Cost Accounting 1

Material Costing Methods

(Define the mode or systems of Material purchase or issuance)

Course: Cost Accounting

Question: Discuss the various mode or Systems of Materials purchase and issuance.

Answer :
The methods or systems of materials purchasing or issuing vary to production process and material
requirement according to the size & type of industry, the cycle of procurement and use of materials
usually involves the following steps,
1- Concerned departments design the product , material’s specification and requirements of each
stage of operation and also cooperate in developing standard where applicable.
2- The production budget provides the detail about materials requirements.
3- The purchase requisition informs the purchasing agent the quantity & type of material needed.
4- The purchase order contract for appropriate quantities to be delivered at specified date to avoid
any interrupt in operation.
5- The receiving reports insure that quantity & quality are correct as per requirement..
6- The material requisition notifies the storeroom or warehouse to deliver the goods to concerned
department as per committed time period.
7- The materials ledger records the material transaction in perpetual inventory record.

The main objective of cost accounting to provide accurate and meaningful data to get the cost of goods
sold for any specific company to evaluate or ascertaining the cost of each unit or rendering service.
After the unit cost and total incoming materials cost which mentioned at received section ledger card
and next step to record with cost in proper form these materials as they move either from storeroom to
factory directly or indirectly posted as per company using methods , most common methods of costing
materials issued & inventories are given below,

Fist-in, First-out (FIFO)

Method of inventory valuation based on the assumption that goods are sold or used in the same
chronological order in which they are bought.

Last-in, First-out (LIFO)

LIFO assumes that an entity sells, uses or disposes of its newest inventory first.

Average (Weighted Avg.)

Institute of Business & Technology (BIZTEK) M.Tauqeer

Cost Accounting 2
A costing method by which the value of a pool of assets or expenses is assumed to be equal to the
average cost of the assets or expenses in the pool

*Other methods such as market price at the date of issue or last purchase price & standard cost.

The above methods relate to assumptions to the flow of costs and physical flow of units.
Although this discussion deals with materials inventory, the same costing methods are also applicable to
work in process and finished goods inventories,

Institute of Business & Technology (BIZTEK) M.Tauqeer