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Accounting for Materials

After the materials are issued against stores requisitions, at periodical ends, analysis of the materials issued in connection with various jobs or standing order numbers (i.e., overheads) becomes essential, so that to the respective job accounts, direct materials issued during the period to the jobs can be charged & to the factory overhead account, indirect materials issued during the period can be charged. Through a record called material analysis sheet or material abstract, this analysis is done.

Material Analysis sheet:-

Records used for the purpose of analysis of the cost of materials which, by jobs or standing order numbers, are issued during a period, is known as material analysis sheet. Usually analysis is done on weekly basis. The cost of direct materials which are consumed by each job or work order during the period & also the cost of indirect materials chargeable to factory overhead account are shown, at a glance, by this record. After the preparation of analysis sheet, it is necessary to see that the entire direct & indirect materials cost which are issued during the period has been covered.

Scraps:

Scraps may arise on account of breakdown of machinery, wrong planning, bad workmanship, bad production method, inferior material etc. Although scraps posses value but the ascertainment of the value before the actual sale, often becomes difficult. The various alternative treatments of scraps in cost accounts are as follows:

Ascertainment of the value of scraps & the same may be credited to the job from which the scraps occurred.

The sale proceeds of scraps from all jobs may be credited to production or factory overhead account.

To the miscellaneous income account, the sale proceeds of scraps may be credited. In this case, however the sales proceeds of scraps does not comes into cost accounts.

To the job using the scraps as raw materials, the value may be debited & the job from which these originated may be credited.

If the ascertainment of the value of the scraps can be done & the job from which they occurred can be identified, then the first of the above treatment is the best. The relevant accounting entries in this case are as below:

(i) Scrap Materials A/c            Dr
            To Work-in-Progress A/c
(Being the value of scrap credited to the job from where they originated)

(ii) Bank/ Debtors A/c             Dr
            To Scrap Materials A/c
(Being the sale of the scraps)

If it is difficult to identify the scraps with the jobs, then in that case treatment (b) above is suitable. Owing to the difficulty in valuation, the entry in this case is passed after sale of scraps. The relevant entry is as below:

(i) Bank/ Debtors A/c Dr
To Factory Overhead A/c
(Being the sale proceeds of scraps credited to factory overhead)

The sale proceeds as indicated in (c) above are credited to Miscellaneous Income A/c, which is then transferred to Profit & Loss A/c, when the scraps are insignificant.

(i)Bank/ Debtors A/c Dr
To Miscellaneous Income A/c
(Being sale proceeds of scraps treated as miscellaneous income)

(ii)Miscellaneous Income A/c Dr
To Profit & Loss A/c
(Being transfer to profit & loss account)

Treatment (d) is applicable, when scraps from one job are treated as raw materials for another job. The relevant entry in this case is as below:

Work-in-Progress (job using the scraps) A/c Dr
To Work-in-Progress (job giving out the scraps) A/c

(Being scrap transferred to other job as raw material)

Spoilage:

Spoilage is the units of output which could not reached the required standard of quality or specification. Thus, correction of these sub standard units can be done & at additional cost, can be brought to standard. They are sold as sub-standard articles or as seconds, when the rectification of the sub-standard or faulty units is not considered as economic. If the fault is allowed to remain uncorrected; correction is done, when the additional cost of rectification is less than the loss in value.

Accounting treatment of spoilage:

(1) Loss arising out of spoilage may be charged to the production order on which spoilage occurred;
Or,
(2) Loss arising out of spoilage may be charged to the production overhead for recovery from all the production orders.

If, with any particular order, the identification of spoilage can be made, the first out of the above two treatment should be done. The accounting entries in this case will be as follows:

(i) Work-in-Progress A/c         Dr
            To Materials Control A/c
            To Wages Control A/c
            To Production Overhead Control A/c
(Being elements charged to jobs)

(ii) Spoiled Goods Stock A/c Dr
To Work-in-Progress A/c
(Being sale value of spoiled goods credited to jobs)

However, second treatment should be done, if spoilage is of general nature & cannot be identified with any production order. In this case, the accounting entries will be as follows:

(i) Work-in-Progress A/c         Dr
            To Materials control A/c
            To Wages Control A/c
            To Production Overhead Control A/c

(Being elements charged to jobs)

(ii) Spoiled Goods Stock A/c                            Dr (Sales value of spoiled goods)
Manufacturing Overhead Control A/c            Dr (loss due to spoilage)
            To Work-in-Progress A/c

Sometimes such sub-standard units are referred to as spoilage which cannot be sold as even as seconds. Such goods are sold as scraps in this case.

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