Material Cost Doc

8/3/2019 Material Cost Doc

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PRESENTED BY :-

NAME ROLL N

NEHA MORE - 13

SAILEE RAJE - 23

POOJA MANNA - 38

MINAL MORE - 51

POOJA NAIK - 59

MATERIAL COST


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Index

Sr.

no.

particulars pg.no.

1Introduction

4

2Features

5

3Needs

8

4Types

9

5Scope

14

6Measures

15

7Inventory control

17

8

Documents

18

9Stores ledger

23

10Abc analysis

26

11Conclusion

27

12 bibliography 28


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Acknowledgement

We owe a great many thanks to a great many people who helped and

supported us during the project work.

We express our thanks to the Principal Dr.(Mrs.)Shakuntala A. Singh, Co-

ordinator Mr.D.M.Murdeshwar and Librarian Faculty of, K.G. Joshi College Of

Arts and N.G. Bedekar College Of Commerce,Thane. For extending her support.

Our deepest thanks to Lecturer, Mrs. Varsha Pense the Guide of the

project for guiding and correcting various documents of mine with attention and

care. She has taken pain to go through the project and make necessary correction

as and when needed.

We would also thank our Institution and our faculty members without whom

this project would have been a distant reality. We also extend our heartfelt

thanks our families and well wishers.


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Introduction

Management desires to keep proper control over the cost. Generally, cost ofmaterial is the major proportion of the total cost of product. Hence, materials

management becomes more important.

Store is also a similar termed used for materials. However, stores include notonly raw materials but also tools, equipment, spares, oil, lubricants etc.

The entire process of manufacture would be disrupted or even stopped if the righttype of material is not available in right quantity at right time.

Inventory is also similar termed used for raw materials .,semi finish goods(WIP) ,finished goods , spares , components and other consumable materials for

running and maintence of the plant and machinery.

Raw materials which are converted into final product become a part of finishedgoods. Since the raw materials can be conveniently indentified with a particular

unit of final product, it is called as Direct Materials.

Materials can be directly identified but not convenient to allocate will be called asIndirect Materials.

The cost of direct materials i.e. of raw materials is generally higher than the cost ofindirect materials.

The cost of indirect materials may be small or negligible but its necessity cannot beignored.

This is possible only if a good system of purchase control and issue of thematerials for consumption is established by an organization.


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FEATURES OF MATERIAL COST CONTROL

The quantity & specification of material should match with therequirement of the product so that neither too expensive or superior nor

cheap or inferior material shall be selected for use in the product.

The purchasing shall aim at minimum price timely procurement and should

avoid urgent purchases at higher cost.

Proper storage of all materials.

Wastages and losses shall be avoided at every stage of operation for storing

till usage in production.

Regular report on quantity and value of receipt, usage and stock.


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CONTROLING MATERIAL COST

Example:-

K-12 On lines electronic form processing system and web store benefits schools,

PTAs (Parent, Teacher Association), Athletic Booster Clubs, ASBs and other

school affiliated organizations. Besides having the ability to handle back-to-school

registration electronically, the system also helps raise funds with online donations.

K-12 Online also provides a student directory management program to easily

create student directories.

School Benefits:

SAVES TIME AND LABOR

y No more printing registration material.y No more assembling registration packets.y Eliminates sorting, processing and filing of paper forms


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SAVES MONEY

y No more registration packet postage and envelopes.y No more paper used for printing.y School only prints hardcopies of information needed

MAKES MONEY(cost-benefit analysis available upon request)

y Ease of use facilitates sign-up with fundraising partners.y Increased donations as a result of credit card processing.y Schools can sell books through bulk book sales, receiving up to 50% of list price.y An estimated 500% ROI.


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NEEDS FOR MATERIAL COST

1. Conciliation For Proper Quality with Price of Material:-

If company buys high quality material, its price will be high. If company buys lowquality material, its price will less. Company has to compromise quality with price ofmaterial. Quality will not less than minimum standard. At that level, company has to

pay price of material.

2. Purchase at Competitive Price:-

If company is selling the products in competitive market, its price must be same with

other competitors. It will be only possible, if company will buy products at competitiveprice. For buying competitive price, company has to check past records of purchasedmaterial and compare prices with other competitors.

