Costing for Materials

Abstract

In many organisations materials can be a substantial part of the total costs of their operations. This can be items such as the raw materials used by a manufacturer, finished part units which are put together in an assembly organisation, the goods which are traded by wholesalers and retailers, the drugs and medical supplies held by a hospital or the many supplies required to keep an army going. Management needs to establish procedures to ensure that:

• the correct quantities of materials are ordered at the right price and the right time;

• the correct materials are delivered;

• adequate arrangements exist to store materials until they are required;

• materials are issued from stores only with proper authorisation, and records are maintained of materials issued or returned;

• a consistent and realistic system is operated to charge production or the appropriate department with the cost of materials used and to give a satisfactory valuation of materials in store.

In this chapter we consider various stages of the procedures to ensure that the above activities are conducted efficiently. We begin with an overview of the entire system before looking at its component parts. From a costing and management accounting viewpoint, the main aim is to ensure that materials issued to departments and the production process are correctly charged out, and that an appropriate value is placed on the materials held in store.