Chapter 2 - Material Costs Flashcards
Materials inventory is the cost of……
*Raw materials and components for use by a manufacturing business
*Products bought for resale by a shop or wholesaler
*Service or consumable items such as stationary, bought for use within a business.
What department usually buys materials for the business ?
Purchasing or procurement department
Why is it important for a business to know how much inventory it has at any time ?
So it knows when to reorder more inventory
What are the 3 main methods of managing inventory levels ?
1) perpetual inventory
2) just in time method ( JIT )
3) formulas
methods of controlling inventory
What is the perpetual inventory method ?
The receipts and issue of inventory is recorded as items pass in and out of the business.
NOTE - usually done by computer
methods of controlling inventory
What is the just in time method ?
This is where supplies of components are delivered to the business ( PRODUCTION LINE ) just as they are needed.
methods of controlling inventory
What information is needed for the formula method to run successfully?
HINT - There’s 5
1) Maximum inventory level
2) Buffer inventory
3) Lead time
4) Reorder level
5) Reorder quantity
methods of controlling inventory
What is the maximum inventory level ?
The maximum amount of inventory a business can physically hold at once
Aka
As much as will fill the warehouse
methods of controlling inventory
What is buffer inventory ?
The minimum level of inventory a business holds which should not fall lower before a new order from a supplier is delivered
methods of controlling inventory
What is lead time ?
The amount of time it takes for new inventory to be delivered after being ordered
methods of controlling inventory
What is the reorder level ?
The level of stock where a new order needs to be placed
What does EOQ stand for ?
Economic Order Quantity
Why would a reorder amount that is too large have a negative impact on a business ?
Too much inventory will be held leading to more expenses on the business
Why would a reorder amount that is too small have a negative impact on a business ?
There is the danger of running out of whatever is ordered
Expenses related to constantly reordering
How do you work out the value of a businesses inventory ?
Number of items held x cost per item
What are the two different ways a business can value their inventory ?
They can value it at:
1) how much it cost them to buy from their supplier
2) the net resale value, this can be actual or estimated
Valuation of inventory
If the cost price is lower than the selling price would the business value the inventory at the cost price or the selling price ?
They would value the inventory at cost price
Valuation of inventory
If the cost price isn’t lower than the selling price would the business value the inventory at the cost price or the selling price ?
They would value the inventory at the selling price
The costing process requires that ____ is given to raw materials when they are issued
Value
The cost of the materials or goods at the time of issue is normally…..?
The purchase cost
What are the two most commonly used methods for deciding which cost to use for raw materials ?
1) First in first out (FIFO)
2) Weighted average cost (AVCO)
methods of inventory valuation
How does the FIFO method work ?
The oldest cost prices are used when goods are issued from stores, once they are gone you move on to the most recent cost prices.
methods of inventory valuation
How does the AVCO method work ?
The AVCO method uses a calculation as below:
AVCO = total cost of inventory held / numbers of items held
methods of inventory valuation
What is an important thing to note when using the AVCO method of inventory valuation ?
A new weighted average must be calculated each time that further purchases are made
