Costing for materials - inventory Flashcards
What must I learn from costing materials?
P
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
What one the ways of classifying costs and what is an example of this way?
- Element
- materials
What are materials?
- Costing term
- items purchased by organisation
Who is responsible for purchasing materials ?
Purchasing department
What is the role of the purchasing department? - P38
- Lowest possible cost
- no compromisation on quality
- available when needed
- no high storage
Purchasing materials
Why does material purchasing need to be carefully planned and controlled? - P38
- shortage of materials = affect production and sales
- surplus materials = increased storage costs
- surplus materials = obsolescence and deterioration
- surplus materials = interests on money owed
What is the usual systems from stores to control the purchase of materials?
- stores department > purchasing department > supplier > stores department > accounts department
What would the method of planning and controlling materials depend on ? P39
- Size
- Resources
- Needs of a particular organisation
Once the the organisation has what it needs, what is the key to keep planning and controlling materials ? - P40
- 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
How are materials coded and tracked?
- Unique code number
What are the methods available for purchasing and controlling inventory?
- PET JP
- P - Periodic review system
- E - estimation
- T - Two- bin system
- J - Just in time
- P - Perpetual/ continuous inventory - taking
What is the estimation method of purchasing/ controlling inventory?
- imprecise
- only quantities and types very low
- timing and quantity - estimated
What is the two-bin system?
- Two bin system
- Bin A empty - order placed - materials drawn from Bin B
- Bin B - demand during order fullfiment (Bin A) + minimum acceptable inventory
What is the periodic review system?
- fixed intervals
- predetermined level
What is the just in time method ? P40
- latest possible time - no high levels of inventory
Why is the just in time method a risky strategy ? - P40
- exactly the point needed
- correct quantities - correct place - just time for use
What are the benefits for using the just in time method? P41
PS CAP
* P - Productivity improved
* Scrap & wastage is lower
* Cost of holding inventory reduced
* Accounting transactions will lower
* pricde reductions - materials
What can formulas be used for ? P41
- identify reordered:
- minismise costs of ordering and storage
- ensure materials needed for production
What is the reorder level? - P41
- Fixed quantities
- e.g always 20,000 litres
Point at which - next order placed
What pieces of information would the company need for the reorder level to work efficiently?
- Lead time
- reorder quantity
- minimum inventroy level
- maximum inventory level
- reorder level
What is the lead time ? - P41
- Time between : placing order and receiving it
What is the reorder quantity ? P41
- quantity of material
What is the minimum inventory level? P41
- lowest quantity - unexpected emergenices - not below
- buffer inventory
What is the minimum inventory level?
- lowest quantity - unexpected emergenices - not below
- buffer inventory
What is the maximum inventory level ? P41
- highest quantity - at any one time
- set - physicla storage & capacity available
What is the reorder level ? P41
- point - next order inventory placed
What should happen under the reorder level system? P42
- order of material received
- minimum level of inventory reached
What would the reorder level be calculated as? - p42
- (maximum usuage * maximum lead time) + minimum inventory level
How is the order quantity and how is it calculated? P42
- maximum inventoru level - minimum inventory level
What should happen within the reorder quantity once the order has been received ? - P42
Minimum level > maximum level
How does an organisation set the minimum and maximum levels ? - P42
- maximum inventory level = minimum inventory levle + reorder quantity
- Minimum inventory level = reorder level - (average usuage x averaqge lead time)
What is the key factor to having an efficient inventory system ? P43
reorder quantit
What are the two main categories of cost involved in holding inventory? P43
- holding costs
- ordering costs
What can holding costs and ordering costs be ?
Fixed/ variable
How can holding costs be summarised?
- Storage costs : e.g. warehouse rent, store person’s salary, warehouse equipment depreciation
- cost of capital : material tie up: benefits lost are costs
How can ordering costs be summarised ?
- Administrative costs : placing orders - variable
- transport costs - goods to storage
What is an economical order quantity? P44
minimises costs of ordering & holding
How does an organisation calculate the most economical order quantity ?
Mathematical formula
square root - two cods over chips
EOQ = Square root of 2 * co * d / ch
What does Co mean in the most economic order quantity calculation? - P44
Cost of each order placed
What does D mean in the most economic order quantity calculation? - p44
Annual demand
What does Ch mean in the most economic order quantity? P44
one unit of inventory for one year
Why is an accurate valuation of inventory needed? - p46
- calculate costs of gods
- calculate profit earned by organisation
When valuing inventory, what is an important part of enabling an organisation to run effectively & efficiently? - p46
*Without Incurring high storage costs
* without financial resources tied up
Adequate levels of inventory
Why do many organisations take out inventory takes? - P46
- physical levels - point in time
- nimber of items * costs per item = inventory value at cost
What will the costing system of the organisation be used to identify cost per units as? - P46
- At cost - actually incurred - purchasing, manufacturing
- At net realisable value - actual estimated selling price - further costs
- lower = usuage in financial statements
What does costing of raw materials require when valuing inventories ? -p47
- raw materials valued:
- issued to production/ sold to customers
What does issued to production mean? - P47
- item out of invenotry into production process
How will large manufacturing organisations keep records of each item of inventory held ? - P47
- Through store departments
- e.g. store ledger cards
What are the stores legder cards?
