[VOL 2.

COST AND MANAGEMENT ACCOUNTING.

ACCOUNTING FOR PRIME COSTS.

ACCOUNTING FOR MATERIAL COST(S).

Materials.
The term material refers to all items that are consumed in the process of manufacture.
Materials are anything that can be stored, stocked or stockpiled. Materials can be regarded as either direct material or indirect
materials in costing.

Direct Material.
These are the raw materials from which the product is made. They are these materials from whose consumption may be
identified with specific production units and which usually become part of the finished product.

Indirect Materials.
These are consumable stocks used in production and are those materials which cannot be conveniently identified with individual
cost units eg. oil

Material or inventory control is a systematic control and regulation of purchase storage, usage of materials in such a way so as to
maintain an even flow of production and at the same time avoiding excessive investment in those inventories.

OBJECTIVES OF MATERIAL CONTROL.

The broad objective of material control are:
(i) To avoid under stocking.
(ii) To overstocking.
(iii)To be economical in purchasing. ie purchasing materials in large quantities at the most favorable prices. A purchaser should
be able to make a valuable contribution to the reduction in cost.
(iv)To buy proper quality of requirements. ie while purchasing materials due consideration should be given to the quality
(v)To minimize wastage ie the objective is to minimize the loss of material. Proper storage conditions must be provided to
different types of materials
(vi)To obtain relevant information about materials. This is concerned with the system that gives complete and up to date
accounting information about the availability of materials.

ESSETIAL REQUIREMENTS OR PRINCIPLES OF MATERIAL CONTROL.

1. There should be proper coordination and cooperation between various departments dealing in materials
2. There should be a purchasing department under the control of a competent and expert purchase manager. Procurement.
3. There should be proper classification and codification of materials.
4. Material requirements should be properly planned ie. There must be an effective MRP II system.(material requirement
procedure.)
5. The perpetual inventory system should be operated so that up to date information is available about stock levels.
To infect the above essential requirement of material control there are various techniques that are commonly used ie.
(i) ABC technique.
(ii) Economic batch quantity.
(iii) Economic order quantity.
(iv) Perpetual inventory systems etc.

SETTING STOCK LEVELS.

In order to avoid the two dangers of over stocking and under stocking. Most companies adopt a scientific approach of fixing stock
levels by adhering to these levels each item of material will automatically be held within appropriate units of control. These levels
are not permanent and must be changed to suit the changing circumstances.
The stock levels here are,
(i) Maximum stock level
(ii) Minimum stock level
(iii) Re-order level
(iv) Re-order quantity
(v) Danger level

MAXIMUM LEVEL.
This is that level above which stocks should not normally be allowed to rise. The maximum level may however be exceeded by
certain case ( when conditions dictate eg. x-mass period.
Max.level =re-oderlevel +re-oderquantity-(min-consumption x mini-reoder period).

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MINIMUM LEVEL.
It is that level below which stocks should not normally be allowed to fall. It’s essentially a safe stock and is not normally touched.
In case of stock falling. Below this level, there is a risk of stoppage in production.

Min.level=Re-oderlevel - (normal consumption x normal re-oder period).

RE-ORDER LEVEL.
This is the level at which new orders are made. It’s that level at which purchase requisition is initiated for free materials. It’s
fixed some where above the minimum level.
Reorder level=max. Consumption x max.re-order period.

DANGER LEVEL
This is the level at which normal issues are stopped and materials are issued for important jobs only. This level is generally fixed
somewhere below the minimum level.
Danger level=normal consumption x max.reorder period (underemergence conditions)

AVERAGE STOCK LEVEL.

This refers to the level of stock you need for use.
Average level = max.level + minimum level
2
Alternatively = minimum level + ½ reorder qty.

ILLUSTRATION.
Assume two materials A&B are used as follows
Minimum usage 50 units per week@
Maximum usage 150 units per week@
Normal usage 100 units per week @
Re-order qty: Material A 600units
Material B 1000units
Delivery period: Material A 4 to 6 weeks
Material B 2 to 4 weeks.

Calculate the various stock levels.

