Materials accounting in nissei electric hanoi company - Hoàng Thị Lan Chi

PREFACE Vietnam is in the wide and deep integration in all aspects. In there, economic integration is always the most interesting since it has a great effect on the society. Together with opportunities of export expansion to international market, getting a lot of investments from foreign enterprises, groups as well as individuals, we also face many challenges from integration. At present, goods from international market overflow into Vietnam market freely and almost all of them have more competitive advantages. In addition, growing numbers of foreign enterprises and groups set up their branches or companies in Vietnam and supply to domestic market. They have better characteristics by far than Vietnam such as: technology, capital, manufacture experiences, etc. If we do not research promptly to improve for higher quality, lower cost of products…, definitely our market share will be reduced right in the domestic market. Recently, I have an opportunity of practicing in Nissei Electric Hanoi Company, studying their management system, enterprise culture and going into the details of materials accounting at accounting department. This is an export-processing company in the Nissei group, with 100% investment capital from Japan. Materials in Nissei Electric Hanoi Company are various and imported regularly for production. Materials play an important role and also make up a high cost in product price. Therefore, managing materials well is one of the most important issues of company. Nissei researched to create model management software has high integrated ability, together with confidential managers and a prompt working environment, they can manage company in general and materials in detail efficiently. They are new features that Vietnamese companies should follow and apply suitably to our companies. Thanks to the thesis “MATERIALS ACCOUNTING IN NISSEI ELECTRIC HANOI COMPANY”, I would like to present my opinion on materials accounting in Nissei and the model management system as well as Nissei culture thence I inferred some lessons for Vietnamese companies. The thesis includes three chapters: Chapter 1: General theory for materials accounting in productive enterprises. Chapter 2: Materials accounting in Nissei Electric Hanoi Company. Chapter 3: Suggestions to improve materials accounting in Nissei Electric Hanoi Company and lessons for Vietnamese companies. Because of the limitation of time and knowledge, mistakes are not avoided; I would like to receive contribution from readers for improvement of content as well as form for my thesis. Thanks a lot! Author Hoang Thi Lan Chi CHAPTER 1 GENERAL THEORY FOR MATERIALS ACCOUNTING IN PRODUCTION ENTERPRISES Materials and accounting issues in materials: Definition and characteristic of materials: Merchandise inventory is an important factor in determining the cost of goods sold for retailers and wholesalers. In a manufacturing enterprise, inventories are owned by the company and usually classified into three categories: finished goods, work in process and raw materials. In there, raw materials are a major component to take shape of product. Effective material management is frequently the key to successful business operations. Materials have two main characteristics: They participate in only one production cycle and their original forms are changed; Their values are transferred into products’ value in the production process. Classification of materials: Materials in production enterprises are various and plentiful. Each type of materials has a different role, use and feature. Therefore to manage materials effectively, businesses need to classify them. Depending on managing requirement, materials can be classified in different ways. Following are three ways to classify materials [1]: According to materials’ use: Raw materials: are main objects forming products and their value is transferred into products’ value entirely on production process. Sub-materials: are materials supporting for production process, combining with raw materials to increase quality and design of product, used to ensure that equipments run well or supporting for technical and management demand. Fuels: are used for production such as coal, oil, etc... In essence, fuels are sub-materials which are separated to manage and used accounts more conveniently because of their important role. Spare-parts: are used for replacement and repair of machinery, equipment, etc... Capital construction equipment: includes construction parts, fit and non-fit equipment used in capital construction, industry Other materials: are materials not grouped into the above types. They mainly are scraps taking back from the production process or liquidation of fixed tangible assets. By this classification way, businesses can know which type of materials is needed to be managed more strictly, especially materials are used directly for production, materials have high values or materials are leaked easily. According to suppliers: Home-made materials: are materials created by enterprises themselves to support for production demands. Materials provided from outside: are materials which enterprises buy from the domestic market or import from foreign countries. Other materials: are materials formed from presentation or from joint-venture partners’ contribution... Managing materials according to their sources is also very important to companies. For example, with an exporting-importing enterprise, they usually classify materials in two types according two main ways of importing materials: import from domestic and import from foreign countries to manage. According to purpose of using : Materials directly used for manufacturing products. Materials used for other demands like general manufacture, selling or enterprise management. According to this classification, business can arrange sections to manage materials for difference purpose of using, ensure supplying materials timely… Measurement of materials: Determining material cost is an important task of materials accounting. They use a monetary ruler to express the value of materials according to given principles. These principles are assigned in the provision No 04 of VAS 02 about materials which is promulgated along with Decision 149/2001 of the Ministry of Finance on 31st December 2001: “Materials are valued according to their original prices. Where the net realizable value is lower than the original price, they must be valued according to the net realizable value”. In there: The original price of inventories