Inventory and Production cycle Flashcards
Chapter 8
What is the nature of the inventory and production cycle ?
It relates to an entity’s function of managing and safeguarding its inventory and, in the case of a manufacturing entity, controlling the production process
What is the purpose of this cycle?
It is to:
- Safeguard the inventory against damage and theft
- Control the movement of inventory during the production process
- Control the production process itself= for manufacturing entities
What are the major accounts affected by this cycle ?
1) Statement of Comprehensive income ( COS and Purchases- in the case of a periodic inventory system)
2) Statement of Financial Position (Inventory)
What is the accounting treatment required for inventory ?
Inventory is recognized at the lower of cost and net realizable value, while the latter being the estimated selling price less the estimated cost of completion and estimated necessary costs to make the sale
- When inventory is sold, the carrying amount of such inventories shall be recognized as an expense in the period of which the elated revenue shall be recognized. The amount of any write-down of inventory to the net realizable value and losses of inventory shall be recognized as an expense in the period in which the write-down or loss occurred.
What is the accounting treatment required for the COS and Purchases?
The cost of all inventories shall comprise of all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
What are the cycle’s functional areas ?
1) Storage of raw materials
2) Production planning
3) Transfer of raw materials to production
4) Production
5) Transfer of finished goods to finished goods warehouse
6) Storage of finished goods
7) Cost allocation and updating of inventory records
8) Maintenance of inventory records
How would you explain the functional area: Storage of raw materials ?
Purpose: To safeguard raw materials against damage and theft
Main activities: Protecting the raw materials
Persons involved in this area: Raw material warehouse personnel
How would you explain the functional area: Production planning ?
Purpose: To plan the production process
Main activities: Determine production needs, determine raw materials needed and request raw materials
Persons involved in this area: Marketing manager, Production manager, and factory manager
How would you explain the functional area: Transfer of raw materials to production ?
Purpose: To control the raw materials issued to the factory
Main activities: Preparation of raw materials to be transferred , transfer of raw materials to the factory, receipt of raw materials at the factory
Persons involved in this area: Raw materials warehouse personnel, factory personnel, inventory clerk and other accounting personnel
How would you explain the functional area: Production ?
Purpose: To control the production process
Main activities: Comparison and reconciliation of raw materials received and finished goods manufactured; inspection of the quality of the finished goods
Persons involved in this area: Factory personnel
How would you explain the functional area: Transfer of finished goods to the finished goods warehouse
Purpose: To control the finished goods transferred to the finished goods warehouse
Main activities: Transfer of finished goods from the factory to the FG warehouse, receipt of finished goods at the FG warehouse
Persons involved in this area: Factory personnel; finished goods warehouse personnel; inventory clerk and other accounting personnel
How would you explain the functional area: Storage of finished goods ?
Purpose: To safeguard finished goods from damage and theft
Main activities: inspecting goods received into the finished goods warehouse; protecting the inventory in storage
Persons involved in this area: Finished goods warehouse personnel
How would you explain the functional area: Cost allocation and updating of inventory records ?
Purpose: To update costing of the manufactured inventory on the inventory records
Main activities: Calculation, review and recording of labour and overhead costs allocated to finished goods; recording movement of inventory; performing inventory counts and updating inventory records accordingly
Persons involved in this area: Accounting personnel and warehouse personnel
How would you explain the functional area: Maintenance of inventory records ?
Purpose: To keep the inventory records up to date
Main activities: Recording any inventory adjustments required to the inventory records
Persons involved in this area: Accounting personnel
How is the flow of transactions in the cycle through the information system ?
