Accounting for Inventories

The costing department has the responsibility to record every transaction relating to inventories in proper books. The recording work starts from the time a requisition is made and ends when the materials have been consumed or goods have been sold.

Input-output ratio or material productivity

The term “Input-Output Ratio” is used in connection with measurement of productivity of material, labour, capital etc. However, with reference to materials, this ratio implies a relation between the quantity of material issued to production and the quantity of material obtained in the form of finished product. This ratio serves as a useful yardstick for controlling cost of materials. Higher the ratio, lower is the productivity. The ratio is computed by dividing the total input by the total output. It can be expressed in the form of a percentage thus:



Inversely, productivity can be measured as output per unit of input.

Advantages
    
1. The efficiency of the production departments can be evaluated.
    
2. Actual consumption of materials can be compared with the standard consumption which shows favourable or unfavorable usage.
    
3. Management can analyse the causes of variations – the causes may be more losses, wastages, difference in material mix etc. Corrective actions may be taken.
    
4. The ratio can be used effectively in making a choice about the substitute to be used in periods of material shortage.

Lack of proper supervision and control, use of inferior quality of material, etc. may result in lower productivity. An all-out effect should be made to increase the productivity of material which will ultimately result in lower cost.  

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