consists of the purchasing cost, processing cost and other directly-related costs incurred for having the inventories stored in the present place and conditions; The net realizable value is estimated price of inventories in the normal production cycle minus (-) estimated cost to finish product and estimated cost need to consume them. Therefore, in accordance with Inventory accounting standard, materials in enterprises are determined according to real price. Determine cost of stored material: Determining cost of stored materials conform to cost price principle. Enterprises store materials from many sources. Depending on every source, the real value of materials is defined differently [7]. Materials are provided from outside: Real value of materials = Price on bill + Purchasing cost + Non-refundable taxes - Trade discounts, price reductions In there: Purchasing cost includes: cost of transportation, loading and unloading, loss in norm. Non-refundable taxes such as custom tax, VAT… Materials are provided by hiring people to process. Real value of materials = Real value of material used + Hiring cost + Transportation cost (if any) Materials are provided by enterprises themselves: Real value of materials = Cost price of materials used + Transportation cost (if any) Materials are provided by issuing: Real value of materials = Price according to receiving report Materials are provided from join-venture partners’ contribution: Real value of materials = Value of capital due to join-venture assembly defines Materials are provided by presenting: Real value of materials = Market price at receiving time Wasted materials are taken back from production: Real value of materials = Reusing price or selling price of materials Determine cost of materials used: Choosing the determine cost of materials used method is based on the characteristics of each business regarding quantity of materials; time of storing and using materials; ability of accountant, stockman and material condition. Provision No 13 of VAS 02, there are four methods to determine cost of materials used: Specific identification method: To this method, costs of materials used from which lot will be defined follow the price of that lot. This method requires that each unit on hand be identified with a specific purchase invoice. To do this, enterprise must use some form of identification such as serial numbers, or stock tags, or bar codes containing the cost recorded in some appropriate coding system, which are attached to the item. Application of the specific identification method is a greater possibility when using a computerized inventory system, where the cost of each item may be identified in the bar code for that item. When the item is used, the cost of that item is readily obtained from the computer’s reading of the bar code. This method is applied to enterprises having a few good items or stable and identifiable good items. Advantages: define exactly cost of materials used, certain cost is suitable for certain revenue. Disadvantages: when business has a lot of material items, materials move continuously, controlling materials will be very difficult and detail materials accounting will be very complex. For most entities, this method is not practical and is too costly to apply. Average method: the cost of materials used is equal to quantity of materials used multiply with average unit price. The average unit price can be defined according to two ways below: Weighted average method: under this method, an average cost per unit is calculated by dividing the total cost of beginning materials and materials stored in period by the total number of units at the beginning and stored in period. Average unit price = Cost of beginning materials + Materials stored in period Quantity of beginning materials + quantity of materials stored in period This method is suitable for enterprises having a few material items but material movement is high; and is used with synthetic accounting by periodic inventory system. Advantages: simple, possible to cut down materials accounting works, not depending on materials movement. Disadvantages: materials accounting is driven into the late period, therefore it affects the progress of other accounting. Moving average method: a new average cost per unit is calculated after each purchase. The average is called a moving average because a new weighted average cost is calculated after each purchase rather than simply calculating a weighted average at the end of the period. The moving average cost, calculated after a purchase, is used to calculate the cost of materials on hand until additional units are acquired at a different unit price. The moving average cost of materials is calculated as follows: Uninterrupted Average unit price = Materials value before n storing time + Materials value at n storing time Quantity of materials before n storing time + Quantity of materials at n storing time This method should be applied in enterprise which has few types of materials and where materials movement is not high; and is used with synthetic accounting by perpetual inventory system. Advantages: gains the most accurate cost of materials used when the accountant uses this method; reflects fluctuation of price timely; determination cost of materials is implemented regularly. Disadvantages: accounting work is numerous and complex. This method is suitable for enterprises using accounting software only. First in first out (FIFO): The FIFO method assumes that the earliest materials purchased are the first to be used. FIFO is widely used because it is easy to apply. FIFO often parallels the actual physical flow of merchandise because it generally is good business management to sell the oldest units first [12]. This method is suitable for inflationary period and applied for enterprises which have a few of materials items and movement of materials is not high. Advantages: accountants can define cost of materials used timely. This method supplies a logical estimation on material value at the end of the period. Disadvantages: current cost is not suitable current revenue. The current revenue achieved since cost of materials in detail and inventories in general stored previously. Therefore, the business cost of an enterprise does not react timely with market prices of materials. Last in first out (LIFO): Under the LIFO method, the cost of last unit purchased is assumed to be the cost of first unit sold. The cost of the most recent purchases is transferred to cost of materials used. The cost of the ending materials consists of the cost of the earliest