Chapter 4: Materials Flashcards
What are the five steps in the purchasing process?
1. Purchase Requisition: The production department orders from the stores department using a goods requisition note.
2. Inventory Check: If there are no goods available, the stores department submits a purchase requisition to the purchasing department.
3. Purchase Order: The purchasing department orders goods from supplier using a purchase order.
4. Delivery: The supplier delivers the goods to the stores department and submits a purchase invoice.
5. Issuance to Production: The stores department issues the goods to the production department.
What are the four main costs of having inventory?
1. Purchase price
2. Holding costs
• Insurance
• Deterioration
• Labour costs
3. Ordering costs
• Administrative expenses
• Transport costs
4. Stock-out costs
• Lost sales
• Reputation damage
• Emergency orders
What are the two main types of inventory control systems?
1. Fixed quantity system
• A replenishment order of a fixed size is placed when inventory falls below a certain level
2. Periodic review system
• Inventory levels are reviewed at fixed points in time (stock take)
Define buffer inventory and how to calculate it.
Buffer inventory is the minimum level of inventory to be held. It is an extra amount that is kept in excess of forecast demand.
Buffer inventory = re-order level - (average usage x average lead time)
Lead time is the time it will take to receive an order.
Define maximum inventory level and how to calculate it.
Maximum inventory level is the maximum amount that a warehouse can hold.
Maximum inventory = buffer inventory + maximum re-order quantity
Define re-order level and how to calculate it.
Re-order level is the level of inventory that will trigger an order to be placed.
Re-order level = buffer inventory + (average usage x average lead time)
Define minimum re-order quantity and how to calculate it.
Minimum re-order quantity will restore inventory to the re-order level.
Minimum re-order quantity = average usage x average lead time
Define the Economic Order Quantity (EOQ)
The EOQ is the order size that minimises the total costs of holding and ordering inventory.
How do you identify which method of pricing inventory has been used?
By comparing the cost per unit of the first issue with the average cost per unit.
If the cost per unit of the first issue matches the average cost per unit then AVCO is being used, if not FIFO is being used.
What impact do prices rising or declining have on FIFO and AVCO?
If prices are rising, FIFO will return a higher profit.
If prices are declining, AVCO will return a higher profit.
What are the advantages and disadvantages of FIFO and AVCO?
FIFO
Advantage - closing inventory value will be up to date
Disadvantage - valuation on issues will be out of date as old prices are being used
AVCO
Advantage - compromising on inventory valuation
Disadvantage - the average price rarely reflects the actual purchase price
How do you value inventory when there is WIP involved?
- Calculate the equivalent units (EU) by multiplying the units still in WIP by the percentage complete.
- Calculate the cost per EU by dividing the total cost by the total EU.
- Multiplying the cost per EU by the amount of completed units and the amount of WIP units.
How do you calculate the material required including wastage?
Material purchases = material usage (units x material per unit) + wastage
