Material Cost

Material Cost

Material Consumed =
Opening Stock of Material
+ Purchases of Material
- Closing Stock of Material
 Example 1
Determine the cost of raw material and value of closing stock for given period.
Opening balance of raw material 10 kgs at Rs. 1,000
Purchases during period 100 kgs at the rate of Rs. 100 per kg
Carriage inwards charges for period Rs. 600
Raw material consumed during period 105 kgs

Particulars Qty (Kg) Rate Amount (Rs)

Purchase 100 100 10,000
Add Carriage inwards 600
Cost of raw material purchased 100 106 10,600
Add :- Opening balance 10 100 1,000
Raw material available for consumption 110 11,600
Less :-Raw material consumed 105 ???? ????
Closing Stock 5 ???? ????
 Example 1
Particulars Qty (Kg) Rate Amount (Rs)
Purchase 100 100 10,000
Add Carriage inwards 600
Cost of raw material purchased 100 106 10,600
Add :- Opening balance 10 100 1,000
Raw material available for consumption 110 11,600
Less :- Raw material consumed 105 ???? ????
Closing Stock 5 ???? ????

How is 105 kg raw material consumed ? What is value of Closing stock

10 x 100 + 95 x 106 = 11,070 5 Kg at 530
Or 0 x 100 + 105 x 106 = 11,130 5 Kg at 470
Or 5 x 100 + 100 x 106 = 11,100 5 Kg at 500
……. many more options !!!!
How do we address this?
 Material Issue Pricing
1. First in First out (FIFO)
Material purchased First are issued first.
2. Last in First out (LIFO)
Material purchased last are issued first
3. Simple Average method
Issues are valued at average price
4. Weighted Average method
Total cost of material available for issue divided by
the quantity available.
 Material Issue Pricing
Ex 1 - FIFO method
Raw material available 110 kgs, Raw material consumed 105 kgs
10kg from Opening stock and 95 kg from purchase
Closing stock 5 kg remaining from unused purchase

Particulars Qty Rate Amount (Rs)

(Kg)
Purchase 100 100 10,000
Add Carriage inwards 600
Cost of raw material purchased 100 106 10,600
Add :- Opening balance 10 100 1,000
Raw material available for consumption 110 11,600
Raw material consumed 10 x 100
95 x 106
105 11,070
Closing Stock 5 530
 Material Issue Pricing
Ex 1 - LIFO method
Raw material available 110 kgs, Raw material consumed 105 kgs
100kg from purchase and 5 kg from Opening stock
Closing stock 5 kg remaining from unused Opening Stock

Particulars Qty Rate Amount (Rs)

(Kg)
Purchase 100 100 10,000
Add Carriage inwards 600
Cost of raw material purchased 100 106 10,600
Add :- Opening balance 10 100 1,000
Raw material available for consumption 110 11,600
Raw material consumed 5 x 100
100 x 106
105 11,100
Closing Stock 5 500
 Material Issue Pricing
Ex 1 - Simple average method
Raw material available 110 kgs, Raw material consumed 105 kgs
Average issue price = ( 100 + 106 ) / 2 = 103
Raw material consumed = 105 x 103 = 10,815

Particulars Qty Rate Amount (Rs)

(Kg)
Purchase 100 100 10,000
Add Carriage inwards 600
Cost of raw material purchased 100 106 10,600
Add :- Opening balance 10 100 1,000
Raw material available for consumption 110 11,600
Raw material consumed
105 103 10,815
Closing Stock 5 785
 Material Issue Pricing
Ex 1 - Weighted average method
Raw material available 110 kgs, Raw material consumed 105 kgs
Weighted average issue price = ( 10x100 +100x106 ) / 110 = 105.4545
Raw material consumed = 105 x 105.4545 = 11,072.72

Particulars Qty Rate Amount (Rs)

= 10,815 (Kg)
Purchase 100 100 10,000
Add Carriage inwards 600
Cost of raw material purchased 100 106 10,600
Add :- Opening balance 10 100 1,000
Raw material available for consumption 110 11,600
Raw material consumed
105 105.45 11,072.72
Closing Stock 5 527.28
 Example 2
Determine the cost of raw material issued and value of closing stock for
given period. Using FIFO, LIFO, Simple average and Weighted average
method.
Opening balance of raw material 20 kgs at Rs. 2,000
Purchased 50 kgs at the rate of Rs. 105 per kg
Issued 40 kgs
Purchased 60 kgs at the rate of Rs. 102 per kg
Issued 70kgs

Try this at home.

