Inventory and Production Cycle

Question 1

When is Process Costing used?

Answer 1

A large quantity of like items are manufactured in a production line

Question 1

What is a Job Card

Answer 1

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

Question 1

What should the written instructions regarding the count cover?

Answer 1

• 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

Question 2

What other method is allowed per IAS 2 (pertaining specifically to manufactured goods)?

Answer 2

Standard Costing method - where the standard cost approximates actual cost only. Hence we must flex the standard cost for variances that are controllable.

Question 3

What are the three things the internal controls in inventory cycle should prevent

Answer 3

Control over physical transfer Protect inventory from damage, loss or theft Provide information required to calculate a cost for manufactured goods

Question 4

What two functions does the production stage of the Inventory and Production Cycle perform?

Answer 4

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

Question 5

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?

Answer 5

Manufacturing/Production Schedules

Question 5

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,

Answer 5

Inventory Amendment Form

Question 5

Give 3 risks that can arise in the warehousing stages of the Inventory and Production Cycle?

Answer 5

(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)

Question 5

Give an example of how management could overstate its inventory

Answer 5

(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)

Question 6

How should the count teams be made up?

Answer 6

One member of the inventory process the other completely independent

Question 7

How many times should be inventory be counted during a count?

Answer 7

Twice

Question 8

Should inventory still be dispatched during the count?

Answer 8

No

Question 9

What internal control would you expect to satisfy the Existence and/or Completeness Assertion?

Answer 9

Inventory Stock Counts

Question 10

Explain what the Existence Assertion means in relation to Inventory.

Answer 10

All inventory actually exists at the financial statement date and that it is not overstated or fictitious

Question 11

Give examples of controls that can be implemented specifically to prevent damage, theft or loss.

Answer 11

1. Physical Controls
2. Reconciliation and comparisons of information
3. Regularly supervisory checks to identify unauthorised resource use
4. Segregation of Duties - The same person should not have responsibility for custody of stock and maintaining records.

Question 11

Explain what the Valuation and Allocation Assertion means in relation to Inventory.

Answer 11

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)

Question 12

What should counters do once they are finished with their count?

Answer 12

The counters responsible for count sheets should:

1. Draw lines through all blank spaces on all inventory sheets, and
2. Sign each count sheet and all alterations.

Question 13

What is the main risk associated with Inventory balance? Over-/understatement, and why?

Answer 13

Overstatement. Management would attempt to increase profits by increasing the closing balance of inventory and at the same time showing a higher asset value

Question 14

What should happen to inventory received during the count?

Answer 14

It should be received in a separate area and counted. This amount should be added to the count of the warehouse.

Question 15

What are the four costing formulae used?

Answer 15

1. FIFO - Most common Method
2. Weighted Average - Used in manufacturing processes where its difficult to distinguish items
3. Specific Identification - for unique goods (job costing)
4. Retail Method - used by small business, set SP, using Markup they work out the cost.

Question 16

Give 3 Risks that may arise during the production stage of the Inventory and Production Cycle.

Answer 16

(Give any 3 of the following:)

1. Unauthorised requisitioning or issuing of materials (theft);
2. Requisition or issue of incorrect materials resulting in losses from wastage/delays;
3. Failure to budget costs properly resulting in selling prices which are too low and subsequent losses;
4. Failure to monitor actual expenditures and identify variances between actual and budget; and
5. Failure to control the transfer of finished goods to the finished goods store (stolen, lost or damaged)

Question 18

The Inventory and Production Cycle deals with two main aspects of Inventory, what are they?

Answer 18

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)

Question 21

What Assertions apply to the Inventory Balance in the SFP?

Answer 21

Existence, Rights and Obligations, Completeness, Valuation and Allocation

Question 23

When is Job Costing used?

Answer 23

Unique items are made or a small number of the same are made

Question 24

Why must an inventory count be carried out at year end for a periodic system?

Answer 24

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

Question 26

What three documents are important for an inventory counts?

Answer 26

1) Inventory Count Sheets 2)Inventory Amendment Forms 3) Inventory Lists

Question 27

Inventory can either be Manufacture or….?

Answer 27

Purchased for Resale

Question 28

Give examples of physical controls that can be implemented specifically to prevent damage, theft or loss.

Answer 28

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

Question 29

What is a GRN?

Answer 29

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)

Question 30

What two functions do the warehousing stages of the Inventory and Production Cycle perform?

Answer 30

1) Control the transfer of goods in and out of all warehousing facilities 2) Physically protect the inventory in all warehouses

Question 31

What is a Cycle Count?

Answer 31

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.

Question 32

What three things are on an inventory tag?

Answer 32

i) A tag sequenced number; ii) Inventory item number & description; and iii) An empty block to enter counted amount of inventory.

Question 33

Explain what the Rights Assertion means in relation to Inventory.

Answer 33

The company holds or controls the rights to all inventory in the SFP. Any encumbrances must be disclosed

Question 35

What kind of manufacturing costing process would a production report be used for?

Answer 35

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

Question 36

Explain what the Completeness Assertion means in relation to Inventory.

Answer 36

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

Question 37

Label the Diagram (Items A, B, and C)

Answer 37

A) Inventory Tag

B) Inventory Amendment Form

C) Inventory List

Question 38

What cost formula is specifically barred from use in terms of IAS 2

Answer 38

LIFO - Last in First Out. This method is used to manipulate profits for tax purposes in America

Question 39

What details are contained on an inventory sheet?

Answer 39

Description, location, quantity actually counted, Cost & Total Cost

Question 40

What two systems can be used in accounting for inventory?

Answer 40

The Perpetual or Periodic System

Question 41

How are inventory counts, using an inventory tag carrie rout, briefly?

Answer 41

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

Question 42

When may count teams be dismissed?

Answer 42

Count Teams only formally dismiss once the count is complete and all queries attended to.

Question 43

Label the Diagram

Answer 43

A) Production Schedule

B) Job Card/Production Report

C) Finished Goods

D) Materials Issue Note