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Material Costing, Cost Accounting Video Lecture - B Com
FAQs on Material Costing, Cost Accounting Video Lecture - B Com
| 1. What is material costing in cost accounting? |  |
Ans. Material costing in cost accounting refers to the process of determining the cost of materials used in the production of goods or services. It involves identifying, measuring, and allocating the expenses associated with the procurement, storage, and usage of raw materials. By accurately calculating material costs, businesses can evaluate the profitability of their products or services and make informed decisions regarding pricing, inventory management, and cost control.
| 2. How is material cost calculated in cost accounting? | |
Ans. Material cost is calculated in cost accounting by considering the cost of purchasing raw materials, transportation fees, storage expenses, and any other costs incurred during the procurement process. The formula for material cost is:
Material Cost = Direct Material Purchases + Freight and Transportation Costs + Storage Costs + Other Direct Material Costs
Direct material purchases refer to the cost of raw materials acquired from suppliers, while freight and transportation costs include expenses associated with shipping the materials to the production facility. Storage costs encompass expenses related to warehousing and preserving the materials, such as rent, insurance, and handling charges. Other direct material costs may include packaging materials or custom duties.
| 3. What are the advantages of material costing in cost accounting? | |
Ans. Material costing in cost accounting offers several advantages to businesses, including:
1. Accurate pricing decisions: By determining the precise cost of materials, businesses can set prices that cover expenses and generate profits.
2. Effective inventory management: Material costing helps companies assess the optimal quantity of materials to order and maintain in stock, preventing overstocking or stockouts.
3. Cost control: By analyzing material costs, businesses can identify areas for cost reduction, negotiate better supplier contracts, or seek alternative materials to minimize expenses.
4. Profitability analysis: Material costing enables businesses to evaluate the profitability of different products or services, aiding in decision-making related to product mix or discontinuation.
5. Budgeting and forecasting: Accurate material costing facilitates the creation of realistic budgets and forecasts, providing insights into future expenses and potential profitability.
| 4. How does material costing contribute to cost control? | |
Ans. Material costing contributes to cost control by providing businesses with a detailed understanding of the cost components associated with materials. By analyzing and monitoring material costs, companies can identify inefficiencies, wastage, or opportunities for cost reduction. For example, if the cost of a particular material is found to be excessively high, businesses can explore alternative suppliers or negotiate better pricing terms. By effectively controlling material costs, companies can enhance their overall cost efficiency, increase profitability, and remain competitive in the market.
| 5. What are the challenges of material costing in cost accounting? | |
Ans. Material costing in cost accounting can present several challenges, including:
1. Accurate cost allocation: Allocating material costs to specific products or services accurately can be complex, especially when multiple materials are used in the production process.
2. Fluctuating material prices: The cost of materials can vary over time due to market conditions, supply chain disruptions, or changes in currency exchange rates. Adapting to these fluctuations can pose challenges in maintaining accurate material costing.
3. Tracking material usage: Ensuring accurate tracking of material usage during the production process requires robust inventory management systems and procedures. Any discrepancies can impact the accuracy of material costing.
4. Inventory valuation: Determining the value of materials in inventory at any given time can be challenging, especially when using different cost allocation methods like FIFO (First In, First Out) or LIFO (Last In, First Out).
5. Complexity of overhead allocation: Allocating overhead costs, such as storage or handling expenses, to individual materials can be complex and may require accurate measurement techniques or cost drivers to ensure fairness and accuracy in material costing.
Text Transcript from Video
Welcome To the best CHIPS Making Company !
Well recently i visited to chips making company
and i was amazed to see the process ,The Process of Chips making was somewhat like
truck full of Raw Materials used to come into factory.
Potatoes i mean
Which were unloaded on Conveyor belt ,Where inspection staff
used to inspect the size of Potatoes (We had given a criteria that Particular size of Potatoes is to be accepted )
If The Size of Potatoes is not Appropriate or is not as per criteria set then Inspection Staff needs to reject it.
For Example (as shown in picture ,very small size potatoes are rejected)
and the rejected ones are sent back to suppliers.
At The end of the conveyor belt
We have machine...now what does this machine do... it peel the Potatoes
that you can clear see Peel Potatoes and unpeeled Potatoes .
Right , all these peel Potatoes get stored
in a huge container or store box.
In Store box there is one Entry point and
one exit point ,The entry point
It is an entrance of peel potatoes
Let's assume that store box is full .
Now When production take place,the raw materials need to be issue
at that time production channel is opened .