3. Continue Supply of Material:-

It is main objective and feature of material that for continue operating of machinery, itis very necessary that we should have to continue supply of raw material for

production. Without, this our fixed cost will be increased. That is not good. So, it isneeded that store keeper must record when he issues the goods to production

department. He also alerts to purchase department for new buying of material.

4. Equilibrium in the Stock of Material: -

Over-stocking and under-stocking both are harmful for concern. Equilibrium in stock

of material means optimum stocking of materials. It can be only possible, if companyrecords and control the stock and use different techniques for measuring level of stock.

5. To Reduce the Wastage and Losses

To reduce normal and abnormal wastage and losses of material in production should be

also the aim of material record and control.


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TYPES OF MATERIAL COSTS

Manufacturing Costs:Definition and Explanation of manufacturing cost:

Manufacturing costs are those costs that are directly involved in manufacturing ofproducts and services.

Examples of manufacturing costs include raw materials costs and salary of laborworkers. Manufacturing cost is divided into three broad categories by most

companies.

1.Direct materials cost2.Direct labor cost3.Manufacturing overhead cost.1.Direct Materials Cost:

The materials that go into final product are called raw materials. This term is

somewhat misleading, since it seems to imply unprocessed natural resources likewood pulp or iron ore. Actually raw materials refer to any materials that are usedin the final product; and the finished product of one company can become rawmaterial of another company. For example plastic produced by manufacturers of

plastic is a finished product for them but is a raw material for Compaq Computers

for its personal computers.

Direct Materials are those materials that become an integral part of the finishedproduct and that can be physically and conveniently traced to it. Examples includetiny electric motor that Panasonic uses in its CD players to make the CD spin.

According to a study of 37 manufacturing industries material costs averaged about55% of sales revenue.

Sometimes it is not worth the effort to trace the costs of relatively insignificantmaterials to the end products. Such minor items would include the solder used tomake electrical connection in a Sony TV or the glue used to assemble a chair.


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Materials such as solder or glue are called indirect materials and are included aspart of manufacturing overhead, which is discussed later on this page.

2.Direct Labour Cost:

The term direct labour is reserved for those labour costs that can be essentiallytraced toindividual units of products. Direct labour is sometime called touch labor,since direct labor workers typically touch the product while it is being made. Thelabour cost of assembly line workers, for example, is a direct labour cost, as wouldthe labour cost of carpenter, bricklayer and machine operator

Labour costs that cannot be physically traced to the creation of products, or thatcan be traced only at a great cost and inconvenience, are termed indirect labour andtreated as part of manufacturing overhead, along with indirect materials. Indirect

labor includes the labor costs of janitors, supervisors, materials handlers, and nightsecurity guards. Although the efforts of these workers are essential to production, itwould be either impractical or impossible to accurately trace their costs to specificunits of product. Hence, such labor costs are treated as indirect labor.

In some industries, major shifts are taking place in the structure of labour costs.Sophisticated automated equipment, run and maintained by skilled workers, isincreasingly replacing direct labour. In a few companies, direct labour has becomesuch a minor element of cost that it has disappeared altogether as a separate costcategory. However the vast majority of manufacturing and service companies

throughout the world continue to recognize direct labour as a separate costcategory.

According to a study of 37 manufacturing industries, direct labor averaged only

about 10% of sales revenue.

Direct Materials cost combined with direct labor cost is called prime cost.

Examples Direct Materials

Publishing company Paper, ink, book covers

Automobile manufacturerTires, automobile metal parts

Computer manufacturer Hard drives, monitors


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In equation form:

For example total direct materials cost incurred by the company is$4,500 and direct labor cost is $3,000 then prime cost is $7,500 ($4,500+ $3,000).

3. Manufacturing Overhead Cost:

Manufacturing overhead, the third element of manufacturing cost, includes all

costs of manufacturing except direct material and direct labor.E

xamples ofmanufacturing overhead include items such as indirect material, indirect labor,maintenance and repairs on production equipment and heat and light, propertytaxes, depreciation, and insurance on manufacturing facilities. Indirect materialsare minor items such as solder and glue in manufacturing industries. These are notincluded in direct materials costs. Indirect labor is a labor cost that cannot be traceto the creation of products or that can be traced only at great cost andinconvenience. Indirect labor includes the labor cost of janitors, supervisors,

materials handlers and night security guards. Costs incurred for heat and light, property taxes, insurance, depreciation and so forth associated with selling and

administrative functions are not included in manufacturing overhead. Studies havefound that manufacturing overhead averages about 16% of sales revenue.Manufacturing overhead is known by various names, such as indirectmanufacturing cost, factory overhead, and factory burden. All of these terms aresynonymous with manufacturing overhead.

