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Material Cost
Material Cost
NEHA MORE SAILEE RAJE POOJA MANNA MINAL MORE POOJA NAIK
ROLL NO.
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MATERIAL COST
particulars
Introduction Features Needs Types Scope Measures Inventory control Documents Stores ledger Abc analysis Conclusion bibliography
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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, Coordinator 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.
Introduction
Management desires to keep proper control over the cost. Generally, cost of material 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 not only raw materials but also tools, equipment, spares, oil, lubricants etc. The entire process of manufacture would be disrupted or even stopped if the right type 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 finished goods. 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 as Indirect Materials. The cost of direct materials i.e. of raw materials is generally higher than the cost of indirect materials. The cost of indirect materials may be small or negligible but its necessity cannot be ignored. This is possible only if a good system of purchase control and issue of the materials for consumption is established by an organization.
The quantity & specification of material should match with the requirement 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.
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
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 competitive price. For buying competitive price, company has to check past records of purchased material 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, it is 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 is needed 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 company records 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.
Manufacturing Costs:
Definition and Explanation of manufacturing cost:
Manufacturing costs are those costs that are directly involved in manufacturing of products and services. Examples of manufacturing costs include raw materials costs and salary of labor workers. Manufacturing cost is divided into three broad categories by most companies.
1. Direct materials cost 2. Direct labor cost 3. 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 like wood pulp or iron ore. Actually raw materials refer to any materials that are used in the final product; and the finished product of one company can become raw material 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 finished product and that can be physically and conveniently traced to it. Examples include tiny 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 about 55% of sales revenue. Sometimes it is not worth the effort to trace the costs of relatively insignificant materials to the end products. Such minor items would include the solder used to make electrical connection in a Sony TV or the glue used to assemble a chair.
Materials such as solder or glue are called indirect materials and are included as part of manufacturing overhead, which is discussed later on this page.
Automobile manufacturer Tires, automobile metal parts Computer manufacturer Hard drives, monitors
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In equation form: Prime Cost = Direct Materials Cost + Direct Labor Cost 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).
In equation form: Conversion Cost = Direct Labor Cost + Manufacturing Overhead Cost For example if total direct labor cost is $3,000 and total manufacturing overhead cost is $2,000 then conversion cost is $5,000 ($3,000 + $2,000).
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Non-manufacturing Costs:
Definition and explanation of non-manufacturing cost:
Non-manufacturing costs are those costs that are not incurred to manufacture a product. Examples of such costs are salary of sales person and advertising expenses. Generally non-manufacturing costs are further classified into two categories. 1. Marketing and Selling Costs 2. Administrative Costs
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y Administrative Cost:
Administrative costs include all executive, organizational, and clerical costs associated with general management of an organization rather than with manufacturing, marketing, or selling. Examples of administrative costs include executive compensation, general accounting, secretarial, public relations, and general administration of the organization 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 and Inspection :- This function begins at the time when goods are received from the supplier. It is to ensure that right type of material and of right quality is received from the supplier. 3) Storing :- Store keeping is that aspect of material control which is concerned with physical storage of goods. The description, quantity and location of material are noted separately in the form of bin card which record quantity. The main objective of store keeping is to protect stores against loses and keep goods ready for delivery or issue and provide maximum services at minimum cost. 4) Issue of material for use :- This function ensures that right type of material is made available and issued to the production department. The material received is 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 COST
TO
CONTROL
MATERIAL
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 of total cost of production is the most important cost. Therefore, the importance of cost control in this sphere is totally unquestionable. Proper control must be exercised on i. ii. purchase of material, and stores function i.e. receipts, holding & issues, so that the material cost can be controlled.
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Besides the above, as any other chief, the chief of the purchase department, must be honest & sincere, should be a man of high integrity, must be able to efficiently manage his staff, & must have the knowledge of the policy of the organization as well 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 for materials. Preparation of manual of sources of supply.
Receiving of purchase requisition, calling tenders & selection of suppliers wherever 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 or materials 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 the accounts 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 held o For sale in the ordinary course of business or o In the process of production for sale or o 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 progress and finished goods . It includes planning, organizing and controlling purchase and storage to ensure availability in terms of quantity, quality, timeliness at least cost.
