Cost Accounting Chapter No.3 costing and control of materials and labor.pptx

Cost Accounting

1. CHAPTER 03 Costing and control of Materials and Labor

2. Accounting for Materials Purchase of Materials: Three forms are commonly used in purchasing goods Purchase Requisition: A written request sent to inform purchasing department of a need for materials or supplies. Purchase order: A written request to a supplier for specified goods at an agreed upon price. The request also stipulates(demand (part of agreement ) of delivery and payment terms. Receiving report: It is issued by receiving department after checking and counting of goods as per specifications ordered. Usually the copy of purchase order sent to receiving department does not mention quantity ordered. Accounting for materials by a manufacturer usually involves two activities : the purchase of materials and their issuance

3. PURCHASE REQUISITION

4. PURCHASE ORDER

5. RECEIVING REPORT

6. ISSUANCE OF MATERIALS The person in charge of the storeroom is responsible for the proper storage, protection, and issuance of all materials placed in his or her custody. Material requisition forms prepared by the production manager or department supervisor

7. Materials Requisition Form

8. Inventory Control Procedures/system Inventory Control procedures are used to maintain cost at a minimum level and plant production on a smooth uninterrupted schedule. Control procedures commonly used are: Order Cycling: A method in which a review of materials on hand is made on regular or periodic cycle.

9. ORDER CYCLING A technique often used for small items is the 90-60-30- day method. When inventory drops 60-day supply, an order is placed for a 30-day supply.

10. Inventory Control Procedures/system Control procedures commonly used are: Order Cycling: A method in which a review of materials on hand is made on regular or periodic cycle. Min-Max Method: Based on assumption that materials inventory have minimum and maximum level.

11. Min-Max Method Once the specific minimum and maximum quantities are determined. when the inventory reaches the minimum quantity, an order is placed to increase the inventory to the maximum quantity. 2000 Units 1 000 Units

12. Inventory Control Procedures/system Achievement of good control keeps cost at a minimum level and plant production on a smooth uninterrupted schedule. Control procedures commonly used are: Order Cycling: A method in which a review of materials on hand is made on regular or periodic cycle. Min-Max Method: Based on assumption that materials inventory have minimum and maximum level. Two bin Method: It is commonly used when materials are relatively inexpensive and/or non essential .

13. TWO BIN METHOD

14. Inventory Control Procedures/system Achievement of good control keeps cost at a minimum level and plant production on a smooth uninterrupted schedule. Control procedures commonly used are: Order Cycling: A method in which a review of materials on hand is made on regular or periodic cycle. Min-Max Method: Based on assumption that materials inventory have minimum and maximum level. Two bin Method: It is commonly used when materials are relatively inexpensive and/or non essential. The Automatic Order System: Is one in which orders are “automatically” placed as soon as level of inventory reaches a predetermined order-point quantity.

15. THE AUTOMATIC ORDER SYSTEM This system is particularly advantageous when a company uses a computer. Perpetual inventory record cards are maintained which record purchases and requisitions of the specific materials. When the predetermined order point is reached, the computer automatically sorts the materials cards. They are then processed by a clerk who places an order for the necessary quantity.

16. Inventory Control Procedures/system Achievement of good control keeps cost at a minimum level and plant production on a smooth uninterrupted schedule. Control procedures commonly used are: Order Cycling: A method in which a review of materials on hand is made on regular or periodic cycle. Min-Max Method: Based on assumption that materials inventory have minimum and maximum level. Two bin Method: It is commonly used when materials are relatively inexpensive and/or non essential. The Automatic Order System: Is one in which orders are “automatically” placed as soon as level of inventory reaches a predetermined order-point quantity. The ABC Plan: When company has a large number of individual items, each one having a different value.

17. THE ABC PLAN ABC Plan is used when a company has a large number of individual items , each one having a different value. Material control for high-value(expensive) item should be different from that fora low-value item . Thus, the ABC Plan is a systematic way of grouping materials into separate classifications and determining the degree of control the each group merits.

