantity is supplied gratis by the supplier, it has to be accounted for in the quantity.
g. Cost of Packaging/Containers: When containers come along with the material and are retained by the firm and sold as scrap, this value is credited to overhead account. When the disposable value is significant, the operating departments are asked to return the container to the store, and the material return note is valued at a predetermined rate.
In the case of returnable containers, the cost of the material and cost of containers (returnable value) are shown separately, and only cost of containers not returned is charged to overheads.
Provisional Pricing of Issues
Sometimes, there is a time lag between the dates of supply of materials and the receipt of supplier’s bill. If the accounts of period are to be finalized, a provisional pricing of issues is done based on the information in the purchase order. Any difference between the provisional value and actual value is either adjusted to the balance in the account or charged to overhead. This can be done if differences are small. If differences are significant, the issues are repriced and while periodic statements may not be revised, the annual audited statements will be based on repriced material values.Purchase credit book
Purchase credit book is also a book of original entry like Purchase invoice book and is used for recording details of debit notes issued to suppliers. It also specifies which accounts are debited and credited. The suppliers’ accounts are debited and the relevant accounts in various ledgers of cost accounting system are credited.
Accounting for Material Issues
Material is issued on material requisitions filled and given by operating departments or cost centers.The material issued has to be valued. There is a complexity in valuing issues, as the balance of material in the account may be from two receipts with different unit prices. Different accounting practices are followed by different firms. The accounting policies followed for valuing issues are:
1. First-in-First –out (FIFO) Method: In this accounting system, the pricing is done as though the material from the earliest received lot is issued first. To do this accounting practice, the balance must be stated as balance split into various receipt lots.
2. Last-in-First-Out: In this accounting system, the pricing is done as though the material from the recently received lot is issued first. To do this accounting practice, the balance must be stated as balance split into various receipt lots.
3. Average Price Method: In this method, whenever a new lot is received, the value of the total balance is found out and a new unit value of the material is arrived at.
4 Standard Price Method: At the start of each new financial year, standard unit prices are fixed for all the materials. Issues are valued at these standard prices.
Pricing of Returns
When the operating departments are cost centres return the material previous issue to them, the returns notes are to be valued. The general practice is value them at prices at which they were issued.Materials Issue Analysis
At the end of each accounting period, say a month, all the material requisitions, return notes and transfer notes of the month are collected and sorted according to departments or cost centres as well as production order and standing order numbers on documents. These documents are Material Issue Analysis Sheets. It is classified record of material issues, returns and transfers. This analysis sheet can do the function of requisitions journal. Which accounts are debited is available in the analysis sheet.
References
N.K. Prasad and A.K. Prasad, Principles and Practice of Cost Accounting, Book Syndicate Private Limited, Calcutta, India, 1991.
Originally posted in
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