What is Accounting for materials? Types of Accounting materials and Purchase of materials

Accounting for materials
What is Accounting for materials? Types of Accounting materials and Purchase of materials?

What is Accounting for materials?

Introduction

The term material simply includes raw material, components, tools spare parts and consumable stators. Material which forms a part of a finished product is the firs

t and most important element of cost. Materials constitute such a significant part of product cost and since this cost is controllable, proper planning, purchasing, purchasing, handling and accounting are of great importance. In other words, proper control of materials is necessary form time order for purchase of materials are placed with suppliers units they have been consumed.

Concept and meaning of materials

The term 'materials' is generally, used in manufacturing concerns. Materials are the commodities or articles used for processing in the factory to manufacture goods or rendering serves. It includes physical commodities used to manufacture the final product. It is the first and most important element of cost.

Materials form a high portion of the total cost of reduction. In certain cases, like sugar, matters may form as high as 60 percent of total cost. The production is rarely less than 25 to 30 percent is case of most products. This means that efficiency as regards materials is a vital factor in total cost of production and products earned. Any saving in materials will be directly reflected in profit. Therefore, it is necessary that minimum care should be devoted to the purchase, storing and use of materials. Raw materials, diesel, tools etc. are the example of materials.

Types of materials
Normally, there are two types of materials in manufacturing concern. They are as follows:
Direct materials
Direct materials: means the materials which form part of finished output and can be identified with the finished product easily. For example; wood, plywood, adhesive, wood polish, nails etc. in case of manufacturing furniture, cost of cotton in case of manufacturing cotton yarn, cost of yarn in case of manufacturing cloth, cost of iron in case of manufacturing machinery etc. the main feature of direct materials is that these enter into and form part of the finished product.
Indirect materials
Indirect material: refers to the materials costs, which cannot be allocated but can be apportioned to or absorbed by cost centers or cost units. These are the materials, which cannot be traced as part of the product, and their cost is distributed among the various cost centers or cost units on some equitable basis.
 Examples of indirect materials are coal and fuel for generating power, cotton waste, lubricating oil and grease used in maintaining the machinery, materials consumed for repair and maintenance work, dusters and brooms used for cleaning the factory, etc.
Meaning of material control
No system of costing can be said to be complete without a proper system of material control. Material control is a system which ensures that right quality of material is available in the right quantity at the right time and right place with the right amount of investment. Materials control basically aims at efficient purchasing of materials, their efficient storing and efficient use. In materials so as to have the minimum cost of materials. Materials control consists of controls at two level; quantity controls and cost controls.
 Need/ objectives for material control
Materials controls are needed for the following reasons:
1. To avail materials continuously: there should be a continuous availability of all types of materials in the factory. So, there should be a proper control on material to run the production smoothly.
2. To prevent the excessive investment in material: materials control aims at preventing over investment in material. This is done by proper stocking of material i.e. removing the over stocking.
3. To purchase the qualitative materials at reasonable price: another objective of material control is to ensure that the qualitative materials are purchased. Similarly, the purchase should be at reasonable prices this can be achieved through trade discount, terms of credit, carrying system etc.
4. To prevent the wastage and misappropriation the materials: the loss or damage of materials should be stored as low as possible in the god own. Storekeeper should be trained to handle the materials in a scientific way to avoid the waste and misappropriation. Leakage must be avoided to control the cost of production.
5. to provide information about availability of materials: the success of production process largely depends on the availability of materials. Hence, it is necessary to identify the source of materials supply. For this, the information about the suppliers is vital.
Essential of material control
Material control is essential because of following reasons:
1. Proper co-ordination among the departments: there must be a proper cooperation and coordination among the department involved in purchasing, receiving and stoning so that there will be proper availability of materials for smooth production.
2. Authorized purchase: the purchase of materials should be made by authorized personnel or department. A centralized purchase system is suitable for this.
3. Perpetual inventory system:  it is possible to determine the quantity and value of each type or material in stock with perpetual system is suitable for this.
4. Internal check system: the organization should be introduced internal check system to ensure that all transaction involving materials are checked by authorized person.
5. Uses of standard forms: standard forms for orders, issue, transfer of materials from one job to the other, transfer of material from the job to the stores etc. are used.
6. Proper classification and codification of materials: it is necessary to classify and codify the materials to handle and store the materials properly. it also helps to maintain secrecy on material.
7. Fixation of proper stock level: there are different types of stock level such as; maximum stock, minimum stock, average stock etc. the main objective of fixing the stock level are to remove the unnecessary investment in materials and run the production smoothly.
Material scheduling or routing
Store routing denotes the produces relating to the materials control. It is a system of controlling the material scientifically. Normally, it involves three processes in manufacturing concerns. They are as follows:
• Purchasing materials
• Store keeping
• Issuing materials
Purchase of materials
Purchase and purchase department
Material is a mahor component for any organization since it affects the production, quality of products, price and sales. Thus, a systematic process is development for the purchase of materials. Purchase includes the identification of the material to be purchase, selection of the appropriate suppliers, sending the purchase order, examination of the materials to ensure that they are as per purchase order and payment of bills. The department involved in the purchase of material is called the purchase department. The purchase procedures are mentioned below:
The purchase department performs the following activities.

