ACCA Materials Notes by PW

Topic

ACCA Materials Notes

Materials Purchasing Process

The process includes requesting materials, raising purchase requisitions, obtaining quotations, placing orders, receiving goods, issuing materials to production and processing payment.

Material Requisition

Raised by the Production department when materials are required for production. It is created and approved by the Production Manager and sent to Stores/Warehouse.

Purchase Requisition

Raised by Stores when required materials are not available. The Stores Manager creates and approves it before it is sent to the Purchasing department.

RFQ and Purchase Order

Purchasing uses an RFQ (Request for Quotations) to obtain supplier quotations. A Purchase Order (PO) is then prepared and approved before being sent to the supplier.

Goods Received Note

A GRN is prepared by the Warehouse after goods are received and inspected. It helps match goods received with the purchase order and supplier invoice.

Material Issue and Return

A Material Issue Note records materials issued from Stores to production. A Material Return Note records unused materials returned from production to Stores.

Material Transfer Note

Used to record the transfer of unused materials between different departments or factory locations.

Materials Control Account

Records material movements using double-entry accounting. Purchases increase materials inventory, while materials issued to production reduce it.

Purchase of Materials

Dr Materials Control; Cr Bank/Payables. The entry records the purchase of materials.

Direct Materials Issued

Dr Work-in-Progress; Cr Materials Control. Direct materials issued to production become part of production cost.

Indirect Materials Issued

Dr Production Overhead; Cr Materials Control. Indirect materials are treated as part of production overhead.

Material Returned from Production

Dr Materials Control; Cr Work-in-Progress. This records unused materials returned to Stores.

Return to Supplier

Dr Payables; Cr Materials Control. This records materials returned to the supplier.

Inventory Valuation

When the same material is purchased at different prices, a method is required to determine the cost of materials issued and the value of closing inventory.

FIFO

First-In, First-Out: the oldest inventory is assumed to be issued first. Closing inventory is therefore valued using the most recent purchase prices.

LIFO

Last-In, First-Out: the newest inventory is assumed to be issued first. Closing inventory is therefore valued using the oldest purchase prices.

Cumulative Weighted Average

The average cost is recalculated whenever new inventory is received. CWA = Total cost of inventory held ÷ Total units held.

Periodic Weighted Average

The average cost is calculated once at the end of the accounting period. PWA = Total cost of receipts and opening inventory ÷ Total units received and opening units.

CWA vs PWA

CWA changes after each receipt, while PWA uses one average price for the accounting period. CWA therefore reflects price changes more frequently.

FIFO and LIFO in Rising Prices

In the comparison covered in the lecture, FIFO gives lower COGS and higher profits, while LIFO gives higher COGS and lower profits when prices are rising.