Quick answer: Material costing controls how materials are bought, stored, issued and valued. Key tools are codification, bin cards and the stores ledger, ABC analysis, the two-bin system, perpetual inventory, just-in-time purchasing, reorder level (maximum usage × maximum reorder period) and economic order quantity, EOQ = √(2AO ÷ C).
| Topic | Key point |
|---|---|
| Records | Bin card (quantity only), stores ledger (quantity and value) |
| Control techniques | ABC analysis, two-bin system, perpetual inventory, JIT |
| Formulas | Reorder level = max usage × max reorder period; EOQ = √(2AO/C) |
| Losses | Normal wastage absorbed in cost; abnormal wastage to costing P&L |
Material costing is the part of cost accounting that controls how raw materials are bought, stored, issued and valued. Materials are often the largest single cost in manufacturing, so small improvements here have a big effect on profit. The questions below cover the key terms, with formulas and a worked EOQ example.
Material Costing Questions and Answers
Following are the explained questions and answers for material costing:
1. Explain Material Control?
Material control is the adoption of proper procedures in the procurement, storage, utilization, and evaluation of material so that costs can be reduced by efficient material management.
It reduces excessive investment in materials, continues an uninterrupted supply of materials, and minimizes material wastage and losses.
An effective material control system helps in fixing responsibility.
2. Name the departments involved in the organization of material control?
The following departments are involved in the organization of material control:
- Purchase Department.
- Receiving and Inspection department.
- Storage Department.
- Cost Accounts Department.
- Audit Departments.
3. What is meant by the Codification of Material?
Allotment of the code number to the materials for identification of each item is known as codification of material.
4. What is a Bin card?
It is annexed to that rack in which material is stored showing receipt, issue, and balance of material in quantity only.
5. What is a Stores Ledger?
It is prepared by the cost accounting department to enter transactions regarding receipt, issue, and balance of material.
It records quantity and price both.
6. What is the normal wastage of material?
Wastage of the material due to Its nature or general reasons like evaporation, seasoning or maintenance, etc. Is normal wastage.
7. What is abnormal wastage?
Abnormal wastage is loss beyond the normal level caused by avoidable or unexpected events such as fire, theft, flood, earthquake or careless handling. Its cost is charged to the costing profit and loss account, not to production.
8. What is ABC analysis for Material Control?
Goods in the warehouse are classified as A for the material of high value.
B items are of medium value and C items of low value. Typically A items are about 10% of items but around 70% of total value, B items about 20% of items and 20% of value, and C items about 70% of items but only 10% of value, so control effort is concentrated on A items.
9. What is Just-in-time(JIT) Purchase?
In the JIT approach, there is no need to keep stock of inventory because the next day’s requirement of stock will be supplied by the supplier in the early morning.
10. What is Economic Order Quantity?
Economic order quantity (EOQ) is the order size at which the total of ordering cost and carrying cost is lowest. EOQ = √(2AO ÷ C), where A = annual usage, O = cost of placing one order and C = carrying cost per unit per year. Example: A = 8,000 units, O = ₹100, C = ₹4, so EOQ = √(2 × 8,000 × 100 ÷ 4) = √4,00,000 ≈ 632 units.
11. What is meant by the Reorder Level? Give formula.
Answer: Reorder level is the level of material at which new order should be placed for the purchase of material so that the stock will be regularly available for production.
Reorder Stock Level = Maximum Reorder Period x Maximum Usage
12. Explain the different steps of material purchasing in brief?
- Purchase Requisition.
- Selection of supplier.
- Purchase Order.
- Receipt of Materials.
- Inspection of Material.
- Return of damaged or not of type of ordered goods to the supplier.
- Approval of the Invoice.
- Payment of Material.
13. What do you understand by Two Bin System?
In this system, two bins are maintained for each type of material. In one bin minimum stock level or reorder level is kept and excess material is kept in the second bin.
When the material of the second Bin is exhausted, the material requisition is sent to the purchasing department for order placing. Meanwhile, the material from the first bin is transferred to the second bin and new material will be kept in the first bin.
14. Explain the Perpetual Inventory System?
It is a system of records maintained by the controlling department which reflects the physical movement of stocks and their current balance.
A permanent inspection party is appointed for continuous stock-taking of material.
This party regularly physically verifies the different items of material, throughout the year and prepares a report termed as a store audit note.
15. Why Weighted average method considered to be scientific? Explain.
The weighted average method is considered scientific because it irons out the price fluctuation during a period.
The price charged to the product will not directly affect the rising of price and falling prices as this method will maintain the balance between them.