Costing for materials - inventory Flashcards

1
Q

What must I learn from costing materials?

P

A

RAPID VI
R - record costs info for materials
A- analyse costs info for materials
P- prepare and interpret inventory records
I- identify and use inventory control methods
D -define various stages of inventory
V - value inventory and issues to production
I - identify the correct costs accounting journals

different types of inventory

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2
Q

What one the ways of classifying costs and what is an example of this way?

A
  • Element
  • materials
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3
Q

What are materials?

A
  • Costing term
  • items purchased by organisation
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4
Q

Who is responsible for purchasing materials ?

A

Purchasing department

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5
Q

What is the role of the purchasing department? - P38

A
  • Lowest possible cost
  • no compromisation on quality
  • available when needed
  • no high storage

Purchasing materials

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6
Q

Why does material purchasing need to be carefully planned and controlled? - P38

A
  • shortage of materials = affect production and sales
  • surplus materials = increased storage costs
  • surplus materials = obsolescence and deterioration
  • surplus materials = interests on money owed
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7
Q

What is the usual systems from stores to control the purchase of materials?

A
  • stores department > purchasing department > supplier > stores department > accounts department
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8
Q

What would the method of planning and controlling materials depend on ? P39

A
  • Size
  • Resources
  • Needs of a particular organisation
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9
Q

Once the the organisation has what it needs, what is the key to keep planning and controlling materials ? - P40

A
  • any type of material available - at any point in time
  • manual/ computerised - records receipts and issues of materials
  • phyiscla count

When to re-order and what quantity oto order

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10
Q

How are materials coded and tracked?

A
  • Unique code number
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11
Q

What are the methods available for purchasing and controlling inventory?

A
  • PET JP
  • P - Periodic review system
  • E - estimation
  • T - Two- bin system
  • J - Just in time
  • P - Perpetual/ continuous inventory - taking
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12
Q

What is the estimation method of purchasing/ controlling inventory?

A
  • imprecise
  • only quantities and types very low
  • timing and quantity - estimated
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13
Q

What is the two-bin system?

A
  • Two bin system
  • Bin A empty - order placed - materials drawn from Bin B
  • Bin B - demand during order fullfiment (Bin A) + minimum acceptable inventory
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14
Q

What is the periodic review system?

A
  • fixed intervals
  • predetermined level
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15
Q

What is the just in time method ? P40

A
  • latest possible time - no high levels of inventory
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16
Q

Why is the just in time method a risky strategy ? - P40

A
  • exactly the point needed
  • correct quantities - correct place - just time for use
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17
Q

What are the benefits for using the just in time method? P41

A

PS CAP
* P - Productivity improved
* Scrap & wastage is lower
* Cost of holding inventory reduced
* Accounting transactions will lower
* pricde reductions - materials

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18
Q

What can formulas be used for ? P41

A
  • identify reordered:
  • minismise costs of ordering and storage
  • ensure materials needed for production
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19
Q

What is the reorder level? - P41

A
  • Fixed quantities
  • e.g always 20,000 litres
    Point at which - next order placed
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20
Q

What pieces of information would the company need for the reorder level to work efficiently?

A
  • Lead time
  • reorder quantity
  • minimum inventroy level
  • maximum inventory level
  • reorder level
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21
Q

What is the lead time ? - P41

A
  • Time between : placing order and receiving it
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22
Q

What is the reorder quantity ? P41

A
  • quantity of material
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23
Q

What is the minimum inventory level? P41

A
  • lowest quantity - unexpected emergenices - not below
  • buffer inventory
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24
Q

What is the minimum inventory level?

