Grade 12 Account Note

Accounting for Material


Commodities which are used in the production of finished product are called materials. All those items, which are used in the process of producing goods or rendering services, are called materials. It includes all raw materials and supplies like lubricants, fuel and loose tools. Sometimes materials are also denoted by the term inventory of stores.

Materials are of two types as direct and indirect materials

Direct materials:

Direct materials cost means the cost of materials that can be identified with and allocated to cost centre or cost units. Cost of paper used to print textbook is direct cost since it is main input of textbook. Thus, main raw materials, and necessary components are a few examples of direct materials.

Indirect materials:

Indirect materials cost refers to the material costs, which cannot be allocated but can be apportioned to or absorbed by cost centres or cost units. Cost of materials incurred for repair or a machine used for printing of text is defined as indirect materials cost. Fuel, lubricating oil, materials used for repair, coal, maintenance work etc. are few examples of indirect materials.


Material control

The systematic and regular control over purchasing, storing and consumption of materials is material control. Material control involves the planning, operating, organizing and controlling the purchasing, storing and using of materials so as to achieve the objectives of minimizing possible cost of materials and uninterrupted production. In other words, it is a system, which helps to provide the right quality of materials in the right quantity at the right time and right place with the right amount of investment. Effective control also requires the systematic preparation of periodic summaries and reports. It can be defined as a systematic control over purchasing, storing and consumption of materials. It helps to maintain a regular and timely supply of materials by avoiding over and under stocking.


Need for materials control

Materials control is necessary for making efficient purchase, storing and consumption of materials. Every manufacturing company requires to maintain a materials control system that facilitates efficient purchase, storage and use of the materials. Needs of materials control are given as follow;

i.To ensure the availability of materials
ii. To ensure optimum investment in materials
iii. To ensure minimum wastage
iv. To provide information about the availability of materials
v. TO ensure reasonable price of material


Objective of materials control

Materials control basically aims at efficient purchase, storage and consumption of materials. The following are the objectives of material control;

To purchase materials at a reasonable price.
To maintain the cost of materials at the minimum level.
To protect materials against loss by fire, theft, and leakage.
To minimize the handling cost and time in storing and using the materials.
To provide information to management about raw materials, their cost and availability.
To avoid obsolescence of materials  by adopting an appropriate method of material issue.
To ensure better quality of materials at right quantity and at right time for efficient


Essentials of Materials Control

The main essentials of materials control are as follows;

There should be up to date record of materials
There should be centralized purchasing
There should be proper co-ordination between sales, production, purchase, receiving, inspection and storage departments.
All items in stores should be codified, classified and standardised.
Issue of materials should be in the basis of requisition.


The process set by a manufacturing company to control materials is called store routing. It consists of all the processes involved in proper purchasing, storing and issuing of materials to the concerned departments. The store routing can be summarized as follows:

1.Purchasing and receiving of materials

Request for purchase of materials
Inquiry and tender quotation forms issued to potential suppliers
Selecting a suitable supplier
Placing the order

2.Storing of materials

Classification and codification of materials
Keeping records of the materials in Bin Cards, Store ledger and so on.

3.Issuig of materials

Requition form
Pricing of materials issued



Purchasing involves acquiring materials of right quality, at right quantity, at right time from right source, and at a reasonable price. A separate purchase department should be established to perform purchasing activities. The department which performs purchasing activities in the manufacturing concern in the managed way is termed as purchasing department. The purchasing department plays a very important role in an organization because purchasing has its effect on every vital factor concerning the manufacture, quality, cost efficiency and prompt delivery of goods to customers.


Purchase control

A manufacturing company is required to invest a huge amount of money in purchasing materials. It is, therefore, essential to exercise proper materials and purchase control. Purchase control refers to the purchase of materials of right quality in right quantity at a reasonable price and at a right time. It requires a good amount of attention to the purchasing procedures of materials relating to cost, quality, volume, time and delivery of materials.


Centralized purchasing

Centralized purchasing refers to the purchase of materials by a single purchase department. This department is headed and managed by a purchasing manager. Under centralized purchasing, all purchase s are made by the purchase department to avoid duplication, overlapping and the non-uniform procurements. Under this system, the purchasing department purchases the required materials for all the departments and branches of the company.



