INTRODUCTION TO COST

ACCOUNTING
Lenore A. Loqueloque
Materials Accounting

● The materials accounting system must be integrated with the general

ledger.
● Purchases are recorded as debits to materials in the general ledger.
● Materials account is supported by a subsidiary stores or materials ledger
in which there is an individual account for each item.
Determining the Cost of Materials Issued

● In selecting the method to be used, the company

should review their accounting policies and the
state tax regulations.
● The flow of materials does not dictate the flow
of costs.
○ Flow of materials – the order that materials are
issued for use in the factory.
○ Flow of costs – the order in which unit costs are
assigned to materials.
Cost of acquiring materials

● purchases discounts
● Freight in

○ Debit to ―raw materials inventory‖ & add freight cost proportionately

to each materials record card.

○ Debit to ―Freight in‖

○ Debit to ―Factory overhead-control‖

Pricing issues of material

● Pricing of materials may change from time to time.

● Materials are usually acquired by several deliveries at
different prices
● Actual costs can then take on several different values
● Therefore, the materials pricing system adopted should
be the simplest and the most effective one
INVENTORY COSTING METHODS

● First – In, First – Out Method (FIFO)

○Assumes that materials used in production are costed at the

prices paid for the oldest materials and the ending inventory is
costed at the prices paid for the most recent purchases.
● Moving Average Method

○ Material issued and the ending inventory are costed at the

average price. This average unit price is computed every time a
new lot of materials is received and it continues to be used until
another lot is purchased.
Valuation at Cost or Net Realizable Value (NRV), Whichever is Lower

• Materials is not written down below cost if the finished goods in which
they will be incorporated are expected to be sold at or above cost.

• When a decline in price of materials indicates that the cost of finished

goods exceeds NRV, the materials are written down to NRV.
Accounting Procedures

● The purpose of materials accounting is to provide a summary from the

general ledger of the total cost of materials purchased and used in
manufacturing.
● All materials issued during the month and materials returned to stock are
recorded on a summary of materials issued and returned form.
Journal entries

Transactions Journal entries

Purchase of materials Raw materials inventory xx

Accounts Payable xx
Return to vendors Accounts payable xx
Raw materials inventory xx
Freight cost Raw Materials Inventory or
Freight in or
Factory Overhead, control xx
cash xx

Issuance of materials to Work in Process Inventory xx

production Factory Overhead, Control xx
Raw materials Inventory xx
Returns to the stockroom Raw Materials inventory xx
Work in process, inventory xx
Factory Overhead, Control xx
JUST IN TIME SYSTEM
Production systems

● Push manufacturing systems

● Pull manufacturing systems (JIT)
Production Systems

● Push Systems
○ Produce in anticipation of customer orders

○ Store raw material, work in process, and finished goods inventory

Production Systems: Pull

● Pull systems (JIT)

○ Produce as needed

○ Minimal storage
JIT Manufacturing

● JIT Manufacturing attempts to

○ Acquire components and produce inventory units only as they are needed

○ Minimize product defects

○ Reduce cycle/setup times for acquisition and production

● Kanban—a card indicating a work center’s need for additional
components
Supplier Relationships
● Limited number of certified vendors who can provide quality and reliability
● Vendors become ―partners‖
● Consider

○ Reliability and responsiveness

○ Delivery performance

○ Service

○ Human resources qualifications

○ Research and development strength

○ Production capacity

○ Environmental policies
Product Design
● Fewest number of parts
● Standardized parts
● Minimize production steps
● Quality designed into product
● Minimal engineering changes
● Recyclability of the product
Product Processing
● Reduce machine setup time
○ Perform setup while machine is running
○ Eliminate all unnecessary movements by workers and/or materials
○ Use setup teams

● Continuous quality
○ Ensure vendor quality at point of purchase
○ Monitor worker and machine quality

● Standardizing work
○ Standard procedures
○ Without variation
○ On time
○ Every time
JIT Plants

● Minimize material handling time, lead time, movement of

goods
● Use manufacturing cells which allow for visual controls,
greater teamwork, quick exchange of vital information
● Reduce storage
● Increase throughput
● Develop multiskilled workers
● Use autonomation—programmed factory equipment
JIT Support Systems and Logistic Support

● JIT support systems ● Logistic support

○ Six-sigma method ○ Open buying on the Internet
○ Internet business model ○ Focused factory
arrangements for vendors
○ Supply-chain management
■ Connect vendors closely
○ Business-to-business e- to production operations
commerce
■ May involve relocation
■ Transactional or plant modernization
by vendors as well as
■ Information sharing financial assistance
from manufacturer
■ Collaborative
Lean Manufacturing

● Make only those items in demand by customers

● Make products without waste

○ Minimize waste

○ Maximize quality

○ Eliminate activities that add costs but not value

○ Shorten lead time for delivering products and services

Accounting Implications of JIT

● Backflush costing is the accounting system used by JIT systems.

○ It is streamlined cost accounting method that speeds up, simplifies and
minimizes accounting effort in an environment that minimizes inventory
balances, requires few allocations, uses standards costs, and has few
variances from standard.
 Traditional and Backflush Accounting Systems
Transaction Traditional System Backflush System

a. Purchase of raw Raw materials xx Raw and In Process xx

materials Accounts Payable xx Accounts payable xx
b. DM issued to Work in Process xx No entry
production Raw Materials xx
c. Direct labor cost Work in Process xx Conversion costs xx
Payroll xx Payroll xx
d. FO costs FO, control xx Conversion costs xx
incurred various accounts xx various accounts xx
e. Transfer of FO Work in Process xx No entry
cost to WIP FO, control xx
f. Completion of all Finished goods xx Finished goods xx
products Work in process xx Raw and In Process xx
Conversion costs xx
g. Sale of all Cost of goods sold xx Cost of goods sold xx
products Finished goods xx Finished goods xx
Fin.