Issue of Materials to Production is the process of supplying raw materials, components, and other production items from the store to the production department for manufacturing goods. Materials are issued only after receiving proper authorization through documents such as a Material Requisition Note. This process ensures that the right type and quantity of materials are available at the right time, preventing delays in production. Proper recording of material issues helps in cost control, inventory management, and accurate costing of products. It also minimizes wastage, avoids shortages, and ensures efficient utilization of materials in the production process.
Objectives of Material Issue:
1. Ensure Timely Supply of Materials
The primary objective of material issue is to provide the required materials to the production department at the right time. Timely availability of materials prevents production delays, avoids machine idle time, and ensures that manufacturing activities continue smoothly according to the production schedule.
2. Maintain Proper Inventory Control
Material issue helps maintain accurate records of stock by updating inventory after every issue. It prevents overstocking and stock shortages, enables effective inventory monitoring, and ensures that materials are available whenever required without unnecessary accumulation.
3. Prevent Wastage and Misuse
A proper material issue system ensures that materials are issued only against authorized requisitions. This reduces unnecessary consumption, theft, pilferage, and wastage of materials, leading to better utilization of resources and lower production costs.
4. Facilitate Accurate Costing
Material issue records provide accurate information about the quantity and value of materials consumed in production. This helps determine the correct cost of manufacturing products, prepare cost sheets, and calculate product-wise and department-wise costs effectively.
5. Improve Production Efficiency
By supplying the correct quantity and quality of materials to the right department, the material issue process supports uninterrupted production. It reduces waiting time, improves workflow, and enhances the overall efficiency and productivity of manufacturing operations.
6. Ensure Accountability
The material issue process maintains proper documentation through material requisition notes and issue records. This creates accountability for both the storekeeper and the production department, making it easier to trace material usage and fix responsibility in case of discrepancies.
7. Support Effective Decision Making
Accurate records of material issues provide valuable information for planning production, estimating future material requirements, controlling inventory levels, and preparing budgets. This enables management to make informed decisions regarding purchasing, production, and cost control.
Methods of Issuing Materials:
1. First-In-First-Out (FIFO)
Under FIFO, materials received first are issued first. The issue price is based on the oldest purchase lot in stock. This method follows the natural physical flow of materials and is logical for perishable goods. Closing stock is valued at the latest purchase prices, so the balance sheet reflects current market values. However, production costs are based on old prices, which may be lower than current replacement costs – leading to lower cost of sales and higher reported profits during inflation. FIFO is simple to operate, easy to understand, and minimizes the risk of obsolescence, but it increases clerical work if there are many purchase lots.
2. Last-In-First-Out (LIFO)
Under LIFO, materials received last are issued first. Issue price is based on the most recent purchase lot. During inflation, this matches current costs with current revenues – giving a more realistic profit figure and reducing tax liability in some jurisdictions. Closing stock is valued at oldest purchase prices, often understated in the balance sheet. LIFO is not accepted under many accounting standards (e.g., IAS 2/Ind AS 2). It is impractical for physical flow (stacks don’t move backward) and may lead to obsolete stock remaining on records. Clerical effort is moderate but requires careful lot tracking.
3. Highest-In-First-Out (HIFO)
Under HIFO, materials with the highest purchase price are issued first – regardless of physical receipt date. This is a deliberate conservative approach to immediately charge the highest possible cost to production, thereby minimizing reported profits and tax outflows. It is used by management to reduce profit volatility or to depress earnings in highly profitable periods. However, it does not reflect physical flow nor market trends. It requires continuous price comparisons and is rarely used in practice due to its arbitrary nature. Stock valuation becomes artificially low. It is generally discouraged for statutory reporting but may be used for internal management analysis.
4. Simple Average Price Method
Under this method, the issue price is calculated by taking the arithmetic mean of all purchase prices available in the stock – without considering quantities purchased. Formula: Sum of all purchase prices ÷ Number of purchases. It is extremely simple to compute and requires minimal clerical effort. However, it ignores quantity weights – so a small high-cost lot can distort the average significantly. It does not reflect actual physical flow or economic reality. It may also cause profit fluctuations and does not provide a reliable closing stock value. Hence, it is suitable only for petty items or where price variations are insignificant.
5. Weighted Average Price Method (Periodic/Simple Weighted)
This method calculates the average price by giving weightage to quantities in each purchase lot over a given period (say, a month). Formula: Total cost of materials purchased during the period ÷ Total quantity purchased during the period. All issues during the period are charged at this single computed rate. This smooths out price fluctuations over time. However, it is not responsive to recent price changes and may not reflect current market conditions. It requires a fixed period-end calculation, making real-time issues difficult. It is commonly used for bulk commodities where price volatility is moderate and administrative simplicity is desired.