A
  • lowest quantity - unexpected emergenices - not below
  • buffer inventory
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25
Q

What is the maximum inventory level ? P41

A
  • highest quantity - at any one time
  • set - physicla storage & capacity available
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26
Q

What is the reorder level ? P41

A
  • point - next order inventory placed
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27
Q

What should happen under the reorder level system? P42

A
  • order of material received
  • minimum level of inventory reached
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28
Q

What would the reorder level be calculated as? - p42

A
  • (maximum usuage * maximum lead time) + minimum inventory level
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29
Q

How is the order quantity and how is it calculated? P42

A
  • maximum inventoru level - minimum inventory level
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30
Q

What should happen within the reorder quantity once the order has been received ? - P42

A

Minimum level > maximum level

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31
Q

How does an organisation set the minimum and maximum levels ? - P42

A
  • maximum inventory level = minimum inventory levle + reorder quantity
  • Minimum inventory level = reorder level - (average usuage x averaqge lead time)
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32
Q

What is the key factor to having an efficient inventory system ? P43

A

reorder quantit

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33
Q

What are the two main categories of cost involved in holding inventory? P43

A
  • holding costs
  • ordering costs
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34
Q

What can holding costs and ordering costs be ?

A

Fixed/ variable

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35
Q

How can holding costs be summarised?

A
  • Storage costs : e.g. warehouse rent, store person’s salary, warehouse equipment depreciation
  • cost of capital : material tie up: benefits lost are costs
36
Q

How can ordering costs be summarised ?

A
  • Administrative costs : placing orders - variable
  • transport costs - goods to storage
37
Q

What is an economical order quantity? P44

A

minimises costs of ordering & holding

38
Q

How does an organisation calculate the most economical order quantity ?

A

Mathematical formula
square root - two cods over chips
EOQ = Square root of 2 * co * d / ch

39
Q

What does Co mean in the most economic order quantity calculation? - P44

A

Cost of each order placed

40
Q

What does D mean in the most economic order quantity calculation? - p44

A

Annual demand

41
Q

What does Ch mean in the most economic order quantity? P44

A

one unit of inventory for one year

42
Q

Why is an accurate valuation of inventory needed? - p46

A
  • calculate costs of gods
  • calculate profit earned by organisation
43
Q

When valuing inventory, what is an important part of enabling an organisation to run effectively & efficiently? - p46

A

*Without Incurring high storage costs
* without financial resources tied up

Adequate levels of inventory

44
Q

Why do many organisations take out inventory takes? - P46

A
  • physical levels - point in time
  • nimber of items * costs per item = inventory value at cost
45
Q

What will the costing system of the organisation be used to identify cost per units as? - P46

A
  • At cost - actually incurred - purchasing, manufacturing
  • At net realisable value - actual estimated selling price - further costs
  • lower = usuage in financial statements
46
Q

What does costing of raw materials require when valuing inventories ? -p47

A
  • raw materials valued:
  • issued to production/ sold to customers
47
Q

What does issued to production mean? - P47

A
  • item out of invenotry into production process
48
Q

How will large manufacturing organisations keep records of each item of inventory held ? - P47

A
  • Through store departments
  • e.g. store ledger cards
49
Q

What are the stores legder cards?

A
  • Inventory record cards
  • components:
  • dates
  • quantities
  • prices of receipts/ issues
    *
50
Q

What is the main advantage of using the stores ledger card? - P47

A
  • items in inventory
  • costs - items are purchased or issued
51
Q

How re items issued on store ledger cards? - P47

A
  • Purchase price
  • cost varies over time
  • decision required : value issues and balance of inventory - changing costs
52
Q

What are the three common method of valuing issues to production & those held at a particular point in tiome

A
  • FIFO
  • LIFO
  • AVCO
53
Q

What is the Fifo mehod?

A
  • Oldest/ first costs prices - issuing
  • recent prices - remaining
54
Q

How may inventory record cards appear in the assessment and what must be done to cater for this? P50

A
  • one entry per cell
  • each receipt carefully tracked
  • records maintained - correct allocation made
55
Q

When using the FIFO method, how should the costs be calculated on the balance side if you are only to enter one figure in the dells ?

A
  • total costs/ quantity
56
Q

What is the LIFO method?

A
  • most recent/ last - issue
  • oldest costs prices = remaining
  • not acceptable - financial accounting purposes - IAS
  • Acceptable - Internal management accounting purposes
57
Q

When using the LIFO method, how should the costs be calculated on the balnace side if you are only to enter one figure in the cells ?

A

Total costs/ quantity

58
Q

What is the weighted average costs ? P54

A
  • Average cost - values issues from store & remaining inventory
59
Q

How is the weighted average costs calculated ?

