MODULE 4:- MATERIALS AND

LABOUR COST CONTROL

course CODE :- BCL102

SUBJECT :- COST ACCOUNTING
BY VAISHNAVI NARENDRA
MATERIAL COST AND CONTROL

 MATERIAL :- A tangible product or a substance where a

skill is required to incorporated to turn it into a finished
good, This term might also refer to raw materials which is
used for production, subassemblies and fabricated parts.
 Inventory :- This refers to the raw materials, work in
progress goods and also all the finished goods that
considered to be a portion of business operations; the
assets which are ready for sale.
 Material control :- This aims at the purchasing of
materials and also effective storing and also uninterrupted
production and effective consumption.
OBJECTIVES OF AN EFFECTIVE MATERIAL
CONTROL
 Materials of desired quality would be accessible
when there is a need for an effective and an
uninterrupted production.
 Purchase of materials should be made under most
favorable prices that too in best possible terms.
 The materials must be protected against, theft,
fire etc.
 Materials are to purchased only when there is a
need for any economic activity.
PRICING ISSUES OF MATERIAL

 The pricing issues of materials might be fluctuating; change

from time to time.
 There actual costs is taken on different values.
 So the material pricing system should be the simplest and most
effective one.

METHODS INVOVLED IN EVALUATION OF STOCK

FIRST IN FIRST OUT :-FIFO
LAST IN FIRST OUT :- LIFO
WEIGHTED AVERAGE COST :- WAVCO
SPECIFIC IDENTIFICATION /UNIT COST METHOD
FIRST IN FIRST OUT

 This is a particular method where the first stock

which is received is sold first.
 The Cost of materials is based on the oldest
prices.
 The closing stock is valued at the most recent
prices
 FIFO
BEGINING GOODS ENDING
*

*
INVENTORY AVAILABLE INVENTORY
FOR SALE
+ +
NET COST OF
PURCHASES GOODS SOLD
ADVANTAGES AND DISADVANTAGES OF
FIFO
 ADVANTAGES OF FIFO METHOD
 FIFO method saves money and also time in calculating the exact cost of the inventory
being sold because the cost is always having a relevance on the former cash flows of
the purchases which are used first.
 The concept is comparatively simple and easy to understand , any layman can
understand with a little knowledge.
 This method is the most reliable practical approach, all the hidden costs are also taken
into account apparently FIFO rectifies the manner.
 It is widely used method and the approach of valuation will increase the quotient of
reliability and consistency
 The policy under FIFO claims no vagueness with respect to values determined under
cost of sales, figures profit/loss statement. So there is no manipulation being
witnessed in the financial statements.
 Cost of sales = Opening stock+ Purchases – Closing stock
 DISADVANTAGES OF FIFO METHOD
 One of the biggest disadvantage is the valuation of inventory stock at the
times of inflation; results in higher profit zone subsequently there is a higher
liaison of “tax liabilities”. This can result in higher cash flows and additional
charges on tax.
 FIFO method is not suitable when there is a circumstance called “higher
inflation” , because there is no reliable pattern of inflation of prices which
would inflate drastically.
 This method is not suitable whenever there is a fluctuation of prices because
this results in misstated profits and sometimes the pricing value might be
clumsy or cumbersome.
LAST IN FIRST OUT (LIFO)

 This method assumes that last stock to be

received and it had to be sold first.
 The cost of materials is based on the recent
prices.
 The closing stock is valued at the oldest prices.
 LIFO
LIFO
• BEGINNING • ENDING
INVENTORY • Goods INVENTORY
•+ available •+
for sale
NEW COSTOFGOODS
PURCHASES SOLD
ADVANTAGES AND DISADVANTAGES OF
LIFO METHOD
 ADVANTAGES OF LIFO
 LIFO method matches the most recent costs against current revenues
 It helps in reducing the inventory profits by matching the most recent
costs against the revenues, There is a reduction of understatement of
cost of goods sold and also an overstatement of profit.
 There is a tax benefit and improvisation of cash flows
 This method is very much reliable during “inflation”, since the current
purchases at higher prices are matched against the revenues .
 This method can be adapted even when there is a fluctuation of
prices, so the net income of a company that uses LIFO is very much
unaffected by the decline of prices in future.
 DISADVANATGES OF LIFO METHOD
 Reduced earnings in inflationary times, This method would reduce the
reported earnings at the time of inflation, therefore many companies would
fear that this would have a negative impact on their profits and apparently
they would also loose many investors.
 There is an understatement of inventory, because it is based on the oldest
costs , so the working capital position looks even more worse than the actual
reality.
 One of the major disadvantage in LIFO system is the manipulation of data, the
reported earnings can be manipulated by changing the purchase pattern in
the end of the year.