Controlling and Costing Materials:
Effective materials management is essential in order to (1) provide the best service to
customers, (2) produce at maximum efficiency, and (3) manage inventories at predetermined
levels to stabilize investments in inventories.
Successful materials management requires the development of a highly integrated and
coordinated system involving sales forecasting, purchasing, receiving, storage, production,
shipping, and actual sales. Both the theory of costing materials and inventories and the practical
mechanics of cost calculations and record keeping must be considered.
Costing materials present some important, often complex, and sometime highly controversial
questions concerning the costing of materials used in production and the cost of inventory
remaining to be consumed in a future period. In financial accounting, the subject is usually
presented as a problem of inventory valuation; in cost accounting, the primary problem is the
determination of the cost of various materials consumed in production and a proper charge to
cost of goods sold.
The discussion of materials management in this chapter deals with:
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Procedures for materials procurement and use.
Materials costing methods.
Cost of materials in inventory at the end of a period.
Costing procedures for scrap, spoiled goods, and defective work
Summary of materials management
Procedures for Materials Procurement and Use:
Although production processes and materials requirements vary, the cycle of procurement and
use of materials usually involves the following steps:
1. Engineering and planning determine the design of the product, the materials
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specifications, and the requirements at each stage of operations. Engineering and
planning not only determine the maximum and minimum quantities to run and the bill of
materials for given products and quantities but also cooperate in developing standards
where applicable.
The production budget provides the master plan from which details concerning
materials requirements are eventually developed.
The purchase requisition informs the purchasing agent concerning the quantity and
type of materials needed.
The purchase order contracts for appropriate quantities to be delivered at specified
dates to assure uninterrupted operations.
The receiving report certifies quantities received and may report results of inspection
and testing for quality.
The materials requisition notifies the storeroom or warehouse to deliver specified time
or is the authorization for the storeroom to issue material to departments.
The materials ledger cards record the receipt and the issuance of each class of
materials and provide a perpetual inventory record.
Accounting procedures for materials procurement and use involve forms and records
necessary for general ledger financial accounting as well as those necessary for costing a job,
process or department, and for maintaining perpetual inventories and other statistical
summaries. The purchase requisition, purchase order, receiving report, materials requisition, bill
of materials, scrap report, returned materials report, materials ledger cards, and summary of
materials used are some of the forms used for materials control under a cost system. The
purchases journal, the cash payments journal, the general journal, and the general ledger control
accounts are also used.
The discussion here is not based on any particular type or size of industry. It is, rather a general
description of the accounting and controlling procedure involved in the procurement and use
of materials. To understand the detailed procedure of purchasing, receiving stocking, and using
materials (materials procurement and use) click on the following links:
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Purchases of productive material.
Purchases of supplies, services, and repairs.
Materials purchasing forms.
Receiving materials.
Invoice approval and data processing.
Correcting invoices.
Electronic data processing (EDP) for materials received and issued.
Cost of acquiring materials.
Storage and use of materials.
Issuing and costing materials into production.
Materials ledger card--perpetual inventory.
Materials Costing Methods:
The ultimate objective in cost accounting is to produce accurate and meaningful figures. These
figures can be used for purposes of control and analysis and eventually matched against revenue
produced in order to determine net operating income.
After the unit cost and total cost of incoming materials are entered in the received section of a
materials ledger cards, the next step is to cost these materials as they move either from
storeroom to factory as direct materials or indirect materials or from storeroom to marketing
and administrative expense accounts as supplies. The more common methods of costing
materials issued and inventories are:
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First-in-First-Out (FIFO) Costing Method
Average Costing Method
Last-in-First-Out (LIFO) Costing Method
Other Methods-Month end average cost, last purchase price or market price at date of
issue, and standard cost.
These methods relate to assumptions as to flow of costs. The physical flow of units may coincide
with the method of cost flow, though such a condition is not a necessary requirement. Although
this decision deals with materials inventory, the same costing methods are also applicable to
work in process (WIP) and finished goods inventories.
Cost of Materials in Inventory at the End of a Period:
When the cost basis is used in costing inventories for financial statements and income tax
returns, the sum total of the materials ledger cards must agree with the general ledger materials
control account which, in turn, is the materials inventory figure on the balance sheet. Unless a
shift from the cost basis is made in valuing the year end inventory, the method used for costing
materials issued is the method used for assigning dollars to inventory.
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Inventory valuation at cost or market whichever is lower
American Institute of Certified Public Accountant (AICPA) cost or market rules
Adjustments for departures from the costing method used
Inventory pricing and interim financial reporting
Transfer of materials cost to finished production
Physical inventory
Adjusting Materials Ledger Cards and Accounts to Conform to Inventory Accounts
Costing procedures for scrap, spoiled goods, and
defective work:
Generally, manufacturing operations cannot escape the occurrence of certain losses or output
reduction due to scrap, spoilage, or defective work management and the entire personnel of an
organization should cooperate to reduce such losses to a minimum. As long as they occur,
however, they must be reported and controlled.
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Scrap and waste
Spoiled goods
Defective work
Summary of Materials Management:
Materials managers are constantly confronted with these problems and requirements:
1. Inventories account for a large portion of the working capital requirements of most
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businesses. This fact makes materials or inventory management a major problem
requiring constant attention by all three management levels (top, middle and low).
At present, the problem of materials management has become even more acute due to
market conditions and inflation.
Effective materials management and materials control is found in an organization in
which individuals have been vested with responsibility for, and authority over, the various
details of procuring, maintaining, and disposing off inventory. Such a person or persons
must have the ability to obtain, coordinate, and evaluate the necessary facts and to take
actions when and where needed.