It uses the specialized knowledge and skill by appointing specialized and expert purchasing staff.
It brings about economics of bulk purchase.
It facilitates the standardization of materials.
It facilitates effective control over purchases, by maintaining an efficient system of ordering, receiving inspection, accounting etc.
It ensures consistent policy with regard to purchase such as terms of payment, cost of delivery etc.
It brings about economics of centralized accounting of purchase.
a)When there is only one plant or

b)Several plants are not located far away from each other and are using same materials.



It is expensive due to increase in administration cost of a  separate purchase department.
It is not suitable when plants of departments are located far away from one another  or are using different materials.


Decentralized purchasing

Decentralized purchasing refers to purchasing materials by all departments and branches independently to fulfil their needs. Such a purchasing occurs when departments and branches purchase separately and individually. Under decentralized purchasing, there is no one purchasing manager who has the right to purchase materials for all departments and divisions. The defects of centralized purchasing can be overcome by the decentralized purchasing system. It helps to purchase the materials immediately in case of an urgent situation.


It avoids unnecessary cost of setting up a purchasing department.
It avoids delay in purchasing because the required material can be easily purchase as and when required.
Department can get the benefit of localized purchasing.
Due to then provision of purchase of material by the concerned department the material may be purchased in right quantity and quality.


There is chance of overstocking and blocks the capital of  the company.
The benefits of a bulk purchase cannot be obtained.
Fewer chances of effective control of materials.
Lack of proper cooperation and coordination among various departments.

There may be lack of special knowledge about the purchasing with purchasing staff.



Purchasing of materials involves a number of steps which may be different from one company to another. Generally, the following steps are involves in purchasing and receiving materials:

1.Purchasing requisition

Purchasing requisition is a form used to make a formal request to purchase department to purchase the materials specified there in. Purchase requisition is received from the store keeper for all items in regular use, production department for specific items not regularly used and stored, production regular use, production department development, plant engineer for material required for special maintenance and departmental heads for any materials required for their department. The purpose of purchase requisition to authorized the purchasing the materials specified there in and provides written record of details of material required.

Purchase requisition has three purpose:

To inform the purchasing department of the need or purchase materials.
To fix the responsibility of the department making the purchase requisition.
To use for further reference.


2.Request for quotations or tenders

After receiving a purchase requisition, the next step of purchase procedure is to find the convenient and economical sources of supply. The purchase department must maintain a list of suppliers. Selection of a particular supplier is usually made after inviting tenders or quotations from possible sources of supply. Invitations for tender in a prescribed format are sent to prospective suppliers. It contains detailed information about the availability of goods, price of materials, and terms and conditions of purchasing.


3.Purchase order

After completion of the above procedure, the purchase department prepares a purchases order for the supply of materials. The purchase order is a contractual agreement with the suppliers for the supply of materials. It is prepared in five copies, the original copy is sent to the supplier, the second copy for receiving department, third for account department, fourth for imitating department and the fifth one is retained in the purchasing department for reference.


4.Receiving and inspecting materials

The receiving department should perform the unction of unloading and receiving of material dispatched by the suppliers. The receiving department verifies the materials with the help if delivery note and the copy of the purchase order after receiving the delivery of goods. The suppliers sends detailed information and an invoice of the materials supplied by it. It has to verify and check the quantity and physical condition of materials by making a comparison of the purchase order and the materials received in large companies, an inspector is appointed to inspect all the materials received and to prepare an inspection report.


5.Checking and passing of bills for payment

When the invoices are received from the supplier, they are sent to the stores and accounting departments for the verification of the quantity and price of materials mentioned in the invoices. After checking the required documents, the store department requests the accounting department for making the payment of the invoice to the suppliers.



Store keeping refers to the act of storing materials for their safe custody till these are issued to the production and other departments. It involves receiving, storing and issuing of materials. The place where materials are kept is known as 'store'. The term 'stores' has wide meaning and includes raw materials used in production, consumable store such as oil, grease etc, tools, patterns, maintenance materials etc, stock of work in progress and stock of finished goods.


Objectives of storekeeping

All of proper place for every item of store
Keep every item of store in fixed place
Maintain proper and upto date records
Issuing materials quickly to department
Classify and codify the materials for easy identification


Types of stores

1.Centralized stores

A centralized stores is that store which receives materials for and issue them to all departments divisions and production floors of the company. Such a store is only one in the company which receives materials for and issues them to all who need them. The materials required for all the departments and branches are stored and issued by only one store.


Economy in cost
Better supervision of store
Better layout and control of stores
Minimum investment in store
Less space is occupied
Better safety and security of stock


Delay in sending materials to the department and branch.
increase in the material handling cost.
Greater risk of loss by fire.
Not suitable for a large company.


