Valuation of materials – Meaning
One of the main objects of cost accounting is the ascertainment of accurate costs and the accuracy of costs depends upon the ascertainment of the accurate cost of materials consumed and labour used in the production of a particular product. Material is the most important element of cost and it should be valued and charged to cost units in a proper manner. The valuation of materials can be studied under two parts:
(I) Valuation of Materials Purchased (or Received), and
(II) Valuation of Materials Issued.
Valuation of materials purchased/received
The valuation of the materials received/purchased is made on the basis of actual cost which comprises:
- The purchase price or invoice price charged by the supplier (less trade discount, if any, allowed by him).
- Taxes, duties, packing, freight, carriage & cartage, transit insurance and octroi paid and charged by the supplier or directly paid by the purchaser.
- Expenses on purchasing, receiving, inspecting and storing the materials.
The expenses under (iii) above are of course incurred in connection with materials purchased but from the view point of convenience and practicability, these are not included in the cost of materials purchased but are treated as part of overhead.
In connection with the calculation of the cost of materials purchased, the following items require a special mention:
1. Discount, and 2. Cost of Containers.
Discount may be expressed as a concession or reduction in the invoice price of materials bought, allowed by the supplier to the buyer or customer. It may be divided into three parts:
(a) Trade Discount: It is a reduction off the selling price (or invoice price) allowed by the seller to the buyer on account of a business custom or usage. The amount of trade discount received by the purchaser is deducted from the invoice price of the materials purchased.
(b) Quantity Discount: It is a type of special concession or reduction off the selling price allowed by seller to buyer on account of bulk purchases. It is allowed to encourage bulk orders and its rate varies according to the quantity ordered and purchased by the buyer. Quantity discount is also deducted from the invoice price of the materials purchased to calculate their cost.
(c) Cash Discount: Cash discount is a concession or allowance allowed by the creditor (or supplier) to the debtor (or customer) on account of ready cash payment or payment before the expiry of the specified credit period. It represents interest on amount due for the unexpired credit period. As such, cash discount is treated as a financial item not to be deducted from the cost of the materials purchased.
Cost of Containers
The suppliers of materials generally supply the materials in containers. The treatment of the cost of containers may be given as follows:
(a) Non-returnable containers not charged separately by the supplier: If materials have been supplied in non-returnable containers for which no separate charge has been made in the invoice, no treatment is needed in respect of containers for calculating the cost of materials. If the containers have some realizable value, it should be estimated and deducted either from the cost of materials or from the amount of factory overhead.
(b) Non-returnable containers charged separately by the supplier: If materials have been supplied in non-returnable containers, which have been charged separately and are neither returnable nor possess any realizable value, their price should be included in the cost of materials.
(c) Returnable containers charged separately by the supplier: If materials have been supplied in returnable containers which have been charged separately and these can be returned to the supplier or resold, the difference between their cost price and returnable value (or resale value)’ should be included in the cost of materials.
If the materials are supplied in returnable containers on which the buyer is to get credit for the full price charged (by the supplier) on their return, the cost of containers is not included in the cost of materials on the presumption that these shall be returned to the supplier in due course.
A manufacturer purchased 5,000 units of material No. X — 51 @ $15 per unit less trade discount of 2% on invoice price. Freight paid was $1,000, Carriage and Cartage $200, Octroi $750. The expenses of purchasing, receiving and storing for the year amounted to $5,000. Ascertain the cost of material per unit.
Note: The expenses of purchasing, receiving and storing are not considered for computing the cost of materials purchased for the purpose of convenience in accounting.
A consignment consisted of two chemicals A and B. The invoice gave the following data:
A shortage of 200 kgs. in A and 128 kgs. in B was noticed due to breakages. What is the stock rate you would adopt for pricing issues, assuming a provision of 5 percent towards further deterioration?
(3) The following details are available in respect of a consignment of 1,250 kgs. of material ‘X’.
Cost of Containers @ $60 per container for 50 kgs. of material. Rebate is allowed @ $40 per container if returned within six weeks, which is a normal feature.
One container load of material was rejected on inspection and not accepted.
On the basis of the above, you are required to find out the landed cost per kg. of material ‘X’.