- Inventory record cards
- components:
- dates
- quantities
- prices of receipts/ issues
*
What is the main advantage of using the stores ledger card? - P47
- items in inventory
- costs - items are purchased or issued
How re items issued on store ledger cards? - P47
- Purchase price
- cost varies over time
- decision required : value issues and balance of inventory - changing costs
What are the three common method of valuing issues to production & those held at a particular point in tiome
- FIFO
- LIFO
- AVCO
What is the Fifo mehod?
- Oldest/ first costs prices - issuing
- recent prices - remaining
How may inventory record cards appear in the assessment and what must be done to cater for this? P50
- one entry per cell
- each receipt carefully tracked
- records maintained - correct allocation made
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 ?
- total costs/ quantity
What is the LIFO method?
- most recent/ last - issue
- oldest costs prices = remaining
- not acceptable - financial accounting purposes - IAS
- Acceptable - Internal management accounting purposes
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 ?
Total costs/ quantity
What is the weighted average costs ? P54
- Average cost - values issues from store & remaining inventory
How is the weighted average costs calculated ?
- total costc of goods in store/ number of items in stores = weighted average cost
How would you record a receipt with AVCO ? P55
- Added to total costs
- Added to total quantity
- New costs = total costs/ total quantity
How would the closing balance always be calculated? P55
- Adding cost of receipt to previous balance
- deducting issue costs from prevuious balance
How will FIFO impact on profit? P56
- Times of rising prices
- Higher reported profits
- Higher tax being paid
- Acceptable for tax purposes
How will LIFO impact on profit?
- Times of rising prices
- lower reported profits
- lower tax liability
- unacppetable - tax purposes
What impact will AVCO have on profits? P56
- Value between FIFO & LIFO
- soothes out peaks & troughs of profits & losses
What are the two other valuation methods other than FIFO, LIFO , and AVCO?
Standard costs
Replacement costs
What is the standard cost valuation method? P59
- Predetermined cost per unit
- expected levels of costs
- helps - planning, control & decision making
What is the replacement cost valuation method? - P59
Up-to-date prices
costs can be replaced
not financial accounts
can be for management accounts - no external regulations
What are part finished/ finished goods given a value based on ? p59
production costs
What do production costs include for finished/ part finished goods ? P59
- Direct materials ( raw materials)
- direct labour
- direct expenses
- production overheads
What is the purposes of stocktaking ? P59
- Minimisation of discrepancies
- actual number differs quantity in inventory records
What is periodic inventory taking ? P59
- counts physical inventory completely
- once per year - year - end
What is the perpetual / continuous inventory taking? P59
- Throughout the year
- Small number of items - weekly basis
All items = once a year - ABC continuous inventory taking system
What is coninuous inventory taking often used alongside with ? P60
- Perpetual inventory - record card every transaction along with valuations
- items checked - perpetual inventory - discrepancies investigated and adjusted
What are the reaosons for discrepancies with perpetual / continuous inventory taking? P60
- TBC
- T - Theft & pilfering
- B- Breakages
- C - Clerical errors on the records
What is the purpose of bookkeeping for materials? - P60
- collect costs:
- Ascertain values:
- finished goods
- raw material inventory
- when they are sold
- COS
How is the purpose of bookkeeping for materials acheived?
- series of control accounts
- each control account = sector of accounts within costs classification
What two things can an organisation use for bookkeeping of materials ? P60
- Ingergrated system of bookkeeping
- interlocking sytem of bookkeeping
What is an intergrated sysgtem of bookkeeping?
- costs accounts & financial accounts - same ledger
- one set of entry - saves time & effort
*
What is an interlocking system of bookkeeping? P61
- separate ledgers - costing & financial accounting
- cost ledger control account - enteries of a financial nature
- e..g material through cash/ credit - important for financial accounting
What is important when considering which method of bookkeeping for costing to use ? P61
- relationship : various costing & accounting system in an organisation
What is the material costing system linked with? P61
- Inventory control system
- Mateiral costs > inventory record cards > costs of materials into work in progress
WHat are the two main entries that deal with purchases of materials? P61
- Receipt of materials into inventory
- Issues of materials : production & transger surplus materials from production into inventory
How are materials purchased on credit accounted for ?
- Debit : materials account
- credit : trade payables control
How are materials purchased for cash accounted for?
Debit: materials account
Credit : bank
How are materials issued to work in progress accounted for (production) ?
Debit: work in progress account
credit : materials account
How are materials returned from work in progress ( production) to inventory? p61
Debit: materials account
Credit : work in progress account
What is to remember when accounting for material and work in progress ? P61
- separate accounts
- each type of material
- each type of work in progress