2.Decentralized Stores

Decentralized stores is that type of store which receives materials for and issues them to only one department and not to the whole company. The decentralized store may be  many in the company, as each department has its own such store. Purchasing and handling of materials are undertaken by each and every department separately. Each and every branch has their own store for operation of production activities.


Saving in material handling cost
Prompt issue of material is possible
Storing and control will be easy and effective
Smooth production will be possible
Risk of loss by fire can be minimized


Higher cost of  supervision.
More space is required for individual departments.
Higher amount of investment is required.
More time for stock taking and checking.
Higher cost for staff and stationery.
Improved technique is less possible for controlling of materials.


3.Centralized stores with sub-stores

This is a mix store system, a mix of centralized and decentralized stores, under this store system, sub-stores are established in different departments according to the requirement of the company. Sub-store are maintained at each department when the central store is at a distance from the production department. Such sub-stores are managed and controlled by the central store itself. At the beginning of a period, the central store issues a fixed quantity of materials to the sub-stores. At the end of the period, sub-stores send a filled requisition from to the central store to maintain the stock to a pre-determined level.


Overcoming the demerits of centralized store
Offering an easier location for storing of materials.
Avoiding delay in issuing materials.
Providing services to meet the special needs of individual departments.
Reducing the internal transportation cost.


High cost for stationery and staffing.
High material handling cost.
More time in stock talking.
Extra set-up stock taking.
Complicated store control.



It refers to the place where stores are situated. The location of stores should be near to the receiving department so that the materials handling charges are at a minimum. There should be an easy excess to all other department so that the minimum of expenses is incurred in unloading. The stores should be located considering the nature of materials; the bulky materials should be stored nearer to the user's department to minimize the labour and transport, the planned location charges. In conclusion, the planned location of the store will avoid delay in the movement of materials to the department in which these needed.



A manufacturing company appoints a person for careful storing and safeguarding materials in a store who is called storekeeper. A storekeeper is a person who is the chief of the stores and who is given the responsibility of store management. He is responsible for safeguarding the materials and supplies in proper place until they are required for production activities. A storekeeper should be well-experienced, well-trained, honest and familiar with the tricks of storekeeping.

The main functions of storekeeper are as follows;

To maintain a proper record of materials relating to the receipt and issue of materials.
Checking the physical quantity of materials and verify with a bin card.
To prevent unauthorized entrance into the storeroom.
To maintain the stock registers, entering therein all receipts, issues and balance of materials.
To check and control losses due to evaporation, leakage, theft, and so on.
To arrange for physical verification of store items periodically.
To keep the stores always neat clean and tidy.
To supply  information of materials, stock position, and so on whenever needed.



The process of grouping of materials on the basis of their nature or usage is known as classification. The process of giving district names and symbols for each item is called codification. A good system of store keeping requires an appropriate classification codification. Materials are classified either on the basis of their  nature or on the basis of their consumption. On the basis of nature is most commonly used such as materials are classified as construction materials, consumable stores, spare parts, lubricating oils etc. After the classification of materials, these are codified alphabetically or numerically each  item of store by giving it a separate stores code number are used to indicate the main group and the decimals to indicate primary, secondary and other groups. The main code consists of first two digits, sub-code consists of the next two or three digits upon the requirement and last one or two digits indicate to details of the size, quality etc upon the requirements.

Advantages :

Quick and easy identification of materials.
Helps ensure a proper material control.
Secrecy of materials.
Saving of time in materials handling.
Essential for mechanized accounting system.



The following are the important store recording methods that are used for keeping records of the various items to store:


A document used in the stores department to show receipt, issue and balance of each item of materials is called bin card. In the bin card, the stock level like minimum stock level, maximum stock level, reorders level of each items are mentioned. All the receipts and issues entries made in bin card can supported by relevant documents such as good received note, materials return note, stores requisition note etc. An entry is made at the time of each receipt or issue and the balance in hand of the stock is calculated. The bin card shows the quantity of materials but not the value of materials.

2.Two-bin system

In some manufacturing companies, a bin is divided into two parts: a smaller and a larger one. The smaller bin stores the quantity equal to the minimum quantity and the larger part stores the remaining quantity. The quantity in the smaller part is not issued so long as  the quantity is available in the large part. New supply is ordered as soon as the larger bin is empty.

