CMA Intermediate · Cost Accounting

Material Costs: formula sheet

Full chapter guide

Key formulas

Total material cost: Material consumed = Opening stock + Purchases (including freight in, duties) − Closing stock; Use cost of purchase net of trade discount. Add costs of bringing material to the factory. Returns to suppliers are deducted.
Direct material test: Direct material = traceable to the cost unit + significant in value; If either condition fails, treat it as indirect material and include it in overheads.
Prime cost link: Prime cost = Direct materials + Direct labour + Direct expenses; Direct materials are the first component of prime cost. Indirect materials never enter prime cost.
Order of the procedure: Purchase requisition → Quotations and supplier selection → Purchase order → Receipt and inspection → GRN → Bill checking → Payment; Learn this sequence. Questions often ask you to arrange or explain the steps in order.
Three-way matching: Invoice checked against Purchase order (rate, terms) + GRN (quantity received) + Inspection report (quality accepted); Payment is made only for quantity accepted, at the rate agreed in the PO.
Amount payable for a bill: Amount payable = Quantity accepted × PO rate − trade discount + taxes and other agreed charges, less any advance paid; Use accepted quantity, not the quantity invoiced or dispatched. Treat recoverable GST as per the question.
Cost of material purchased: Cost of purchase = Purchase price + non-recoverable duties and taxes + freight, handling and other directly attributable costs − trade discounts and rebates; Consistent with the CAS 6 and AS 2 approach to material cost. Recoverable taxes such as eligible input tax credit are excluded.
Reorder level (ROL): ROL = Maximum consumption × Maximum reorder period; Reorder period is the lead time. Use maximum usage and maximum lead time.
Minimum level: Minimum level = ROL − (Normal consumption × Normal reorder period); Normal consumption is the normal (average) usage given in the question; the normal reorder period is the normal lead time.
Maximum level: Maximum level = ROL + ROQ − (Minimum consumption × Minimum reorder period); ROQ is the reorder quantity, often the EOQ.
Danger level: Danger level = Average consumption × Lead time for emergency purchases; Some questions use minimum level × emergency lead time ratio; follow the data given.
Average stock level: Average stock level = (Minimum level + Maximum level) ÷ 2; Alternative: Minimum level + ½ × ROQ. Both are accepted; use the one the question suits.
ABC value: Annual consumption value = Annual quantity × Unit price; Rank in descending order of value, then compute cumulative % of items and of value.
Inventory turnover ratio: Turnover = Cost of material consumed ÷ Average stock; Used to spot slow-moving items.
Economic Order Quantity: EOQ = √(2 × A × O ÷ C); A = annual consumption in units, O = ordering cost per order, C = carrying cost per unit per year. If carrying cost is a percentage, C = percentage × purchase price per unit.
Carrying cost per unit: C = carrying cost % × price per unit; Use this when the question gives carrying cost as a percentage of the stock value.
Number of orders per year: Number of orders = A ÷ EOQ; Gives how many orders you place in a year.
Annual ordering cost: (A ÷ Q) × O; Q is the order quantity used.
Annual carrying cost: (Q ÷ 2) × C; Based on average stock of Q ÷ 2.
Total inventory cost with discounts: Total cost = A × price + (A ÷ Q) × O + (Q ÷ 2) × C; Compute at each price level and pick the lowest total. Include purchase cost, as price differs between options.
EOQ condition: Annual ordering cost = Annual carrying cost at EOQ; A quick check of your answer.
FIFO issue rule: Issue from the earliest receipt lots first, in order, until the issue quantity is met; Closing stock is made up of the latest lots.
LIFO issue rule: Issue from the latest receipt lot on hand first, then move back to earlier lots; In a perpetual ledger, 'latest' means latest lot on hand on the date of issue, not the latest of the whole period.
Weighted average rate (perpetual): Rate = Value of stock on hand ÷ Quantity on hand, recalculated after each receipt; Issues do not change the rate. Receipts do.
Weighted average rate (periodic): Rate = (Opening stock value + Receipts value) ÷ (Opening quantity + Receipts quantity); Use only when the question asks for one rate for the whole period.
Simple average rate: Rate = Sum of receipt rates ÷ Number of receipt rates; Ignores quantities. Issues plus closing stock may not equal total receipts.
Standard price method: Material price variance = (Standard price − Actual price) × Quantity received; Positive means favourable when actual price is below standard. Issues are charged at standard price.
Stores ledger check: Opening stock value + Receipts value = Issues value + Closing stock value; Holds for FIFO, LIFO and perpetual weighted average. Always verify it.
Normal loss cost per good unit: Cost per good unit = (Total cost of input − Sale value of normal loss) ÷ Good units expected; Good units expected = Input − Normal loss units. Use this when the loss is a normal part of the process.
Abnormal loss value: Abnormal loss = Abnormal loss units × Cost per good unit; Credit the process or job account, debit Abnormal Loss Account. Then credit it with the sale value and transfer the balance to Costing Profit and Loss Account.
Normal scrap (in process or job): Sale value of scrap is credited to the process or job account (or to overheads); This reduces the cost of good output. Scrap of a specific job is credited to that job.
Spoilage, normal: Net spoilage cost = Cost of spoiled units − Disposal value; If normal and common to all jobs, charge to production overhead. If due to a specific job, charge to that job.
Spoilage, abnormal: Net loss = Cost of spoiled units − Disposal value → Costing Profit and Loss Account; Never include abnormal spoilage in the cost of good units.
Defectives, rework: Rework cost = Material + Labour + Overhead for rectification; If normal and general, charge to production overhead. If abnormal or job-specific, charge to Costing Profit and Loss Account or that job.
Obsolete stock loss: Loss = Book value of stock − Realisable value; Charge to Costing Profit and Loss Account if abnormal; to overheads if normal and regular.
Closing stock valuation rule: Value = Lower of (Cost, NRV); Apply to each item or each group of similar items. Do not net gains on one item against losses on another.
Net realisable value: NRV = Estimated selling price − Estimated costs of completion − Estimated selling costs; For raw materials not being sold, replacement cost is often used as the best available measure of NRV, provided the finished goods are expected to sell at or above cost.
Stores ledger balance: Closing balance = Opening balance + Receipts − Issues; Check this in both quantity and value. The quantity must agree with the bin card.
Stock discrepancy: Shortage or excess = Physical quantity − Book (bin card) quantity; A negative result is a shortage. A positive result is an excess. Value it at the stores ledger rate.
Physical stock adjusted to the required date: After-date count: Required-date stock = Count stock + Issues − Receipts after the required date Before-date count: Required-date stock = Count stock + Receipts − Issues between the count date and the required date; Use the first formula when the count is taken after the required date, such as a count after the balance sheet date. Take only the issues and receipts that fall after the required date. Use the second formula when the count is taken before the required date. Take only the receipts and issues between the count date and the required date. Work in quantity first, then value.

