In relation to the estimation of the cost of the product for pricing decisions, stores accounting assumes a key role.
Material costing is very important in terms of the valuation of the cost of materials consumed by the production
department as well as in terms of the estimation of the value of materials held in stock. We will discuss the materials costing under classifications of the receipt of materials, issue of materials, and of the stocks held at the end of the accounting period.
We will see the various methods used in costing and their limitations.
Costing of the Receipt of Materials
The factors that are to be included in the building up of the cost of the materials received are material price, freight charges; insurance and taxes. Price usually refers to the price quoted and accepted in the purchase orders Prices may often be stated in various ways, such as net prices, prices with discount terms, free on board, cost insurance and freight, etc. For costing purposes we have to work out the actual cost incurred by taking price quoted by supplier as the basis. subtracting the discounts and adding any other expenses not covered.
The freight costs incurred in transporting the goods are usually collated under a separate head. Sometimes prices may include this element. Hence care should be taken to
ensure that there is no double counting,
Goods in transit are mostly covered by insurance.
All such insurance expenses must be calculated and added to the base cost and transportation cost.
Under the miscellaneous head, we need to classify costs incurred by way of customs duties, taxes, and packages. Such separate classifications give a better framework for cost control. In sum, we can say that cost of the materials received is equal to the price quoted less discounts, plus freight, insurance, duties, taxes and package charges. Very often such detailed classification helps in quicker analysis and effective control. Duty drawback statements, for example, are prepared by many organisations which want to avail of the exemption of duties in respect of the value exported.
Such statements require a detailed break-up of various clements of cost. In the absence of the detailed classifications discussed above, it will become very difficult.to prepare such statements.
Costing of the Issues to Production
First in first out (FIFO), last in first out (LIFO), average cost, standard cost, base stock method, market price at the time of issue, latest purchase price, replacement or current cost are some of the methods used in costing the issues to production
There are several other methods of costing also. We and frequently used methods in detail.
The assumption made here is that the oldest stock is depleted first. Therefore at the time of issue, the rate pertaining to that will be applied. This is logical in the case of items which deteriorate with time. Since actual prices are used, there cannot be any profit or loss’ in the pricing arrangements. In FIFO process, the value of the stocks held
on hand is the money that has been paid for that amount, of stock at latest price levels and hence can straightaway be used in balance sheet, truly reflecting the value.
The limitations of FIFO process are that the process becomes unwieldy when too many changes in price levels are encountered and the fact that this method does not provide a satisfactors answer to costing returns from stores.
Laito- The basic assumption here is that the most recent receipts are issued first.
Under LIFO system. In a period of rising prices, latest prices are charged to the issues, thereby leading to lower
reported profits and hence savings in taxes. When there are wide fluctuations in price levels, LIFO tends to minimise unrealised gains or losses in inventory. However, LIFO syse semper disadvantages as that of FIFO systems.
Average cost – In this method, the issues to the production department are split into equal batches from each at stock. It is a realistic method reflecting the price
tems have the shipment levels and stabilising the cost figures.