South African Grade 11 and 12 Accounting: Manufacturing Accounts - Buying Raw Materials

Note that this post is aimed at South African high school Accounting, and assumes that students are at a Grade 11 level. It also assumes that learners understand the basic concepts behind manufacturing, such as direct and indirect costs, fixed costs, variable costs, etc.

Buying Materials

Direct raw materials

This section assumes that you know that the "Raw Materials Stock" account represents direct materials.

Buying raw materials is perhaps the simplest transaction to deal with. By now you should be happy with buying an asset: If the business pays cash, we credit Bank (to decrease it) and we debit the asset; if we buy it on credit, we credit Creditors' Control (to show that we owe them more) and we debit the asset.

Over the year, the business will probably buy raw materials fairly frequently, but we only post through journal totals at the end of the period. This means that if, over the course of the year, we purchased R50 000 worth of raw materials with cash and we also bought R75 000 worth of raw materials on credit, our ledger will look like this:

The beginnings of the Raw Materials Stock account

Note that we had a starting balance of R14 000. This means that at the beginning of the year, the business had raw materials to the value of R14 000.

For the year-end transactions for Raw Materials Stock -- as well as other accounts -- see the post on the end-of-year procedures.

Carriage on Purchases

Now is a good time to mention Carriage on Purchases. This is a fancy name that just means the cost of transporting an asset from the seller to our business, but we must be careful in how we handle it.

As you should remember, we always record assets at the lower of historic cost and net realisable value. This means that we usually record assets at their historic cost price -- the price that we originally paid for the asset. The important thing to remember is that the cost price of an asset is the total of all the costs that get the asset to our business in a useful condition. If we buy an asset but it sits in our supplier's warehouse, it's useless to us. If it isn't doing anything for our business, it's not really an asset.

Because all these costs make up the historic cost, we add costs like carriage on purchases directly to the asset account. This means we treat carriage on purchases as though we were just buying more stock at that price.

As an example, let's say that we also paid R1 200 for carriage on purchases out of petty cash. Our ledger would now look like this:

Raw Materials Stock -- now with carriage on purchases paid from Petty Cash.

Normally in the exercises that we will do, carriage on purchases will just be added to the bank or the creditors' control amounts, depending on whether we pay with or use credit.

Note that carriage on purchases is probably going to appear in every test and exam that covers this section!

Indirect Raw Materials (Consumable Stores)

Some tests and exams will tell you that indirect raw materials have been purchased. Do not confuse these with the direct raw materials dealt with above.

Buying Consumable Stores

When we buy indirect raw materials, we usually put them into the expense account Consumable Stores, which we treat like Stationery or any of the other consumable stores accounts that we have dealt with. We will credit bank and debit Consumable Stores. After purchasing consumable stores on cash and credit, the ledger account will look something like this:

Buying Consumable Stores

This makes it seem as if Consumable Stores behaves like Raw Materials Stock or another asset, but remember that Consumable Stores is an expense!

Consumable Stores at the end of the year

At the end of the year, if any consumable stores are left over, we put them into the asset account Consumable Stores on Hand, and close off the rest to Factory Overhead Cost (See the post on closing-off ledger accounts at the end of the year for more on that).

For example, if we have only R500 of consumable stores left over at the end of the year, we will put the R500 into the Consumable Stores on Hand account (an asset), and the rest will be closed off to the Factory Overhead Cost account:

Consumable Stores at the end of the year

Consumable Stores on Hand will be balanced at the end of the year.

Consumable Stores at the beginning of the year

At the start of the next financial period, this balance will be transferred back to Consumable Stores, like this:

Consumable Stores on hand and Consumable Stores at the beginning of the year.

For more end-of-year transactions, look at the other post on the year-end process.