Week 4 – Chapter 4 MATERIALS COSTING - Studespace · PDF fileThe Manufacturing Process ... this case, a particular job order). ... CHAPTER 4 Labour Costing CHAPTER 5 Factory Overhead

Week 4 – Chapter 4 MATERIALS COSTING

FNSACC507A Provide Management Accounting Information

In this lesson you will learn…

1.  About the documents used to cost and control factory materials.

2.  How to prepare accounting records from these documents.

By the end of this lesson, you need to know how to…

ACCOUNT FOR MATERIAL COSTS � Prepare a stock card to record transactions

accounted for using both a perpetual and a periodic inventory recording system and both the F.I.F.O. and Weighted Average inventory valuation methods.

� Prepare all relevant GJ entries.

The Manufacturing Process

Is about converting raw materials into finished goods with the use of

direct labour and factory overhead.

The Manufacturing Process

WORK IN PROGRESS

MATERIALS

LABOUR

OVERHEADS

FINISHED GOODS

DIRECT versus INDIRECT (materials + labour)

DIRECT INDIRECT

Can be easily and conveniently traced to a particular cost object (in this case, a particular job order).

Cannot be easily and conveniently traced to a particular cost object (in this case, a particular job order).

Classified as factory overhead and allocated to production via a predetermined overhead rate.

e.g. wood used to make wooden furniture

e.g. nails & glue used to assemble wooden furniture; factory supervisor’s salary

Accounting for

MATERIALS

Overview 1.  Accounting for materials 2.  Raw materials cycle 3.  Material-related costs 4.  Costing material requisitions/issues 5.  Stocktaking

1. Accounting for MATERIALS � Raw materials are a necessary input into the

production process. � Our focus will be on accounting for the costs

associated with the acquisition, storage and usage of raw materials in determining the final cost of the finished product.

2. Raw materials cycle

1. PURCHASE 2. ISSUE (usage)

Storeroom puts in request with Purchasing department for materials to be ordered à purchase requisition

Production department requests materials to be issued to production à materials requisition form

Purchasing department orders materials from supplier à purchase order

Goods ordered are received and checked by Receiving department à receiving report (given to Purchasing department and Accounts Payable)

à supplier invoice (to finalise purchase transaction & authorise payment of supplier invoice, PR, PO and RR need to be matched and reconciled with SI.

In accounting for materials, there are two (2) main activities:"

All material movements in a factory need to be supported by appropriately authorised documentation.

2. Raw materials cycle

1. PURCHASE 2. ISSUE (usage)

Return of materials to supplier à debit note (issued by purchaser) + credit note (issued by supplier)

Return of materials to storeroom à materials returned to store form

Material transfers e.g. from JOB1 to JOB2 à materials transfer note

In accounting for materials, there are some adjustments that may need to be made:"

All material movements in a factory need to be supported by appropriately authorised documentation.

3. Material-related costs e.g. Freight in; Discount received (on purchases)

TOTAL cost of materials =

Cost of materials purchased +

Material-related costs

3. Material-related costs Accounting for material-related costs: OPTION 1: à Include as part of final unit cost of material purchased �  accounted for as part of prime cost of production �  most accurate costing method OPTION 2: à Include in factory overhead (which is indirectly applied to production via predetermined overhead rate).

4. Costing material requisitions (a.k.a. issues)

� The purchase price of our materials fluctuate over time which means that our inventory of raw materials may contain identical items acquired at different prices.

�  Issues of direct and indirect materials to production need to be costed so that we can work out the final cost per unit of production.

� Therefore, we need to select a method for costing material requisitions.

� We have a few options…

5. Costing material requisitions (a.k.a. issues)

�  Inventory recording systems: �  Perpetual inventory system �  Periodic inventory system

�  Inventory costing (valuation) methods: (within each recording system) �  F.I.F.O. (first in, first out) method �  Weighted average method

Inventory recording systems PERPETUAL PERIODIC

•  Movements of inventory into and out of the storeroom are continuously tracked.

•  Records are maintained that enable the balance of inventory on hand to be determined at any time.

Movements in inventory are NOT continuously tracked. They are only determined at the end of the accounting period.

Inventory recording systems PERPETUAL PERIODIC

An individual record is kept for each inventory item showing: à quantity + value purchased à quantity + value issued to production à balance of inventory on hand after each transaction

A record is maintained of: 1. Opening balance of inventory item (from physical stocktake records) 2. Purchases of materials (from supplier invoice) 3. Closing balance of inventory item (from physical stocktake records)

Under this method, cost of materials issued not directly determined. Material usage (in units and dollars) = Op. balance + Purchases = Materials avail. for use – Cl. balance Impossible to determine whether a stock difference occurred during the period.

Inventory costing (valuation) methods

AASB102 – Valuation & Presentation of Inventories � Inventories should be valued at LOWER of COST or NET REALISABLE VALUE. � Any of the four (4) costing methods specified by the standard can be used to assign costs to inventories provided it is:

* Appropriate given the circumstances * Applied consistently from one period to the next

� We are going to focus on the use of the F.I.F.O. and Weighted Average methods.

5. Stocktaking 1. Under perpetual recording system � To check accuracy of perpetual records. � Variances due to recording errors, theft,

shrinkage etc. � Perpetual records must be adjusted to match

physical count. 2. Under periodic recording system � To determine opening and closing

balances of inventory.

Addi$onal  Readings  Optional extra reading: 1. AASB 102 – Inventories (Fact Sheet) Open the following document: WEEK 4_FNSACC507A_Management Accounting_LESSON 4 Additional Reading 1_AASB102 Fact Sheet

2. Inventory Shrinkage Open the following document: WEEK 4_FNSACC507A_Management Accounting_LESSON 4 Additional Reading 2_Inventory Shrinkage

Worked Examples

Accounting for MATERIALS (WEEK 4) 1. Fast Ferraris Ltd

1a. Perpetual – F.I.F.O.

1b. Perpetual – Weighted Average

2. Enigma Ltd

2a. Periodic – F.I.F.O.

2b. Periodic – Weighted Average

Worked Examples  NOTE TO STUDENTS:

Before moving on to the next slide, please open and work through the following document now:

WEEK 4_FNSACC507A_Management

Accounting_WORKED EXAMPLES

This week’s homework � Read chapter 4 à Materials (p.168 to p.194) � Complete homework questions (chapter 4)

(ref. STUDENT ONLINE STUDY GUIDE)

You are now ready to start the next lesson on:

CHAPTER 4

Labour Costing CHAPTER 5

Factory Overhead