MATERIAL

MAF 220 – COST ACCOUNTING I

MATERIAL

Are the things needed to produce output/ products

Major part of total cost & is one of the most important assets

MATERIAL CONTROL

Is a system to ensure that material is purchase at the right quality for the right quantity at the right time & price

Needed to:-› Prevent wastage, production delay &

obsolescene

MATERIAL CONTROL CYCLE

PRODUCTION DEPT

PURCHASING DEPT

RECEIVING DEPT

INSPECTION DEPT

STORE DEPT

SUPPLIER

MRNPRN

QuotationPurchase

orderInvoiceDelivery

order

GRNIN

MIN

STOREKEEPING

Handling and keeping records of materials in store

Centralized store = HQ buys n handles material

Decentralized store= BRANCH buys n handles material

Objectives:› Speedy receipts & issue of materials› Labelling material for identification› Maintain correct level of stock› Efficient use of storage space

STOCK CONTROL

To maintain optimum level of stock in hand

To control investment in stock Method:

› ABC analysis› Stock levels› EOQ› Stock recording› Stock taking

ABC analysis

Stocks are analyzed according to their value

Category Type of value Control

A Highest value Maximum

B Medium value Medium

C Lowest value minimum

STOCK LEVELS

Control & monitoring can be done by using the formulas:› Re-order level› MAX stock level› MIN stock level› R-order qtty› Ave. stock level› Stock turnover ratio

ECONOMIC ORDER QUANTITY (EOQ)

Enables an org to control investments in materials

Is used to determine how much material should be order

Minimizes the total cost of stock

EOQ Equation

2DO C

Tabulation› Consists of several order size, where

the min total cost is EOQ Graph

O

C

TC

EOQ

EOQ = √ 2DO⁄C D= total demandO = ordering costC = carrying cost

At reorder level, stock will be ‘0’ and when replenished the stock will be the maximum level, Q.

At constant demand, average stock is Q/2.

If the total annual demand is D and the order quantity is Q, then the number of orders for stock in a year will be D/Q.

If the cost per order is O, then the total ordering costs will be D/Q xO

TOTAL COST = (Q/2)C +(D/Q)O

You are required to determine the EOQ based on the following data:

Forecasted demand = 2,000 units per month

Ordering cost = RM450.00Unit costs = RM10.00Carrying cost = RM15% per annum

STOCK RECORDING

Perpetual inventory system› Reflect physical movement of stock & the

balance at all times› Is checked against continuos stock taking

Periodic inventory system› Recording are done by doing stock taking

at a given time

STOCK VALUATION

To charge to production on a consistent and realistic basis of the cost of materials used and also to provide a satisfactory basis of valuation for inventory on hand

STOCK VALUATION

3 methods to value stock in hand › LIFO› FIFO› WAM

FIRST IN FIRST OUT (FIFO)

Materials are used in chronological order

Ensures materials are issued at actual cost

Closing stock valuation is higher

LAST IN FIRST OUT (LIFO)

The latest materials received are used first.

Ensures materials are issued at actual cost

Lower valuation for closing stock

Weighted Average

Average price is used Price is calculated by dividing the total

cost of material in stock by the total quantity of material in stock.

A new price needs to be calculated each time new material are received

Calculate the value of 30 units of material A closing stock using:

a) FIFO methodb) LIFO methodc) Weighted Average method

1 july opening stock 20 units @rm144 july receipts 40 units @rm1514 july receipts 50 units @rm1810 july issues 40 units17 july issues 40 units

JUST-IN-TIME PURCHASING

Attempts to overcome EOQ. It affects the way purchasing is carried out.

It requires:› The buyer to identify the suppliers› The buyer enter into a contract with the

suppliers to supply materials move frequently› Buyer give a copy of production schedule to

supplier› Supplier carries out quality control› Supplier delivers just in time› Materials used in production immediately

Reducing waste and increasing efficiency of the material usage

Reduce or eliminate inventories at every stage of production

Key features:› Smooth, uniform production rate› Pull method of production› Purchase in small lot size› Quick inexpensive setups› High quality of materials› Effective preventive maintenance› Teamwork› Multi skilled workers