A
  • total costc of goods in store/ number of items in stores = weighted average cost
60
Q

How would you record a receipt with AVCO ? P55

A
  • Added to total costs
  • Added to total quantity
  • New costs = total costs/ total quantity
61
Q

How would the closing balance always be calculated? P55

A
  • Adding cost of receipt to previous balance
  • deducting issue costs from prevuious balance
62
Q

How will FIFO impact on profit? P56

A
  • Times of rising prices
  • Higher reported profits
  • Higher tax being paid
  • Acceptable for tax purposes
63
Q

How will LIFO impact on profit?

A
  • Times of rising prices
  • lower reported profits
  • lower tax liability
  • unacppetable - tax purposes
64
Q

What impact will AVCO have on profits? P56

A
  • Value between FIFO & LIFO
  • soothes out peaks & troughs of profits & losses
65
Q

What are the two other valuation methods other than FIFO, LIFO , and AVCO?

A

Standard costs
Replacement costs

66
Q

What is the standard cost valuation method? P59

A
  • Predetermined cost per unit
  • expected levels of costs
  • helps - planning, control & decision making
67
Q

What is the replacement cost valuation method? - P59

A

Up-to-date prices
costs can be replaced
not financial accounts
can be for management accounts - no external regulations

68
Q

What are part finished/ finished goods given a value based on ? p59

A

production costs

69
Q

What do production costs include for finished/ part finished goods ? P59

A
  • Direct materials ( raw materials)
  • direct labour
  • direct expenses
  • production overheads
70
Q

What is the purposes of stocktaking ? P59

A
  • Minimisation of discrepancies
  • actual number differs quantity in inventory records
71
Q

What is periodic inventory taking ? P59

A
  • counts physical inventory completely
  • once per year - year - end
72
Q

What is the perpetual / continuous inventory taking? P59

A
  • Throughout the year
  • Small number of items - weekly basis
    All items = once a year
  • ABC continuous inventory taking system
73
Q

What is coninuous inventory taking often used alongside with ? P60

A
  • Perpetual inventory - record card every transaction along with valuations
  • items checked - perpetual inventory - discrepancies investigated and adjusted
74
Q

What are the reaosons for discrepancies with perpetual / continuous inventory taking? P60

A
  • TBC
  • T - Theft & pilfering
  • B- Breakages
  • C - Clerical errors on the records
75
Q

What is the purpose of bookkeeping for materials? - P60

A
  • collect costs:
  • Ascertain values:
  • finished goods
  • raw material inventory
  • when they are sold
  • COS
76
Q

How is the purpose of bookkeeping for materials acheived?

A
  • series of control accounts
  • each control account = sector of accounts within costs classification
77
Q

What two things can an organisation use for bookkeeping of materials ? P60

A
  • Ingergrated system of bookkeeping
  • interlocking sytem of bookkeeping
78
Q

What is an intergrated sysgtem of bookkeeping?

A
  • costs accounts & financial accounts - same ledger
  • one set of entry - saves time & effort
    *
79
Q

What is an interlocking system of bookkeeping? P61

A
  • separate ledgers - costing & financial accounting
  • cost ledger control account - enteries of a financial nature
  • e..g material through cash/ credit - important for financial accounting
80
Q

What is important when considering which method of bookkeeping for costing to use ? P61

A
  • relationship : various costing & accounting system in an organisation
81
Q

What is the material costing system linked with? P61

A
  • Inventory control system
  • Mateiral costs > inventory record cards > costs of materials into work in progress
82
Q

WHat are the two main entries that deal with purchases of materials? P61

A
  • Receipt of materials into inventory
  • Issues of materials : production & transger surplus materials from production into inventory
83
Q

How are materials purchased on credit accounted for ?

A
  • Debit : materials account
  • credit : trade payables control
84
Q

How are materials purchased for cash accounted for?

A

Debit: materials account
Credit : bank

85
Q

How are materials issued to work in progress accounted for (production) ?

A

Debit: work in progress account
credit : materials account

86
Q

How are materials returned from work in progress ( production) to inventory? p61

A

Debit: materials account
Credit : work in progress account

87
Q

What is to remember when accounting for material and work in progress ? P61

A
  • separate accounts
  • each type of material
  • each type of work in progress