Chapter 2 - Material Costs

Question 1

Materials inventory is the cost of……

Answer 1

*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.

Question 2

What department usually buys materials for the business ?

Answer 2

Purchasing or procurement department

Question 3

Why is it important for a business to know how much inventory it has at any time ?

Answer 3

So it knows when to reorder more inventory

Question 4

What are the 3 main methods of managing inventory levels ?

Answer 4

1) perpetual inventory
2) just in time method ( JIT )
3) formulas

Question 5

methods of controlling inventory

What is the perpetual inventory method ?

Answer 5

The receipts and issue of inventory is recorded as items pass in and out of the business.

NOTE - usually done by computer

Question 6

methods of controlling inventory

What is the just in time method ?

Answer 6

This is where supplies of components are delivered to the business ( PRODUCTION LINE ) just Sd they ate needed.

Question 7

methods of controlling inventory

What information is needed for the formula method to run successfully?

HINT - There’s 5

Answer 7

1) Maximum inventory level
2) Buffer inventory
3) Lead time
4) Reorder level
5) Reorder quantity

Question 8

methods of controlling inventory

What is the maximum inventory level ?

Answer 8

The maximum amount of inventory a business can physically hold at once

Aka

As much as will fill the warehouse

Question 9

methods of controlling inventory

What is buffer inventory ?

Answer 9

The minimum level of inventory a business holds which should not fall lower before a new order from a supplier is delivered

Question 10

methods of controlling inventory

What is lead time ?

Answer 10

The amount of time it takes for new inventory to be delivered after being ordered

Question 11

methods of controlling inventory

What is the reorder level ?

Answer 11

The level of stock where a new order needs to be placed

Question 12

What does EOQ stand for ?

Answer 12

Economic Order Quantity

Question 13

Why would a reorder amount that is too large have a negative impact on a business ?

Answer 13

Too much inventory will be held leading to more expenses on the business

Question 14

Why would a reorder amount that is too small have a negative impact on a business ?

Answer 14

There is the danger of running out of whatever is ordered

Expenses related to constantly reordering

Question 15

How do you work out the value of a businesses inventory ?

Answer 15

Number of items held x cost per item

Question 16

What are the two different ways a business can value their inventory ?

Answer 16

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

Question 17

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 ?

Answer 17

They would value the inventory at cost price

Question 18

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 ?

Answer 18

They would value the inventory at the selling price

Question 19

The costing process requires that _____ is given to raw materials when they are issued

Answer 19

Value

Question 20

The cost of the materials or goods at the time of issue is normally…..?

Answer 20

The purchase cost

Question 21

What are the two most commonly used methods for deciding which cost to use for raw materials ?

Answer 21

1) First in first out (FIFO)
2) Weighted average cost (AVCO)

Question 22

methods of inventory valuation

How does the FIFO method work ?

Answer 22

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.

Question 23

methods of inventory valuation

How does the AVCO method work ?

Answer 23

The AVCO method uses a calculation as below:

AVCO = total cost of inventory held / numbers of items held

Question 24

methods of inventory valuation

What is an important thing to note when using the AVCO method of inventory valuation ?

Answer 24

A new weighted average must be calculated each time that further purchases are made