Ch 7 - Inventory Management

Question 1

Long-Term Contract Costing

Answer 1

Used to calculate annual revenues/expenses for large contracts that last over multiple periods (ex. Construction projects)

Percentage of completion is the most common costing method

• Revenues and gross profit are recognized in the applicable periods of production, not when production has been completed
• The costs incurred in reaching the relevant stage of completion are calculated and are then matched with income
• This is in line with the accrual principle and the matching principle

Question 2

VOWD

Answer 2

value of work done

Question 3

4 steps to Calculate Long-Term Contract Costing

Answer 3

METHODS OF CALCULATION:

1. Calculate estimated costs = costs to date + additional estimated costs to complete
2. Calculate estimated profit = contract price - estimated total costs (and subtract any additional land costs)
3. Calculate % of completion using
   - % costs incurred
   - % certified costs OR
   - value of work completed

4.Calculate profit = % complete x estimated profit

Question 4

Calculate estimated costs

Answer 4

Step 1: Calculate estimated costs = costs to date + additional estimated costs to complete

Question 5

Calculate estimated profit

Answer 5

Step 2: Calculate estimated profit = contract price - estimated costs

Question 6

Calculate % of completion using which three methods?

Answer 6

Step 3: Calculate % of completion using

• % costs incurred
• % certified costs OR
• value of work completed

Question 7

Calculate profit

Answer 7

Step 4: Calculate profit = % complete x estimated profit

Question 8

What should you use to calculate % completed if it is available?

Answer 8

*If an architect’s or engineer’s certificate exists as to stage of completion to calculate % complete – USE THIS as the actual cost completed to date.

• This is a verifiable document from a professional that helps remove any bias
• better choice than % costs incurred which can be subjective if costs are due to contractor error, inexperience, bias (earnings management!)

Question 9

Progress payments

Answer 9

• Payments by the customer that are not necessarily the true profit amount – it is just a contract agreement on timing of payments – don’t use this to determine % complete!

Question 10

Retention value

Answer 10

• a % of the contract retained by customer (often 10%) that is not released until a specified period after contract end date (also called a “holdback”)
• This amount is usually held until the contract has been verified as being complete in all aspects by the customer or an independent party, and to ensure that no liability exists on the customer’s part.

Question 11

Holdback

Answer 11

• a % of the contract retained by customer (often 10%) that is not released until a specified period after contract end date (also called a “Retention value”)

Question 12

Inventory

Answer 12

Goods bought or manufactured for resale but unsold

Question 13

Cost of inventory

Answer 13

Cost includes all costs of purchase or manufacture to bring inventory to its present location and condition

Question 14

How to record inventory on a company’s statement of comprehensive income

Answer 14

On a company’s statement of comprehensive income:

•the cost of inventories is recorded as “Cost of goods sold”

Question 15

How to record inventory on a company’s statement of financial position

Answer 15

On the statement of financial position:

•it is reported under current assets as “Inventory.”

Question 16

How to record inventory on a company’s statement of financial position

Answer 16

On the statement of financial position:

•it is reported under current assets as “Inventory.”

Question 17

Objective of inventory management

Answer 17

Objective is to optimize the levels of inventory

• Reduce costs associated with ordering and carrying inventories
• Ensuring there is enough inventory on hand to meet consumer demand

Question 18

Economies of Scale

Answer 18

The cost of ordering an inventory decreases with the increase in ordering volume

Question 19

Lead Times

Answer 19

Time between when an order is placed with a supplier and when it is needed

Question 20

Safety stock

Answer 20

an amount of extra stock that is kept on hand to cover any unexpected increases in demand

Question 21

EOQ formula

Answer 21

Square root(2DO/C)

D = demand for a given time period (# of units)
O = ordering costs ($ per order)
C = carrying costs ($ per unit)

Question 22

Costs of Inventory

Answer 22

Includes all costs of purchase, conversion (manufacturing costs) and costs bringing the inventory to its present location and condition

Includes costs of inventory PLUS import duties, transportation/freight costs, less rebates/discounts

Conversion costs include direct labour PLUS allocation of fixed/variable production costs/overhead

Question 23

Manufacturing company Inventory types

Answer 23

1. Raw materials – unprocessed goods
2. Work in process – uncompleted goods
3. Finished goods – manufactured or purchased and ready for sale

Question 24

Raw materials

Answer 24

Unprocessed goods

Question 25

Work in process

Answer 25

Uncompleted goods

Question 26

Finished goods

Answer 26

manufactured or purchased and ready for sale

Question 27

Cost of Goods Sold formulas

Answer 27

Beg Inv + Purchases – Ending Inv = CoGS

Beg Inv + CoG MF – End Inv = CoGS

Question 28

Valuation of Inventory

Answer 28

Valuation of Inventory

Must be lower of cost or net realizable value (NRV) as per

IFRS Cost: cost of acquiring or MF inventory

NRV: value at which inventory could be sold on open market, less cost of disposal (shipping, reclamation)

Normally cost is less than NR

Question 29

IFRS Cost

Answer 29

IFRS Cost: cost of acquiring or MF inventory

Normally IFRS cost is less than NRV

Question 30

Net Realizable Value (NRV)

Answer 30

NRV: value at which inventory could be sold on open market, less cost of disposal (shipping, reclamation)

Normally IFRS cost is less than NRV

Question 31

Valuation of Individually purchased inventory

Answer 31

Purchase cost is used to value the inventory and the cost of goods sold when the inventory is sold

Question 32

Valuation of Similar/undifferentiated products (bulk)

Answer 32

Weighted average cost

OR

FIFO (first in, first out)

Question 33

Job order Costing

Answer 33

Cost of raw materials as they are issued to each job (either a custom product or a batch of products)

Plus the cost of time spent by different categories of labour

To each of these costs, overhead is allocated to cover the fixed and variable manufacturing overheads that are not included in materials or labour

Accumulated cost of materials, labour, and overhead is the cost of that custom product

Custom: Unique, single products

Batch: A quantity of the same goods produced at the same time (a production run)

Question 34

Process Costing

Answer 34

Costs are collected over a period of time together with a measure of the volume of production

At the end of the accounting period, the total costs are divided by the volume produced (equivalent units) to give a cost per unit of volume

Equivalent units are the number of fully completed units in production

Equivalent units measure the fully completed units by multiplying the number of units in the work-in-process inventory by their percentage of completion

This amount is added to the finished units to determine the equivalent unit

Continuous: continuous production process of the same, indistinguishable go

Question 35

Three steps needed when using weighted average cost of FIFO

Answer 35

Under both methods, it is necessary to complete three steps:

1. Determine the number of units completed.
2. Calculate the equivalent units in work in process and the cost per equivalent unit.
3. Assign the cost to finished goods and ending WIP inventory

Question 36

Just-in-time

Answer 36

Maintain minimal inventories (as close to zero as possible) to reduce inventory carrying costs, such as storage and materials handling costs, and to reduce the cost of obsolescence

Question 37

Advantages of Just-in-time

Answer 37

Advantages

• Cost savings
• Improved customer and employee satisfaction
• Improved quality

Question 38

Disadvantages to Just-in-time

Answer 38

Disadvantages

• Inability to predict demand
• Strong reliance on suppliers