Accounting for Raw Materials

De La Salle University Summary of Accounting for Raw Materials I.

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M. GUIA

Control for Materials a. Objectives i. To provide adequate supply for efficient and uninterrupted operation ii. To maintain minimum investments in materials and supplies iii. To avoid loss of time and cost of handling b. Types i. Physical Control 1. Limited Access 2. Segregation of Duties 3. Accuracy in recording ii. Control of investments 1. Re-Order Point 2. Economic Order Quantity a. Tabular Method b. Formula Method 3. Safety Stock Source Documents a. Materials Requisition Slip b. Purchase Requisition c. Purchase Order d. Receiving Report Inventory System a. Periodic System b. Perpetual System Purchasing Issues a. Purchase Price and Cost b. Discounts i. Quantity or Trade Discounts ii. Cash Discounts 1. When Taken Method (Gross Method) 2. When not taken method (Net Method) 3. When Offered method (Allowance Method) c. Purchase Returns d. Freight-In i. Recording 1. Direct Charging (included in the raw materials) a. Relative Peso Value Method b. Relative Weight Method 2. Indirect Charging (included in factory overhead) Costing Methods a. Specific Identification b. Cost Flow Assumptions i. FIFO ii. Weighted Average Spoiled materials a. Charged to specific job b. Charged to all production Defective Materials a. Charged to specific job b. Charged to all production Scrap Materials a. Traced to a specific job b. Not traceable to a specific job c. From factory supplies/indirect materials

De La Salle University

De La Salle University Problems on Accounting for Raw Materials

M. GUIA/E. MAGCALE

Problem 1 (Re-Order Point): Assume that the expected daily usage of an item of materials is 100 units. The anticipated lead time is 4 days, and it is estimated that a safety stock of 800 units is needed. Required: Compute for the Re-Order Point. Problem 2 (EOQ): The following information pertains to a particular inventory of materials: Ordering Costs P 10.00/order Carrying Costs of Inventory P 0.80/unit Annual Demand for Raw Materials 10,000 units Required: 1. Using the tabular method and the following order sizes, compute the EOQ of the raw material: (100, 300, 500, 700, and 900 units) 2. Using the formula method, compute for the EOQ Problem 3 (EOQ and Re-Order Point): A television manufacturer buys wooden cabinet from outside suppliers at P 400 per set. Total annual needs are 5,000 units at a rate of 20 sets per working day. The following cost data are available: Desired annual returns on inventory investment (10% @ P400) P 40 Rent, Insurance, and Taxes per unit P 10 Total Annual Carrying Costs per unit P 50 Ordering Costs P 50 Required: 1. Using the tabular method and the following order sizes, compute the EOQ of the raw materials: (20, 40, 50, 100, 200, 300) 2. Using the formula method, compute for the EOQ 3. Using the computed EOQ, compute the Annual ordering costs and annual carrying costs. 4. Assuming a lead time of 3 days with no desired safety stock, what will be the company’s reorder point? Problem 4 (Costing Methods): Assume the following information for a particular inventory: August 1: Inventory 400 units @ P10 P 4,000 12 Purchase 600 units @ P 12 7,200 16 Issue 500 units 18 Purchase 300 units @ P 15 4,500 20 Issue 200 units 25 Purchase 400 units @ P 14 5,600 28 Issue 400 units Required: Compute for both the value of ending inventory and cost of materials used/issued using: 1. Periodic – FIFO 2. Perpetual – FIFO 3. Periodic – Average (Weighted Average) 4. Perpetual – Average (Moving Average) Problem 5 (Costing Methods) The Heaven and Earth made the following materials purchases and issues during January: January 1 Balance on hand 1,000 units @ P4.00 each 3 Issued 250 units 5 Received 500 units @ P4.50 each 6 Issued 150 units 10 Issued 110 units 11 Factory returned 10 units to the store room that were issued on the 10th 15 Received 500 units @ P5.00 each 20 Returned 300 units to vendor from January 15th purchases 26 Issued 100 units