purchase [12]. This method is suitable in deflationary periods and applied to enterprises which have a few of materials items and movement of materials is not high. Advantages: current revenue is suitable current cost. Costs of enterprises’ products react timely with market prices of materials. Therefore, the information about enterprises becomes more reliable. Disadvantages: reduce enterprise’s net income in deflation periods and material values on the balance sheet can be smaller than their real value. The selection of a cost method to use for a particular type of inventory depends on many factors such as the effect that each method has on the entity’s financial statement, Income tax laws, information needs for managers and financial statement users, the clerical cost of applying a costing method, and requirements of accounting standards. In practice, more than one of the methods may be considered appropriate in accounting for the same type of inventory. That is, accounting standards do not prescribe the use of a specific costing method as being “best” for a particular set of inventory conditions. It is up to managers and the accountant to decide which method provides the most useful information to financial statement users. However, when using materials, accountant must calculate, determine real cost of materials used according to method registered and must ensure consistence in a finance year [13]. Managing requirement and accounting duty for materials: Managing requirement for materials: In our economy, profit becomes the last aim of business. The inverse ratio relation between cost and profit is more and more interested in. So enterprises always find the way to minimize production cost, reduce cost price. Therefore, with the ratio is about 60-70% in total cost, materials must be managed more effectively. If business uses materials economically and suitably, they will make products of high quality; in addition, the cost price of products will be reduced. The business will have more advantages in the market. More scientific management of materials more economical effect businesses gains. These roles require materials management to be close in all stages from purchasing, reserving and maintaining to using them. In the purchasing stage: enterprises usually buy materials to satisfy timely for production process and other demands. In this stage, materials must be managed closely on quantity, specification, sort and price. In the reserve and maintenance stage: to keep production process continuously, enterprise must reserve materials sufficiently; however, avoid storing materials exceeding the required level because it will lead to capital stagnant; maintaining materials according to their physicochemical properties. In the using stage: enterprises must determine cost of materials in products sufficiently, correctly, timely. Therefore, in this stage, business must record and reflect using materials for production process, ensure using them effectively. Accounting duty for materials: To meet managing requirement, materials accounting must include the following tasks and functions: Organize the voucher system: obey rules of form, time of making vouchers, rotation of vouchers, reserve and maintenance of vouchers of the Ministry of Finance. Rotation of vouchers must ensure that supply information sufficiently to materials managers, safety for vouchers; record into accounting books sufficiently, timely; avoid tautology and should minimize the rotation time of vouchers. Accounts system: ensure the rules of unity and accommodation. The general accounts of business are due to accounting regulation and the detail accounts are due to business’s characteristic. Organize accounting books system of a business must ensure two rules: unity and accommodation. Business must apply all obligatory books stipulated by the Ministry of Finance and create books supporting for material management to supply information sufficiently and timely. Reports on materials need to be created according to accounting regulations on time and transported to the functional section managing materials. Materials accounting: Detail accounting for materials: Materials voucher system in enterprises is applied according to accounting regulation promulgated on Decision 15/2006 of the Ministry of Finance on the 20th March 2006. Materials voucher system consists of: Storing materials voucher (Form 01 – VT); Using materials voucher (Form 02 – VT); Inventories test report (Form 03 – VT); Remaining materials at the end of period report (Form 04 – VT); Stock-taking report (Form 05 – VT); VAT invoice (Form GTKT - 3LL) The process of making and rotating materials vouchers is taken as shown by this diagram: Business Planning Section Reserved Director, Chief Accountant Materials Accountant Stockman Supplying section Research demand of materials Sign contract/ approve using stock Record materials books Store materials, use materials Create storing/ using voucher Diagram 1: Rotation of materials vouchers Detail accounting for materials is monitoring and recording the fluctuation of storing, using and remaining of each material in production process to supply detail information for managing every material item. Detail accounting for materials must ensure controllable storing, using and remaining situation in quantity and value of each material item; synthesize the information above according to each warehouse, stand and field. Enterprises can use one of the three methods below to account materials in details: Parallel inventory cards method; Balance books recording method; Rotation collation books recording method. The thesis imitates three methods by diagrams and presents their advantages, disadvantages and applying conditions. Note: Daily recording Periodically recording Collating daily Collating periodically Parallel inventory cards method: Represent this method according to the diagram below: Using inventory voucher Storing inventory voucher General accounting book Storing-Using-Remaining report Detail accounting book Stock card Diagram 2: Parallel inventory cards method Advantages: This method is simple in recording, controlling, collating and supply information on storing, using and remaining of materials item timely, correctly. Disadvantages: recording by both stockman and accountant so taking a lot of time and effort. This method is suitable to apply for businesses using accounting software and business with a few material items. Balance books recording method: Represent this method according to the diagram below: General accounting book S