Direct material cost includes the cost of

material, indirect taxes, Transport, storage and

delivery charges, packing and container
charges less quantity discount and trade
discount
Direct Material
Direct materials are those materials which are
directly identifiable and traceable as a part of the
final product.
◦ It may be raw material like wood used in making
tables and chairs,
◦ Component parts used in a product ,e.g., tyres and
tubes in a car,
◦ Any material used in primary packing of the
products, like cans for tinned food and drink.
Materials cost constitutes a prime part of the
total cost of production of manufacturing firms.
There fore it becomes very important to have
efficient control of materials. Materials control
basically aims at efficient purchasing of
materials, their efficient storing and efficient
consumption.
Material stock control
Ordering
Purchasing
Receipt
Storage
Issues
Bill of material
It is prepared by the Engineering/ Planning
department. Bill of material acts as an
authorisation to the stores department in
procuring the materials and the concerned
department in material requisition from the
stores. It is circulated to the following
departments:
 Purchase Department
 Stores department

 Cost Accounts department

 Production department
Job No. :
Bill of material
Si.No:
Job starting date:
Date:
Job
Si. Finishing date:
Materia Descripti Size/unit Qty. Issues Particulars
No. l code on s
Date Qty. Rate Amount
(Rs.) (Rs.)

Requested by Checked by Approved by

____________ __________ ___________
Purchase Requisition Note
(prepared by stores)
Si NO.: Date :

Materia Descr Size Qt Job/Deptt Delivery Purchase Order

l code iption y. .
Date Place No Rate Supplie
. r

Authorised signature
______________
Other documents
Purchase order
Material Inspection Note
Goods Received Note
Stores/Material requisition note
Material Transfer note
Material return Note
Bin Card
Stores ledger
Bin card
Bin No. : Maximum
Level:
Material code No. : Minimum level
:
Material Description :
Receipts Issues Re-Order
Balance Remarks
Level :
Date
Stores G.R.N.
Ledger Qty.
No. : Date Req. No Qty. Qty.
No Units Units units
Methods of Pricing Material
Issues:
Actual Cost method
First in First out method (FIFO)
Last in First out method (LIFO)
Simple Average Cost Method
Weighted Average cost method
Standard Cost Method
Base Stock Method
Market Price Method
ILLUSTRATION-1
From the following information prepare a Stores Ledger
Account under FIFO and LIFO method:

1-1-2003 Opening Stock 1000 units at Rs. 5

each.
5-1- 2003 Purchased 900 units at Rs.6 each.
10-1-2003 Issued 1200 units.
12-1-2003 Purchased 800 units at Rs. 6.20 each.
15-1-2003 Purchased 300 units at Rs.6.40 each.
19-1-2003 Issued 400 units.
22-1-2003 Issued 600 units.
27-1-2003 Purchased 200 units at Rs.6.50 each.
31-1-2003 Issued 600 units.
 LIFO AND WEIGHTED
AVERAGE METHOD
Prepare ‘stores ledger’ and enter the following
transactions adopting the FIFO and weighted
average method of pricing out issues:

Sept.1 Opening balance : 50 units at Rs.30 per

unit
5 Issued 2 units
7 Purchased 48 units at Rs. 40 per unit
9 Issued 20 units
19 Purchased; 76 units at Rs. 30 per unit
24 Received back 19 units out of the units
issued on 9th September
27 Issued 10 units
A case of shortage of
inventory
 From the following information select the most suitable
method of pricing materials issues and write up a Stores
Ledger Card based on LIFO method:
Jan.2003
1 Opening balance 24000 kg @ Rs.7500 per ton.
1 Purchased 44000 kg @ Rs.7600 per ton
3 Issued 10000 kg.
5 Issued 16000 kg.
12 Purchased 10000 kg. @ Rs.7800 per ton.
13 Issued 24000 kg.
18 Issued 25000 kg
22 Purchased 50000 kg. @ Rs.8000 per ton
28 Issued 20000 kg.
31 Issued 22000 kg.
Economic Order
Quantity(EOQ)
Economic Order Quantity
(EOQ)
EOQ =
2 x Annual Consumption X Ordering
Cost
Storage(holding)cost per unit

Storage (holding) cost per unit =

Cost per unit X Storage cost(%)
Fixation of Inventory levels:
 Re-order level:
= Maximum usage X Maximum lead time
or
= Minimum stock level + (Average or Normal usage X
Average lead time)
Minimum stock level = Re-order level – (Average usage X
Average lead time)
Maximum stock level = Re-order level + Re-ordering
quantity – (Minimum usage X Minimum lead time)
Danger level = Average usage X Maximum re-order
period for emergency purchases
Average stock level
= Minimum stock level + ½ of Re-order quantity
or
= ½ (Minimum stock level + Maximum stock level)
Inventory Control
ABC Analysis:
Under this technique, the items in inventory are classified
according to value of usage. This method divides inventory into
three classes: A, B and C. Items in class ‘A’ constitute the most
important class of inventories so far as the proportion (or
percentage) in the total values of inventory is concerned. Items
in class ‘B’ constitute an intermediate position while those in
item ‘c’ are quite negligible.
 Two Bin System
 Perpetual Inventory system
 Continuous Stock taking
 Periodic Stock taking system
 VED analysis
 FNSD Analysis
 Pareto Analysis
 JIT