3.Store Ledger

A store ledger is a record of stock, both in quantity and value and is maintained by the store accounting section. It consists of the same columns of a bin card, but in addition, there is an amount column in which the value are entered. Thus, this ledger provides information for the pricing of materials issued and the value of materials at any time of each item of stores.



                                        Bin cards

Stores ledgers

It is maintained by the storekeeper.

It is prepared by cost accounting department.

It is a record of quantity only.

It is record of quantities and values.

Entries are made immediately after each transaction.

Entries are made periodically.

Posting are made before a transaction.

Posting are made after a transaction

It is kept inside the store.

It is kept outside the store.




It is also known as Automatic inventory system. Perpetual inventory system is a technique of controlling stock items by maintaining store records in a manner such that stock balances at any point of time are readily available. The terms "Perpetual inventory" refer to the system of record-keeping and a continue physical verification of the stocks, with reference to store-records.

According to Wheldon, perpetual inventory system is a method of recording stores balance after every receipt and issue to facilitate regular checking and to obviate closing down for stock-taking.

The two main functions are:

Recording store receipts and issues to determine the stock in hand at any time, in quantity or value or both without the need for physical counting of the stock.

Continuous verification of the physical stock with reference to the balance recorded in the store record is convenient for the management.


It helps in rapid stock taking which, in turn, helps in the preparation of interim accounts.
A moral check on the store staff to maintain proper stock records.
The investment in materials and supplies may be kept at the lowest point.
It is not necessary to stop production so as to carry out a complete physical stocktaking.
Deterioration, obsolescence etc, can be avoided.
Discrepancies and error can be quickly discovered and remedial action can be taken.



Preparation and treatment of requisition form

The storekeeper receives materials and other items, stores them carefully and finally issues them for the purpose of production. But, the storekeeper must not issue materials unless a properly authorized materials requisition is presented to him. Request for the issue of materials should be made to the storekeeper in the prescribed form signed by the person demanding them. The document, which authorizes and records the issues of materials, is known as material requisition from.


Method of pricing material issued

There are various methods, in use, of pricing issues of materials form store. The selection of a suitable method is significant from the viewpoint of cost absorbed and consequently on profit.

Materials are purchased specifically for a job. The material issued is charged to the job at its landed cost. Landed cost includes the invoice price, fright, cartage, insurance and control charges on materials. Issue of such items cannot be linked with a particular 'lot' and therefore, exact landed cost of the particular unit issued cannot be identified.

Some important methods of pricing are as follows:


First-In-First-Out (FIFO) Method

The method in which materials are issued from the store on a first come first serve basis is called FIFO. Under this method, the materials received first in stores are issues first. Materials are issued strictly on a chronological order. The first issue is made out of the unit of opening stock, next issue from the first purchase and the closing stock is remained in stock always from the latest purchase.


This method is easy to understand and operate.
It is used where transactions are not voluminous and prices of the materials are falling.
This method is suitable for bulky materials with high unit prices.
Deterioration and obsolescence can be avoided.
Value of closing stock of materials will reflect the current market price.


It is improper if many lots are purchased during the period at different prices.
The objectives of matching current costs with current revenue cannot be achieved under this method.
If the prices of materials are raising rapidly, the current production costs may be understand.
This method overstates profit especially in inflation.


Last-In-First-Out (LIFO) Method

This method follows the principle that the last items of materials purchased are issued at first. The valuation of the materials issued is made according to the latest purchase price of materials. The closing stocks of the materials are valued always on the earliest prices of the materials. In case of a rising price, this method is suitable because material is issued at current market prices.


This method is appropriate for matching cost and revenue.
This method is simple to operate and easy to understand.
It facilitates complete recovery of material cost.
It is most suitable when prices are rising.


Inventory valuation does not reflect the current prices and therefore are useless in the context of current conditions.
Due to variation of prices, comparison of cost of similar job is not possible.
Calculations become complicated and cumbersome when rates of receipts are highly fluctuating.
It involves considerable clerical work.


Simple Average Method

Under this method, issue prices of materials are fixed at average unit price. According to CIMA,LondonA price which is calculated by dividing the total prices of the materials in the stock from which the material to be priced could be drawn by the number of the prices used in that total.

The simple average is an average of prices without considering the quantities involved.


It is very suitable when materials are received in uniform lot quantities.
This method is very easy to operate,
It reduces clerical work.


If the quantity in each lot varies widely, the average price will lead to erroneous costs.
Costs are not fully recovered.
Closing stock is not valued at the current cost.


