COST AND WORKS ACCOUNTING II

Unit 1 Material Accounting

Stores Location and Layout
Location: Location has significant impact on stores handling cost as well as smooth
operation of production activity. Central Stores should be situated close to
receiving department and to roads and railways sidings. Sub stores should be
located close to production units.
The following factors influence location of stores:
1) Nature of Materials: Whether materials are bulky and heavy or light and
valuable, or delicate and perishable influences locations of stores. In case of the
first category, the consideration of transportation cost are important in the second
case, the safety of materials in the deciding factor; and in the last category the
location should be such that the scope for breakage and spoilage is least.
2) Location and Spread of User Departments: Location of stores should be such
that internal movement of material is least and these are easily and quickly
available to user departments as and when required.
3) Total Size of Materials: If the total size of stores is large in terms of quantity,
weight and volume, then consideration of cost of storage space and transportation
cost are the main determinants. Central stores is le as at a place where these costs
are least without disturbing production flow. In case the size inventories is small
then these consideration are less important.
4) Size of Organization: Location of stores department is more important in case of
large organisation. In a small organisation stores may be under the small roof as the
producing unit.
5) Availability and Costliness of Space: In case the space is not available close to
production site or is exorbitantly costly, store may be located at a distance after
balancing other cost considerations.
6) Repackaging and Re-shaping of Materials: Sometimes materials purchased
require repackaging or sorting or cleaning or polishing before. These are issued for
production. In such case the location of stores, should be such as to provide
sufficient space for these activities.
7) Total Size of Materials: Security Considerations: Store should be located at such
a place that safeguards can be enforced against theft and pilferage. In case stores
are dangerous chemicals or inflammable or explosive then security considerations
are in the nature of production against fire and leakages so as to ensure safety to
employees' life and protecting health of public in general.

Layout of Stores: Layout store is also important. Storage layout refer to the design
of store and arrangement of materials within the stores. Layout of stores also
influences
(i) The ease in handling materials,
(ii) Identification of materials.
(iii) Speed with which materials are traced,
(iv) breakage
(v) spoilage,
(vi) obsolescence,
(vii) pilferage
(viii) control on materials and
(ix) Overall storage cost.
Layout of storage is influenced by a number of factors
❖ The nature of materials - voluminous, costly, delicate hazardous, etc.
❖ Frequency with which issues of materials is made
❖ Availability of space
❖ Availability of stores staff
❖ Frequency of receipts of materials
❖ Codifications
❖ Security considerations
❖ Ease is handling, etc.
All these factors combined together determine the storage layout.
Types of stores organisation / Stores Department:
Organisation of stores differs from one undertaking to another undertaking. It
depending on their size of stocks, the nature of materials dispersal of production
units, the process of purchasing and many more factors.
Stores can basically be organised in any of the following ways –
Centralised or Central stores: In case of centralised stores entire storage for all
types of materials and supplies required for all departments is at one place. It
means all materials are kept at one central store. Centralised storage particularly
suitable where entire production activity is located at one place or all production
units are suitable close to each other.
Advantages of centralized stores:
The following are the major advantages of centralised store:
● Total stocks are less compared with a situation when each production unit
has its own store. As a result overall less capital is tied in stores.
● Better supervision and control can be exercised.
● Mechanical devices can be used for handling stores.
● Stores record result in Lower clerical cost.
● Specialised expert staff can be employed to manage centralised stores.
● There is economy in storage place.
● Material handling cost is lower.
● Bulk price is facilitated advantages of buying, better price bargaining,
economy in transportation cost.
● Material requirement can be forecast with greater degree of accuracy.
● It result in lesser obsolescence of stores and quicker detection of slow
moving items.
● Investment in stock is minimized.
● It reduced clerical cost and economy in records & stationery.
Disadvantages:
This type of storage leads to some difficulties also. Which are as follows –
● Cost of transporting materials is high when other/ user departments are
located at a distance from central store.
● Problem in internal or external transportation may lead in stoppages of
production
 ● Chances of pilferages are higher when large quantities are stored at central
place
● There may be delays in issue of materials from central stores to user
department
● Breakdown in transport may stop production in departments due to
non-availability of materials.
Decentralized/ Independent -
Under this type of stores independent stores are established in various departments.
In this case each department in the organisation maintains its independent stores.
Which fixes minimum maximum and reorder level for all materials stored by it.
Handling of stores is undertakes by the storekeeper in each department.
Advantages:
● It helps to meet urgent requirements and shortages
● It minimizes interference due to breakdown of transport service
● It enables quick service of material to requiring departments
● It provides better motivation to the stores staff
● It helps to reduce transportation cost
Disadvantages:
● More problems of co-ordination and control because of different policies &
procedures
● Unsuccessful in the absence of quality staff
● More cost incurred to the organisation due to additional staff
● Uniformity and standardisation is not possible
Central stores with sub-stores-
It is an improvement over centralised stores. Where it is disadvantages to maintain
central stores sub-stores can be maintained. This system may be medium between
purely centralised stores and purely Decentralised stores. Sub-stores are permitted
stocking of specilised materials for particulars department. Sub - store may be
closer liaison between storekeeper and user department. Its use may avoid delay in
getting materials. For this types of stores more space may be required Sub- stores
are generally maintained on imprest system. In imprest system all material are in
bulk in a central store each sub-store is given as a commencing stock, sufficient
supplies for a little more than the re-stocking period. At the end of the suitable
period the sub-storekeeper passes all its If helps to reduce transportation cost.
Requisitions to the central store. Which reimburse it for these issues and there by
restores the stock of each material to its imprest level. In short, this type of stores
operates in a similar way to a petty cash system. So this system of stores is also
known as the "Imprest system" of stores control.

