Chapter 3 : Materials cost and inventory valuation Flashcards
WIP (Work in progress)
The stages in between raw materials and finished goods at which the purchased goods are being made ready for sale.
Holding costs examples
Warehouse rent, insurance, security, obsolescence and deterioration
Ordering costs examples
Admin costs associated with placing an order, transport inwards costs
JIT inventory control techniques
Supplies are ordered and delivered just as they are needed for production, and goods are manufactured just as they are needed for sales.
Inventory is therefore kept at a minimum, and the system relies on accurate forecasting and reliable suppliers.
minimum inventory level formula
Reorder Level - (average usage x average lead time)
Reorder level formula
(Max usage x max lead time) + Buffer inventory
Maximum inventory level
Reorder level + Reorder Quantity - (Min usage x max lead time)
Economic order quantity EOQ
Square root ( 2 x fixed cost per order x annual demand ) / cost of holding one unit for one year
Advantages of FIFO
Logical pricing method, IAS 2 accounting standard, closing inventory similar to replacement cost
Disadvantages of FIFO
Cumbersome to operate because of the need to identify each batch of material separately , managers find it difficult to compare costs and make decisions with varying prices for same materials
Advantages of LIFO
Inventory closest to current market price, LIFO is often the opposite of what is physically happening therefore difficult to explain to managers , managers find it difficult to compare costs and make decisions
FIFO Examples
groceries, expiry date goods
LIFO Examples
Clothes and phones, maximizing revenue goods
AVCO Examples
Petrol, gold
AVCO advantages
Smoother fluctuations in price, easier to administer no need to identify each batch separately
