## Material Identification, Monitoring, and Consumption Entries
### Material Identification System
To track costs accurately, every material and product must be coded:
1. Coding System: Each material gets a unique code for easy tracking through the supply chain.
2. Product Code: Each product/cost centre has a unique code for direct material allocation.
3. Indirect Materials: Maintenance, inspection, and testing materials cannot be traced to individual products — they are charged to the cost centre and absorbed using an Overhead Absorption Rate (e.g., per labour hour or machine hour).
### Key Source Documents
| Document | Purpose |
|---|---|
| Material Requisition Note | Records materials issued for specific product/cost centre |
| Material Return Note | Credits original product for unused materials; updates stock |
| Material Transfer Note | Records movement of material between products or cost centres |
### Material Abstract (Issue Analysis Sheet)
The storekeeper periodically analyses all MRNs, return notes, and transfer notes and prepares a Material Abstract — a consolidated summary sent to cost accounts for updating the cost ledger.
### Consumption Entries in Financial Accounts
For external financial reporting, material costs are allocated between:
- Cost of Goods Produced (P&L)
- Closing Inventory (Balance Sheet)
Consumption Formula:
$$\text{Consumption} = \text{Opening Stock} + \text{Purchases} - \text{Closing Stock}$$
Valuation of Closing Stock:
- Valued at cost or net realisable value (NRV), whichever is lower — per AS-2 / Ind AS-2.
- This conservative approach ensures inventory is not overstated on the balance sheet.