Analyze inventory levels and suggest optimal and alternate uses of material including 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 for sale. In case of a manufacturing sector inventory consists of:
y y y y
RAW MATERIALS. WORK-IN-PROGRESS. FINISHED GOODS. Inventory is one of the item of current asset and the success of a business firm 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 unit cost generally keep a day to day record of changes in inventory (called perpetual inventory method) to ensure accurate and ongoing control. Organizations with inventory 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, such as 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 its cost price or its current market price whichever is lower of the two to prevent overstating of assets and earning due to sharp increase in the inventory's value in inflationary periods. The optimum level of inventory for an organization is determined by inventory analysis. Called also stock in trade, or just stock.
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BASED ON COST PRICE:FIRST IN FIRST OUT METHOD (FIFO). LAST IN LAST OUT METHOD (LIFO). HIGHEST IN FIRST OUT METHOD (HIFO). NEXT IN FIRST OUT METHOD (NIFO). BASE STOCK METHOD. SPECIFIC OR ACTUAL FIXED PRICE METHOD. INFLATED PRICE METHOD. FIXED COST METHOD. AVERAGE COST METHOD. SIMPLE AVERAGE PRICE METHOD PERODIC SIMPLE AVERAGE PRICE METHOD. WEIGHTED ANERAGE METHOD. (PERIODIC WEIGHTED AVARAGE METHOD. MOVING SIMPLE AVARAGE PRICE METHOD. MOVING WEIGHTED AVERAGE METHOD.
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Documents
Forms of documents used in stores
1) Forms of purchase requisition: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 Sr. No. : _____________ Description Requisitioning Department : ___________ Quantity Required by Remarks Date
Store Department : _______________ Remark : Issue from Stock : ____________ Buy Storekeeper For Purchase Department : Quotation Received : ___________ Order No. Remarks : ___________ : ___________ Purchase Officer : ____________ : ____________ Approved by
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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
Packing/ Dispatch: _______ You are requested to send your bill to _________ Department Yours Faithfully, Purchase Officer
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Yours faithfully
4. Material inspection note:- 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 ;-
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ABC LTD Material Inspection Note Material Inspection Note no. : _________ Purchase order no. Stores Receipt note no. : _________ Date : _________
: _________
Supplier s Delivery Challan No.: _________ Sr. No. description Stores code no. Quantity received accepted rejected Reasons for rejection
Inspector
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 Stores Bin Card No. _________ Material code no. Description : _________ : _________ Location code :
_________
Stock control levels : _________ Minimum Maximum Re-order Date : _________ : _________ : _________ Receipts
Document no.
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 : _________ Store code Location code : _________ : _________ Folio : _______
Date
Document
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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 are issued 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. 2. 3. 4. 5. 6. 7. It is simple in calculation and application. It is logical. It is easy to understand. It facilitates inter-firm and intra-firm comparisons. The price is based on actual cost and not on estimated cost. Stock is valued at current price. It is suitable when prices are falling and the rate of consumption is slow. 8. Valuation of inventory and cost of finished goods are consistent
Disadvantages :
1. 2. 3. 4. Cost of production is not linked with the current prices. Cost is under stated. It becomes complicated to price return of materials. 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 earlier
method. 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 understand 2. It is a good method of avoiding tax 3. 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 highly fluctuating. 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 always within 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. 2. 3. 4. 5. It is logical and consistent. Changes in price do not affect issues and inventory. Value shows actual cost. It involves less clerical work. 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. Highdollar 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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I.
Investment in inventory is minimized because of closed control over limited items A. Cost of ordering and carrying is reduced.
II.
III.
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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 the firm.
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 transactions involving materials, supplies and equipment purchases are properly approved and automatically checked. Storage of all materials and supplies in a well designated location with proper safeguards.
Operation of a system of perpetual inventory together with continuous stock checking so that it is possible to determine at any time the amount and value of each kind of material in stock. Operation of a system of stores control and issue so that there will be delivery of materials upon requisition to departments in the right amount at the time they are needed.
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Bibliography
Web sites :www.google.com www.yahoo.com www. Scribd .com
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