Notes, Exercises, Videos, Tests and Things to Remember on Introduction and Types of Materials
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The material includes raw material, components, tools, spare parts and consumable stores. Material which forms a part of a finished product is the first and most important element of a cost. Materials constitute such a significant part of product cost and since, this cost is controllable, proper planning, purchasing, handling and accounting are of great importance. A manufacturing company incurs different types of costs to produce a unit of output.
Such costs include material costs, labor costs and other costs. Among them, material costs are important because in many manufacturing companies, such costs are greater than all other costs combined.
In other words, proper control of materials is necessary from the time orders for the purchase of materials are placed with suppliers until they have been consumed. Material is one of the most important elements of production.
The term “material” refers to raw materials that are used for production, sub-assemblies and fabricated parts. Materials include components, consumable stores, maintenance material, spare parts and tools. They are used in manufacturing industry in their fundamental forms and they constitute a part of the physical form of a product. Wool, cotton, glass, sugarcane, rubber, etc. are some of the examples of material.
The costs of all such materials constitute part of the costs of jobs, operations, productions, or services for which they are utilized. Materials represent nearly 60%-70% of the costs of production in most manufacturing firms.
The term ‘materials’ is general, used in manufacturing concerns. Materials are the commodities or article used for processing in the factory to manufacture goods or rendering services. It includes physical commodities used to manufacture the final product. It is the first and most important element of cost.
Materials form a high proportion of the total cost of production. In certain cases, like sugar, materials may form as high as 60% of the total cost. The production is rarely less than 25% to 30%in the case of most products. This means that efficiency as regards materials is a vital factor in total cost of production and profits earned.
Any saving in materials will be directly reflected in profits. Therefore, it is necessary that maximum care should be devoted to the purchase, storing and use of materials. Raw materials, diesel, tools, etc. are the example of materials.
Normally, there are two types of materials in a manufacturing concern. They are as follows:
Direct materials means the materials which form part of the finished output and can be identified with finished product easily. For example; wood, plywood, adhesive, wood polish, nails, etc. in the case of manufacturing furniture, the cost of cotton in the case of manufacturing cotton yarn, the cost of yarn in case of manufacturing cloth, the cost of iron in case of manufacturing machinery, etc. The main feature of direct materials is that these enter into industry and form part of the finished product.
Indirect materials refer to the material costs, which cannot be allocated but can be apportioned to or absorbed by cost center or cost units. These are the materials, which cannot be traced as part of the product whose cost is distributed among the various cost centers or cost units on some equitable basis. Examples of indirect materials are coal and fuel for generating power, cotton waste, lubricating oil and grease used in maintaining the machinery, materials consumed for repair and maintenance work, dusters and brooms used for cleaning the factory, etc.
The main between direct material and indirect material are given below:
Basis of Difference
Part of product
Direct material remains as the part of the product.
Indirect material do not remain as the part of a product.
It can be easily identified with final products.
It cannot be easily identified with final products.
Nature of cost
It is a part of the prime cost.
It is a part of overhead.
The price of direct material is comparatively higher.
The price of indirect material is comparatively lower.
Effective control is needed for direct material.
Effective control is not needed for indirect material.
No system of costing can be said to be complete without a proper system of material control. It is a system which ensures that right quality of material is available in the right quantity of time and right place with the right amount of investment.
Materials control basically aims at efficient purchasing of materials, their efficient storing and efficient use. In other words, it is a systematic control over the storing, purchasing and consumption of materials so as to have the minimum cost of material. Materials control consists of controls at two levels: Quantity controls and cost controls.
Material control is needed for the following reasons:
Material control is essential and most important because of following reasons:
There must be a proper co-ordination and balance among the departments involved in purchasing, receiving and storing so that there will be a proper availability of materials for smooth production.
The purchase of materials should be made by authorized personnel of the department. A centralized purchase system is suitable for this.
It is possible to determine the quantity and value of each type of material in stock with perpetual inventory system as required.
The organization should be introduced for internal check system to ensure that all transaction involving materials are checked by authorized persons.
Standards forms for orders, issue, transfer of materials from one job to the other, transfer of material from the job to the stores, etc. should be used.
It is necessary to classify and codify the raw materials to take proper handling and storing of the materials properly. It also helps to maintain secrecy on the material.
There are different types of stock levels such as maximum stock, minimum stock, average stock, etc. The main objectives of fixing the stock level are to remove the unnecessary investment in materials and run the production smoothly.
Koirala, Yadav Raj, et al. Principles of Accounting-II Third Edition. Kathmandu: Asmita Books Publishers & Distributors (P) Ltd., 2067 B.S. 429-431.
Online accounting reading. 08 July 2016 <http://onlineaccountreading.blogspot.com/2014/09/accounting-for-materials.html#.V3-C6_l97IU>.