Advantages:
● It ensures prompt issue of stores
● It confines the advantages of centralised stores with sub stores and the same
time it does not sacrifice the centralised control
● It reduces handling cost of materials
● It avoids the maintenance of elaborate inventory records.
Generally in big manufacturing concern separate stores department may be
maintain for each item they are-
● Raw materials
● Consumable stores
● Components
● Partly finished goods
● Finished goods
● Scrap materials
● Plant maintenance materials
Classification and Codification:
Classification:
As per CIMA Terminology, classification is the arrangement of items is a logical
sequence having regard to their nature (subjective classification) or the purpose to
be fulfilled (objective classification) Classification is the process of arranging
items in groups and sub-groups according to common characteristics.
Classification according to nature of items is useful for identification, storage,
ordering and accounting of materials. Classification according to the purpose of
materials. Classification according to the purpose of materials or the user activity /
department, etc., is significant for costing considerations. Exact grouping of
materials varies depending on size of inventories, nature of materials, varieties of
materials, system of accounting, number of user departments, location of stores and
producing units, etc.
However, in a manufacturing organisation are generally classified as follows-
o Raw - materials - basic materials use in production, such as cotton, wool,
silk for textile production. Oilseeds for extracting oils, various types of steel
products.
o Components - To be used in products.
o Consumable Stores - Used in the production process i.e. dyes and chemicals,
grease, lubricating oil, cotton waste etc.
o Tool - e.g. jigs, screw drivers, wrenches, clamps.
o Nuts and bolts - and other such items.
o Maintenance materials - required for maintained of plant and machinery,
vehicles, buildings etc.
o Office - materials - e.g., printing and stationery.
o Work-in-progress -i.e. semi-finished products.
o Sundry items - Not failing in the above categories can be further classified
into various sub- groups depending on the shape, sized, quality and other
relevant attributes. Cotton may be sub-grouped as long staple cotton,
medium staple cotton and short staple cotton; and oilseeds. cotton seeds,
sunflower seeds. etc.
Codification:
Classification and codification go together. Classification is the first step and
codification is the next step. Classification provides the basic for codification is the
process of assigning a symbol or code number to items falling in different groups
and sub-groups.
According to the CIMA Terminology a code has been defined as a system of
symbols designed to be applied to a classified set of items classification facilitates
identification of items on the basis of description while coding is the process of
assigning symbol or code number. Codes are shorter and precise substitute for long
and imprecise description.
Advantages of coding:
 ● Codification of materials leads to many benefits which are as follows –
● Codes lead to precise identification of item.
● Codes are short.
● Codes are unambiguous.
● Use of codes in all documents related to movement and use of materials
facilitates effective communication between stores, purchasing, production,
control and costing department
● Coding is necessary for mechanized accounting.
● It reduces clerical work and economizes accounting.
● Coding facilitates data processing.
● It facilitates maintaining organisational secrets, regarding material
purchases, storage and usage.
● Coding facilitates speedy movement of materials within the organisation.
● Coding helps in overall materials control.
Basic Principles of Coding / System of Coding:
While assigning codes, the following principles should be kept in mind-
Exclusive - Each code number should relate to only one type of material and there
should be no duplication.
Clear - The code must be clear and identify the material without any ambiguity.
Brief - Codes should be brief because long codes take longer to write and are prone
to error.
Elastic - The code should be such that new materials can be added easily and
logically.
Alphabetical or Mnemonic -As for as possible, codes should be easier to
remember, such as, HCW for Hard Copper Wire.
System of Coding:
Numerical - In this method, a number is allotted to each item. Sub-groups are
indicated by decimals.
For examble in a foundry, the following codes may be assiged.
Coal 31
Wood 32
Copper 33
Steel 34
Aluminum 35
Bronze 36