(a)Maximum level.
(b)minimum level.
Solution.
Max. level= RO + RQ- (min cons.x min.reorder period)

Material A.
(150x6) +600-(50x4) material B (150X4)+1000-(50X2)
900+600-200 600+1000-100
1300 1500

Minimum level= RO-(normal cons x normal reoder period

A= (150x6)-(100x4+6)
2 B (150x4) –(100x4+2)
900-(100x5) 2
900-500 600-(100x3)
400 600-300
300

Re-oder level= max cons x max Re-order period

A = 150 x 6 =900
B = 150 x 4 = 600
Danger level
DL = Normal cons x max re-order period
A 100x6
600
B 100x4
400
Average stock level
Av = max + min

2
 2 min level + ½ reorder level
A = 400+ ½ x600
= 400+300
= 700
A = 1300 + 400
2
= 850 B = 300+ ½ x1000
= 300 +500
= 800
B = 1500+300
2
= 900

VALUATION OF MATERIALS.
When materials are issued from stores to production departments, a difficulty 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
and at different price
This means that the actual cost can take all several different values and therefore a method of pricing material issues must be
selected.
There are two categories of the methods:
a) Methods that are not relevant for decision making (suitable for external reporting). They include:
 LIFO method
 FIFO method
 Average weighted cost method (AVCO)
b) Methods that are relevant for decision making.
These include: –
 Net realizable Value (NRV)
 Replacement cost method
 Standard price method (standard cost method)

1. FIRST IN FIRST –OUT (FIFO).

This method is based on the assumption that materials which are purchased first are issued out first. It uses the price of the
first batch of materials purchased for all issues until all units from the batch have been issued. After the first batch is fully
issued the price of the next batch received becomes the issue price.
Upon this batch, once all the materials are used still the price of the next batch is used for pricing ad so on.
In this method, the materials are issued at the oldest cost price listed in the stores ledger account and thus the materials in
stock are valued at the price of the latest purchases.
There are 3 important effects when using FIFO method and these are;
(i) Materials are price at their actual costs
(ii) Change to production for materials costs is at the oldest prices of the materials in stock
(iii) Closing stock is valued at the latest price paid

Illustration
From the following transactions prepare a store ledger account using FIFO method
2004
Date month purchased/issued qty unit price
1 july opening stock 500@ 20,000
4 july purchased 400@ 21,000
5 july issued 600@
8 july purchased 800@ 24000
9 july issued 500@
13 july issued 300@
24 july purchased 500@ 25000
28 july issued 400@

Solution
Stores ledger a/c

Purchase Issues balance

Date GRN QTY PRICE DATE NRN QTY PRICE QTY AMOUNT
1/July Opening - - - - - - 500 10,000,000
stock
4/july 001 400 21000 - - - - 900 18400000

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- - - - 5/july 601 600
- - - - - 500 20,000 400 8400000
- - - - - 100 21000 300 6300000
8/july 002 800 24000 - - - 1100 25500000
- - - - 9/july 102 500
- - - - 300 21000 800 19200000
- - - - 200 24000 600 14400000
- - - - 13/july 103 300 - 300 7200000
24/july 003 500 25000 - - - 800 19700000
28/july 104 400
300 24000 500 12500000
100 25000 400 10000000

2.LAST IN FIRST OUT (LIFO).

This method operates with a reserve order of the FIFO method. It is based on the assumption that the last batch of materials
purchased is the first is the first batch of which the materials are issued. The unit price to be quoted for the material issue is
the price of the last batch purchased until all units from this batch have been issued that the price of the previous batch is used.
These important paints should be noted regarding this method.

i) Materials issues are priced at actual cast.

ii) Charge to production for materials cast is at later prices paid.
iii) Closing stock valuation is at the oldest price paid and is completely out of line with the current prices.\

Look at how you adjust for cases where there is ascertainable inflation.

Illustration
Using the same transactions above use LIFO to prepare stores ledger accounts

Purchases Issues Balances

Date GRN Qty Price Date NRN Qty Price Qty Amounts
1/july Opening 500 10,000,000
stock
4/july 201 400 21000 900 18400000
6/july 201 600
400 210000 300 1000000
200 20000 300 600000
8/july 202 800 24000 1100 25200000
9/july 202 500 24000 600 13200000
13/july 203 300 24000 300 6000000
24/july 203 500 25000 800 18500000
28/july 204 400 25000 400 8500000

AVERAGE WEIGHT COST METHOD (AVCo divided).

