Accounting

for Materials
Part 2
Chapter 6
Control Procedures

Order
Min-max
Cycling

Automatic
Two-bin Order
System

ABC Plan
Order Cycling
materials are reviewed
on a regular cycle, and
orders are placed to
maintain a desired
inventory level.
Min-max Method
Minimum and Maximum
inventory levels are
established.
When minimum level is
reached, reordering is
done.
Two-bin Method
 Maintenance of bin factor,
when the first bin is empty,
an order is placed.
 The second bin provides
coverage until the order is
received.
 Used for inexpensive items.
Automated Order
System
an order is automatically
made when the
inventory reaches a
predetermined level.
Works best in
computerized system.
ABC Plan
A for most expensive items,
usually few in quantity.
B for moderately priced items
and moderate in terms of
quantity.
C is for inexpensive items and
generally large in quantity.
Method of Costing Materials
First-in, First-out (FIFO)
method
 assumes that “the materials
first purchased are first used”
 The Ending Inventory is
expressed in terms of RECENT
or NEW prices. The Cost of
Materials Used expressed in
terms of EARLIER or OLD
prices.
 Average Cost Method
 Weighted Average Method – is average costing
under periodic inventory system. This method is
based on the assumption that units issued should
be charged at an average cost, such average
being influenced or weighted by the number of
units acquired at each price. Computed by
dividing goods available for sale in pesos by the
goods available for sale in units.
 Moving Average Method – is average costing
under perpetual inventory system. A new
weighted average unit cost is calculated after
each new purchase, and this amount is used to
cost each subsequent issuance until another
purchase is made.
 Problem 6 page 189
The following information is to be used in costing
inventory on August 31.
Aug 1 Beginning Balance 1,600 units @ P6.00
5 Purchased 400 units @ P7.00
9 Purchased 400 units @ P8.00
16 Issued 800 units
24 Purchased 600 units @ P9.00
27 Issued 1,000 units
Compute for the cost of materials used and the
cost assigned to the August 31 inventory by using
a. FIFO
b. Average
Problem 7
The Heaven and Earth Company made the following material
purchases and issues during July:
Jan 1 Balance on hand, 1,000 units @ P4.00 each
3 Issued 250 units
5 Received 500 units at P4.50 each
6 Issued 150 units
10 Issued 110 units
11 Factory returned 10 units to the store room that
were issued on the 10th
15 Received 500 units @ P5.00 each
20 Returned 300 units to vendor from May 15th purchase
26 Issued 100 units
Compute the cost of materials used and ending inventory under
a. FIFO b. Average
Problem 8
The Sterling Company shows the ff. information relating to
one of its raw materials.
Inventory, Jan 1 300 units @ P 17.50
Purchases, Jan 10 900 units @ P18.00
Purchases, Jan 20 1,200 units @ 18.25
Issuance, Jan 8 200 units
Issuance, Jan18 600 units
Issuance, Jan 25 1,000 units
Compute for the ending inventory under perpetual and
periodic inventory system for
a. FIFO
b. Average
 Accounting for
Materials Part 3
Chapter 6
Factors Affecting Material
Costing

Discounts
• Trade Discount
• Quantity Discount
• Cash Discount
Freight In
• Direct Charging
• Indirect Charging
Trade Discounts
 grantedto buyer to encourage
buyers to buy in volume.
 Generallygiven in terms of
percentages and in series
called chain discounts.
 These discounts are deducted
from the list price to arrive at
the invoice price.
 Alsoknown as Quantity
Discounts.
 Cash Discounts
 granted to customers to motivate them to pay
promptly.
 When taken method – purchases and liabilities
(payable) are recorded at gross amount. Discount
is recognized only when the account is paid within
the discount period.
 When not taken method – purchases and liabilities
(payable) are recorded at net amount (discount is
deducted even though it is not taken).
 When offered method – purchases are recorded at
net and the liability is recorded at gross, the
difference is charged to “Allowance for Purchase
Discount”.
 Freight-In
 Direct charging – when the freight incurred on the
purchase of raw materials is added to the invoice
price, thus increasing unit cost. Charged to
Material account. If two or more materials are
purchased and delivered at the same time, the
freight may be allocated using the following
methods:
 Relativepeso value method - freight is allocated on the
peso value of the items purchased. Usually used for
materials purchased and expressed in different terms of
measurement.
 Relative weight method - freight is allocated on the
basis of the weight of the items purchased.
Freight-In

