Inventory and Production Cycle Flashcards
When is Process Costing used?
A large quantity of like items are manufactured in a production line
What is a Job Card
Document that tracks the stages of production for a specific job. As costs accumulate they are recorded and O/H allocation is made to arrive at total cost
What should the written instructions regarding the count cover?
- The identification of count teams and responsibilities of each
- The method of counting (Tags, double count, marking counted inventory in two colours with chalk)
- Identification of slow moving/damaged inventory as well as consignment inventory
- Controls over issues to and returns of inventory sheets to the count controller
- Procedures to be adopted if problems arise during the count o Detailed instructions concerning dates, time, locations
What other method is allowed per IAS 2 (pertaining specifically to manufactured goods)?
Standard Costing method - where the standard cost approximates actual cost only. Hence we must flex the standard cost for variances that are controllable.
What are the three things the internal controls in inventory cycle should prevent
Control over physical transfer Protect inventory from damage, loss or theft Provide information required to calculate a cost for manufactured goods
What two functions does the production stage of the Inventory and Production Cycle perform?
1) Purpose is to manufacture the company’s products
2) Required to:
i) Requisition & Receive components
ii) Control costs during manufacture
iii) Record Actual Costs
iv) Account for items produced and to transfer them to the warehouse facility
v) Compare actual and budgeted costs
A document used to notify manufacturing/production department as to what is to be produced, based on sales forecasts, current inventory holdings of F.G. and specific orders/contracts, is known as what?
Manufacturing/Production Schedules
What sequenced document used to record adjustments which must be made to correct the perpetual inventory records when actual and theoretical inventory do not agree,
Inventory Amendment Form
Give 3 risks that can arise in the warehousing stages of the Inventory and Production Cycle?
(Give any of the following:) 1) Goods received from suppliers are not transferred into warehouses timeously or at all (stolen); 2) Inventory (in any form) is stolen or lost; 3) Inventory Deteriorates in value e.g. Inadequate physical controls (gets wet) or due to its nature; 4) No record is created for goods or components physically moved; 5)Goods produced or moved are incorrect resulting in lost sales or production delays; or 6) Inventory shortages are concealed (including those due to theft)
Give an example of how management could overstate its inventory
(any one) 1) By manipulating/changing the cost formula used (e.g. changing from WA to FIFO where prices are increasing) 2) capitalising costs that should not be, in terms of IAS 2 (e.g. capitalising administrative overheads)
How should the count teams be made up?
One member of the inventory process the other completely independent
How many times should be inventory be counted during a count?
Twice
Should inventory still be dispatched during the count?
No
What internal control would you expect to satisfy the Existence and/or Completeness Assertion?
Inventory Stock Counts
Explain what the Existence Assertion means in relation to Inventory.
All inventory actually exists at the financial statement date and that it is not overstated or fictitious
Give examples of controls that can be implemented specifically to prevent damage, theft or loss.
- Physical Controls
- Reconciliation and comparisons of information
- Regularly supervisory checks to identify unauthorised resource use
- Segregation of Duties - The same person should not have responsibility for custody of stock and maintaining records.
Explain what the Valuation and Allocation Assertion means in relation to Inventory.
Inventory is included in the financial statements at an appropriate amount (This includes write- downs to NRV), utilising an appropriate costing formulas. (Namely the quantity of goods and price per unit)
What should counters do once they are finished with their count?
The counters responsible for count sheets should:
- Draw lines through all blank spaces on all inventory sheets, and
- Sign each count sheet and all alterations.
What is the main risk associated with Inventory balance? Over-/understatement, and why?
Overstatement. Management would attempt to increase profits by increasing the closing balance of inventory and at the same time showing a higher asset value
What should happen to inventory received during the count?
It should be received in a separate area and counted. This amount should be added to the count of the warehouse.
What are the four costing formulae used?
- FIFO - Most common Method
- Weighted Average - Used in manufacturing processes where its difficult to distinguish items
- Specific Identification - for unique goods (job costing)
- Retail Method - used by small business, set SP, using Markup they work out the cost.
Give 3 Risks that may arise during the production stage of the Inventory and Production Cycle.