 Example 3
Prepare a statement for given period showing the pricing of issues, balance
stock value on the basis of a) Simple vaverage, b) weighted average c) FIFO
and d) LIFO method.
2016 March 1 Purchased 100 units @ Rs 10 each
March 2 Purchased 200 units @ Rs 10.2 each.
March 5 Issued 250 units to Job X vide M.R.No.12
March 7 Purchased 200 units @ Rs 10.50 each
March 10 Purchased 300 units @ Rs 10.80 each
March 13 Issued 200 units to Job Y vide M.R.No.15
March 18 Issued 200 units to Job Z vide M.R.No.17
March 20 Purchased 100 units @ Rs 11 each
March 25 Issued 150 units to Job K vide M.R.No.25
 Sol. Example 3
Simple average method
Date Receipts Issue Balance
Qty. Price Value Qty. Price Value Qty. Value

Working Notes:
 Sol. Example 3
Simple average method
Date Receipts Issue Balance
Qty. Price Value Qty. Price Value Qty. Value

2016 March 1 100 10 1000 -- -- -- 100 1000

March 2 200 10.2 2040 -- -- -- 300 3040
March 5 -- -- -- 250 10.10 (1) 2525 50 515
March 7 200 10.5 2100 -- -- -- 250 2615
March 10 300 10.8 3240 -- -- -- 550 5855
March 13 -- -- -- 200 10.50 (2) 2100 350 3755
March 18 -- -- -- 200 10.65 (3) 2130 150 1625
March 20 100 11 1100 -- -- -- 250 2725
March 25 -- -- -- 150 10.90 (4) 1635 100 1090

Working Notes
(1) Price = (10 + 10.2) / 2 = 10.10 (2) Price = (10.2 + 10.5 + 10.8) / 3 = 10.5
(3) Price = (10.5 + 10.8) / 2 = 10.65 (4) Price = (10.8 + 11) / 2 = 10.90
 Sol. Example 3
Weighted average method
Date Receipts Issue Balance
Qty. Price Value Qty. Price Value Qty. Value

2016 March 1 100 10 1000 -- -- -- 100 1000

March 2 200 10.2 2040 -- -- -- 300 3040
March 5 -- -- -- 250 10.13 (1) 2533 50 507
March 7 200 10.5 2100 -- -- -- 250 2607
March 10 300 10.8 3240 -- -- -- 550 5847
March 13 -- -- -- 200 10.63 (2) 2126 350 3721
March 18 -- -- -- 200 10.63 (3) 2126 150 1595
March 20 100 11 1100 -- -- -- 250 2695
March 25 -- -- -- 150 10.78 (4) 1617 100 1078

Working Notes
(1) Price = 3040/300 = 10.13 (2) Price = 5847/550 = 10.63
(3) Price = 3721/350 = 10.63 (4) Price = 2695 /250 = 10.78
 Sol. Example 3
FIFO method
Date Receipts Issue Balance
Qty. Price Value Qty. Price Value Qty. Value

2016 March 1 100 10 1000 -- -- -- 100 1000

March 2 200 10.2 2040 -- -- -- 300 3040
March 5 -- -- -- 250 100 10 1000
150 10.20 1530 50 510
March 7 200 10.5 2100 -- -- -- 250 2610
March 10 300 10.8 3240 -- -- -- 550 5850
March 13 -- -- -- 200 50 10.2 510
150 10.5 1575 350 3765
March 18 -- -- -- 200 50 10.5 525
150 10.8 1620 150 1620
March 20 100 11 1100 -- -- -- 250 2720
March 25 -- -- -- 150 150 10.8 1620 100 1100
 Sol. Example 3
LIFO method
Date Receipts Issue Balance
Qty. Price Value Qty. Price Value Qty. Value

