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
2
Q
What one the ways of classifying costs and what is an example of this way?
A
- Element
- materials
3
Q
What are materials?
A
- Costing term
- items purchased by organisation
4
Q
Who is responsible for purchasing materials ?
A
Purchasing department
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
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
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
8
Q
What would the method of planning and controlling materials depend on ? P39
A
- Size
- Resources
- Needs of a particular organisation
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
10
Q
How are materials coded and tracked?
A
- Unique code number
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
12
Q
What is the estimation method of purchasing/ controlling inventory?
A
- imprecise
- only quantities and types very low
- timing and quantity - estimated
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
14
Q
What is the periodic review system?
A
- fixed intervals
- predetermined level
15
Q
What is the just in time method ? P40
A
- latest possible time - no high levels of inventory
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
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
18
Q
What can formulas be used for ? P41
A
- identify reordered:
- minismise costs of ordering and storage
- ensure materials needed for production
19
Q
What is the reorder level? - P41
A
- Fixed quantities
- e.g always 20,000 litres
Point at which - next order placed
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
21
Q
What is the lead time ? - P41
A
- Time between : placing order and receiving it
22
Q
What is the reorder quantity ? P41
A
- quantity of material
23
Q
What is the minimum inventory level? P41
A
- lowest quantity - unexpected emergenices - not below
- buffer inventory
24
Q
What is the minimum inventory level?
A
- lowest quantity - unexpected emergenices - not below
- buffer inventory
25
What is the maximum inventory level ? P41
* highest quantity - at any one time
* set - physicla storage & capacity available
26
What is the reorder level ? P41
* point - next order inventory placed
27
What should happen under the reorder level system? P42
* order of material received
* minimum level of inventory reached
28
What would the reorder level be calculated as? - p42
* (maximum usuage * maximum lead time) + minimum inventory level
29
How is the order quantity and how is it calculated? P42
* maximum inventoru level - minimum inventory level
30
What should happen within the reorder quantity once the order has been received ? - P42
Minimum level > maximum level
31
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)
32
What is the key factor to having an efficient inventory system ? P43
reorder quantit
33
What are the two main categories of cost involved in holding inventory? P43
* holding costs
* ordering costs
34
What can holding costs and ordering costs be ?
Fixed/ variable
35
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
36
How can ordering costs be summarised ?
* Administrative costs : placing orders - variable
* transport costs - goods to storage
37
What is an economical order quantity? P44
minimises costs of ordering & holding
38
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
39
What does Co mean in the most economic order quantity calculation? - P44
Cost of each order placed
40
What does D mean in the most economic order quantity calculation? - p44
Annual demand
41
What does Ch mean in the most economic order quantity? P44
one unit of inventory for one year
42
Why is an accurate valuation of inventory needed? - p46
* calculate costs of gods
* calculate profit earned by organisation
43
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
44
Why do many organisations take out inventory takes? - P46
* physical levels - point in time
* nimber of items * costs per item = inventory value at cost
45
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
46
What does costing of raw materials require when valuing inventories ? -p47
* raw materials valued:
* issued to production/ sold to customers
47
What does issued to production mean? - P47
* item out of invenotry into production process
48
How will large manufacturing organisations keep records of each item of inventory held ? - P47
* Through store departments
* e.g. store ledger cards
49
What are the stores legder cards?
* Inventory record cards
* components:
* dates
* quantities
* prices of receipts/ issues
*
50
What is the main advantage of using the stores ledger card? - P47
* items in inventory
* costs - items are purchased or issued
51
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
52
What are the three common method of valuing issues to production & those held at a particular point in tiome
* FIFO
* LIFO
* AVCO
53
What is the Fifo mehod?
* Oldest/ first costs prices - issuing
* recent prices - remaining
54
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
55
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
56
What is the LIFO method?
* most recent/ last - issue
* oldest costs prices = remaining
* not acceptable - financial accounting purposes - IAS
* Acceptable - Internal management accounting purposes
57
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
58
What is the weighted average costs ? P54
* Average cost - values issues from store & remaining inventory
59
How is the weighted average costs calculated ?
* total costc of goods in store/ number of items in stores = weighted average cost
60
How would you record a receipt with AVCO ? P55
* Added to total costs
* Added to total quantity
* New costs = total costs/ total quantity
61
How would the closing balance always be calculated? P55
* Adding cost of receipt to previous balance
* deducting issue costs from prevuious balance
62
How will FIFO impact on profit? P56
* Times of rising prices
* Higher reported profits
* Higher tax being paid
* Acceptable for tax purposes
63
How will LIFO impact on profit?
* Times of rising prices
* lower reported profits
* lower tax liability
* unacppetable - tax purposes
64
What impact will AVCO have on profits? P56
* Value between FIFO & LIFO
* soothes out peaks & troughs of profits & losses
65
What are the two other valuation methods other than FIFO, LIFO , and AVCO?
Standard costs
Replacement costs
66
What is the standard cost valuation method? P59
* Predetermined cost per unit
* expected levels of costs
* helps - planning, control & decision making
67
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
68
What are part finished/ finished goods given a value based on ? p59
production costs
69
What do production costs include for finished/ part finished goods ? P59
* Direct materials ( raw materials)
* direct labour
* direct expenses
* production overheads
70
What is the purposes of stocktaking ? P59
* Minimisation of discrepancies
* actual number differs quantity in inventory records
71
What is periodic inventory taking ? P59
* counts physical inventory completely
* once per year - year - end
72
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
73
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
74
What are the reaosons for discrepancies with perpetual / continuous inventory taking? P60
* TBC
* T - Theft & pilfering
* B- Breakages
* C - Clerical errors on the records
75
What is the purpose of bookkeeping for materials? - P60
* collect costs:
* Ascertain values:
* finished goods
* raw material inventory
* when they are sold
* COS
76
How is the purpose of bookkeeping for materials acheived?
* series of control accounts
* each control account = sector of accounts within costs classification
77
What two things can an organisation use for bookkeeping of materials ? P60
* Ingergrated system of bookkeeping
* interlocking sytem of bookkeeping
78
What is an intergrated sysgtem of bookkeeping?
* costs accounts & financial accounts - same ledger
* one set of entry - saves time & effort
*
79
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
80
What is important when considering which method of bookkeeping for costing to use ? P61
* relationship : various costing & accounting system in an organisation
81
What is the material costing system linked with? P61
* Inventory control system
* Mateiral costs > inventory record cards > costs of materials into work in progress
82
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
83
How are materials purchased on credit accounted for ?
* Debit : materials account
* credit : trade payables control
84
How are materials purchased for cash accounted for?
Debit: materials account
Credit : bank
85
How are materials issued to work in progress accounted for (production) ?
Debit: work in progress account
credit : materials account
86
How are materials returned from work in progress ( production) to inventory? p61
Debit: materials account
Credit : work in progress account
87
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