Further, physical characteristics can be indicated in the code by decimals. This is

shown below for copper, of which the numerical code as shown above is 33 is
shown below
Copper bar grade 1 33.2
Copper bar grade 2 33.22
Copper bar grade 3 33.23

This numerical method allows a wide range and is, therefore, most suited where
the number of ems is very large.
Alphabetical or Mnemonic: In this method each item of store may be denoted by a
combination of alphabets. As alphabets present the first sound of description of
materials, it becomes easy to remember the codes. The system is thus known as
'Mnemonic'
Examples –
Mild Copper Bar MCB
Cast Iron Sheet CIS
Stainless steel SSW
wire

Alpha – numerical: This is a combination of numerical and alphabetical methods.

Example-
Mild Copper Bar of 6" MCB6
Length
Toughened Steel Tubes of TST34
3/4" diameter
Brass Strips of 1/4" Bs14
thickness
The code of materials should appear on all documents relating to the movement
and use of materials and should be marked against the appropriate bins. As a note
of caution, codes must be handled with extreme care. If a slight mistake is made in
quoting the code, the entire work may have be scrapped, entailing considerable loss
to the factory.
Stores and Material Records - Bin Card, Store Ledger etc.
Stores and Material Records- The stores records are of two types as follows:
Perpetual Inventory Records: These records show the movement of stores, i.e. the
receipt of materials, issues of materials to production department and also balance
in stock. Bincard and stores ledger are the two basic perpetual inventory records.
Documents: Documents include Goods Received Note, Bill of Materials, Materials
Requisition Note, Materials return Note. Materials transfer Note etc. But for the
detail understanding of store records usually the following records are maintained.
Inventory Records Maintained by the storekeeper in the stores:
Bin Card or Stock Card:
Bin Card consists of two terms 'Bin and Card' Bin refers to an almirah, a rack, box,
container space where materials are kept. A separate bin is maintained for each
item of material and is signed an identification number, A card is tied to or placed
outside each bin to record the quantity of materials received, issued, returned and
in hand in the bin. This card is called bin card or stock card. This card is called bin
card or stock card, This card also contains particular regarding maximum level,
minimum level, Bin No. name and code of material, location and stores ledger
folio. The objective of Bin Card is to provide a continuous record of the quantity of
materials received issued, returned and in hand.
The sources of entries in Bin Card are made on the basis of-
o Materials Received Note
o Materials Requisition slips
o Materials Returned Notes
o Bin Card is maintained by store keeper in the stores.
Advantages:
Advantages of Bin Card are as follows:
o It provides up-to-date records of materials received, issued returned and in
hand.
o It facilitates on the spot comparison of the physical stock of an with its book
balance as shown by Bin Card. Thus, It facilitates control through surprise
checking.
o It facilitates an easy physical identification of each item of materials.
o There would be less chances of mistakes because entries are received or
issue by the person actually handling the materials
o It facilitates to prevent the situation of under / over stocking by keeping the
stock within the maximum and minimum levels prescribed
o It facilitates to know when the fresh order should be placed when the
balance stock reaches re-order level.
Disadvantages:
Disadvantages of Bin Card are as follows:
o It records are dispersed over and wide area.
o Bin cards liable to be smeared with dirt and grease because of proximity to
material and also because of handling materials.
o People handling materials are not ordinarily suitable for the clerical work
involved in writing Bin Cards.
Store Ledger:
Store ledger is a subsidiary ledger in which a separate account is opened for each
item of the materials in the store records both the quantity and cost materials
received, issued, returned and in hand.
The entries in Store Ledger Account are made on the basis of
1) Materials Received Notes.
2) Materials Requisitions slips.
3) Materials Returned Notes.
Stores Ledgers is maintained by Cost Accounting Department and not be Stores
Department.
Methods of Pricing the issue of materials:
When materials are issued from stores from stores to production department a
question arises regarding the price at which materials issued are to be charged. This
is because the same type of material may have been purchased in different lots at
different times at several different prices when materials have been exclusively
purchased for a job or contract then these can be charged at the same rate at which
these materials were actually purchased. If specific units of materials are identified
with specific product and the price at which these materials were purchased is
easily known. These specific rates may be used for materials issued for such
production. If purchase prices of materials remains constant over a period of time,
then all issues of materials during such period can be charged at constant prices.
When purchase prices may fluctuate significantly then question arises which of
these prices should be used for pricing of issues of materials.
The Problem of pricing of issues arises due to the following reason.
 o Purchase price of materials fluctuates from time to time
o It is difficult to identify different units of materials and their prices with
different consignments.
o At one time stock of a particular material includes material purchased at
different prices.
o Each issue of materials is to be assigned some price at which production is
charged for materials used.
o Pricing of issues of materials automatically determines value of stock in
hand.
o In case material cost is a significant portion of total cost. Pricing of issues
has noticeable impact on computation of profit.
FIFO METHOD
This method is based on the assumption that the goods which are received first are
issued first. This assumption is made for the purposes of assigning costs and not
for the purposes of the physical flow of goods. The Physical of goods therefore,
need not necessarily coincide with the pattern of cost flow assumption. It uses the
price of the first at received for all the issues until all units from this lot have been
issued after which the price and so on. Cost materials issued represents the cost of
earlier purchases. Cost of closing stock represent the cost of latest purchases.
Advantages of FIFO Method
o This method conform to the physical flow of goods.
o In periods of falling of prices, lower income is reported since old costs
(which are higher than the current costs) are matched with current revenue.
As a result, income tax liability is reduced
o It is a simple to understand and easy to operate if prices of materials do not
fluctuate very frequently.
o No unrealized inventory profits / losses are made by using this method
because it is based on cost.
o The value of closing stock tends to be nearer current market prices because it
represents the cost of recent purchases.
Disadvantages of FIFO Method
o This method involves a lot of calculation work in case there are violent
fluctuation in the prices of B materials.
 o In a period of fluctuating prices, the goods of issues do not they represent
current market prices.
o In Periods of rising prices, higher income is reported since old costs (Which
are lower than the current costs) are matched with current re venues. As a
result, Income tax liability is increased.
o Comparison among similar jobs is very difficult if materials of different
batches carrying different prices are used in these jobs.
LAST IN FIRST OUT (LIFO) METHOD
It is based on the assumption that the goods which are received last are issued first.
This assumption is made for the purpose of assigning costs and not for the
purposes of the physical flow of goods therefore, need not necessarily coincide
with the pattern of cost flow assumption. It uses price of the last lot received for all
the issues until all units from this lot have been issued after which the price of
previous lot received is used for pricing and so on. In case a new lot is received,
new lot becomes the last. Last lot and its price is used for pricing the issues in the
manner explained above. Cost of Materials Issued represents the cost of latest
purchases. Cost of closing stock represents the cost of earlier purchases.
Advantages of LIFO Method
o No unrealized inventory profits/losses are made by using this method
because it is based on cost.
o The cost of issues tend to be nearer current market price because it is
represents cost of recent purchases.
o In periods of rising prices, lower income is reported since current costs
(which are higher than the old costs) are matched with current revenue. As a
result income tax liability is reduced.
Disadvantages of LIFO Method
o This method does not conform to the physical flow of goods.
o Involves a lot of calculation work in case there are violent fluctuations in the
prices of materials.
o In periods of falling price, higher income is reported since current costs
(which are lower than the old costs) are matched with current revenues. As a
result, income tax liability is increased.
 o Comparison among similar jobs is very difficult if materials of different
batches carrying different prices are used in this jobs.
o The value of closing stock does not tend to be nearer current market prices
because it represent the cost of earlier purchases.
Simple Average Price Method :
It used an average price pricing the issue of materials until either an old lot is
exhausted or a new lot is purchased when new average price will be calculated.
Average price is calculated as follows
Average Price = Total of Unit Prices of all lots in Stores
Total Number of Unit prices