When the production channel is opened ,Potatoes from store box
gets rolled into production channel and stock level
proportionately decreases. (we used to repeat the process when required ).
Why Can't we keep this production channel open 24*7 ???
because the
machine attached in front has some limitation.
and the limitation is that in one time specific quantity
Let's Say for 50 Potatoes
can only be processed so when 50 potatoes are loaded ,
production channel the need to be closed.
So in Next Step
Potatoes are cut and fried , and result is CHIPS ARE READY .:)
When i Saw the process
I was very curious to know the marking beside store box .
the marking are funny ! :P
I Couldn't understand , but i was very curious Just like you .
So Asked the production manager
Why and What are the markings???
So he told me that (Smile in green)= MAX STOCK.
and i can't Stock over than this.
it's pretty general , if i keep potatoes above the max level ,
i will face all the problem
of over-stocking . like i block my capital ,wastage of Raw material.
This is my max level.
Then what is this Phone symbol level?
this is my re order level .
as i reach to my re-order level i.e
From max level (green smilie ) to re-order level ( phone symbol)
at this time i should place an order.
because potatoes need time to reach the factory .
and this states that at this point if i will not place the order
and if truck does not reaches on time
and this will decrease in stock and it can be the case of Zero stock .
So that is the reason to order potatoes at RE-ORDER level.
RE-ORDER level-level in my stock ,on which i place my next order.
I asked what are these level one is min level
i.e stock level shouldn't be less than min level.
Then what's that level (emoji of WOW on Facebook :P)
But here it's not WOW , here it's DANGER Level .
means when stock reaches to danger level
I Will start panicking as i am left with no raw materials to carry out my production process.
and i should take an emergency action, to carry out the production process
Why if stock gets over than
i don't have potatoes to forward to production channel
then person frying chips ,will waste of time
Correct ?
So i thought , if i already know
at which level order is to placed then
why need to go MIN level or DANGER Level.
u know at re-order level u can carry out production process effortlessly. Right?
But There is still uncertainty
Why ?
This Truck from its schedule
time is arriving late or early .
Both the possibility are there.
For example , In our Country
GST is applicable .
Many are sad
some went on strike.
Suppose Transport Company went on strike then?
If this truck as per my estimation
it was going to come on 3 or 4 day
but now truck comes very late .
this was a problem
there is lot of uncertainty
Placing an order and arriving the order,
time in between is called Lead time .
Placing an order and arriving the order, time in between is called Lead time .
the supplier gave
me 3 range.
Avg time
Min Time
or Max Time
Averagely if Production manager calls
Place an order and order arrives (truck arrives )
it takes 3 days
Max time based on observation is
5 days (trucks Arrives)
Min time taken will be 1 day (truck arrives)
because Driver in full speed gets the raw material
So this are different lead time scenario and uncertainty
Okay , i understood about
uncertainty and lead time
Still there is something incomplete.
there is 1 more thing that need your attention.
It is our sales .
Many times in year
there is inflation
Example Festivals
at that time it's inflation
usually i have observed
when there is cricket tournament
that time every company does branding on high scale.
example On Lays Cricketers pictures are printed.
There scheme on Chips ,
that on buying Chips you will get XXX runs
and if you complete 100 runs Chips offers to meet cricketers.
Correct ?
So in every business there
is Fluctuation in sales .
Inflation and Depression (recession)
If There is inflation
Sales needs to be increased.
Sales will be increased by increasing production.
So it is not decided
that driver will arrive .
It can be 1 day , 3 days or 5 days
averagely we have observed it takes 3 days .
We are still unknown with
the usage of raw material
Usage is dependent upon
1. lead time ( Placing an order and arriving the order, time in between is called Lead time .)
next important :
2. Usage
Usage can be in 3 level MIN , MAX or AVG.
Max Usage is likely to occur when we increase our sales - Inflation.
We have notice , When there is max usage
in one day
we took 300 potatoes
for production.
when there was min usage we notice 100 potatoes in one day
When there was avg usage we notice 200 potatoes we took in one day
From this we faced 2 uncertainty
1. lead time ( Placing an order and arriving the order, time in between is called Lead time .)
2.Usage because trade time is very important.
we need to look whether it's inflation or depression
Correct ? Understood?
Ok Production manager , How did u mark this re - order level ???
U might have calculated something right ? Yes
Re-order level calculation or
where to set re order level ?
if you where production manager
and you were asked to set ROL , How will you set?
You will think ,
that level
where i need to inform the supplier
about the raw material
ROL is kind of reminder .
So Question arises that when i need to place reminder ???
answer is best time.