Manufacturing overhead cost combined with direct labor is called conversion cost.

In equation form:

For example if total direct labor cost is $3,000 and total manufacturingoverhead cost is $2,000 then conversion cost is $5,000 ($3,000 +$2,000).

Prime Cost = Direct Materials Cost + Direct Labor Cost

Conversion Cost = Direct Labor Cost + Manufacturing


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Non-manufacturing Costs:Definition and explanation ofnon-manufacturing cost:

Non-manufacturing costs are those costs that are not incurred to manufacture aproduct. Examples of such costs are salary of sales person and advertisingexpenses. Generally non-manufacturing costs are further classified into twocategories.

1. Marketing and Selling Costs2. Administrative Costs

y Marketing or Selling Costs:Marketing or selling costs include all costs necessary to secure customer orders

and get the finished product into the hands of the customers. These costs are oftencalled order getting or order filling costs.

Examples of marketing or selling costs include advertising costs, shipping costs,sales commission and sales salary.

\\\Product(manufacturing)costsand


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y Administrative Cost:A

dministrative costs include all executive, organizational, and clerical costsassociated with general management of an organization rather than withmanufacturing, marketing, or selling.

Examples of administrative costs include executive compensation, generalaccounting, secretarial, public relations, and general administration of theorganization as a whole.


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Scope

It involves the following function:-

1) Purchasing of Material:- Purchasing involve purchasing the right quantity,right quality from the right source at right price and right time.

2) Receiving andInspection:- This function begins at the time when goodsare received from the supplier. It is to ensure that right type of material and ofright quality is received from the supplier.

3) Storing :- Store keeping is that aspect of material control which is concernedwith physical storage of goods. The description, quantity and location of materialare noted separately in the form of bin card which record quantity. The mainobjective of store keeping is to protect stores against loses and keep goods readyfor delivery or issue and provide maximum services at minimum cost.

4) Issue of material for use:-This function ensures that right type of materialis made available and issued to the production department. The material receivedis issued for consumption on the basis of material requirement note from the

consuming department.

It also include inventory control and valuation and accounting.


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MEASURES TO CONTROL MATERIAL

COST

If the elements of cost can be properly controlled then only the objectives of

costing can be fulfilled. In many cases, material cost consuming a major part oftotal cost of production is the most important cost. Therefore, the importance ofcost control in this sphere is totally unquestionable. Proper control must beexercised on

i. purchase of material, andii. stores function i.e. receipts, holding & issues, so that the material cost can be

controlled.

Control on Purchase of Material:

The most important part of material control is the control on purchase of

material. In small concerns, usually the proprietor or his manager makes the purchases where as separate purchase department is there in any big concern.Depending upon the size of the organization, the number of workers & executiveswho shall constitute a purchase department is decided. Normally, the purchasemanager or purchase officer is the chief of the purchase department, who isresponsible for all the purchases. Upon the efficiency of the purchase departmentdepends the success of any organization, particularly, when the market is

competitive. Thus a chief of a purchase department must possess the followingqualifications so that he can discharge his duties efficiently:

a. Technical knowledge of the organization.b. Knowledge, with reference to the sources, market price, market trend etc,

about the items of materials that may be required by the organization.c. Regarding restriction on import or export of the materials that may required

by the organization, up-to-date knowledge of the government policy.d. Knowledge about the deed of purchase, procedure regarding carrying the

goods by road, railway or air, procedure regarding import.e. Knowledge about insurance.f. Knowledge about the nature of supply of materials.g. Power to understand the financial position of the prospective supplier.h. Knowledge so that he can work out the economic order quantity.


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Besides the above, as any other chief, the chief of the purchase department, mustbe honest & sincere, should be a man of high integrity, must be able to efficientlymanage his staff, & must have the knowledge of the policy of the organization aswell as its financial resources.

