Chapter

9 Accounting for Materials

Contents:
1. Meaning of Materials and Materials Control.
2. Meaning of Purchase and Purchase Control.
3. Know about Storing and Store Keeping of
Materials.
4. Storekeeper and Duties and Responsibility of
Storekeeper.
5. Classification and Co-dification of Materials.
6. Recording of Materials Received.
7. Materials purchasing and Receiving
procedures
8. Know the Methods of Materials Valuation
 Accounting for Materials
Material is the first element of cost of production which provide
physical existence to the final product. It is major component of
product. It cover 70% of total cost of production. It includes raw
material, fabricated, sub- assemblies etc. The materials are divided
Into two types i.e. Direct materials and indirect materials.

Meaning of Materials Controls

Material controls is a systematic control over purchasing, storing and
consumption of materials. It helps to maintain regular and timely
supply of materials by avoiding over and under stocking. The
Importance of materials controlies in its role in reducing the cost of
production and increasing the profitability of the company.

Objectives of materials controls

 Regular supply of materials.
 To purchase materials at a reasonable price.
 To maintain the regular supply of finished goods.
 To minimize wastage and losses of materials.
 Purchasing of
Materials
Purchasing of materials involves acquiring of materials of the
right quality, at a right quantity, at right time from right
source and at a reasonable price. The purchase department
determines the quality, quantity, items, price and time of
purchase of materials.
Purchase Controls
Purchase controls refers to the purchase of materials of right
quality in a right quantity at a reasonable price and at a right
time. It requires 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 this system, the
purchasing department purchases the required materials for
all departments and branches of the company.
 Advantages of Centralized Purchasing

(i) Minimize delivery cost.

(ii) Benefit of more trade discount.

(iii) Better control of purchasing.

(iv) Better handing of store is possible.

Disadvantages of Centralized Purchasing

(i) High initial cost.

(ii) Delay in purchasing.

(iii) Chances of misunderstanding between the

other branches.

(iv) Ignoring local materials to purchase and use.

 Decentralized purchasing

Decentralized purchasing refers to purchasing materials by all

departments and branches. Under decentralized purchasing there is
no one purchasing manager who has the right to purchase materials
for all department and section. It helps to purchase the materials
immediately in case of an urgent situation.
Advantages:
(i) No heavy investment is required initially.
(ii) Materials can be purchased by each department locally.
(iii) Purchase orders can be place quickly.
(iv) Easy and quick to replace the defective items.
Disadvantages:
(i) There is a chance of over and under purchasing of materials.
(ii) May not possible for control of materials.
(iii) Lack of proper co-operation and co-ordination among various
department.
(iv) Better layout of store is not possible due to multiple stores
in multi places.
 Store
Keeping
The place where materials are kept is known as store. A store
refers of raw materials, work in progress and finished goods
remaining in stock. Store keeping means the activities
relating to purchasing, issuing, protecting, storing, recording
and safeguarding of materials. The store is a service
department headed by a store keeper who is responsible for a
proper storage, protection and issue of all kinds of materials.
Objectives of store
keeping
(i) To avoid over and under stocking of
materials.

(ii) To protect the materials from losses and

damages.

(iii) To maintain systematic records of

materials.

(iv) To minimizes the storage costs of

 Centralized Stores
If only one store is maintained by a business organization then
that store is called centralized stores. All the materials are
received and issued from the one store department in
centralized store.
Advantages:
(i) Less space is occupied.
(ii) Investment is stocks is minimized.
(iii) It is economical for storing materials.
(iv) Better supervision of store is possible.
Disadvantages:
(i) Increase in transportation cost.
(ii) More risk of loss by fire.
(iii) Not suitable for a large scale organization.
(iv) Delay in distributing materials.
 Decentralized Store
Under this system of store, there is an independent or separate
store in each department. Each department has to make a
separate store for recording the materials they required.
Advantages:
(i) It reduce transportation cost.
(ii) Suitable for large scale organization.
(iii) Minimizes the chances of loss by fire.
(iv) It minimizes the materials handling cost.
Disadvantages:
(i) More store keeper are needed.
(ii) More space is required for storing.
(iii) Higher amount of investment is required.
(iv) Lack of efficient store control.
 Store keeper
The person who takes care of stores and controls is called
storekeeper. Storekeeper is a store superintendent or store manager
who is responsible to control the store. A store keeper should be well
trained, experienced and honest and he should have a sound
knowledge of store keeping. A store keeper has a very important role
in store keeping. Thus, he should both the technical and managerial
skills to manage and control the store routine work efficiently.
Duties and responsibility of store
keeper:
 Maintaining the up to date record of materials relating to
receipt, issue and balance.

 Preventing materials losses due to theft, deterioration,

leakage etc.

 Keeping the stores always neat, clean and tidy.

 To prevent unauthorized person to enter into the store.

 To have a physical verification of store periodically.

 Classification of materials
Classification is the process of grouping to each materials
either on the basis of their nature, sizes, brand, types and
usage. Materials classified to make issuing, storing and
identifying materials easily and quickly.

