MATERIALS COSTING FNSACC507A Provide Management Accounting - PowerPoint PPT Presentation

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 MATERIALS WORK IN PROGRESS FINISHED GOODS LABOUR OVERHEADS

DIRECT versus INDIRECT (materials + labour) DIRECT INDIRECT Can be easily and conveniently Cannot be easily and conveniently traced to a particular cost object (in traced to a particular cost object (in this case, a particular job order). 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 e.g. nails & glue used to assemble furniture wooden furniture; factory supervisor’s salary

Accounting for M A T E R I A L S S

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

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 In accounting for materials, there are two (2) main activities: � 1. PURCHASE 2. ISSUE (usage) Storeroom puts in request with Purchasing Production department requests department for materials to be ordered materials to be issued to production à purchase requisition 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. All material movements in a factory need to be supported by appropriately authorised documentation.

2. Raw materials cycle In accounting for materials, there are some adjustments that may need to be made: � 1. PURCHASE 2. ISSUE (usage) Return of materials to supplier Return of materials to storeroom à debit note (issued by purchaser) + credit à materials returned to store form note (issued by supplier) Material transfers e.g. from JOB1 to JOB2 à materials transfer note 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 Movements in inventory are NOT out of the storeroom are continuously tracked. They are only continuously tracked. determined at the end of the • Records are maintained that accounting period . enable the balance of inventory on hand to be determined at any time .

Inventory recording systems PERPETUAL PERIODIC An individual record is kept for A record is maintained of: each inventory item showing: 1. Opening balance of inventory item à quantity + value purchased (from physical stocktake records) à quantity + value issued to 2. Purchases of materials production (from supplier invoice) à balance of inventory on 3. Closing balance of inventory item hand after each transaction (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