The purchase manager has to perform the under mentioned jobs:

Budget preparation for the purchase department. Fixation of the grades of materials. Preparation of a list of approved suppliers at agreed price on long term basis.

Helping the engineering department for the development of standards formaterials. Preparation of manual of sources of supply.

Receiving of purchase requisition, calling tenders & selection of supplierswherever necessary, placement of formal orders & making follow-up process.

Materials received are to be checked with reference to quantity ordered &quality as per the store-keepers note.

Arrangement needs to be made for return of materials received in excess ormaterials which have not been supplied in accordance with specification.

When excess materials or materials varying from specification are accepted,settlement is required to be made with the suppliers.

Invoices are needed to be checked & send with advice for payment to theaccounts department.

In order to take the best advantage on purchase, market research to be done.


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Inventory control

Inventory is tangible property or assets heldo For sale in the ordinary course of business oro In the process of production for sale oro For consumption in the production of goods or services for sale

including maintenance supplies and consumables other than

machinery spares.

Inventory comprises of raw material, stores and spares , work in progressand finished goods .

It includes planning, organizing and controlling purchase and storage toensure availability in terms of quantity, quality, timeliness at least cost.

Analyze inventory levels and suggest optimal and alternate uses of materialincluding value engineering.

Ensure physical stock taking to avoid pilferage.

Provide information for inventory valuation.The term inventory refers to the stock of products a firm is offering forsale. In case of a manufacturing sector inventory consists of:

y RAW MATERIALS.y WORK-IN-PROGRESS.y FINISHED GOODS.y

Inventory is one of the item of current asset and the success of a businessfirm largely depends upon proper inventory management.

Inventory is often the largest item in the current assets category, and must be

accurately counted and valued at each accounting period

period to determine a company's profit or loss.


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Organizations whose inventory items have a large unitcost generally keep a dayto day record ofchanges in inventory

(called perpetual inventorymethod) toensure accurate and on-going control.

Organizations withinventory items of small

unit cost generally update their inventory records at the end of an

accounting period or when financial statements are prepared(called periodic inventory method).

The value of an inventory depends on the valuation method used, suchas first-in, first-out (FIFO) method or last-in, first-out (LIFO) method.

GAAP require that inventory should be valued on the basis of either itscost price or its current market price whichever is lower of the two to

prevent overstating of assets and earning due to sharp increase in theinventory's value in inflationary periods.

The optimum level of inventory for an organization is determinedby inventory analysis. Called also stock in trade, or just stock.


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METHODS OF INVENTORY VALUATION:

BASED ON COST PRICE:-y FIRST IN FIRST OUT METHOD (FIFO).y LAST IN LAST OUT METHOD (LIFO).y HIGHEST IN FIRST OUT METHOD (HIFO).y NEXT IN FIRST OUT METHOD (NIFO).y BASE STOCKMETHOD.y SPECIFIC ORACTUAL FIXED PRICE METHOD.y INFLATED PRICE METHOD.y FIXED COST METHOD.y AVERAGE COST METHOD.y

SIMPLE

AVERA

GE

PR

ICE

MET

HODy PERODIC SIMPLEAVERAGE PRICE METHOD.y WEIGHTED ANERAGE METHOD.y (PERIODIC WEIGHTED AVARAGE METHOD.y MOVING SIMPLEAVARAGE PRICE METHOD.y MOVING WEIGHTED AVERAGE METHOD.BASED ON MARKET PRICE METHOD:y REALISABLEVALUE METHOD.y REPLACEMENT VALUE METHOD.

BASED ON STANDARD PRICE:y CURRENT STANDARD PRICE.y BASIC STANDARD PRICE.


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INVENTORY CONTROL TECHNIQUES:

(1)ECONOMIC ORDER QUANTITY( EOQ):

The economic order quantity is the optimum quantity to be ordered for purchase

each time whenever the purchases are to be made.

(2) DETERMINATION OF STOCK LEVELS:

This involves determining different stock levels such as:

o Maximum stock level:Maximum stock level represents the quantity level above which inventory

should not be allowed.

o Minimum stock level :Minimum stock level represents the quantity below which inventory should

not be allowed to fall.

o Record level:The moment stock of the material in store reaches the store

keeper should initiate the purchase requisition for fresh supplies of thematerials.


