2.

ACCOUNTING FOR MATERIALS

Starting in this module, we will look into the details of elements of costs. In the previous module,
you have learned about the materials, labor and overhead. Module 2 will discuss both accounting
and management aspects related to materials.

Specifically, this module covers the following topics.

1. Procedures for Material Control
2. Materials Control Methods
3. Economic Order Quantity Model
4. Recording of Materials
5. Inventory System/Methods of Costing Materials
6. Methods of Costing Materials
7. Recording of Transactions in Stock Ledger Card
8. Inventory/Stock Discrepancies
9. Inventory/Stock Valuation

After every topic, there will be non-graded self-assessment questions to check your knowledge
about the completed lesson. A key to correction will be provided for you to know the correct
answer. In this manner, you will be able to review the topic where you got an incorrect answer.
After each module, there will be a graded assessment in the form of quizzes, either True or False,
Multiple-choice, and Fill-in the blanks questions. This graded learning activity aims to check your
knowledge about the different processes covered in the module.

I will be available for consultation to guide you with the tasks as well as in giving feedback on your
submissions and participation.

After the end of this module, you should be able to:

1. Define the meaning of material control;
2. Discuss the objectives of material control;
3. Discuss the activities and requirements of material control;
 4. Apply the different types of inventory costing and methods of costing materials;
5. Discuss the different levels of stock inventories;
6. Discuss the recording of stocks to stock ledger card, causes of discrepancies between
physical count and stock ledger card and how to account those variances;
7. Calculate the inventory using the Lower of Cost or Net Realizable Value valuation method.

TOPIC 1: PROCEDURES FOR MATERIAL CONTROL

Look again at your own kitchen, what happens if you run out of ingredients in the middle of meal
preparation? What happens if these ingredients are not stored properly? These are the same
concerns of those in the manufacturing business. So take a closer look to the topic: Accounting for
Materials in the learning activities below:

Learning Activity 2-1

Read: Chapter 3 – Accounting for Materials, pp. 82-86

Flores (2016).Integrated Cost Accounting – Principles and Applications

Optional Resources:
PowerPoint Presentation ( Google Sheet, Docs, Slides – Link to be provided)

Self-Assessment/Review Questions:
1. What are the main objectives of materials control?
2. ______________ is the document used for the transfer of
excess materials from one department, job or activity to another.
3. ______________ is the document used for the issuance of
materials to production.
4. ____________ is the document used for the transfer or return
of excess materials to the warehouse or storeroom?
5. Materials records that indicate both the quantity and value of inventory is called
_________________?

TOPIC 2: MATERIALS CONTROL METHODS

What are the control measures applicable to materials? How do we ensure that production will not
be delayed due to understocking or will not incur significant carrying cost due to overstocking? Read
more about this topic in the learning activities below:
Learning Activity 2-2

Read: Chapter 3 – Accounting for Materials, pp. 87-88

Optional Resources:
PowerPoint Presentation ( Google Sheet, Docs, Slides – Link to be provided)

Self-Assessment/Review Questions:
1. _______________ is an inventory control method used by the company
under a computerized environment that automatically places an order when
the supply reaches the minimum level set by the management.
2. _______________ is an inventory control method that minimum level
is set as a signal to place an order to avoid stock out and maximum
level is set to avoid high storage cost and spoilage.
3. __________________ is an inventory control method that uses two (2) bins. The 1 st bin
is used up from the time of purchase to reorder and the 2nd bin is used from reorder point until
the receipt of the order.
4. __________________ is a control method that reviews the entire inventory in a regular
interval and places an order for low quantity items that will not last until the next review.
5. __________________ is inventory control that involves classification of different types of
inventories. This method gives the highest degree of control to an item with the largest
inventory value compared to other inventories.

TOPIC 3: ECONOMIC ORDER QUANTITY MODEL (EOQ)

How do you balance the impact of overstocking and understocking? What is that appropriate level
of inventory that the entity will have to maintain. Learn more of this in the learning activities below.

