Accounting for Materials Costs

CAT MA1 Course Notes Contents Page

Introduction to Accounting for Materials Costs

This chapter looks at how material costs are accounted for and how inventory can be valued.

Raw material, work-in-progress, finished goods

Raw materials are purchased and then undergo further processing or are incorporated into products. Raw materials can be basic materials such as chemicals, flour, or lengths of wood. Or raw materials can be items which have been manufactured by the supplier, such as components and parts for use in production. Work in progress refers to partly made products. They have progressed from the bought in stage (raw materials) but are not yet complete. Finished goods are complete and are ready for sale.

Accounting for material costs

Materials progress through a factory as follows: Movement of the material between each stage has to be accounted for in a series of ‘T’ accounts. As material moves into a department or category, the T account is debited with the cost. As material moves out of a department or category, the T account is credited with the cost. It can be useful to record units of material as well as value.

Material requirements making allowance for sales and product/material inventory changes

The raw materials purchased are not necessarily the same as the raw materials that will be used in production. This is because there might be changes in raw material inventory. It would, for example be possible to use raw materials in a period without having to purchase any if there were already enough raw materials in inventory. The adjustments needed are: The company has to buy enough to cover usage and to provide enough for closing inventory, but it gets a ‘head start’ because there is already some in opening inventory. Similarly: