Inventory Valuation and The Manufacturing Account

Question 1

Manufactures will hold inventory in various forms what are they?

Answer 1

Raw materials - These are the materials which have bought by a manufacturing business and ready to be transferred to the production area where they will be used to make the finished goods.
Work-in-Progress - Comprises part finished products that are awaiting completion.
Finished goods - Items which have been completed and are ready to sell.

Question 2

what are the three Valuation methods

Answer 2

FIFO - First in First out
LIFO - Last in First out
AVCO - Average cost

Question 3

What is the main principle of FIFO?

Answer 3

A method of inventory that assumes that goods will be used up in the order that they are acquired. Meaning that the remaining balance will be valued based on the prices of more recent purchases.

Question 4

What is the main principle of LIFO?

Answer 4

Method of inventory valuation assumes that the most recently acquired inventory will be used first. Leaving earlier acquisitions to make up the value of the remaining balance .

Question 5

What is the main principle of AVCO?

Answer 5

Involves calculating an average cost of goods each time a new purchase is made and using this valuation for subsequent issues and balances until a new purchase is made.

Question 6

Name some methods which can be used to manage inventory?

Answer 6

Buffer stock - Extra amount held as a reserve in case an emergancy
Lead time - Length of time between placing an order to purchase more material
Re-order level - When inventory drops to this level then its time to place a new order
Re order quanitity - Amount of material which should be placed, enough so that there isnt too many orders placed but not too many so the business runs out of space.

Question 7

Manufacturing Account method:

Answer 7

Opening inventory +
purchase of raw materials +
closing inventory of raw materials -
DIRECT MATERIALS USED =
Direct Labour +
DIRECT COST =
Manufacturing Overheads +
MANUFACTURING COST =
Opening Inventory of WIP +
Closing Inventory of WIP -
COST OF GOODS MANUFACTURED =
Opening inventory of finished goods +
Closing Inventory of finished goods. -
COST OF GOODS SOLD =