Suppose if you want to play cricket
at 6:00 am naturally u keep alarm early
of 5:00 or 5:30 which depend upon you sleep time.
Similarly production manager
as per his production channel he
will set his ROL .
but any person,
If you ask to layman to set ROL
that i am never stock out
then he will ask you
Tell me the max time =5 days
now tell me max usage in a day = 300
that means
1500 potatoes
when in my stock any day 1500 potatoes are there can i mark it as ROL?
Because of this
u did something really well
Avg days it's use to come in 3 days
and its usage was 200 potatoes in a day
so ideally what will you use
3*200=600
But the reminder level
is set on 1500 potatoes
Correct ??? did you understand?
ROL= MAX Leadtime *Max Usage
See it is industries specific ,honestly
In material Chapter the Formula are bookish in,
real life scene is different
this is industries specific
9/10 times
u know that driver
takes Avg time to deliver the raw materials
and your usage is Avg
than u can keep your ROL = Avg Leadtime *Avg Usage.
i.e 3*200 =600 you can set your ROL
Because for Your industries it's Perfect.!
If Raw materials is readily available
and easily available then
your ROL will be
ROL= Min Leadtime* Min Usage
ROL =1*100=100
So ROL is Just a safety point of view
that where i want a reminder
or where i need a buzz that i need to call the supplier for order the raw materials
If i m very scared and my production is very important
then i can keep my ROL = Max Lt* Max Usage
and i can set this as ROL at 1500 potatoes
So we understood that when we reach at 1500 potatoes in stock box at that very point i need to place my order.
From here one more Question arises.
When we will call supplier
What will we ask ?
Quantity Right ? but How much ??
Now the question arise
how do i decide
that whenever i order
what quantity is to be order ?
this we will see in our next video :)
Well recently i visited to chips making company
and i was amazed to see the process ,The Process of Chips making was somewhat like
truck full of Raw Materials used to come into factory.
Potatoes i mean
Which were unloaded on Conveyor belt ,Where inspection staff
used to inspect the size of Potatoes (We had given a criteria that Particular size of Potatoes is to be accepted )
If The Size of Potatoes is not Appropriate or is not as per criteria set then Inspection Staff needs to reject it.
For Example (as shown in picture ,very small size potatoes are rejected)
and the rejected ones are sent back to suppliers.
At The end of the conveyor belt
We have machine...now what does this machine do... it peel the Potatoes
that you can clear see Peel Potatoes and unpeeled Potatoes .
Right , all these peel Potatoes get stored
in a huge container or store box.
In Store box there is one Entry point and
one exit point ,The entry point
It is an entrance of peel potatoes
Let's assume that store box is full .
Now When production take place,the raw materials need to be issue
at that time production channel is opened .
When the production channel is opened ,Potatoes from store box
gets rolled into production channel and stock level
proportionately decreases. (we used to repeat the process when required ).
Why Can't we keep this production channel open 24*7 ???
because the
machine attached in front has some limitation.
and the limitation is that in one time specific quantity
Let's Say for 50 Potatoes
can only be processed so when 50 potatoes are loaded ,
production channel the need to be closed.
So in Next Step
Potatoes are cut and fried , and result is CHIPS ARE READY .:)
When i Saw the process
I was very curious to know the marking beside store box .
the marking are funny ! :P
I Couldn't understand , but i was very curious Just like you .
So Asked the production manager
Why and What are the markings???
So he told me that (Smile in green)= MAX STOCK.
and i can't Stock over than this.
it's pretty general , if i keep potatoes above the max level ,
i will face all the problem
of over-stocking . like i block my capital ,wastage of Raw material.
This is my max level.
Then what is this Phone symbol level?
this is my re order level .
as i reach to my re-order level i.e
From max level (green smilie ) to re-order level ( phone symbol)
at this time i should place an order.
because potatoes need time to reach the factory .
and this states that at this point if i will not place the order
and if truck does not reaches on time
and this will decrease in stock and it can be the case of Zero stock .
So that is the reason to order potatoes at RE-ORDER level.
RE-ORDER level-level in my stock ,on which i place my next order.
I asked what are these level one is min level
i.e stock level shouldn't be less than min level.
Then what's that level (emoji of WOW on Facebook :P)
But here it's not WOW , here it's DANGER Level .
means when stock reaches to danger level
I Will start panicking as i am left with no raw materials to carry out my production process.
and i should take an emergency action, to carry out the production process
Why if stock gets over than
i don't have potatoes to forward to production channel
then person frying chips ,will waste of time
Correct ?