Quick revision

Direct material forms part of the product and can be traced to it; indirect material cannot be traced economically.
Reorder level = maximum consumption × maximum reorder period.
Minimum level = reorder level − (normal consumption × normal reorder period).
Maximum level = reorder level + reorder quantity − (minimum consumption × minimum reorder period).
Danger level = average (normal) consumption × lead time for emergency purchases. Some texts instead call it a level below the minimum level, based on normal consumption. Another variant uses normal consumption × emergency reorder period, which is the same idea. Check the question's wording and use the data it gives.
EOQ = √(2 × A × O ÷ C), where A is annual demand, O is ordering cost per order and C is carrying cost per unit per year.
At EOQ, total ordering cost equals total carrying cost.
FIFO issues at the oldest price, so closing stock is valued at recent prices.
LIFO issues at the latest price, so closing stock is valued at older prices.
Weighted average rate = total cost of stock ÷ total units in stock, recomputed after each receipt in the periodic or perpetual method used.
ABC analysis classifies items by value of consumption so tight control goes to high-value items.
Normal loss is absorbed in the cost of good units, and any realisable (scrap) value of the normal loss is deducted from the cost before the rate per good unit is found. Abnormal loss is valued at the same cost per unit as good units, less its own scrap or realisable value, and the net amount is written off to the costing profit and loss account. Treatment can differ by type of loss, such as scrap, waste, spoilage and defectives, so classify first.

Common mistakes

Calling every material used in production direct material. Fix: Apply both tests: traceable to the unit and significant. Lubricants, consumable stores and small items like nails are indirect.
Treating the classification of an item as fixed for all businesses. Fix: Read the facts. Say that classification depends on the cost unit and on materiality, and classify as the question directs.
Treating purchase requisition and purchase order as the same document. Fix: Requisition goes inside the business to the purchase department. The order goes outside to the supplier.
Saying the purchase department raises the requisition. Fix: The store keeper or the user department raises it. The purchase department acts on it.
Using normal usage and lead time to compute reorder level. Fix: ROL uses the maximum of both. Minimum level uses the normal values.
Forgetting to subtract minimum consumption during minimum lead time in maximum level. Fix: Always write the full formula: ROL + ROQ − (min usage × min lead time).
Using monthly demand directly in the formula while ordering and carrying costs are yearly. Fix: Convert A to a yearly figure first and keep all inputs on a yearly basis.
Treating carrying cost percentage as the rupee value C. Fix: Multiply the percentage by the unit price to get C in rupees per unit per year.
Using the latest receipt of the whole period for a LIFO issue, even when that receipt has not yet arrived on the issue date. Fix: In a perpetual ledger, on each issue date use only lots already on hand, newest first.
Averaging the rates of receipts (simple average) when the question asks for weighted average. Fix: Weight each rate by quantity. Divide total value by total quantity.

Exam tips

In MCQs, look for the key phrase: traceable to a cost unit means direct, and used generally means indirect.
For a 14-mark theory answer, structure it as meaning, classification, importance and objectives, in that order.
When a table of items is given, add a short reason beside each classification. It earns step marks.
In numerical problems, show the consumption working line by line, including freight and discount adjustments.
Link material cost to prime cost or the cost sheet when the question mentions either.
For a 'discuss the procedure' question, write the steps in order with the document name in bold, who prepares it, and its purpose.
Always state the three-way match when explaining bill checking. It earns easy marks.
In numerical questions, take the accepted quantity first and then apply rate, discount and charges.