18. Material Yearly Usage Unit Cost Total Cost A 10,000 .50 5,000 B 7,100 .65 4,615 C 2,000 2.50 5,000 D 5,250 2.00 10,500 E 6,000 1.75 10,500 F 2,750 .80 2,200 G 1,500 1.00 1,500 H 5,500 1.85 10,175 Total 40,100 49,490 THE ABC PLAN for example:

19. Material Yearly Usage Unit Cost Total Cost D 5,250 2.00 10,500 E 6,000 1.75 10,500 H 5,500 1.85 10,175 A 10,000 .50 5,000 C 2,000 2.50 5,000 B 7,100 .65 4,615 F 2,750 .80 2,200 G 1,500 1.00 1,500 Total 40,100 49,490 THE ABC PLAN for example: STEP ONE: MAKE LIST ACCORDING TO TOTAL COST

20. Material Yearly Usage Unit Cost Total Cost Percentage D 5,250 2.00 10,500 21.2% E 6,000 1.75 10,500 21.2% H 5,500 1.85 10,175 20.6% A 10,000 .50 5,000 10.1% C 2,000 2.50 5,000 10.1% B 7,100 .65 4,615 9.3% F 2,750 .80 2,200 4.5% G 1,500 1.00 1,500 3.0% Total 40,100 49,490 THE ABC PLAN STEP TWO: Make separate percentage of all materials from total cost

21. Material Yearly Usage Unit Cost Total Cost Percentage D 5,250 2.00 10,500 21.2% E 6,000 1.75 10,500 21.2% H 5,500 1.85 10,175 20.6% A 10,000 .50 5,000 10.1% C 2,000 2.50 5,000 10.1% B 7,100 .65 4,615 9.3% F 2,750 .80 2,200 4.5% G 1,500 1.00 1,500 3.0% Total 40,100 49,490 THE ABC PLAN STEP THREE: Classify into categories 63% (A) 29.5% (B) 7 .5 % (C)

22. LABOR Labor is the physical or mental effort expended in manufacturing a product. Labor cost is the price paid for using human resources. The principal labor cost is wages paid to production workers. Wages payments made on an hourly, daily, or piecework basis. Salaries are fixed made regularly for managerial or clerical services.

23. Usually involves three activities Timekeeping: Collection of hours worked by employees by two main sources Time Card (Clock Card): It is inserted by in a time clock by employee several times each day: upon arrival, going to lunch, taking break, and when leaving for the day. Labor Job ticket: Prepared daily by employees for each job worked on, these indicate hours, description, and wage rate. 2. Computation of total payroll: Preparation of total payroll net payable after deduction of taxes. 3. Allocation of payroll costs: Allocation of cost to departments, individual jobs or products based on time cards and labor job tickets. Accounting for labor

24. Time Card (Clock Card )

25. Labor Job ticket

26. Special Problems Relating to Accounting for Labor Employee Taxes Employer Taxes and Fringe Benefits(extra benefits) Shift Premiums Overtime Premiums Idle Time( when employees have no work to perform but are still paid for their time). Minimum Guaranteed Wage and Incentive Plans(produce more earn more)

27. Appendix: Periodic and Perpetual Inventory Systems Under Fluctuations These methods commonly used to determine the value of ending material inventory and cost of material issued under Periodic Inventory System Specific Identification Average Cost (Simple average and Weighted Average) FIFO LIFO

28. SPECIFIC IDENTIFICATION Specific identification is the simplest but also most time-consuming method of determining cost of materials used and cost of the ending inventory. This method entails keeping a record of the purchase price of each specific unit and the quantity of specific units used. This method is used when dealing with expensive material which are unique like diamond.

29. Date Units Purchased Cost Per Unit Units used Balance of Units Available Beginning Inventory 1/1 20 10 20 1/5 50 11 70 1/6 30 40 1/9 40 12 80 1/15 20 13 100 1/20 60 40 1/28 10 15 50 Total 140 90 Find cost of material available for sale, Cost of material issued and ending material Inventory For the specific identification method, assume that the 30 units issued on January 6 were taken from the lot purchased on January 5, and the 60 units issued on January 20 were taken from both the beginning inventory (20 units) and the lot purchased on January 9 (40 units).

30. Cost of Material Available for use Date Units purchased Units cost Total cost 1/1 20 10 = 200 1/5 50 11 = 550 1/9 40 12 = 480 1/15 20 13 = 260 1/28 10 15 = 150 Cost of materials available for use 1640

31. Cost of Material Issued Date Units Issued Units cost Total cost Issued 1/5 30 11 = 330 1/1 20 10 = 200 1/9 40 12 = 480 Total cost of material Issued 1010

32. Ending Material Inventory Date Remaining Units Units cost Total cost of Ending Inventory 1/5 20 11 = 220 1/15 20 13 = 260 1/28 10 15 = 150 Total cost of Ending material Inventory 630

33. Average Cost When an inventory contains many small homogenous materials like peanuts, gasoline then we use this method There are two methods of computing average cost: Simple Average and weighted average. Simple Average: Under this method the various purchases are added together and their sum is divided by the total number of Purchases to arrive at the average cost per unit.

