The material cost chapter delves into the fundamental concept of material costs within the realm of production and manufacturing. Material costs represent a significant portion of total production costs for many businesses, making it essential for managers to understand how to effectively manage and control these expenses.

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COST
ACCOUNTING
UNIT-2
MATERIAL COST

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MATERIALS
INTRODUCTION
• Materials are fundamental substances or components
used in manufacturing processes to create a wide range of
products and structures.
• They play a crucial role in various industries, including
automotive, aerospace, construction, electronics, and
more.
• The choice of materials in manufacturing is essential, as
it significantly affects the final product's properties,
performance, and cost.

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Meaning: Material is a substance or mixture of
substances that constitutes an object.
Ex: Glass, chalk, paper, wax and plastic
Types of Inventory:
•Raw Materials: Raw Materials are the base materials used
in the manufacturing process to make the finished goods.
•Work in Process: WIP refers to the direct materials used
in the process which are under unfinished form and require
additional processing to turn them into a finished product.
•Finished Goods: These are the goods ready for
consumption or sales.

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Classification of Materials:
Direct materials:
• Direct material refers to the raw materials that are
directly used in the production process of goods and
services of a company and are an essential component of
the finished goods manufactured.
• Direct Material Costs are reported in the trading account
debit side under the head “cost of goods sold.”
•Example 1: In the case of a computer, it is made up of many parts
like a keyboard, hard disk, motherboard, etc. All these form a part
of the direct materials required to manufacture a computer.
•Example 2: In the case of a textile company, Cotton works as a
raw material to process the same into a finished product like a
cloth, which is then used to make clothes.
•Example 3: In the case of a brick manufacturing company, cement
is the primary direct material required to make the brick used in the
construction of buildings.

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Indirect materials:
• Indirect materials, also known as indirect goods or
consumables, are items that are essential for a business's
operations but do not become part of the final product.
• These materials are not directly used in the production of
goods or services but support the overall functioning of
the business.

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1.Safety Equipment: Manufacturing workers require personal protective equipment
(PPE) such as helmets, gloves, safety glasses, and steel-toed boots to ensure their safety
while working on the production floor.
2.Hand Tools: Mechanics and assembly line workers use a variety of hand tools, like
wrenches, screwdrivers, and pliers, to assemble and repair the vehicles.
3.Cleaning Supplies: Manufacturing facilities need cleaning supplies, including mops,
brooms, cleaning chemicals, and trash bags to maintain a clean and safe working
environment.
4.Office Supplies: Administrative personnel in the manufacturing company require office
supplies like pens, paper, computers, and printers to manage the business operations.
5.Maintenance Parts: Replacement parts for machinery, like belts, filters, and bearings,
are crucial for the maintenance of manufacturing equipment to prevent breakdowns and
production disruptions.
6.Lubricants and Oils: These are used to keep machines and equipment properly
lubricated to ensure they function efficiently.
Importance of Materials:
1.Product Quality: The choice of materials significantly impacts the quality
of the final product. The right materials must be selected to ensure the
product meets the required specifications, durability, and performance
standards. Using subpar or inappropriate materials can lead to defects and
product failures.
2.Cost Control: Material costs often account for a significant portion of a
manufacturing company's expenses. Selecting cost-effective materials and
optimizing material usage can help reduce production costs and improve the
company's profitability.
3.Product Innovation: Advances in materials science can drive product
innovation. New materials with improved properties, such as strength,
weight, or thermal resistance, can open up new design possibilities and lead
to the development of more advanced and competitive products.

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4. Environmental Sustainability: Sustainable materials choices are
essential in today's manufacturing industry. Using eco-friendly or recycled
materials and implementing efficient recycling processes can reduce a
company's environmental footprint and enhance its reputation.
5. Supply Chain Management: Managing the supply chain for materials is
critical. Ensuring a reliable supply of materials, tracking inventory levels,
and managing lead times are essential for maintaining production schedules
and avoiding production disruptions.
6. Regulatory Compliance: Different industries and regions have specific
regulations governing the use of certain materials. Manufacturing companies
must ensure that their material choices comply with these regulations to
avoid legal issues and maintain a good corporate image.
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7. Customization and Differentiation: Materials enable customization and
product differentiation. Offering a range of materials or allowing customers
to choose materials for their products can be a competitive advantage,
catering to various needs and preferences.
8. Durability and Longevity: Materials selection can affect the durability
and longevity of products. Choosing materials that resist wear, corrosion, and
other forms of degradation is crucial, especially for products with long
lifespans.
9. Production Efficiency: The availability of appropriate materials and
efficient material handling processes can improve production efficiency. This
includes minimizing material waste and optimizing cutting, shaping, and
assembly methods.

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PURCHASING
• Purchasing is the process of acquiring goods or services
in exchange for money or other forms of payment.
• It involves identifying a need, selecting a supplier or
vendor, negotiating terms and conditions, and
completing a transaction.

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Types of Purchasing:
1.Centralized Purchasing: In centralized purchasing, a single
department or team is responsible for all purchasing activities
within an organization. This approach can help consolidate buying
power, streamline processes, and negotiate better deals with
suppliers.
2.Decentralized Purchasing: Decentralized purchasing involves
various departments or units within an organization making their
own purchasing decisions. This approach is often used in larger
organizations to meet specific departmental needs. While it offers
flexibility, it can also lead to inefficiencies and a lack of centralized
control.
Procedure for Procurement of
Materials

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1.Identifying Requirements: Determining what goods or services
are needed to meet the organization's operational goals.
2.Sourcing Suppliers: Identifying potential suppliers or vendors
who can provide the required products or services.
3.Request for Quotations (RFQ) and Bidding: Sending out
RFQs or requests for bids to suppliers to gather pricing and other
information.
4.Supplier Selection: Evaluating and selecting the most suitable
supplier based on factors such as price, quality, reliability, and
other criteria.
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5. Negotiating Terms: Negotiating prices, payment terms, delivery
schedules, and other contract terms with the chosen supplier.
6. Purchase Order (PO): Issuing a purchase order to the selected
supplier, which outlines the details of the purchase, including the
quantity, price, and delivery terms.
7. Receiving and Inspection: Receiving the goods or services,
inspecting them to ensure they meet the specifications, and
verifying that the supplier has fulfilled their obligations.
8. Payment: Processing payments to the supplier according to the
agreed-upon terms.

