ASCM-L01 — Costing of Materials
Understanding material costs, material control systems, inventory management, and the importance of materials in product costing.
Learning Objectives
By the end of this lesson students should be able to:
• define material cost
• distinguish direct and indirect materials
• explain material control procedures
• calculate material costs
• understand inventory valuation methods
• explain the importance of material cost control
• answer examination-style questions
CONCEPT OVERVIEW
What are Materials?
Materials are the physical items used in the production of goods or provision of services.
Material costs often represent a significant proportion of total production costs.
Importance of Material Costing
Material costing helps businesses:
• determine product costs
• control material expenditure
• reduce waste
• improve profitability
• support pricing decisions
DIRECT AND INDIRECT MATERIALS
| Type | Description | Example |
|---|---|---|
| Direct Materials | Form part of the finished product | Timber in furniture |
| Indirect Materials | Used in production but not identifiable with a specific product | Lubricants, cleaning materials |
Examples
Direct Materials:
✓ Wood
✓ Steel
✓ Fabric
✓ Plastic Components
Indirect Materials:
✓ Lubricating Oil
✓ Cleaning Supplies
✓ Small Tools
✓ Factory Consumables
MATERIAL CONTROL
Objectives of Material Control
✓ Ensure sufficient inventory
✓ Avoid production interruptions
✓ Prevent theft and wastage
✓ Reduce storage costs
✓ Improve efficiency
Common Material Documents
| Document | Purpose |
|---|---|
| Purchase Requisition | Request materials |
| Purchase Order | Order materials |
| Goods Received Note (GRN) | Record receipt of materials |
| Materials Requisition Note | Authorise issue of materials |
| Inventory Record Card | Track inventory movements |
INVENTORY VALUATION METHODS
FIFO (First In, First Out)
Assumes materials purchased first are issued first.
Closing inventory consists of the most recently purchased materials.
AVCO (Average Cost)
Materials are issued at a weighted average cost.
Average Cost
=
Total Cost of Inventory
÷
Total Units Available
WORKED EXAMPLES
Example 1 — Direct Material
A furniture manufacturer uses timber costing £8,000.
Timber forms part of the finished product.
Classification:
Direct Material
📌 Additional structured questions are available in the 🎯 Question Papers + YouTube Explanation section.
Example 2 — FIFO Issue
Purchase:
100 units @ £5
100 units @ £6
Issue:
120 units
FIFO Cost:
100 × £5
+
20 × £6
=
£620
Example 3 — AVCO
Inventory:
100 units @ £5
100 units @ £7
Total Cost:
£1,200
Average Cost:
£1,200 ÷ 200
=
£6 per unit
ACADEMIC SUPPORT NOTE
📌 Material costing is a core AS Cost & Management Accounting topic.
Students should master:
✓ Direct vs Indirect Materials
✓ Material Control Documents
✓ FIFO
✓ AVCO
✓ Material Losses
✓ Inventory Cost Calculations
🎥 Full worked examples are available in the YouTube Learning Library.
📩 Students may submit material costing doubts through the Student Doubt Support facility.
MATERIAL LOSSES
Normal Loss
Expected loss occurring under efficient operating conditions.
Examples:
✓ Evaporation
✓ Shrinkage
✓ Cutting Waste
Abnormal Loss
Unexpected loss arising from inefficiency or unusual events.
Examples:
✓ Theft
✓ Fire Damage
✓ Careless Handling
ADVANTAGES & LIMITATIONS OF INVENTORY VALUATION METHODS
| Method | Advantage | Limitation |
|---|---|---|
| FIFO | Realistic inventory valuation | Can increase issue costs during inflation |
| AVCO | Smooths price fluctuations | Less precise than FIFO |
WORKED EXAMPLES
Example 1 — Direct Material
A furniture manufacturer uses timber costing £8,000.
Timber forms part of the finished product.
Classification:
Direct Material
📌 Additional structured questions are available in the 🎯 Question Papers + YouTube Explanation section.
Example 2 — FIFO Issue
Purchase:
100 units @ £5
100 units @ £6
Issue:
120 units
FIFO Cost:
100 × £5
+
20 × £6
=
£620
Example 3 — AVCO
Inventory:
100 units @ £5
100 units @ £7
Total Cost:
£1,200
Average Cost:
£1,200 ÷ 200
=
£6 per unit
ACADEMIC SUPPORT NOTE
📌 Material costing is a core AS Cost & Management Accounting topic.
Students should master:
✓ Direct vs Indirect Materials
✓ Material Control Documents
✓ FIFO
✓ AVCO
✓ Material Losses
✓ Inventory Cost Calculations
🎥 Full worked examples are available in the YouTube Learning Library.
📩 Students may submit material costing doubts through the Student Doubt Support facility.
Structured Practice
Level 1 — Concept Check
Define:
a) Direct Material
b) Indirect Material
Level 2 — Application
Explain why businesses maintain material control systems.
Level 3 – Examination Style Question
A business purchases:
150 units @ £4
200 units @ £5
Using FIFO, calculate the cost of issuing 180 units.
(4 marks)
📌 Additional structured questions are available in the 🎯 Question Papers + YouTube Explanation section.
∗ Additional structured questions are available in the Question Papers and YouTube Explanation section. Students should practise regularly and review video explanations for procedural clarity.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Proficiency Check
Learn → Practise → Apply → Evaluate
1. Can you distinguish direct and indirect materials?
2. Can you explain the purpose of material control?
3. Can you identify material control documents?
4. Can you calculate FIFO inventory issues?
5. Can you calculate AVCO inventory values?
6. Can you distinguish normal and abnormal losses?
If unsure, revisit:
• Direct vs Indirect Materials
• Material Control Systems
• FIFO & AVCO
• Worked Examples
Detailed Activity Solutions
Solution to Level 3 question
FIFO Issue:
150 × £4
=
£600
30 × £5
=
£150
Total Cost Issued
=
£750
HOW THIS TOPIC APPEARS IN THE EXAMINATION
Common examination tasks include:
✓ Direct & Indirect Material Classification
✓ FIFO Calculations
✓ AVCO Calculations
✓ Material Control Procedures
✓ Inventory Records
✓ Material Loss Analysis
Self-Assessment Checklist
□ I understand material costing
□ I can distinguish direct and indirect materials
□ I understand material control systems
□ I can calculate FIFO issues
□ I can calculate AVCO values
□ I can answer examination questions confidently
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