So i thought , if i already know
at which level order is to placed then
why need to go MIN level or DANGER Level.
u know at re-order level u can carry out production process effortlessly. Right?
But There is still uncertainty
Why ?
This Truck from its schedule
time is arriving late or early .
Both the possibility are there.
For example , In our Country
GST is applicable .
Many are sad
some went on strike.
Suppose Transport Company went on strike then?
If this truck as per my estimation
it was going to come on 3 or 4 day
but now truck comes very late .
this was a problem
there is lot of uncertainty
Placing an order and arriving the order,
time in between is called Lead time .
Placing an order and arriving the order, time in between is called Lead time .
the supplier gave
me 3 range.
Avg time
Min Time
or Max Time
Averagely if Production manager calls
Place an order and order arrives (truck arrives )
it takes 3 days
Max time based on observation is
5 days (trucks Arrives)
Min time taken will be 1 day (truck arrives)
because Driver in full speed gets the raw material
So this are different lead time scenario and uncertainty
Okay , i understood about
uncertainty and lead time
Still there is something incomplete.
there is 1 more thing that need your attention.
It is our sales .
Many times in year
there is inflation
Example Festivals
at that time it's inflation
usually i have observed
when there is cricket tournament
that time every company does branding on high scale.
example On Lays Cricketers pictures are printed.
There scheme on Chips ,
that on buying Chips you will get XXX runs
and if you complete 100 runs Chips offers to meet cricketers.
Correct ?
So in every business there
is Fluctuation in sales .
Inflation and Depression (recession)
If There is inflation
Sales needs to be increased.
Sales will be increased by increasing production.
So it is not decided
that driver will arrive .
It can be 1 day , 3 days or 5 days
averagely we have observed it takes 3 days .
We are still unknown with
the usage of raw material
Usage is dependent upon
1. lead time ( Placing an order and arriving the order, time in between is called Lead time .)
next important :
2. Usage
Usage can be in 3 level MIN , MAX or AVG.
Max Usage is likely to occur when we increase our sales - Inflation.
We have notice , When there is max usage
in one day
we took 300 potatoes
for production.
when there was min usage we notice 100 potatoes in one day
When there was avg usage we notice 200 potatoes we took in one day
From this we faced 2 uncertainty
1. lead time ( Placing an order and arriving the order, time in between is called Lead time .)
2.Usage because trade time is very important.
we need to look whether it's inflation or depression
Correct ? Understood?
Ok Production manager , How did u mark this re - order level ???
U might have calculated something right ? Yes
Re-order level calculation or
where to set re order level ?
if you where production manager
and you were asked to set ROL , How will you set?
You will think ,
that level
where i need to inform the supplier
about the raw material
ROL is kind of reminder .
So Question arises that when i need to place reminder ???
answer is best time.
Suppose if you want to play cricket
at 6:00 am naturally u keep alarm early
of 5:00 or 5:30 which depend upon you sleep time.
Similarly production manager
as per his production channel he
will set his ROL .
but any person,
If you ask to layman to set ROL
that i am never stock out
then he will ask you
Tell me the max time =5 days
now tell me max usage in a day = 300
that means
1500 potatoes
when in my stock any day 1500 potatoes are there can i mark it as ROL?
Because of this
u did something really well
Avg days it's use to come in 3 days
and its usage was 200 potatoes in a day
so ideally what will you use
3*200=600
But the reminder level
is set on 1500 potatoes
Correct ??? did you understand?
ROL= MAX Leadtime *Max Usage
See it is industries specific ,honestly
In material Chapter the Formula are bookish in,
real life scene is different
this is industries specific
9/10 times
u know that driver
takes Avg time to deliver the raw materials
and your usage is Avg
than u can keep your ROL = Avg Leadtime *Avg Usage.
i.e 3*200 =600 you can set your ROL
Because for Your industries it's Perfect.!
If Raw materials is readily available
and easily available then
your ROL will be
ROL= Min Leadtime* Min Usage
ROL =1*100=100
So ROL is Just a safety point of view
that where i want a reminder
or where i need a buzz that i need to call the supplier for order the raw materials
If i m very scared and my production is very important
then i can keep my ROL = Max Lt* Max Usage
and i can set this as ROL at 1500 potatoes
So we understood that when we reach at 1500 potatoes in stock box at that very point i need to place my order.
From here one more Question arises.
When we will call supplier
What will we ask ?
Quantity Right ? but How much ??
Now the question arise
how do i decide
that whenever i order
what quantity is to be order ?
this we will see in our next video :)
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