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Documents

Forms ofdocuments used in stores

1)Forms of purchase requisitio

n:-

This is prepared by different departments to show their total

requirements and send the same to the purchase department .

ABC Industries Ltd.

Material Purchase Indent

Indent No. : _____________

Date : _____________ Requisitioning Department : ___________

Sr.

No.

Description Stores Code

No.

Quantity Required by

Date

Remarks

Store Department : _______________

Remark : Issue from Stock : ____________

Buy : ____________

Storekeeper : ____________ Approved by

For Purchase Department :

Quotation Received : ___________

Order No. : ___________

Remarks : ___________ Purchase Officer


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2.Purchase order:- After selection of supplier, a purchase order is prepared and

sent to him. A copy of the purchase order is also forwarded to the storesdepartment, indenting department and accounts departments.

ABC Co. Ltd.

Purchase order

Indent no. : ________ Order No. : ________

Tender No. : ________ Date : ________

Your quotation no :______

To

___________

___________

Dear Sir,

Re: Supply of __________________

Please supply the following items of stores / materials at the prices indicated

against each. This order is governed by terms and conditions printed overleaf.

Sr.

No.

Description of

material

Stores

code no.

Quantity price terms

Terms of order : _________ Inspection : _________

Delivery : ___________ Payment : _________

Packing/ Dispatch: _______

You are requested to send your bil l to _________ Department

Yours Faithfully,

Purchase Officer


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3.Delivery Challan :- delivery challan is prepared by the supplier. The

material supplied by the suppliers accompany delivery challan.

4. Material inspectionnote:- the goods received may or may not need

inspection. Further, inspection may be within the organization or by other approved

laboratory. If goods are to be inspected by outside agency, the report from such an

agency should be obtained. If inspection is within the organization, Material

Inspection note is prepared and forwarded to the stores department.

Material inspection note appears as follows ;-

XYZ LTD.

Order no. : _________

Date : _________

To

_________

_________

_________

Dear Sir,

Re : Your Purchase order no. _________ Dated __________

Please receive in good condition the materials as given below :

Sr. no. description quantity remarks

Yours faithfully


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5. Bin Card:- It is card which provides continuous record of stock stored. It is

like a ledger which is attached to each bin. It acts like a ready reference and helps

the storekeeper to perform his duties efficiently.

ABC LTD

Material Inspection Note

Material Inspection Note no. :_________

Purchase order no. : _________ Date : _________

Stores Receipt note no. :_________

Suppliers Delivery Challan No.:_________

Sr.

No.

description Stores

code

no.

Quantity

received

accepted rejected Reasons

for

rejection

Special remarks : _________ Inspector

ABC LTD

Stores Bin Card No._________

Material code no. : _________ Location code : _________

Description : _________ Ordering quantity :_________

Stock control levels : _________ Ordering level : _________

Minimum : _________

Maximum : _________

Re-order : _________

Date Document no. Receipts Issues Balance Remark


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6. stores Ledger:-The stores Ledger is the ledger of materials similar to the

ledger under financial accounting. This ledger shows material movement of every

item showing both quantity and value. It is maintained in the following form :

ABD LTD

STORES LEDGER

Material Description : _________ Folio : _______

Store code : _________ Control Level : _______

Location code : _________ Minimum : _______

Maximum : _______

Re-order : _______

Date Document Receipt

Qty rate amt.

Issue

Qty rate amt.

Balance

Qty rate amt.

Re

m

ar

ks


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Stored ledger

It is recorded in both quantity and value of material which is kept in cost

accounting department

1. First in first out (FIFO) :this method assumes that materials areissued for consumption in the same sequence as that in which it is

received. Thus, rate applied to earliest received material in stock is the

basis. Consequently the material in stock is valued at a price of later

receipts. Thus, stock is valued at current or latest purchases. When this

method is used, it is necessary to keep record of quality and valued of

every receipt

Advantages :

1. It is simple in calculation and application.2. It is logical.3. It is easy to understand.4. It facilitates inter-firm and intra-firm comparisons.5. The price is based on actual cost and not on estimated cost.6. Stock is valued at current price.7. It is suitable when prices are falling and the rate of consumption is

slow.8. Valuation of inventory and cost of finished goods are consistentDisadvantages :

1. Cost of production is not linked with the current prices.2. Cost is under stated.3. It becomes complicated to price return of materials.4. Issues are priced differently and comparison becomes meaningless


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2. Last in first out (LIFO) : this method is exactly opposite to the earliermethod. It is based on the hypothesis that materials are stored in leaps and when

required last receipted material is taken out first. The resulting effect is that stock

is valued at earlier prices paid for. In this case also, it is necessary to maintain

record of quality and value of every receipt.

