ACCOUNTING FOR

RAW MATERIALS
 Definition of Raw Materials

A material or substance used in

the primary production or
manufacturing of a goods
 Purchasing System

In purchasing raw materials, companies often pay

transportation costs for various raw materials
purchased, which raises problems regarding
allocating transportation costs to each type of raw
material transported. The treatment of these
transportation costs can be distinguished as
follows.
Purchasing
System
Transportation costs are in
addition to the cost of raw
materials purchased.
Transportation costs are not
added to raw materials
purchased but are treated as
an element of factory overhead
costs.

Transportation costs are treated as an

addition to the cost of raw materials
 Costs that are calculated in the cost
of raw materials purchased

Purchase price = Price listed in the purchase invoice + Purchase Costs +

and the costs incurred to prepare these raw materials

The purchase and transportation costs are elements

that are easily calculated as the cost of raw materials
 EXERCISE 1
PT. NUSANTARA is engaged in the manufacture of bags. In February 2021 the company
produced 400 products with a price 150,000 per product. The following is a breakdown of the
costs incurred by the company:
1. Purchase of raw materials 4,000,000 and supporting materials 30% of the purchase of raw
materials.
2. Raw materials ready to use 4,500,000
3. The cost of transportation for the purchase of 180,000
4. 4% discount on purchases of direct raw materials.
5. The company pays 20 employees with a salary of 400,000 per month and a manager Rp.
1,000,000
6. The company spends 430,000 for electricity, depreciation expense 190,000, factory
insurance cost 120,000, other costs of 285,000
7. Admin and general fees of 850,000, marketing costs 750,000
8. 3% of sales are sales discounts
EXERCISE 1
Below are data regarding the value of the company's inventory:
Beginning inventory Raw materials 480,000
Ending inventory Raw materials 220,000
Beginning WIP 440,000
Ending WIP 530,000
Finished goods (Beginning) 670,000
Finished goods (Ending) 430,000
Requested:
a. Calculate the cost of raw materials !
b. Calculate Factory Overhead Cost !
c. Calculate the cost of production!
ANSWER:
a. Calculating the cost of raw materials:
Beginning raw material inventory 480,000
Purchase of raw materials 4,000,000
Transportation costs 180,000 +
4,180,000
Purchase discount 160,000 –
Net purchases 4,020,000 +
Raw materials ready to use 4,500,000
Inventory of raw materials ending 220,000 –
Cost of raw materials 4,280,000
So the cost of raw materials is 4,280,000.
ANSWER:
b. Calculating factory overhead costs
Auxiliary materials 1,200,000
Indirect Labor 1,000,000
Factory Electricity 430,000
Insurance Fee 120,000
Depreciation Cost 190,000
Other expenses 285,000 +
FOH 3,225,000
So, the FOH is Rp. 3,225,000
ANSWER:
Calculating Production Costs:
Direct Material Costs 4,280,000
Direct Labor Cost 8,000,000
FOH 3,225,000 +
Production Cost 15,505,000
So, the production cost is 15,505,000
 Raw Material

Raw Material Inventory Auxiliary Material Inventory

PT RM purchases raw materials from farmers for 2.5 tons is 15,000,000 paid in cash

Raw Material Inventory 15,000,000

Cash 15,000,000
 Raw materials used for production

Raw materials for production must be recorded in the Work In Process account. The use of auxiliary
materials for the production process is recorded in the Actual Overhead cost account

PT RM's production department asked for 15,000,000 materials for the production process with
the following details:

Raw Matetial Inventory 10,000,000

Auxiliary Material 5,000,000

Entry Journal:
WIP 10,000,000
Actual FOH 5,000,000
Raw Material Inventory 15,000,000
 Raw materials used for production

If the production department does not use all the materials requested, thn materials will be
returned to the warehouse.

PT RM's production department returns some auxiliary materials not used for the production
process because their needs have been met. Auxiliary materials are returned in the amount of
500,000.

Entry Journal:

Raw Material Inventory 500,000

Actual FOH 500,000
 SCRAP
Reduce production costs

scrap sales are treated as a general

deduction from production costs

scrap sales are treated as

miscellaneous sales
 Reduce production costs
Scrap sales are treated to reduce production costs, and the scrap sales reduce the cost of
producing products that produce scrap. This treatment is suitable to apply to products where each
type of product has scrap with a different market value.

From order number 25, scrap was generated

which was sold for 100,000. If the scrap is not immediately sold, so the
entry Journal:
Entry Journal:
Cash 100,000 Inventory - Scrap 100,000
WIP-Raw Material 100,000 WIP-Raw Material 100,000

If the scrap is sold, so the entry Journal:

Cash 100,000
Inventor - Scrap 100,000
 Scrap sales are treated as a general deduction from production
costs

Sometimes the appearance of scrap is difficult to identify. scrap cannot be known to

come from working on other products. Therefore, scrap value can be treated as a cost
deduction in general

From order number 25, scrap was sold for 100,000.

Entry Journal:
Cash 100,000
Actual FOH 100,000
 Scrap sales are treated as a general deduction from production
costs

Scrap sales maybe are very small. Therefore, scrap is recognized as “other income”

From order number 25, scrap was sold for 100,000.

Entry Journal:
Cash 100,000
Other Income/Sales-Scrap 100,000
 Scrap sales are treated as a general deduction from production
costs

Scrap sales maybe are minimal. Therefore, scrap is recognized as “other income”

From order number 25, scrap was generated

which was sold for 100,000.
Entry Journal:
Cash 100,000
Sales-Scrap 100,000
 Inventory Adjustment (Damaged Raw Material)

At the end of the year, PT National performs a physical calculation of the raw materials.
Usually, the calculation difference is around 100,000, but this time the difference in the
total of raw materials is 350,000. The difference is due to the damaged material.

Entry Journal:
Loss-Raw Material 250,000
Actual FOH 100,000
Inventory-Raw Material 350,000
ACCOUNTING
FOR LABOR
 LABOR COST

Recognize the costs incurred Record payments to employees

C

Classify Costs Set Costs for Products

LABOR COST
LABOR COST
Thanks !