SYLLABUS CONTENT

Syllabus content relevant to Material Costing for MA1, MA2 & F2 includes Material Costing Terminologies, Stock
Valuations & Stock Controls.

BASIC TERMINOLOGIES

1. MATERIAL is the first and the prime element of a tangible product that may be of liquid, solid or gas
shape.

2. DIRECT MATERIAL are those material which are easily identified, conveniently measured and directly
charged to the cost of production. It is also part of the finished product.

3. INDIRECT MATERIAL are those materials which cannot be conveniently identified & allocated to the cost
centre or cost unit. Consumable stores, cotton waste, oil and lubricants etc are all indirect materials.

4. Raw Materials Storeroom & STORAGE COST are those items of expenditures a manufacturer bears to hold
the sufficient quantity of raw materials available with him to meet production requirements. This cost
may be of fixed or variable nature and usually comprises of the following:
a) Salary cost of storekeeper and his staff
b) Cost of utilities (electricity/power, gas, water, telecommunication, sewerage)
c) Rent (of fixed hired assets)
d) Depreciation (of fixed owned assets)
e) Cost of insurance materials & installations
f) Raw materials handling costs
g) Cost of disposal of wasted materials
h) Lighting, heating, ventilation and air-conditioning of stores
i) Security cost (both manual and electronic)

5. A MATERIALS REQUISITION NOTE OR FORM is a source document that the production department uses
to request materials for manufacturing process. The production manager usually fills out the materials
requisition form and delivers it to the materials or storage department where all of these raw materials
are stored under the supervision of Store Keeper.

6. A RAW MATERIALS PURCHASE REQUISITION is a formal request initiated by the storekeeper with the
Purchase Department under Centralized System for the purchase of specific items of raw materials.

7. A PURCHASE ORDER (PO) is a commercial document and first official offer issued by a buyer to a seller,
indicating types, quantities, and agreed prices for products or services.

8. An ORDER CONFIRMATION LETTER is a formal acceptance and communication from seller/supplier to

buyer that the PO has been received and will duly delivered at specified Period of Time at an agreed Price
Range.

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9. The time difference between ordering and delivering consignment at buyer’s place is called LEAD TIME
OR DELIVERY PERIOD. It may or may not be some specific days/weeks, usually a range of time is given.

10. Range of price at which material is usually being sold to buyers is the PRICE RANGE, price may fluctuate in
between.

11. A DISPATCH OR SENDING NOTE is issued by raw material supplier to the buyer informing him about the
consignment being sent to him.

12. A DELIVERY NOTE is an external document usually issued by supplier or the transporter/carrier for
physical acknowledgment of raw material consignment at its delivery address.

13. The GRN: GOODS RECEIVED NOTE acts as internal proof of goods received to process and match against
supplier invoices/purchase orders. The goods receipt note is an internal document produced after
inspecting delivery for proof of order receipt.

14. An INVOICE, bill or receipt is a commercial document issued by a seller to a buyer, relating to a sale
transaction and indicating the products, quantities, and agreed prices for products or services the seller
had provided the buyer.

15. A DEBIT NOTE is a document used by a vendor to inform the buyer of current debt obligations, or a
document created by a buyer when returning goods received on credit.

16. On the other hand a CREDIT NOTE is a document used by a vendor to inform the buyer of current
reduction in the debt obligations, or a document created by a buyer when notifying an understatement in
invoice amount.

17. A RAW MATERIALS TURNOVER or Turnout represents usage or consumption of raw materials in
production process. Upon this turnover Fast-moving Materials (having high turnover) and Slow-moving
Materials (having low turnover) are identified.

18. Raw material ORDERING COSTS is the cost associated with ordering materials to supplier.

19. A TENDER is a legal and formal offer or invitation to supply goods or services or to perform certain tasks
for a stated price. While the QUOTATION/Bid is simply a statement setting out the estimated cost for a
particular work, goods or service. The buyer has an unquestionable right to accept or reject it, or not
even respond at all.

20. STOCKTAKING is the physical counting and verification of stocks available in the storeroom.

21. JIT: JUST-IN-TIME: Under this approach an arrangement is made with the supplier to deliver materials as
and when required in flexible quantity right into the Plant.

22. STOCK DISCREPANCY is the difference between stocktaking and stock record figures.

23. A BIN CARD is a document that records the status of stock quantity in the storeroom on daily basis after
every receipts and issues of materials.

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24. A STORES LEDGER CARD is used in perpetual inventory system to record movement of stocks on daily
basis while keeping balance available after every transaction. A part from Bin Card, Stores Ledger Card is
a modified form that records quantity, price and cost simultaneously.