Learning Activity 2-3

Read: Chapter 3 – Accounting for Materials, pp. 88-90

Optional Resources:
PowerPoint Presentation (Google Sheet, Docs, Slides – Link to be provided)

To summarize the Economic-Order-Quantity Model watch this video.Click:

https://www.youtube.com/watch?v=AYpjPWmlyHM link to open source.
To summarize the Economic Order Quantity (Tabular Method)
Click: https://www.youtube.com/watch?v=lt-jTE1SvFs link to open resource.
To summarize on How to Calculate Re-Order Point watch this video.
Click: https://www.youtube.com/watch?v=2kKRgtzcses link to open resource
 Self-Assessment/Review Questions:
1. The level of inventory order that minimizes the total cost related to
inventory management is called ___________________?
2. What are the four (4) basic assumptions of an Economic Order Quantity
(EOQ) Model?
3. Economic Order Quantity can be determined/calculated using the
___________________ and ________________ Approach?
4. When you multiply the lead time by the average daily usage it will give you the
___________________?
5. Additional inventory maintained on top of reorder point to address unusual events that caused
delays in the delivery of order such as floods, strikes to prevent stockout is called
________________?

LET’S PRACTICE!

Solve at least 1 exercise/problem related to the topic. As part of summative/graded assessments, the
compilation of solved problems will be submitted at designated pick-up points or using the
communication channel available to you on a specified date.

Solve Problem:
P3-3 on page 115
Chapter 3 – Accounting for Materials
Integrated Cost Accounting – Principles and Applications By:
Marlon Oyzon Flores 2016 First Edition

TOPIC 4: RECORDING OF MATERIALS

After our discussion of internal control measures related to materials. Let us now discuss how
transactions of this cost element will be put into records. Learn more of this topic by doing the
activities below:

Learning Activity 2-4

Read: Chapter 3 – Accounting for Materials, pp. 90-92

Flores (2016).Integrated Cost Accounting – Principles and Applications

Optional Resources:
PowerPoint Presentation ( Google Sheet, Docs, Slides – Link to be provided)
 Self-Assessment/Review Questions:
1. _________________ is the cost of handling
materials from suppliers commonly recorded as part of factory overhead?
2. _________________ are granted to customers to
encourage prompt payment of accounts and volume purchases?
3. Purchase price of materials are recorded in the books
_________________?

TOPIC 5: INVENTORY SYSTEM/METHODS OF COSTING MATERIALS

At how much the inventory will be reported subsequent to its acquisition. If the entity makes several
acquisitions during the year, what unit cost will be used in determining the ending inventory? Is it
the cost of first acquisition or last acquisition or the average? Recall this concept of measuring
inventory in the learning activities below:

Learning Activity 2-5

Read: Chapter 3 – Accounting for Materials, pp. 92-94

Flores (2016).Integrated Cost Accounting – Principles and Applications

Optional Resources:
PowerPoint Presentation ( Google Sheet, Docs, Slides – Link to be provided)

To summarize the different methods of costing materials/inventory click the below video links:
FIFO Inventory Method
Click: https://www.youtube.com/watch?v=Wa83L8TvoaM
FIFO Periodic Inventory Method
Click: https://www.youtube.com/watch?v=H-053SIwnJ8
FIFO Perpetual Inventory Method
Click: https://www.youtube.com/watch?v=cnVEC6lovOI
Average Cost Inventory Method
Click:
https://www.youtube.com/watch?v=qAWVVw-dC5A&list=TLPQMjQwNjIwMjCFiS_pR2pVzA&index=6
Average Cost Periodic Method
https://www.youtube.com/watch?v=dU32hfszRs0 Moving
Average Inventory Method - Perpetual System
Click: https://www.youtube.com/watch?v=0kVUUVMMo- c
Periodic vs. Perpetual Inventory Accounting
https://www.youtube.com/watch?v=yv4E_d5atd4&t=58s
 Self-Assessment/Review Questions:
1. An inventory method in which a new average unit cost is
calculated every after purchase.
2. This method valued materials ending inventories at the most
recent purchase price.
3. This method assumes that the last materials inventory received
is issued first to production.
4. What are the four (4) methods of costing materials?

TOPIC 6: RECORDING OF TRANSACTIONS IN STOCK LEDGER CARD

Can you still recall the perpetual inventory system from your lesson in Fundamentals of Accounting?
What is the document being used by this system to keep track of the inflow and outflow of
inventory? Proceed to the learning activity below to review this concept.