34. Date Units Purchased Cost Per Unit Units used / issued Balance of Units Available Beginning Inventory 1/1 20 10 20 1/5 50 11 70 1/6 30 40 1/9 40 12 80 1/15 20 13 100 1/20 60 40 1/28 10 15 50 Total 140 61 90 Simple average= total cost per unit / number of items 61 / 5 = 12.20 Cost of material available for sale (140* 12.20) = 1708 Cost of material issued ( 90 * 12.20) = 1098 Ending Material Inventory ( 50 * 12.20) = 610

35. Weighted Average Average cost arises discrepancy because a different quantity was purchased at each price: for example, on January 6, 50 units were purchased at 11 per unit; and on January 15, 20 units were purchased at 13 per unit. Thus, the simple average method only works where same number of units is purchased at each price. When material is purchased in various quantities , an alternative method of computing the average unit cost must be used.

36. Date Units Purchased Cost Per Unit Units used / issued Total cost Beginning Inventory 1/1 20 10 200 1/5 50 11 550 1/6 30 1/9 40 12 480 1/15 20 13 260 1/20 60 1/28 10 15 150 Total 140 90 1640 Weighted average cost per unit =total costs / number of items 1640 /140 = 11.714 Cost of material available for sale (140* 11.714) = 1640 Cost of material issued ( 90 * 11.714) = 1054 Ending Material Inventory ( 50 * 11.714) = 586

37. FIFO (First In, First Out) In Many situations, the materials that are received first are issued first. This is especially true when perishable items are involved. For example, in a milk processing plant, the manager would want to sell the oldest milk first. That’s why first goods purchased are the first issued.

38. Date Units Purchased Cost Per Unit Units used / issued Total cost Beginning Inventory 1/1 20 10 200 1/5 50 11 550 1/6 30 1/9 40 12 480 1/15 20 13 260 1/20 60 1/28 10 15 150 Total 140 90 1640 Date Units Purchased Cost Per Unit Total 1/1 20 10 200 1/5 10 11 110 1/5 40 11 440 1/9 20 12 240 Cost of material issued 990 Date Units Purchased Cost Per Unit Total 1/9 20 12 240 1/15 20 13 260 1/28 10 15 150 Cost of Ending material 650

39. LIFO (Last in, First Out) This method of inventory pricing assumes that the materials received last are the first to be issued. The cost of materials issued closely reflects current cost (during inflation); thus, the income determination should be more accurate because current costs are matched with current revenue. For example : A very simple example of LIFO technique is a stack of plates that you arrange in a pile. The plate that is washed first is the most lower one on the pile while the plate that is washed last is on the top

40. Date Units Purchased Cost Per Unit Units used / issued Total cost Beginning Inventory 1/1 20 10 200 1/5 50 11 550 1/6 30 1/9 40 12 480 1/15 20 13 260 1/20 60 1/28 10 15 150 Total 140 90 1640 Date Units Purchased Cost Per Unit Total 1/28 10 15 150 1/15 20 13 260 1/9 40 12 480 1/5 20 11 220 Cost of material issued 1110 Date Units Purchased Cost Per Unit Total 1/5 30 11 330 1/1 20 10 200 Cost of Ending material 530

41. Appendix: Periodic and Perpetual Inventory Systems Under Fluctuations These methods commonly used to determine the value of ending material inventory and cost of material issued under Perpetual Inventory System: Specific Identification Average Cost (Simple Moving Average and Weighted Moving Average) FIFO LIFO

42. Date Units Purchased Cost Per Unit Units used Balance of Units Available Beginning Inventory 1/1 20 10 20 1/5 50 11 70 1/6 30 40 1/9 40 12 80 1/15 20 13 100 1/20 60 40 1/28 10 15 50 Total 140 90 Find cost of material available for sale, Cost of material issued and ending material Inventory For the specific identification method, assume that the 30 units issued on January 6 were taken from the lot purchased on January 5, and the 60 units issued on January 20 were taken from both the beginning inventory (20 units) and the lot purchased on January 9 (40 units). The cost of material issued and the ending material inventory are computed by multiplying The units issued or on hand by the specific cost each unit issued or still on hand; therefore The choice of either the perpetual or periodic inventory system will not affect the method of Measurement.

43. Simple Average / Simple Moving Average In simple moving average under perpetual inventory system, this computation must be performed after each purchase; this technique is usually referred to as the “ simple moving average”, hence, many averages may be used in one period.