25. Raw material INPUT QUANTITY is the quantity of gross materials put into production, while the OUTPUT
QUANTITY is the quantity of materials become a part of the product and WASTAGES are losses in the
course of making a unit.

Ex-01:
Raw materials usage per unit 4 kilograms
Normal wastage of materials 20% of input quantity
Total units produced 200
Price of Raw Materials/Kg $5.00
The Cost of Materials Charged to Output ?

BUDGETED QUANTITY OF RAW MATERIALS PURCHASED & CONSUMED

Raw Materials Quantity Account

Opening Stock of Raw Materials XX Used/Issued/Consumed * XX
Purchased During the Period XX Closing Stock of Raw Materials XX
XX XX

Product Quantity Account

Opening Stock of Finished Units XX Units Sold XX
Produced During the Period XX Closing Stock of Finished Units XX
XX XX

* Consumed = Production x RM Usage Per Unit

Ex-02:
Opening Stocks Closing Stocks
Raw Materials 800 Kg 1,600 Kg
Finished Goods 1,000 Units 1,800 Units
Raw materials usage per unit 8 Kilograms
Sold units during the period 5,000 Units
Quantity of RM Ordered/Purchased ?

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Ex-03:
Opening Stocks Closing Stocks
Raw Materials 500 Kg 900 Kg
Finished Goods 5,000 Units 2,000 Units
Raw materials usage per unit 0.5 Kilograms
Sold units during the period 15,000 Units
Quantity of RM Ordered/Purchased ?
Price of Raw Materials $4.00/Kg

26. The concept of FREE STOCK denotes the quantity of raw materials available with the storekeeper to meet
future requisitions. This is calculated using the following formula:

Free Stock = Stock-in-hand + Stock-in-transit – Stock Requisitioned

Ex-04:

Raw materials Stock (Beginning) 1,500 kilograms

Purchased to date 4,000 kilograms
Issued to Plant, so far 3,500 kilograms
Raw materials ordered, not yet received from supplier 1,200 kilograms
Booked by Plant through advance requisitions, not yet issued 1,700 kilograms
Stocks-in-hand Quantity ?
Quantity of Free Stock ?

STOCK VALUATION: PERPETUAL/BALANCING/CONTINUOUS/RUNNING SYSTEM

Ex. 05 Following data relate to XYZ Limited for the month of October 2016. You, as a newly inducted Trainee
Accountant, are required to calculate, by preparing Stores Ledger Account, the following under the three
methods of Perpetual System, i.e., FIFO, LIFO & AVCO.
a) The cost of raw material at the start of the month (Beginning Stock)
b) The cost of raw material purchases
c) The cost of raw material issues/cost of production materials/cost of consumption
d) The value of closing stock

DATE NARRATIVE QUANTITY (KG) PRICE ($)

01/10 Beginning stock 10 3.00
05/10 Purchased on cash 50 4.00
09/10 Issued to plant for direct use 40 -
18/10 Purchased on account 80 8.00
25/10 Issued to plant for indirect use 60 5.00

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 Stores Ledger Account – FIFO METHOD
Purchases Issues Stock Balance
Date
Qty Price Cost Qty Price Cost Qty Price Cost

Stores Ledger Account – LIFO METHOD

Purchases Issues Stock Balance
Date
Qty Price Cost Qty Price Cost Qty Price Cost

Stores Ledger Account – AVCO METHOD

Purchases Issues Stock Balance
Date
Qty Price Cost Qty Price Cost Qty Price Cost

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HOME ASSIGNMENT:

ABC plc furnishes the following data for the month of May 2016.
May 01 Beginning inventory 200 Kg @ $2.00 per kilogram
May 08 Purchased on account 300 Kg @ $3.00 per kilogram
May 10 Purchased on cash 100 Kg @ $2.50 per kilogram
May 15 Issued to factory for direct use 300 kilogram
May 19 Issued to factory for indirect use 250 kilogram
May 28 Purchased on account 150 Kg @ $4.00 per kilogram

Compute the amount of closing stock under Perpetual/Running/Continues System using following methods:
a) FIFO
b) LIFO
c) Weighted Average or AVCO Method

Stores Ledger Account – FIFO METHOD

Purchases Issues Stock Balance
Date
Qty Price Cost Qty Price Cost Qty Price Cost

Stores Ledger Account – LIFO METHOD

Purchases Issues Stock Balance
Date
Qty Price Cost Qty Price Cost Qty Price Cost

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 Stores Ledger Account – AVCO METHOD
Purchases Issues Stock Balance
Date
Qty Price Cost Qty Price Cost Qty Price Cost

STOCK VALUATION: PERIODIC/PHYSICAL SYSTEM

Ex. 06 ABC plc furnishes you the following data for the upcoming period. During the period out of the total
quantity of stock available 230 Liters have been used in production, leaving the balance of 70 Liters in the
Closing Stock of raw materials.