6. Weighted Average Price Method (Moving/Continuous)
Also called Moving Average, this method recalculates the average price after every fresh purchase – using the formula: (Value of stock before purchase + Value of new purchase) ÷ (Quantity before purchase + Quantity of new purchase). Issues are charged at the prevailing average until the next purchase arrives. This method smoothens price fluctuations while being responsive to recent costs. It is fair, objective, and widely accepted. It does not allow manipulation (unlike FIFO/LIFO) and values closing stock reasonably. The downside is increased clerical effort with each purchase. It is ideal for continuous inventory systems and is favoured in exam problems.
Recording and Accounting of Material Issues:
Recording and Accounting of Material Issues is the process of documenting and valuing materials issued from the stores to the production department or other departments. Every material issue is supported by authorized documents, such as a Material Requisition Note (MRN), to ensure proper control and accountability. The issued materials are recorded in stores records and cost accounts using suitable pricing methods such as FIFO, LIFO, or Weighted Average. Proper recording helps determine the cost of materials consumed, maintain accurate inventory records, prevent errors and misuse, and provide reliable information for cost control, financial reporting, and managerial decision making.
- Materials are issued only after receiving an authorized Material Requisition Note (MRN).
- The storekeeper verifies the availability of materials in stock.
- The required quantity of materials is issued to the requesting department.
- Details of the issue are recorded in the Stores Ledger or Bin Card.
- The quantity issued, balance in stock, date, and issue voucher number are entered.
- Records are updated immediately to maintain accurate inventory information.
- Copies of the issue documents are sent to the costing and accounts departments.
Accounting of Material Issues
| Transaction | Journal Entry |
|---|---|
| 1. Purchase of raw materials | Raw Materials Inventory A/c Dr.
To Cash/Creditors A/c |
| 2. Direct materials issued to production | Work in Progress (WIP) A/c Dr.
To Raw Materials Inventory A/c |
| 3. Indirect materials issued to production | Factory Overheads A/c Dr.
To Raw Materials Inventory A/c |
| 4. Materials issued to Administration Department | Administration Overheads A/c Dr.
To Raw Materials Inventory A/c |
| 5. Materials issued to Selling and Distribution Department | Selling & Distribution Overheads A/c Dr.
To Raw Materials Inventory A/c |
| 6. Return of unused direct materials to stores | Raw Materials Inventory A/c Dr.
To Work in Progress (WIP) A/c |
| 7. Return of unused indirect materials to stores | Raw Materials Inventory A/c Dr.
To Factory Overheads A/c |
Control of Material Issues and Material Losses:
Material issue control is the process of ensuring that materials are issued only in the required quantity, to the authorized department, and for approved production purposes. Materials should be issued only against a properly authorized Material Requisition Note (MRN). Accurate records of every issue must be maintained in the Stores Ledger and Bin Card. Regular verification of stock, proper supervision, and timely updating of inventory records help prevent over issue, theft, misuse, and wastage. An effective material issue control system ensures uninterrupted production, accurate costing, efficient inventory management, and better utilization of materials.
Material loss control refers to the measures taken to minimize the loss of materials during storage, handling, and production. Material losses may occur due to wastage, evaporation, breakage, theft, spoilage, or defective handling. Proper storage conditions, regular stock verification, careful handling, employee training, and effective supervision help reduce such losses. Standard consumption limits should be established, and actual losses should be compared with standards to identify deviations. Controlling material losses reduces production costs, improves profitability, ensures efficient use of resources, and strengthens overall inventory management.
Challenges in Material Issue Management:
1. Inaccurate Inventory Records
Incorrect or outdated inventory records can result in issuing the wrong quantity of materials or showing stock that is not actually available. This creates production delays, increases costs, and affects inventory planning. Regular stock verification and timely updating of records are essential to overcome this challenge.
2. Delay in Material Issue
Delays in issuing materials to the production department can interrupt manufacturing activities and reduce productivity. Such delays may occur due to poor coordination, lengthy approval procedures, or shortage of materials. An efficient material issue system ensures smooth and uninterrupted production.
3. Unauthorized Material Issue
Materials may sometimes be issued without proper authorization or documentation. This can lead to theft, misuse, and unnecessary consumption of materials. Issuing materials only against approved Material Requisition Notes (MRNs) and maintaining proper records help prevent unauthorized issues.
4. Material Wastage and Losses
Improper handling, storage, or transportation of materials may result in wastage, breakage, spoilage, or pilferage. Such losses increase production costs and reduce profitability. Proper supervision, employee training, and effective inventory control help minimize material losses.
5. Difficulty in Material Valuation
Organizations often face challenges in determining the correct value of materials issued, especially when purchase prices fluctuate. Selecting and consistently applying suitable valuation methods such as FIFO, LIFO, or Weighted Average is necessary to ensure accurate product costing.
6. Poor Coordination Between Departments
Lack of communication between the stores, purchasing, and production departments can lead to material shortages, excess inventory, or incorrect material issues. Effective coordination and information sharing improve inventory management and ensure timely availability of materials.
7. Manual Record Keeping and Human Errors
Organizations that rely on manual inventory records are more likely to experience calculation mistakes, duplicate entries, missing records, and delays in updating stock information. Using computerized inventory management systems improves accuracy, saves time, reduces human errors, and enhances overall efficiency in material issue management.