Co-dification of materials
Co-dification is the process of assigning code, number, symbol
for each item for easy identification and proper arrangement.
It avoids for confusion. It has three method.
1. Alphabetical method: In this method, alphabet are used for
codification of each item of materials like A, B, C, D….
2. Numerical Method: Under this method, a number is allotted
to each item of materials like 1, 2, 3, 4……
3. Alpha-Numeric method: Under this method, alphabet along
with numbers are used for coding the materials like A1, B2, C3,
S12….
 Bin
Bin card consists of two termsCard
Bin and Card. Bin refers to a rack, box, space where
materials are kept. A card which keep quantitative details of receipts, issue and
balances of goods kept in the bin or rack is called bin card. The bin card is attached
to the bin or rack in which materials are stocked. A specimen of bin card is given
below.
Bin card
ABC CO. LTD
Bin No...…………………………………….. Maximum Stock
Level: …………..
Description of materials:..………… Minimum level: ……………………...
Code No: ………….………………………… Re ordering level: ………..……….

Dat Receipts Issues Balances Stock

e Verification
Ref. No. Quantity Ref.No. Quantit Quantity Date Initial
y
 Store ledger
Store ledger is a statement used to record receipt, issue and balance of
materials in both quantity and value. It provides information for the pricing of
materials issued and the value of materials at any time of each item of stores.
Store ledger is maintained by costing department. A specimen of stores ledgers
card is given below.
ABC CO. LTD
Store Ledger Account
Name of the materials: ……………… Maximum level: ………………….…
Code number of materials: ……….. Minimum level: ………..……………
Bin No: ……………………………………… Re ordering level:……….…………..
Re – ordering quantity:………………

Date Particular Receipts Issues Balances

Qty Rate Amou Qty. Rat Amou Qty. Rat Amou Remark
. nt e nt e nt s
 Differences between Bin card and Store ledger Account

Basis of Diff. Bin card Store ledger

User It is maintained by the It is prepared by cost accounting

storekeeper. It isdepartment
a record of quantities and values.
Nature It is a record of quantity only.
Postin Postings are made before a transaction.
Postings are made after a transaction.
g
Using It is kept inside the store. It is kept outside the store.
Department

Perpetual Inventory
System
Perpetual inventory system is the maintain of regular checking and up to date
records of materials. It provide continuous quantitative and value record of
receipts, issues and balances of each item of stores.
Materials purchasing and Receiving
procedures:
1. Purchase Requisition
2. Request for Quotation or Tender
3. Selection of Suppliers
4. Purchase Order
5. Receiving and Inspecting Materials
6. Checking and Passing of Bills for
Payment
 1. Purchase Requisition
 A purchase requisition is a formal request for materials to
purchasing department, received either from Store or
production department.

 On the basis of this purchase requisition, the Purchasing

department purchases materials and supplies.

 For this, printed forms are used and prepared in triplicate.

 The first original copy is sent to purchasing department,

second copy is retained in the initiating department and
third copy is sent to the accounting department.
 2. Request for Quotation 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.
 3. Selection of
Suppliers
 After receiving quotation from different suppliers, the
best suppliers in term of quality, price, regularity in
supply etc. is chosen among all the suppliers.
 4. Purchase Order
 After completion of the above procedure, the purchase
department prepares a purchase order for the supply Of
materials.

 The purchase order is a contractual agreement with the

supplier 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 initiating department and the fifth one is
retained in the purchasing department for reference.
 5. Receiving and Inspecting
 Receiving Materialsis involved in unloading
department and receiving of
materials supplied by the supplier and verifying the goods as
according to purchase order with the delivery note.

 Further it has to inspect the quality, quantity and physical

condition of materials and compare with the purchase order as
accordingly sent by a supplier or not.
 6. 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 supplier.
 1. Purchase
Requisition
ABC CO.LTD.
Purchase
Department (Making Purchase
Requisition
request):…… order No:….
Date: Delivery Date :
S.N.​ Particular
………………………………………… Code …………
Quantity Required Remarks
….. No.​

Represented by: Checked by:

…… ……………..
Approved by: Purchase Officer:
……….. ……..
 2. Request for Quotation or
Tenders
ABC CO.LTD.
To: Tender No:
Tender
….......................... ….......................
Form
............................ Date : ............................
Dear Sir, ..
Please send us a price list of the following terms as per the terms and conditions
enclosed herewith.
Your
S.N.​ reply should reach
Description​ us before
Quantit ​ …. Place of Date of ​Rate Price​
y​ Quantit Delivery​ Delivery​
y
Your Faithfully
…........................
For Smart Co.Ltd
 4. Purchase Order
ABC CO.LTD.
To: Purchase Order
Purchase order
….......................... no…………………
............................ Date :
Dear Sir, ………………………………….
Your quotation has been accepted, Please supply the following items in
accordance with the terms and conditions given below:

S.N Description​ Quantit ​ ate per

R Total Cost​ Date of ​
.​ y​ unit Delivery​ Remar
ks
Terms and
Purchase
Conditions:..........
Manager : ..................
…....................................
........
..
 5. Receiving and Inspecting
Materials
ABC CO.LTD.
Goods Received No:
Date of Note ….....................................
receipt..............
Purchase order No:
Name of
….................
Suppliers..........
Purchase Requisition No.:
S.N.​ Code Description ​Quantity Rate Amoun Remark
…..........
No Invoice No.: t s
…............................
Received by: Inspected by:
……………………. ……………….
Store-Keeper: Presented by:
…………………. ………………
Store
LF…………………………..