Indirect charging – freight

incurred on the purchase of
raw materials is charged to
Factory Overhead Control
account.
 Spoiled, Defective, and Scrap
Materials
 Spoiled Materials – are completed goods but have
developed some imperfections, or rejected at a
control inspection point for failure to meet
appropriate specification. Such materials cannot
be economically reworked.
 Defective Materials – are completed goods but
have developed some imperfections, or rejected at
a control inspection point for failure to meet
appropriate specification. Such materials can be
economically reworked.
Spoiled, Defective, and Scrap
Materials
 Scrap – incidental output of joint
process; salable materials arising
from primary production
operations.
 Waste materials – leftover from
the production process that has no
further use or resale value; may
require cost for their disposal.
 Accounting Method for
Spoiled Materials
 Charged to Specific Job – this method is used if
the reason is the specification of the job that
caused the spoilage. The effect of this method is
that it will increase the unit cost of the remaining
perfect finished goods.
 Entry:
 Spoiled Goods (selling price of the spoiled goods) xxx
 Work in Process (selling price of the spoiled goods) xxx
 Accounting Method for
Spoiled Materials
 Charged to All Production – this method is used if
the reason is considered normal to the process and
the number does not exceed the limit set by the
company.
 Entry:
 Spoiled Goods (selling price of the spoiled goods) xxx
 Factory overhead xxx
 Work in Process (spoiled units x full cost) xxx
 Problem 9 page 191
The Bedrock Company is a manufacturer of golf clothing.
During the month, the company cut and assembled 10,000
golf jackets. 100 of the jackets did not meet the
specifications and were considered “seconds”. Seconds are
sold for P1,000.00 per jacket, whereas 1st quality jackets
sell for P2,500.00. During the month, Work in Process was
charged for P3.6M of materials, P4M of labor, Factory
Overhead Applied at 120% of Direct labor (including
allowance of 20% of direct labor for spoiled units.)
a. Entries for loss due to spoiled work charged to all jobs
b. Entries for loss due to spoiled work charged to a
specific job. (FOH applied at 100% of direct labor cost)
c. Compute the unit cost of the goods in units under A and
B.
Accounting Method for
Defective Materials
 Charged to Specific Job – this method is used if the
reason is the specification of the job that caused the
spoilage. The additional cost incurred for rework will
be charged to all units in the job. The effect of this
method is that it will increase the unit cost of the
finished goods.
 Entry:
 Work in process xxx
 Materials xxx
 Payroll xxx
 Factory Overhead Applied xxx
Accounting Method for
Defective Materials
 Charged to All Production – this method is used if the
reason is considered normal to the process and the
number does not exceed the limit set by the company.
 Entry:
 Factory Overhead Control xxx
 Materials xxx
 Payroll xxx
 Factory Overhead Applied xxx
 Problem 11
Little Mermaid Company received an order of 5,000 automatic
mixing machines. The cost per unit is: P200.00 for materials,
P120.00 for labor, FOH applied is 150% of DL (140% if any
defective unit costs are charged to a specific order). Final
inspection revealed that 1,000 units were incorrectly assembled.
To correct each defective unit requires P50.00 for materials,
P30.00 for labor, FOH of the appropriate rate. Then 20 units were
classified as seconds and sold for P400.00 each, the proceeds
being credited to the order. The customer agreed to accept the
remaining good machines, although the acceptable units are
fewer than the number ordered.
1. Entries if charged to specific job.
2. Entries if charged to all production
3. Cost per unit of Finished goods under number 1 and number 2
600k
 Problem 12
The Marvin Corporation manufactures electrical equipment
from specifications received from customers. Job 101 was for
1k motors to be used in a specifically designed electrical
complex.
Materials P117.00/unit Labor P100.00/unit FOH P83.00/unit
It was discovered at final inspection that 33 motors did not
meet the specifications established by the customer. An
examination indicated that 15 motors were beyond repair and
should be sold as seconds for P55.00 each, and the remaining
18 motors, although defective, could be reconditioned as 1st
quality units by the addition of P1,650 for materials, P1,500 for
labor, and P1,200 for factory overhead.

Journal Entries for all transactions

Cost per unit of the finished goods.
 Accounting for Scrap Material
 If the scrap recovered can be traced to a specific job:
 Entry: Scrap / Scrap Materials xxx
 Work in Process xxx


 If the scrap recovered cannot be traced to a specific job:

 Entry: Scrap / Scrap Materials xxx
 Miscellaneous income xxx


 If the scrap recovered are from factory supplies or indirect

materials:
 Entry: Scrap / Scrap Materials xxx
 Factory overhead control xxx
Accounting for Waste Material

 If the cost of disposing the waste materials is

allocated to all jobs,
 Entry: Factory Overhead Control XXX
 Accounts Payable XXX

 If the cost of disposing the waste materials is

allocated to a specific job,
 Entry: Work in Process – Job # XXX
 Accounts Payable XXX