Under the three methods of FIFO, LIFO & AVCO and Periodic System calculate..
a) The cost of raw material at the start of the month (Beginning Stock).
b) The cost of raw material purchases.
c) The cost of raw material issues.
d) The value of closing stock.

PURCHASED
DATE TRANSACTION TOTAL COSTS
QUANTITY (Liters) PRICE ($)
01/10 Beginning stock 30 2.00
08/10 Purchased on cash 80 4.00
22/10 Purchased on account 150 3.00
25/10 Purchased on account 40 2.40

FIFO Method: Cost of Issues FIFO Method: Cost of Closing Stocks

LIFO Method: Cost of Issues LIFO Method: Cost of Closing Stocks

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 AVCO Method: Cost of Issues & Stock

Weighted Average Cost Per Liter = Total Cost of Raw Materials Available
Total Quantity of Raw Materials Available

HOME ASSIGNMENT
Following data for the month of March 2016 relates to XYZ Limited.

DATE DESCRIPTION QUANTITY & PRICE

March 01 Beginning inventory 200 kilograms @ $2.00 per kilogram
March 05 Purchased on account 300 kilograms @ $3.00 per kilogram
March 12 Purchased on cash 100 kilograms @ $2.50 per kilogram
March 18 Purchased on account 200 kilograms @ $1.50 per kilogram

During the period 550 Kilograms of raw materials were issued to factory for both direct and indirect usage.

Compute the amount of closing stock under Periodic System and FIFO, LIFO & AVCO Methods

SCHEDULE SHOWING TOTAL COST OF RAW MATERIALS AVAILABLE FOR USE

Date Description Quantity & price Cost
March 01 Beginning inventory 200 kilograms @ $2.00 per kilogram
March 05 Purchased on account 300 kilograms @ $3.00 per kilogram
March 12 Purchased on cash 100 kilograms @ $2.50 per kilogram
March 18 Purchased on account 200 kilograms @ $1.50 per kilogram

Stock Valuation Under FIFO Method:

Date Description Quantity & price Cost

Stock Valuation Under LIFO Method:

Date Description Quantity & price Cost

Stock Valuation Under AVCO Method:

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COMPARATIVE INCOME STATEMENT & IMPACT ON PROFIT:
Based on Ex-05 above, assume the quantity issued as quantity sold at unit selling price of $10. Prepare a comparative income
statement under FIFO, LIFO & AVCO valuations.

FIFO LIFO AVCO

Sales (100 x $10) 1,000 1,000 1,000
Cost of Goods Sold:
Opening Stock 30 30 30
Purchases 840 840 840
RM Available For Use 870 870 870
Closing Stock (320) (230) (287)
Cost of Goods Sold (550) (640) (583)
Gross Profit 450 360 417

Based on the above statement find the following:

(a) Which method shows the highest and the lowest amount of inventory?
(b) Which method shows the highest and the lowest amount of profit?
(c) The difference in inventory between FIFO & LIFO and LIFO & AVCO?
(d) The difference in profit between FIFO & LIFO and LIFO & AVCO?

PRICE TREND & METHODS RECOMMENDED:

Price Trend Recommended Method

Increasing LIFO
Decreasing FIFO
Fluctuating AVCO
Stable or Constant Any Method

INCREASING PRICES & IMPACT ON PROFIT:

Following data reflect the price trend of raw materials being used in production:

Transaction Quantity (Kg) Price Per Kg ($) Cost of Purchases ($) Average Price Level ($)
Purchased 10 2.00 20.00 2.00
Purchased 10 3.00 30.00 2.50
Purchased 10 4.00 40.00 3.00
Purchased 10 5.00 50.00 3.50
Total 40 140.00
Issued (25)
Closing Stock 15

1. Calculate the cost of production under FIFO, LIFO and AVCO.

2. Arrange them in descending order on the basis of profit or closing stock.

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DECREASING PRICES & IMPACT ON PROFIT:
Following data reflect the price trend of raw materials being used in production:

Transaction Quantity (Kg) Price Per Kg ($) Cost of Purchases ($) Average Price Level ($)
Purchased 10 5.00 50.00 5.00
Purchased 10 4.00 40.00 4.50
Purchased 10 3.00 30.00 4.00
Purchased 10 2.00 20.00 3.50
Total 40 140.00
Issued (25)
Closing Stock 15

1. Calculate the cost of production under FIFO, LIFO and AVCO.

2. Arrange them in descending order on the basis of profit or closing stock.

FLUCTUATING PRICES & IMPACT ON PROFIT:

Following data reflect the price trend of raw materials being used in production:

Transaction Quantity (Kg) Price Per Kg ($) Cost of Purchases ($) Average Price Level ($)
Purchased 10 5.00 50.00 5.00
Purchased 10 2.00 20.00 3.50
Purchased 10 4.00 40.00 3.70
Purchased 10 3.00 30.00 3.50
Total 40 140.00
Issued (25)
Closing Stock 15

1. Calculate the cost of production under FIFO, LIFO and AVCO.

2. Arrange them in descending order on the basis of profit or closing stock.

CHANGES IN PRICE LEVELS & IMPACT ON PROFIT:

PRICE TREND FIFO AVCO LIFO
Increasing 1 2 3
Decreasing 3 2 1
Fluctuating 3 2 1

EXAMINATION QUESTIONS BASED ON PRICE TRENDS:

1. In a period of rising material prices, which method will give the higher amount of profit?
2. In a period of inflated prices, which method will show the lower amount of profit?
3. In a period of deflationary trend in prices, which method will show the moderate amount of profit?
4. In a period of fluctuating prices, which method will show the higher amount of cost of production?
5. In a period of inflationary trend of prices, which method will give the lowest amount of closing stock?
6. In a period of decreasing material prices, which method will give the higher amount of profit?
7. In a period of deflated prices, which method will show the lower amount of profit?
8. In a period of fluctuating trend in prices, which method will show the moderate amount of profit?
9. In a period of stable prices, which method will show the higher amount of cost of production?
10. In a period of growing purchasing power of currency, which method will give the lowest amount of closing
stock?

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MATERIAL COSTING ENTRIES UNDER COST OR INTERLOCKING SYSTEM

(a) Raw material purchased on account or on cash.

Raw Material Control Account Dr
Cost Ledger Control Account (CLCA)/Cash/Bank/Payables Cr

(b) Raw material issued to factory for direct use.

Work in Progress Control Account Dr
Raw Material Control Account Cr

(c) Raw material issued to factory for indirect or general use.

Factory Overheads Control Account Dr
Raw Material Control Account Cr

(d) Raw material returned from the factory as defective.

Raw Material Control Account Dr
Factory Overheads Control Account (For Indirect Material) Cr
Work in Progress Control Account (For Direct Material) Cr

(e) Raw material returned to supplier as defective, whether purchased on account or on cash
basis.
Cost Ledger Control Account (CLCA)/Cash/Bank/Payables Dr
Raw Material Control Account Cr

EXAMPLE: ABC company provides you the following transactions for the month of May, 2017:
1. Purchases of raw materials on credit $2,000.
2. Purchases of raw materials on cash $3,000.
3. Defective materials returns from Plant to storeroom worth $400 earlier issued as direct material.
4. Defective materials returns to supplier $500 that’s earlier purchased on cash.
5. Stores issues of direct materials $700.
6. Stores issues of indirect materials $200.
7. Supplier has been paid $1,000 as part-payment.

Required: Pass necessary entries & find the closing balance in the Raw Materials Control Account?

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 EXAMINATION QUESTIONS
01. Bringer Mann plc is a small importing company. On 1 st November, it had an opening balance of 50 units of
Commodity-X, valued at $900. On 12th November, it purchased in a bulk a further 250 units of Commodity-X for a
gross price of $5,000. It received a bulk purchase discount of 5% and a further discount of 3% on the gross price for
making early cash payment. On 29th November, it sold 200 units of Commodity-X for a sales value of $6,600.

Using the FIFO method of valuation, the gross profit in the company’s trading account for November for the sale of
Commodity-X was:
(a) $2,700 (c) $2,850
(b) $2,790 (d) $2,940

02. If a company wanted to ensure that its cost of production included the most recent cost for material, it would use
(a) Standard cost (c) Weighted average cost
(b) First-In-First-Out (FIFO) (d) Last-In-First-Out (LIFO)

03. One-7 buys and resells a single product, a riding helmet “RIDER”. On 1 May 2002 the company had 300 helmets in
stock, with a recorded cost value of $30 each. Receipts and issue/sales of stocks during the month were as follows:

RECEIPTS SALES
Date Units Units Cost ($) Units
May 03, 2002 600 32 -
May 12, 2002 - - 700
May 17, 2002 300 34 -
May 24, 2002 200 35 -
May 29, 2002 - - 400

The gross profit from sales for the month was calculated by the new Cost Accountant to be $19,000. It has since been
found that LIFO method of valuation the cost of sales was in use, but FIFO method should have been used.