Learning Activity 2-6

Read: Chapter 3 – Accounting for Materials, pp. 94-101

Optional Resources:
PowerPoint Presentation ( Google Sheet, Docs, Slides – Link to be provided)

Self-Assessment/Review Questions:
1. What inventory method generates the same materials used and
ending inventory balance from both periodic and perpetual inventory
systems?
2. Materials returned from production to the storeroom and
remain unissued at the end of the period produce different results of ending
inventory under ______________ periodic and perpetual system.
3. ______________ this method does not distinguish the old and new purchases,
and a new weighted average unit cost is calculated for the next issuance.

TOPIC 7: INVENTORY/STOCK DISCREPANCIES

What will happen if the records in the stock cards did not match the physical count? How do you
account for the difference? Learn more of this in the activity below:
Learning Activity 2-7

Read: Chapter 3 – Accounting for Materials, pp. 101-103

Flores (2016).Integrated Cost Accounting – Principles and Applications

Optional Resources:
PowerPoint Presentation ( Google Sheet, Docs, Slides – Link to be provided)

Self-Assessment/Review Questions:

1. What are the common causes of stock discrepancies?

2. _______________ loss or shortage is charged to factory overhead.
3. _______________ loss or shortage is charged to the current period under
“Inventory Loss or Shortage” account.

TOPIC 8: INVENTORY/STOCK VALUATION

Is the cost that you have computed in topic 5, the amount to be presented in the Financial
Statements? Recall the measurement principle that you have learned in your Financial Accounting
and Reporting Subject. Do the learning activity to help you remember the concept.

Learning Activity 2-8

Read: Chapter 3 – Accounting for Materials, pp. 104-107

Optional Resources:
PowerPoint Presentation ( Google Sheet, Docs, Slides – Link to be provided)
How to Calculate Net Realizable Value of Inventory watch this video.
Click: https://www.youtube.com/watch?v=krWqHWSCWf0 link to open resource

Self-Assessment/Review Questions:
1. ________________ is the estimated selling price in the ordinary
course, less estimated cost of completion and to make a sale.
2. ________________ is the actual purchase price of goods and
services at the time of procurement.
3. ________________ represents the cost to replace an existing
goods or inventory.
LET’S PRACTICE!

Solve at least 1 exercise/problem related to the topic. As part of summative/graded assessments, the
compilation of solved problems will be submitted at designated pick-up points or using the
communication channel available to you on a specified date.

Solve Problem:
P3-6 and P3-7 on page 116
Chapter 3 – Accounting for Materials
Integrated Cost Accounting – Principles and Applications By:
Marlon Oyzon Flores 2016 First Edition

KEY TAKEAWAYS:
Materials are the major component of the total costs of manufacturing a product, and the most
important assets in a manufacturing business. The total costs of a product can be reduced and
controlled by using the materials efficiently.

Raw Materials inventory is one of the three (3) types of inventory of manufacturing companies
that cannot be found in a merchandising company.

FIFO method did not always produce the same ending inventory balance for both periodic and
perpetual systems. It produces different ending inventory balances when there are materials
issued to production and subsequently returned to the storeroom and remain unissued at the
accounting period.

WRAP-UP SESSION AND CONSULTATION

Before this session, list down the topics that need further discussion.
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
________________________________________________

REFERENCES

Edspira. (2013). EOQ economic-order-quantity formula and explanation.

Retrieved from https://www.youtube.com/watch?v=AYpjPWmlyHM

Edspira. (2014). FIFO inventory method.

Retrieved from ttps://www.youtube.com/watch?v=Wa83L8TvoaM
Edspira. (2018). FIFO periodic inventory method.
Retrieved from https://www.youtube.com/watch?v=H-053SIwnJ8
Edspira. (2018). FIFO perpetual inventory method.
Retrieved from https://www.youtube.com/watch?v=cnVEC6lovOI
Edspira. (2014). Average cost inventory method.
Retrieved from https://www.youtube.com/watch?v=qAWVVw-dC5A&list=TLPQMjQwNjIwMjCFiS_pR2p
VzA&index=6
Edspira. (2018). Average cost periodic method.
Retrieved from https://www.youtube.com/watch?v=dU32hfszRs
Edspira. (2018). Average cost perpetual inventory method.
Retrieved from https://www.youtube.com/watch?v=0kVUUVMMo-c
Edspira. (2015). Periodic vs. perpetual inventory accounting.

Retrieved from https://www.youtube.com/watch?v=yv4E_d5atd4&t=58s