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Documents Involved in Material Accounting
1.Purchase Order (PO): A purchase order is a formal document issued by
the buyer to a supplier to request the purchase of specific materials. It
outlines the quantity, price, delivery terms, and other details of the materials
to be acquired.
2.Goods Received Note (GRN) or Receiving Report: This document is
generated when materials are physically received and inspected. It details the
quantity and condition of the materials received, matching them to the
information in the purchase order.
3.Material Requisition: A material requisition is a document used to request
materials from the storeroom or warehouse for use in production or other
activities. It specifies the type and quantity of materials needed.

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4. Material Issue Voucher: When materials are issued from the
storeroom to a specific department or job, a material issue voucher is
used to record the details, including the quantity, date, and purpose of
the issue.
5. Material Return Note: If materials are returned to the storeroom or
warehouse due to overstock, damage, or any other reason, a material
return note is used to document the return.
6. Stock Transfer Note: When materials are transferred from one
location or department to another within the organization, a stock
transfer note is used to record the movement and ensure accurate
tracking of inventory.
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7. Material Inspection Report: This document is generated after
inspecting incoming materials to verify their quality and conformity to
specifications. It may include details on the inspection process and
results.
8. Material Disposal Record: Materials that are damaged, expired, or
no longer needed may be disposed of. A material disposal record
documents the disposal process, including the quantity and reason for
disposal.
9. Material Valuation Reports: These reports provide information on
the valuation of materials in stock, including their current value based
on the purchase price, market value, or other valuation methods.

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10. Material Usage Records: Records of the usage of materials in
production processes or other activities help monitor consumption, track
trends, and plan for replenishment.
11. Inventory Ledger: An inventory ledger is a comprehensive record of all
materials in stock, including their quantity, value, and movement over time.
It is a key document in material accounting.
12. Material Balance Sheet: This document provides a snapshot of the
material inventory levels, including the opening balance, additions, issues,
returns, and closing balance for a specific period.
Material Storage
• Material storage, also known as
inventory storage, refers to the process
of properly storing and managing
materials, goods, or products within an
organization's facilities.
• Effective material storage is essential
for maintaining inventory accuracy,
ensuring product quality, minimizing
damage or loss, and optimizing the use
of space.

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Warehouse

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Store Keeper
A storekeeper, also known as a
store clerk or inventory clerk, is
responsible for managing and
maintaining the storage and
inventory of materials, goods,
and supplies within an
organization.
Duties of Store Keeper

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Duties of Store Keeper
1.Receiving Materials: Receive and inspect incoming materials, goods, or
supplies to verify their quantity, quality, and conformity to purchase orders or
delivery notes. This may involve checking for damage and ensuring proper
documentation.
2.Inventory Management: Keep accurate records of inventory levels,
including additions, deductions, and any adjustments. Use inventory
management software or manual systems to track stock levels.
3.Storage and Organization: Store materials in an organized manner,
ensuring that they are placed in appropriate locations and labeled for easy
identification. Utilize shelves, racks, bins, or pallets to optimize storage
space.
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4. Material Issuance: Issue materials to authorized personnel or departments
based on material requisitions or work orders. Ensure that materials are issued
in the right quantity and that the relevant documentation is completed.
5. Stock Rotation: Implement stock rotation methods, such as "first in, first
out" (FIFO) or "last in, first out" (LIFO), depending on the nature of materials,
to prevent obsolescence and minimize waste.
6. Safety and Security: Maintain a safe and secure storage environment.
Ensure that materials are stored in a manner that minimizes the risk of damage,
theft, or accidents.
7. Record Keeping: Maintain detailed records of material transactions,
receipts, issues, returns, and adjustments. This documentation is crucial for
accurate inventory tracking and auditing.

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8. Stocktaking and Audits: Conduct regular physical inventory counts or
stocktaking to verify the accuracy of recorded inventory levels. Address any
discrepancies and conduct periodic audits for inventory control.
9. Reordering: Monitor stock levels and initiate reorders when materials
reach a specified minimum level to avoid stockouts. Create purchase
requisitions or inform procurement departments of material needs.
10 Supplier Communication: Communicate with suppliers regarding
material quality, delivery schedules, and discrepancies in received materials.
Report any issues to the relevant departments.
11. Material Handling: Use appropriate material handling equipment, such
as forklifts or pallet jacks, to move and transport materials safely and
efficiently within the storage area.
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12. Compliance: Ensure that all activities comply with relevant
regulations, safety standards, and organizational policies.
13. Documentation& Reporting: Provide regular reports on
inventory levels, material usage, and any significant issues to
relevant departments or management.
14. Continuous Improvement: Identify opportunities to improve
inventory management processes, reduce waste, and optimize
storage space utilization.

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Store Ledger
The summary of stock receipts
contains information about the
items received, their quantities,
prices, and values. The summary
of indents contains information
about the items issued, their
quantities, prices, and values.

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Material Issue
Material issue, or stock
checkout, manages the
process of pulling and
releasing stock items from
a storeroom.
Preparation of stores ledger under
1. FIFO
2. LIFO
3. Simple Average Method
4. Weighted average method

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