As a consequence, the gross profit, i.e., $19,000 has been…

(a) Understated by $1,000 (c) Overstated by $1,000
(b) Understated by $1,800 (d) Overstated by $1,800

04. Failure to record stock returned to stores will result in which of the following if a physical stock-take was not
undertaken?
STOCK QUANTITY PRODUCTION COSTS
(a) Higher than shown on record card Higher than it should be
(b) Lower than shown on record card Higher than it should be
(c) Lower than shown on record card Lower than it should be
(d) Higher than shown on record card Lower than it should be

05. The effect of using the Last-In-First-Out (LIFO) method of stock valuation rather than the First-In-First-Out (FIFO)
method in a period of rising prices is…
(a) To report lower profits and a lower value of closing stock
(b) To report higher profits and a higher value of closing stock
(c) To report lower profits and a higher value of closing stock
(d) To report higher profits and a lower value of closing stock

06. In a period of rising raw material purchase prices, production costs will be lower using:
(a) FIFO
(b) LIFO
(c) HILO
(d) Weighted Average

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07. RED & REED Limited uses the LIFO system for valuing raw material issues from stores to production.

The Materials account had an opening value of $850 on 1st October 2001:

500 units at $1.20 purchased on 12th September 2001

200 units at $1.25 purchased on 27th September 2001

The following receipts and issues were recorded during October:

8th October 2001 Receipts 600 units $1.30 per unit
20th October 2001 Receipts 600 units $1.50 per unit
29th October 2001 Issues 1,500 units

What was the total value (to the nearest $) of the issues on 29th October?
(a) $1,930 (c) $1,997
(b) $1,969 (d) $2,050

08. In a period of rising raw material purchase prices, raw material stock values will be higher using:
(a) FIFO (c) HILO
(b) LIFO (d) Weighted Average

09. Which of the following statements is correct?

(a) A Stores Ledger Account will be updated from a goods received note only.
(b) A Stores Requisition will only detail the type of product required by a customer.
(c) The term LEAD TIME is best used to describe the time between receiving an order and paying for its invoice.
(d) To make an issue from stores authorization should be required.

10. The stock records for one specific stores item for last month show the following information:

DATE UNITS RECEIVED UNITS ISSUED

4th 150
13th 600
15th 200
22nd 250

The stock at the beginning of last month consisted of 200 units valued at $5,200. The receipts last month cost $32·50
per unit. Using the FIFO method of valuation, what was the total cost of last month’s issues?
(a) $18,200
(b) $18,300
(c) $18,525
(d) $19,500

11. Which department would normally be responsible for completing a standard purchase requisition for goods in a service
organization?
(a) The buying (purchasing) department
(b) The department that requires the goods
(c) The goods inwards department
(d) The accounting department staff.

12. If FIFO rather than LIFO was used when material prices are falling, which of the following combinations would be
correct?
Production Costs Profits
(a) Will be lower Will be higher
(b) Will be higher Will be lower
(c) Will be lower Will be lower
(d) Will be higher Will be higher

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DATA FOR QUESTIONS 13 to 16 BELOW:
Broughton Limited manufactures a single product using Material-X. The following information relates to the receipts and issues
of Material-X during the year ended 31st December 2002.

MATERIAL-X STOCK CARD

Receipts Issued
Date Details Units Unit Cost ($) Total Costs ($) Units
01/01/2002 Balance B/d 100 4.50 450 -
03/02/2002 Issued - - - 70
04/03/2002 Received 40 5.20 208 -
06/06/2002 Issued - - - 20
17/08/2002 Received 50 4.90 245 -
10/10/2002 Issued - - - 30
17/11/2002 Received 20 5.35 107 -
02/12/2002 Issued - - - 30

Calculate separately the cost of each issue during 2002 using:

13. FIFO: First-In, First-Out Method of pricing

14. LIFO: Last-In, First-Out Method of pricing

15. The Average Cost Method of pricing, where the average cost is calculated upon each stock movement (i.e., The
Weighted Average Method).

16. Which method will give the highest cost of production per unit?

Note:
Stock cards are not required, but may be produced if this will assist in answering the question.
Workings must be shown.

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