Material Accounting and Control
Introduction
Cost Elements, which include material, labour, and expenses have to be taken into cognizance in the ascertainment of the cost of production, services, department, section, subsidiary or ministry.
The term material cover a range of items, which Include:
1. Raw materials which are needed to produce a finished product e.g flours and sugar for bread or wood for furniture;
2. Work in process, which refers to semi produced raw materials at a particular point in time;
3. Components or parts, for assembly into finished product;
4. Finished products for use or sale for example bag of cement, loaf of bread; and
5. Indirect materials for use by one or more cost centers of an organisation e.g fuel and lubricant, stationary, cleaning materials etc.
What ever the nature of the Business of an organisation, materials are required, obtained, stored and used to achieve its objectives. The cost accountant must therefore, provide management with information that would guide their decision in respect of materials acquisition, planning and control and pricing.
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| Material Accounting and Control |
Material Acquisition
The serious steps to be observed by a cost consious Organizations in respect of purchase and receipt of materials are as follows:
1. Initiation of purchase by means of purchase requisition?;
2. Preparation of purchase order and dispatch to supplier;
3. Receipt of materials;
4. Inspection or testing of the materials;
5. Debit note to supplier in respect of defects, rejects etc.
5. Passing of the voucher to account dept for payment; and
6. Entry in the relevant accounting books.
Purchase requisition:
It is initiated by the user dept requesting the procurement dept to buy on its behalf specified materials through purchase requisition form( PRF) .
The procurement dept:
Upon receipt of the , the purchasing officer will then provide a purchase order. Contains in the order will be the price , quantity and type of material. The person who signs the local purchase order (LPO) must be an authorised officer. The document is presented to a supplier instructing him to supply the stipulated items.
The goods receiving dept:
The receiver checks quantity, quality, and condition of the items against the copy of the purchase order form (POF) send to it as well as the supplier advice note. On satisfaction, a goods received note (GRN) is raised. The GRN shows the date, suppliers name, purchase order number, quantity and description of goods and is endorsed y the head of the receiving dept. In many Organizations the stores dept functions as the receiving dept where the material are expected to pass through separate technical or laboratory inspection. This inspection section provides quality report either on the GRN or on a separate sheet of paper . Copies of GRN including quality report are sent to the procurement dept, the accounts dept, and the store, where there is a separate receiving dept and duplicate copy retained.
Accounts depts:
When an invoice is received from a supplier the invoice must be receipted and numbered. The procurement dept will check the description of goods and price against the POF. The quantity will also be verified from the GRN and reference made to inspection report. At each stage, the appropriate officers must append their names and signatures. The procurement staff will state the quantity, quality, price and an appropriate ledger code number will be entered.
After this processing, the invoice is passed to account for payment. Here, an account clerk will check calculations in the invoice and if found correct, the suppliers account will be credited in the purchase ledger with the amount payable to him. The total of the purchase book is to be debited to the purchase account in the general ledger. When payment is made to the supplier, his account will be debited and cash book will be credited.
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Material planning and control
Material control is a system that ensures the provision of the required quantity and quality of materials at the required time and at least possible cost. If a cost accounting system is to be fully effective, there must be an adequate system for control of materials from the time an order is placed with the supplier until the material is issued for production or other use.
Accordingly, the success or failure of a business may depend largely on efficient materials procurement, storage , utilisation and Accounting.
Efficient material control eliminates losses and any other form of waste that usually passed unnoticed. Theft, breakage, deterioration and the use of excessive floor space can be reduced to the bearest minimum through proper material control.
Material planning and control can be achieved through the use of the following:
1. Material requisition form(MRF):
Also known to as store requisition note(SRN), is raised and endorsed by the user dept, section or unit to request for materials from the store. On issues of the materials, the store endorsed and retained a copy whereas a copy is sent to accounts with a copy retained by the originator. The store dept use their copy to update their records while the store ledger section of the account uses their copy to price the material for onward passage to the cost account section. It is thus section that will charge the relevant dept, unit, product, job or process with the value of materials issued, using the stock valuation system of the Organisation.
2. Material returned note(MRN):
Is a document which records the return to store dept of surplus materials no longer required by the cost center. The various materials records and cost accounts are to be adjusted to ensure that the cost center concerns receive credit for the materials returned while the stick account is debited.
3. Bin card(BC):
A document which provides a running record of receipts and issues in the simplest possible form. An entry will be made at the time of each receipt or issue and a new balance will be determined. It records quantity issued or received into store and not value. For each item, on teh bin card, the maximum, minimum, and reorder levels as well as the order quantity should be reflected. Each bin card is also given a code for easy reference. This is more so in Organizations where store initiate PR. The stock levels in the card are meant to ensure effective control of materials in the store to avoid excessive stock, wastage, work stoppage etc. The level could be defined as follows:
Maximum stock level
The upper level of inventory, which must not be exceeded without specific order from management. Given by formula as:
Reorder level + reorder quantity - ( minimum usage × minimum reorder period )
Minimum stick level
Lowest level, which inventory should be allowed to fall. Given by the formula as:
Reorder - ( average usage × average reorder period)
Average stock level
(Maximum stock level + minimum stick level)/2
Reorder period / lead time
Time taken between placing an order an d the receipt of the materials.
Re order quantity
The Economic order quantity (EOQ): quantity that minimize the total cost of order and holding of stock.
Store ledger card
This is the key to an effective materials control system as it provides the details necessary to ascertained materials values for the checking of physical stock of materials. This document shows not only the quantity but also the value of each item 9f stock, which enable management to ascertain total value of stock at any point in time.
Material pricing/ stock valuation
How can a firm value it's stock which it bought/ purchase at different prices over the period?
There are several methods used by different companies to value stock and we shall be be discussing the three common method which are as follows;
1. FIFO ( first in first out)
2. LIFO (last I. First out)
3. Weighted average method
FIFO
This method uses the price of first batches received for all issues until all unit from this batch has been exhausted after which the price of the next batch received becomes the issue price.
The two point to be noted here are;
1. The need to record units left in each batch after issue and ;
2. The balance of the unit.
LIFO
This method uses the price of the last batch received for all issues until all units from each batch has been exhausted, when the price of the previous batch received becomes the issued price.
Weighted average price
This method averages price after weighing ( i.e adding the value of the last balance on hand and that of current receipts as well as quantities 9f the last balance and that 9f current receipts, then divided the total value by the total quantity to get an average price).
Other methods include replacement value, standards price, specific price and inflated price.
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