44. purchased Cost of material available for use Issued Cost of material issued Balance Date Units Unit Cost Units Unit cost Units Unit Cost Total Cost Units 1/1 20 10 200 20 10 200 1/5 50 11 550 70 10.50 (1) 735 1/6 30 10.50 315 40 10.50 735 1/9 40 12 480 80 11 (2) 880 1/15 20 13 260 100 11.50 (3) 1150 1/20 60 11.50 690 40 11.50 460 1/28 10 15 150 50 12.20 (4) 610 Total 140 1640 90 1005 610 Find cost of material available for sale, Cost of material issued and ending material Inventory 1/1 10 (2) 10+21 (3) 10+11+12 1/5 11 1/9 12 1/15 13 21 / 2 =10.50 33 / 3 = 11 46/4 = 11.50 (4) 10+11+12+13 Cost of material Issued………………………1005 1/28 15 Ending Material Inventory…………………. 610 61 / 5 = 12.20 Cost of material available for use………1615 Simple Moving Average

45. Weighted Moving Average In perpetual inventory system, the weighted average must be recomputed after each purchase instead of the end of the period as in the periodic inventory system, The weighted average cost is computed after each purchase by diving the total cost of material on hand by the total number of units on hand.

46. purchased Cost of material available for use Issued Cost of material issued Balance Date Units Unit Cost Units Unit cost Units Unit Cost Total Cost Units 1/1 20 10 200 20 10 200 1/5 50 11 550 70 10.714 (1) 750 1/6 30 10.714 321.42 40 10.714 428.56 1/9 40 12 480 80 11.357 (2) 908.56 1/15 20 13 260 100 11.686 (3) 1168.6 1/20 60 11.686 701.16 40 11.686 467.44 1/28 10 15 150 50 12.349 (4) 617.45 Total 140 1640 90 1022.58 617.45 Find cost of material available for sale, Cost of material issued and ending material Inventory 20*10=200 (2) 40*10.714=428.56 (3) 80* 11.357 = 908.56 50*11=550 40*12 =480.00 20* 13 = 260 70 750 80 908.56 100 = 1168.56 750/70=10.714 908/80 =11.357 1168.56/100= 11.686 (4) 40 * 11.686 = 467.44 Cost of material Issued………………………1023 10 * 15 = 150 Ending Material Inventory…………………. 617 50 617.44 Cost of material available for use………1640 617/50 = 12.349 Weighted Moving Average

47. FIFO (First In, First Out) Since the cost of material issued is computed from the earliest material purchased, and the ending material inventory consists of most recent purchases, These two amounts will be identical under both the periodic and perpetual inventory system.

48. L IFO (Last In, First Out) Here, cost of material issued and ending material inventory may differ under periodic and perpetual inventory systems. The difference results from the cost to be assigned at the date that materials are issued. Under perpetual system: Cost must be assigned to each unit issued on the date of issue, whereas under the period inventory system, the cost is assigned at the end of period.

49. Purchased Cost of Materials available Issued Cost of Material issued Balance Date Units Unit Cost Units Unit Cost Units Unit Cost Total Cost 1/1 20 10 200 20 10 200 1/5 50 11 550 20 50 10 11 750 1/6 30 11 330 20 20 10 11 420 1/9 40 12 480 20 20 40 10 11 12 900 1/15 20 13 260 20 20 40 20 10 11 12 13 1160 1/20 20 40 13 12 740 20 20 10 11 420 1/28 10 15 150 20 20 10 10 11 15 570 Total 1640 Total 1070 Ending Balance 570

50. LIFO (Last In First Out) Cost of material available for use…………1640 Cost of material Issued………………………..1070 Cost of material inventory……………………. 570

51. Comparison of Inventory Method Specific Identification Weighted Average FIFO LIFO Cost Material issued: Periodic inventory system 1010 1054 990 1110 Perpetual inventory system 1010 1023 990 1070 Ending Material cost: Periodic inventory system 630 586 650 530 Perpetual inventory system 630 617 650 570

52. Which inventory valuation method is right for my business ? Choosing the right inventory valuation method for your business depends on a number of factors, like where your business is based, whether your costs are going up (LIFO) or down. Most businesses use the FIFO method because it usually gives the most accurate picture of costs and profitability.

53. Problem Material Yearly Usage Unit Cost Total Cost A 10,000 .50 5,000 B 7,100 .65 4,615 C 2,000 2.50 5,000 D 5,250 2.00 10,500 E 6,000 1.75 10,500 F 2,750 .80 2,200 G 1,500 1.00 1,500 H 5,500 1.85 10,175 Total 40,100 49,490

54. Problem

55. Problem 3-9

56. Problem 3-10