Advantages :

1. It is simple to understand2. It is a good method of avoiding tax3. It is systematic in nature.4. It shows real income in times of rising prices.5. It shows real income in times of rising prices.6. It minimizes unrealized inventory gains and losses.7. Production is charged at current prices.Disadvantages :

1. It become complicated when the rates of receipts are highlyfluctuating.

2. Costs of different batches vary greatly which makes comparison.3. The stock is required to be adjusted when the prices are falling.4. Current cost cannot be matched with current revenue unless purchases

and sales occur in equal quantities.

5. The company can charge the reported income at its will.6. It is not widely accepted.

3. Weighted average method(wam) : the is method overcomes the demerits of

simple average method. After every receipt of material the average rate is

calculated by total value and quality. Thus, the value of issues and stock is alwayswithin the range of highest and lowest prices paid. The issue and stock at a given

time is valued the same prices. It avoid price fluctuations.


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Advantages :

1. It is logical and consistent.2. Changes in price do not affect issues and inventory.3. Value shows actual cost.4. It involves less clerical work.5. Profits are more realistic.Disadvantages :

1. It is inconvenient and complicated.2. It is not realistic as actual price is not considered.3. It involves more arithmetical work.

In cost accounting, material is defined as the part of inventory. Basically,

material and raw material are used for same purpose. This is main part of total

cost of production. It can reduce or increase according to the fluctuation in

production. So, this is very flexible and controllable source of production. For

making furniture, wood is the material. 60% to 70% proportion in the total cost of

production will be material cost. So, it is very necessary for producing any new

product. Its cost will reflect the profit of company directly. This input can be

stored and transported from one place to another.


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Abc analysis

Meaning:-

A strategy to manage inventory in terms relative to their importance. High-dollar items are generally represented as "A's" and lower value items fall into the

"B" and "C" categories. A strategy to manage inventory in terms relative to their

importance. High-dollar items are generally represented as "A's"

and lower value items as B and C.

-A : 70% value, 10% items

-B : 20% value, 20% items

-C : 10% value, 70% items

-Ensure control on high value items

-Saves time and cost of monitoring

-Reduces total investment in inventory

-Facilitates faster decision making

-Better utilization of resources

-Better physical control of stock


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Importance ofABC Analysis :

I. Investment in inventory is minimized because ofclosed control over limited items A.

II. Cost of ordering and carrying is reduced.

III. The technique cuts down the cost of the system.IV. Fulfillment of objective of inventory control.

V. Helps in the maintaintence of high stock turnoverrate.


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Conclusion

In order to control material costs there must be:-

Proper co-ordination of all departments involved viz., finance,purchasing, receiving, inspection, storage, accounting and payment.

Determining of purchase procedure to see that purchases are made,after making suitable enquiries, at the most favorable terms to thefirm.

Use of standard forms for placing the order, noting receipt of goods,authorizing issue of the materials etc. Preparation of budgets concerning materials, supplies and

equipment to ensure economy in purchasing and use of materials.

Operation of a system of internal check so that all transactionsinvolving materials, supplies and equipment purchases are properlyapproved and automatically checked.

Storage of all materials and supplies in a well designated locationwith proper safeguards.

Operation of a system of perpetual inventory together withcontinuous stock checking so that it is possible to determine at anytime the amount and value of each kind of material in stock.

Operation of a system of stores control and issue so that there will bedelivery of materials upon requisition to departments in the rightamount at the time they are needed.


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Bibliography

Web sites :-

www.google.com www.yahoo.com www. Scribd .com

Text book :-

Introductions to cost accounting of L. N. Chopde andD.H.Choudhari

Material Cost Doc

Documents

Transcript of Material Cost Doc