This method is useful under the following circumstances.

When purchase price do not fluctuate considerably.
When the materials are received in uniform lots of similar quantity, otherwise, it
will give wing results.
Advantages
o It is simple to understand.
o It is easy to operate
Disadvantages
o It increases the clerical work the average price have be calculate on the
occasion of each issue of materials.
o It is not scientific method because it ignores the quantity of materials
purchased while calculating average price.
o It will give incorrect results in case the prices of materials fluctuate
considerable.
o There may be unrealised profit/ loss because it is based on average price and
not on actual cost
Weighted Average Price Method:
This method used a weighted average price for pricing the issue of materials until
new lot is purchased where a new weighted average price will be calculated.
Weighted Average Price is calculated as follows –
Weighted Average Price = Total Cost of Material in Stock
Total Quantity of Materials in stock

This Method is useful when the quantity of materials in each lot purchased is not
uniform
Advantages
o It can be advantageously used in process industries.
o This method averages out the effect of price fluctuations.
Disadvantages
o The closing stock does not correspond to the conventional accounting of
valuation of stock
o There may be unrealised profit / loss because it is based as weighted average
price and not on actual cost.
o It increase the clerical work because a new weighted average price is
required to be calculate on the receipt of new lot
o It cannot be used in the job order industry where each individual order must
be priced at each stage up to completion.