Controlling and Costing Materials:

Effective materials management is essential in order to (1) provide the best service to customers, (2) produce at maximum efficiency, and (3) manage inventories at predetermined levels to stabilize investments in inventories.
Successful materials management requires the development of a highly integrated and coordinated system involving sales forecasting, purchasing, receiving, storage, production, shipping, and actual sales. Both the theory of costing materials and inventories and the practical mechanics of cost calculations and record keeping must be considered.
Costing materials present some important, often complex, and sometime highly controversial questions concerning the costing of materials used in production and the cost of inventory remaining to be consumed in a future period. In financial accounting, the subject is usually presented as a problem of inventory valuation; in cost accounting, the primary problem is the determination of the cost of various materials consumed in production and a proper charge to cost of goods sold.
The discussion of materials management in this chapter deals with:

Materials Costing Methods:

The ultimate objective in cost accounting is to produce accurate and meaningful figures. These figures can be used for purposes of control and analysis and eventually matched against revenue produced in order to determine net operating income.
After the unit cost and total cost of incoming materials are entered in the received section of a materials ledger cards, the next step is to cost these materials as they move either from storeroom to factory as direct materials or indirect materials or from storeroom to marketing and administrative expense accounts as supplies. The more common methods of costing materials issued and inventories are:

Cost of Materials in Inventory at the End of a Period:

When the cost basis is used in costing inventories for financial statements and income tax returns, the sum total of the materials ledger cards must agree with the general ledger materials control account which, in turn, is the materials inventory figure on the balance sheet. Unless a shift from the cost basis is made in valuing the year end inventory, the method used for costing materials issued is the method used for assigning dollars to inventory.

Costing procedures for scrap, spoiled goods, and defective work:

Generally, manufacturing operations cannot escape the occurrence of certain losses or output reduction due to scrap, spoilage, or defective work management and the entire personnel of an organization should cooperate to reduce such losses to a minimum. As long as they occur, however, they must be reported and controlled.

Summary of Materials Management:

Materials managers are constantly confronted with these problems and requirements:

1. Inventories account for a large portion of the working capital requirements of most businesses. This fact makes materials or inventory management a major problem requiring constant attention by all three management levels (top, middle and low).
2. At present, the problem of materials management has become even more acute due to market conditions and inflation.
3. Effective materials management and materials control is found in an organization in which individuals have been vested with responsibility for, and authority over, the various details of procuring, maintaining, and disposing off inventory. Such a person or persons must have the ability to obtain, coordinate, and evaluate the necessary facts and to take actions when and where needed.