Materials returned to the store

Defective and unused materials are returned to the store. When the materials are returned, they should be treated as receipts and are recorded in the store ledger like purchase of materials. After receiving the returned materials, the storekeeper prepares a Material Return Note, which records the return of unused materials.

Materials returned in the original condition may be based under one of the following methods:

a)At the same price at which they were issued
b)At the current price of issue

According to the first method, the returned materials are set apart and at the time of next issue they are priced at the original price rate. This method treats the return as a new purchase but values it at the original price. Under the second method, the return is priced at the rate at which any material requisition placed on the date would have been priced.


Stock level

Inventory refers to the stock maintained by the manufacturing concern and trading organization to meet their future requirement for smooth production and sales. It refers to the different level of stocks, which are required for an efficient and effective control of materials and to avoid over and under stocking of materials. The purpose of materials control is to maintain the stock of raw materials as low as possible and at the same time they may be made available as and when required.

In a scientific system of inventory system of inventory control the following levels of materials are fixed.

Re-order level
Minimum level(Safety stock)
Maximum level
Average stock level
Re-order quantity


Re-order level

It is that level of inventory which the store keeper should initiate the purchase procedure for fresh supplies of inventory. Re-order point is the quantity or level of the inventory on hand that triggers a new purchase order. It is the level at which storekeeper initiates purchase requisition purchase for fresh supplies of material. Fresh order should be placed before the actual stock reaches the minimum level to continue the business activities properly.

It is calculated by,

Re-order level= Minimum level (Safety stock) + (Average lead time   X    average consumption)


Re-order level=Maximum consumption   X   Maximum re-ordering period


Minimum Level or Safety Stock

It is the level stock where new order should be placed considering daily usage rate and lead-time. When the volume or quantity of materials in production fall in below minimum stock level; it shows potential leading to stock out position. Stock falls below minimum level if consumption is more than normal consumption or re-order period is more than normal re-order period or both of these condition appeared. Minimum stock level is considered as buffer stock for use during emergency.

 The following is the formula of it,

Minimum stock level = Re-order level - (Normal consumption X  Normal lead time)


Maximum stock level

The level of stock which is generally not allowed to be exceeded is said maximum stock level. It represents the maximum quantity of an item of material which can be held in stock at any time. The quantity is fixed so that their may be no over stocking

It is calculated by,

Maximum stock level = Re-order level +Re-order quantity- (Min. consumption X Min. lead time)


Re-order quantity

First of all company determines the quantity or size to be ordered at a time. Thereafter, it places the order for purchasing materials by the same size or quantity, which is known as re-order quantity. In other words, the quantity of single purchase order while purchasing any materials is called re-order quantity.

It is calculated by,

Re-order quantity= (Max stock level - ROL) + (Min. consumption X Min. period)



Average stock level

Average stock level denotes the normal/moderate/average stock maintained by the firm. This level, which indicated the average stock to be held by the firm is known as average stock level. It is ascertained by using the following formula:

Average stock level =(Max stock level + Mini stock level)/2

Average stock level = mini stock level + (1/2 + re-order quantity)


Economic Order Quantity (EOQ)

Economic order quantity is also known as re-order quantity. It is that level of inventory where the total cost of holding inventory is at minimum. It is the level of quantity at which the cost of ordering will be equal with the storage cost of materials. In other words, the quantity of materials, which is economical to be ordered at one time, is known as economic order quantity. The total cost of materials consists of the ordering cost and carrying cost. While determining the economic order quantity, the ordering cost and carrying cost should be considered.


Carrying cost

This refers to the cost of keeping items in stock for a certain period of time. Carrying cost is concerned with the storing of materials. It suggests purchasing in small quantities. If small quantities of materials are purchased, the storing cost will be low. The following costs are included in the carrying cost.

Storage cost
Insurance of material
Obsolescence loss due to a change in process or product
Internet on capital blocked on materials
Maintaining cost of material to avoid deterioration.


Ordering cost

All the cost, which is related with placing an order and secure the supplied are called ordering cost .in others it refers to the cost related to the purchase related activities. The ordering cost is the repurchase cost and is repeated in nature. Purchasing of large quantities of materials helps reduce the ordering cost. The following costs are included in the ordering cost.

Cost of staff appointed in the purchasing, inspection and payment departments.
Cost of stationary purchases, telephone charge, email charge, faxes charge etc.

Formula of EOQ,


A= Annual requirement

O = Ordering cost

C = Carrying cost


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