De La Salle University Required: Compute for both the value of ending inventory and cost of materials used/issued using: 1. Periodic – FIFO 2. Perpetual – FIFO 3. Periodic – Average (Weighted Average) 4. Perpetual – Average (Moving Average) Problem 6 (Discounts): The Jenelle Company purchase materials listed at P 40,000; terms 2/15, n/30 on August 1: Required: Journal entries to record the purchase and payments assuming (a.) Full payment is made on August 14, (b.) Full payment is made on August 30 using the following: 1. Gross Method 2. Net Method 3. Allowance Method Problem 7 (Discounts): On January 1, Baxter Corporation purchase materials listed at P 400,000 while receiving a trade discounts of 10%, and 5%, while the credit term is 5/10, n/30. Required: Journal entries to record the purchase and payments assuming (a.) Full payment is made on January 9, (b.) Full payment is made on January 30 using the following: 1. Gross Method 2. Net Method 3. Allowance Method Problem 8 (Freight): An invoice for raw materials A, B, and C is received from the Bulacan Corporation. The invoice totals are: A – P 25,000; B – P 15,000; and C – P 10,000. The freight charge on this shipment weighing 10,000 pounds is P 1,500. Shipping weights for the respective materials are 5,000; 2,000, and 1,000 respectively. Required: Record the purchase and freight using: 1. Direct Charging a. Relative Peso Value Method b. Relative Weight Method 2. Indirect Charging Problem 9 (Periodic): Adrian Taylor Corporation is a newly formed entity that engages in the purchase and resale of amphibious tour vehicles. Purchases for the first year of operation were as follows: Date Purchases 7-Jan 50 units @ P 15,000 each 15-Mar 70 units @ P 16,000 each 16-Jun 30 units @ P 16,500 each 3-Aug 90 units @ P 17,000 each 11-Oct 25 units @ P 17,200 each Sales for this first year of operation amounted to 210 units and totaled P 4,250,000. (a) If Adrian Taylor uses the first-in, first-out (FIFO) inventory method (periodic approach), what values would be assigned to ending inventory and cost of goods sold? How much is gross profit? (b) If Adrian Taylor uses the last-in, first-out (LIFO) inventory method (periodic approach), what values would be assigned to ending inventory and cost of goods sold? How much is gross profit? (c) If Adrian Taylor uses the weighted-average inventory method (periodic approach), what values would be assigned to ending inventory and cost of goods sold? How much is gross profit? Problem 10 (EOQ): An auto parts supplier sells Hardy-brand batteries to car dealers and auto mechanics. The annual demand is approximately 1,200 batteries. The supplier pays P28.00 for each battery and estimates that the annual holding cost is 30 percent of the battery's value. It costs

De La Salle University approximately P20 to place an order (managerial and clerical costs). The supplier currently orders 100 batteries per month. Required: a. Determine the ordering, holding, and total inventory costs for the current order quantity. b. Determine the economic order quantity (EOQ). c. How many orders will be placed per year using the EOQ? d. Determine the ordering, holding, and total inventory costs for the EOQ. How has ordering cost changed? Holding cost? Total inventory cost? Problem 11 (Spoiled Materials) Job 204 called for the making of 4,000 with these unit costs: Direct Materials P 15.00 Direct Labor 13.00 Factory overhead (includes a P1.00 Allowance for spoiled work) 12.00 TOTAL P 40.00 When the order was completed, 200 rejected units, a normal number, were sold for P 18.00 each. Required: 1. Entries if the loss is charged to all production 2. Entries if the loss is charged to the specific job Problem 12 (Defective Materials) Job 204 called for the making of 4,000 with these unit costs: Direct Materials P 15.00 Direct Labor 13.00 Factory overhead (includes a P1.00 Allowance for defective units) 12.00 TOTAL P 40.00 During processing 300 units were found to be defective and required the following total additional costs: materials – P 2,000; labor – P 4,000; and overhead – P 2,000. Required: 1. Entries if the additional costs is charged to all production 2. Entries if the additional costs is charged to the specific job Problem 13 (Freight) An invoice for X, Y, and Z is received from Heavy Corp. Invoice totals are X – P11,250; Y – P 13,500; and Z – P 15,750. The freight charges on this shipment of 18,000 pounds total P 1,620. Weights for the respective materials are 4,500, 6,000, and 7,500 pounds respectively. Required: 1. Cost per pound to be entered on the stock cards for each materials based on cost. 2. Cost per pound to be entered on the stock cards for each materials, based on shipping weight. Problem 14 (Spoiled Materials) The Bedrock Company is a manufacturer of golf clothing. During the month, the company cut and assembled 8,000 golf jackets. One hundred of the jackets did not meet specifications and were considered “seconds”. Seconds are sold for P 80.00 per jacket, whereas first quality jackets sell for P 399.50. During the month, Work-In Process was charged for a total of P 1,320,000: P 360,000 for materials, P 480,000 for labor, and P 480,000 for factory overhead. Required: Entries required for each of the following conditions: 1. Loss due to spoiled work is spread over all jobs 2. Loss due to spoiled work is charge to a specific job. Problem 15 (Periodic and Perpetual): The following information was available from Alexander Company’s January inventory records: Unit Unit Cost Balance 1/1 2,000 9.775 Received 1/6 1,500 10.300 1/26 3,400 10.750 Issued

De La Salle University 1/7 1,800 1/31 3,200 Required: Compute the cost of materials used and the cost assigned to the January 31, inventory using: 1. Perpetual inventory records and average costing methods; and 2. Periodic inventory system at average cost