• To avail materials regularly.
• To purchase the qualitative materials in harmonized conditions.
• To purchase the materials in economic order quantities and remove the over and under stocking of materials.
• To maintain a cordial relationship with the suppliers.
• To update and avail the information on supply, quality, price, purchase procedures, terms of payments, carriage process etc.
Types of purchase
There are two types of material purchase. They are mentioned below:
Centralized purchasing
Centralized purchase means that all the purchase activities are routed through only one department. All purchase should be made by the purchase department to avoid duplication and overlapping procurement In this system, all the other departments should send purchase requisition to the centralized purchasing department to make timely and suitable purchase.

Advantages of centralized purchasing Disadvantages of centralized purchasing
i. Since all the materials required are purchased by the purchase department, better control on material purchasing can be achieved.
ii. Centralized purchasing enable the favorable terms and conditions on materials purchases. This is due to the bulk purchase of materials.
iii. Centralized purchasing helps to achieve economy, due to trade discount, facility of carriage, less administrative expenses, etc.
iv. It helps to build specialized knowledged and skills since the qualified and experienced personnel are involved in purchasing.
v. It helps to achieve uniformity in purchasing policies and practices.

i. Centralized purchasing might lead to delaines in material purchase. Similarly, it might be time consuming while sending materials to the convened departments and units.
ii. There are no advantages of local purchase under centralized purchasing.
iii. There is high initial cost on material under centralized purchasing due to bulk purchase.
iv. It increases the transportation cost of material since the materials are to be dispatched to the departments located away.
v. It might lead to misunderstanding among the departments due to their different material requirements.
Decentralized purchasing
In this purchasing system, there is no one purchasing who has the right to purchase material for all department and section. So, decentralized purchasing means to purchasing materials by all departments independently to fulfill their needs. The disadvantage of centralized department can be easily removed by the decent razed purchasing, method.in this systems material can be purchased by each department locally and separately.
Advantages of decentralized purchasing Disadvantages of decentralized purchasing

i. In this system, purchase can be made quickly, since the departments purchase the materials requirements themselves.
ii. The investment in material is low due to the purchase of material in low quantities.
iii. This system achieves the advantages of the local purchase.
iv. There is no charge of misunderstanding between the departments and units.
v. There is a low possibility of loss and damage of materials.
i. A firm cannot get discount, transportation facility, credit facility etc. under decentralized purchasing due to the small quality of purchase.
ii. It is not possible to have specialized service in each department.
iii. There is a high chance of misappropriation and misuse of material due to ineffective control.
iv. Decentralized purchasing is costly due to separate administrate and accounting works.

Purchase procedures
The purchase of material has certain procedure which is mentioned below:

Receiving purchase requisition
The first step of purchase procedure is receiving the purchase requisitions. It is a request made by various departments to the purchase department for purchasing the required materials. Such purchase requisition is verified by the chief of the concern departments in which the details about the materials like quantity, codes etc are mentioned. The specimen of the purchase requisition is given below:
Selection of suppliers
The second step of the purchase procedure is the selection of the appropriate supplier. To look for the possible suppliers, quotations or tenders are invited. A tender involves the price, quality and other terms and conditition related to the materials. The form developed to get the required information regarding the materials to be purchase is called the tender form.
After analyzing the tender forms received from all the probable suppliers, analysis is made to select the suppliers interceding to supply the materials at the lowest price and the most favorable condition. Besides these, the financial soundness, capacity to suppliers, reliability and continuity of the suppliers are also considered to select a supplier.
Sending purchase order
After selecting the suitable suppliers, purchase order is sent to get the needed materials. It is a request made to the supplier to send the material as per the stated price and quantity. The specimen of purchase order is as below.
Each purchase order is made in 5 copies. The first copy is sent to the suppliers, the second to the person or department demanding the purchase, the third to the department receiving the materials the further to the accounts department and the final copy is kept by the purchase department itself.
Receiving and inspecting materials
The fourth step of a purchase procedure is to received and inspects the materials sent by the suppliers. It has to ensure that the materials are as per the purchase order and there is no loss or damage during the carriage. After inspecting the materials, a report is prepared and the first copy of such report is sent to the purchase department, the second to the account department and the third to the department receiving the materials. The specimen of an inspection form is as under.
Before storing the materials, a statement of the materials received is prepared which is called the goods received note in which the code, price and quantity of the materials are mentioned.
Verifying and passing bill for payment

This is the last process of a purchase procedure. The final approval for the bills of materials to be paid to the suppliers and eventually the account sanction make payment of the same.