2016 March 1 100 10 1000 -- -- -- 100 1000

March 2 200 10.2 2040 -- -- -- 300 3040
March 5 -- -- -- 250 200 10.2 2040
50 10 500 50 500
March 7 200 10.5 2100 -- -- -- 250 2600
March 10 300 10.8 3240 -- -- -- 550 5840
March 13 -- -- -- 200 200 10.8 2160 350 3680
March 18 -- -- -- 200 100 10.8 1080
100 10.5 1050 150 1550
March 20 100 11 1100 -- -- -- 250 2650
March 25 -- -- -- 150 100 11 1100
50 10.5 525 100 1025
 Example 4
Prepare a statement for given period showing the pricing of issues, balance
stock value on the basis of a) Simple vaverage, b) weighted average c) FIFO
and d) LIFO method.
2018 Jan 1 Received 1000 units @ Rs 100 each
Jan 10 Received 260 units @ Rs 105 each.
Jan 20 Issued 700 units to production
Feb 4 Received 400 units @ Rs 115 each
Feb 21 Received 300 units @ Rs 125 each
March 16 Issued 620 units to production
April 12 Issued 240 units to production
May 12 Received 500 units @ Rs 110 each
May 25 Issued 380 units to production
 Material Issue Pricing
First in First out (FIFO)
Advantages:
Most suitable in Perishable product as pricing method more on less corresponds with actual
movement of Materials.
Simple to understand.
All issues are priced at cost price, hence entire cost of materials are recovered.
The method results in lower book profits and hence lower tax liability during the period of falling
prices.
The value of closing stock is realistic as it is valued at the price of latest purchases.
Disadvantages:
The issue price differs for different issues of the same quality of raw material at the same time.
Therefore cost comparisons get distorted.
During the period of rising prices, it results in higher book profits and therefore high tax liability.
This is because closing stock appearing on the credit side is valued at higher prices and the cost of
production appearing on the debit side is valued lower prices.
For pricing one material requisition more than one price may be involved and hence leads to
higher probability of clerical errors.
 Material Issue Pricing
Last in First out (LIFO)
Advantages:
Method gives good matching of sales and cost of sales.
Method is simple to understand.
Issues are priced at cost and hence entire cost of material used is recovered from
production.
It results in lower book profits and hence lower tax.
Disadvantages:
The issue price differs in different issues and hence distorts cost comparison.
During the period of falling prices this method gives high profits and higher tax
liability.
For pricing are material requisition more than one prices may be involved and
hence higher probability of clerical errors in calculations.
 Material Issue Pricing
Simple Average method
Advantages:
Method is simple to understand and operate.
This method is useful, when the materials are received in uniform lots of similar quantity
and prices do not fluctuate considerably.
Disadvantages:
Prices are approximate .
Materials are not charged out at actual cost.
 Material Issue Pricing
Weighted average method
Advantages:
Method gives good matching of sales and cost of sales.
Method is simple to understand.
Issues are priced at cost and hence entire cost of material used is recovered from
production.
It results in lower book profits and hence lower tax.
Disadvantages:
Fresh rate needs to be calculated after every fresh receipt of materials, which
generally comes in fraction.
Issue price is different from the actual cost of materials for the individual issues
and so some nominal profit or loss will appear simply because of the use of average
method.
 Inventory Control
Maximum Level
The Maximum Level indicates the maximum quantity of an item of
material that can be held in stock at any time. The stock in hand is regulated
in such a manner that normally it does not exceed this level.
Maximum Level = Re-Order Level + Re-Order Qty – (Minimum Rate
of Consumption X Minimum Re- Order Period)

Minimum Level
The Minimum Level indicates the lowest quantitative balance of an item
of material which must be maintained at all times so that there is no
stoppage of production due to the material being not available.
Minimum Level = Re-Order level – (Normal Rate of Consumption X
Normal Re-Order Period)
 Inventory Control
Re-order Level
When the stock in hand reach this level, store keeper initiates the
action to replenish the material. Difference between the Re-order Level
and Minimum Level should be sufficient to last production till supply of
material is received.

Re-Order level = Maximum Rate of Consumption X Maximum Re-Order

period (lead time)
Or
Re-Order level = Minimum Level + (Normal Rate of Consumption × Normal
Re-order Period)
 Example 5

The components A and B are used as follows:

Normal usage .... 300 units per week each
Maximum usage .... 450 units per week each
Minimum usage .... 150 units per week each
Reorder Quantity .... A 2,400 units; B 3,600 units.
Reorder period .... A 4 to 6 weeks, B 2 to 4 weeks.
Calculate for each component:
(a)Re-order Level (b) Minimum Level (c) Maximum Level
(d) Average Stock Level.
 Sol Example 5
Particulars A B
Reorder Level 2700 units 1800 units
[Max. Consumption × Max. Re-order Period] (450 × 6) (450 × 4)

Minimum Level 1200 units 900 units

[ROL – (Normal Consumption × Normal Re- [2700 – (300×5)] [1800 – (300×3)]
order period)]

Maximum Level 4500 units 5100 units

[ROL + ROQ – (Min. Consumption × Min. Re- [2700 + 2400 – [1800 + 3600 –
order Period)] (150×4)] (150 × 2)]

Average Stock Level 2850 units 3000 units

[Min. Level + Max. Level] / 2 [4500 + 1200]/2 [5100 + 900]/2
0r (or) (or)
[Min. Level + ½ Re-order Quantity] 2400 units 2700 units
1200 + ½ (2400) 900 + ½ (3600)