(Give any 3 of the following:)
- Unauthorised requisitioning or issuing of materials (theft);
- Requisition or issue of incorrect materials resulting in losses from wastage/delays;
- Failure to budget costs properly resulting in selling prices which are too low and subsequent losses;
- Failure to monitor actual expenditures and identify variances between actual and budget; and
- Failure to control the transfer of finished goods to the finished goods store (stolen, lost or damaged)
The Inventory and Production Cycle deals with two main aspects of Inventory, what are they?
i. The custody & safekeeping of inventory in whatever form it is – goods held for resale or manufactured and finished goods (WIP & FG); and ii. The recording of costs where a production or manufacture process occurs (Process or Job Costing)
What Assertions apply to the Inventory Balance in the SFP?
Existence, Rights and Obligations, Completeness, Valuation and Allocation
When is Job Costing used?
Unique items are made or a small number of the same are made
Why must an inventory count be carried out at year end for a periodic system?
In a periodic system, cost of sales is only determined at year end (unlike a perpetual system where it can be determined at any point in time) therefore, in order to determine the closing balance, an inventory count must be carried out
What three documents are important for an inventory counts?
1) Inventory Count Sheets 2)Inventory Amendment Forms 3) Inventory Lists
Inventory can either be Manufacture or….?
Purchased for Resale
Give examples of physical controls that can be implemented specifically to prevent damage, theft or loss.
o Limit entry/exit – minimum points o Controlled entry/exit – swipe cards, keypads, turnstiles, gate control, security guards, X-ray o Restricted entry – e.g. buying clerks not allowed to enter stores unaccompanied, only production employees allowed in production facility o Secure Buildings – minimum windows, solid structure o Environmental – areas to be dry, clean, neatly packed, pest free and temperature controlled where necessary o Surveillance – Cameras/video recording over production, receiving and despatch areas
What is a GRN?
A Goods Received Note. Made out on transfer of goods from the goods receiving bay to stores. Stores clerk to sign GRN (made when goods delivered by supplier)
What two functions do the warehousing stages of the Inventory and Production Cycle perform?
1) Control the transfer of goods in and out of all warehousing facilities 2) Physically protect the inventory in all warehouses
What is a Cycle Count?
An Inventory count that takes place more than once during a financial year in order to ensure inventory is managed effectively. Explanation: One characteristic of good internal control is the recon of theoretical and actual inventories. Preventative measures can be put in place to reduce the possibility of the problem which caused the discrepancy from re-occurring. An inventory count is required in order to use the perpetual inventory system. Companies with large quantities of inventory perform cycle counts.
What three things are on an inventory tag?
i) A tag sequenced number; ii) Inventory item number & description; and iii) An empty block to enter counted amount of inventory.
Explain what the Rights Assertion means in relation to Inventory.
The company holds or controls the rights to all inventory in the SFP. Any encumbrances must be disclosed
What kind of manufacturing costing process would a production report be used for?
Process Costing. A Production Report contains the results of production, output, wastage, loss, etc. at identifiable stages of completion or production or for specific cost centres
Explain what the Completeness Assertion means in relation to Inventory.
All inventory which the company holds the rights to have been included in the financial statements and all inventory that should have been recorded has been
Label the Diagram (Items A, B, and C)
A) Inventory Tag
B) Inventory Amendment Form
C) Inventory List
What cost formula is specifically barred from use in terms of IAS 2
LIFO - Last in First Out. This method is used to manipulate profits for tax purposes in America
What details are contained on an inventory sheet?
Description, location, quantity actually counted, Cost & Total Cost
What two systems can be used in accounting for inventory?
The Perpetual or Periodic System
How are inventory counts, using an inventory tag carrie rout, briefly?
The 1st team will count and enter the amount in the block, remove the part and give it to the Count Controller. The 2nd team will do the same. Any discrepancies in counts must be recounted
When may count teams be dismissed?
Count Teams only formally dismiss once the count is complete and all queries attended to.
Label the Diagram
A) Production Schedule
B) Job Card/Production Report
C) Finished Goods
D) Materials Issue Note