You consider the previous amounts by the total units e.g. 18400000/900=20,444

PURCHSES ISSUES BALANCES

Date GRN Qty Price Date NRN Qty Price Qty Amount
1/july Opening 500 10,000,000
stock
4/july 301 400 21000 900 18400000
5/july 301 600 20444 300 6133600
8/july 302 800 24000 1100 2533600
9/july 302 500 2303 600 1382100
13/july 303 300 2303 300 691200
24/july 303 500 25000 800 13191200
28/july 304 400 16489 400 6595600

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ACCOUNTING FOR LABOUR COST
Labour recording
Remuneration
Measurement of lab our turn over, efficiency and utilization
Costing systems
Pay roll accounting

Introduction
Employees are paid either a salary or a wage
 A salary is a fixed amount normally spread over equal pounodical period.
 A wage is a payment based either on the type worked in the period or o the out put of the performance (items
produced). For the purpose of labour cost analysis, we need to understand some of the details relating to labour
recording remuneration methods, skills measurement of labour turn over, computation of idle time over time etc. and
labour costing systems.

LABOUR RECORDING
In most manufacturing companies, and many of the service sector, records of attendance time for each worker are required for
operations, processes parts, times quantities, sales made, inquiries handled or whatsoever is used as the basis for the incetive
scheme
These records from the basis of wage calculations and for such casting data as direct and indirect labour cost over
head build up and labour cost control.
These records may be maintained manually or electronically.

TYPES OF LABOUR RECORDS

They are two types:
a) Those for attendance
b) Those relating to out put or performance

a) ATTENDENCE RECORDS
These involve use of clock cards. One clock card may be maintained for each workers using the time recording clock
usually based at the entrance to the premises. The clock is the basis of time recording and whatever time additional time records
are kept. They must be reconciled on the clock card by the time recording clock.
(look at the merits and demerits)
b) OUT PUT RELATED RECORDS
The following are typical records relating to out put and these include:
i) The daily and weekly time sheets
ii) The job cards
iii) Operation cards
iv) Idle time cards
v) Wages sheet (a mini pay roll)
vi) Employees records

DAILY AND WEEKLY TIME SHEETS

These are records filled in by the workers and counter signed which show how he/she spent his / her time during the
day or week.
The general objective is to reconcile all the time in attendance (recorded on the clock card) with time booking s either
at jobs or operations
Weekly rime sheets tend to be less accurate but require less clerical efforts

ii) THE JOB CARDS

Unlike time sheets which related to individual employees and may maintain booking relating to numerous job, a good card
relates to single job or batch is likely to contain entries relating to numerous employees Upon completion of the job, it will contain
a full record of the times and quantities involved in the job or the batch.

iii) OPERATIONAL CARDS (PIECE WORK TICKET)

These are used where employees are paid on the piece of work basis. They contain details of a number of items to be produced by
each employee and this is multiplied by the rate per item to give the total wage.

iv) IDLE TIME CARD.

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This may be used to record the amount of waiting time or idle time. If a productive woker is un occupied for a short period, for
reasons say machine break down, un empty tank at the petrol station etc.
Holidays for students
v) WAGES SHEET
All the employees are listed on the wage sheet alphabetically or in accordance with serial numbers the hours worked by
each employee are entered in the wages sheet from the clock card and multiplied by the rate of pay specifically the wages sheet
Contains gross pay, over time pay, bonus, and any allowances and deductions such as advances, PAYE, NSSF Contributions etc..
vi) EMPLOYEES RECORD CARDS
These contain basic information about the employees. The card is raised when the employee is still engaged and it shows
the history of the employee during his time in the organization. His date of appointment, title, promotion, Transfers and dates of
departure.

LABOUR RENUMERATION METHODS

People are either paid according to the length of time spent working. There are three basic types of remuneration
schemes.

1. Time rate (time based)

2. Piece work rates (output based)
3. Inactive schemes (bonus schemes)

TIME BASED SYSTEMS

1. Basic pay system
2. High day rate systems
3. Common systems

BASIC PAY SYSTEMS

At the simplest level, workers would be paid for the number of hours worked at basic rate per hour up to say 40 hrs per week.