MAPS - Chapter 2 - Material Costs Flashcards
Why is it important to be in control of inventory?
- Holding materials is expensive
- May have to borrow money to buy
- Storage costs like rent
What type of materials are held by a manufacturing business?
- Raw materials and components
- Work-in-progress
- Finished goods
What methods can a business use to know when to order more inventory and how much they need?
- Perpetual Inventory
- Just in Time
- Formulas
What is perpetual inventory?
Often used in supermarkets as items are sold reorders are made accordingly to always have enough stock
What is Just in Time (JIT)?
Often used by manufacturing businesses, supplies are delivered just as they are needed to keep inventory low
What formulas help with inventory management?
- Maximum inventory level
- Buffer inventory
- Lead time
- Reorder level
- Reorder quantity
What is maximum inventory level?
Maximum inventory that can be held at once so you don’t over order
What is the buffer inventory?
Minimum level that inventory should not fall below before a new order is delivered
What is lead time?
How long it takes for new inventory to be delivered after being ordered
What is the reorder level?
The point a new order is the be placed
How do you calculate buffer inventory?
Reorder level - (average usage x average lead time)
How do you calculate reorder level?
(average usage x average lead time) + buffer inventory
How do you calculate maximum inventory level?
Buffer inventory + maximum reorder quantity
How do you calculate maximum reorder quantity?
Maximum inventory level - buffer inventory
How do you calculate minimum reorder quantity?
Average usage x average lead time
What other factors should be considered when completing inventory calculations?
- Needs of the business and if they change
- Obsolescence of inventory
- Seasonal variations affecting usage and inventory levels
Why is the reorder quantity so important?
If you order too large amounts too much will be held costing the business. If too little is ordered the expense of constantly ordering will outweigh the savings of lower inventory levels, also can run out
What is the most economic reorder quantity called?
The economic order quantity (EOQ)
What is the formula for Economic Order Quantity (EOQ)?
(2 x annual usage x ordering cost) / inventory holding cost. All square rooted
What are the two ways in which inventory can be valued?
- Cost (what it cost to buy)
- Net realisable value (what you could sell it for)
How is it decided whether to value inventory at cost or NRV?
Whichever is lower
What does FIFO stand for?
First in, first out
What does AVCO stand for?
Weighted Average Cost
How do you calculate weighted average cost?
Total cost of inventory held / number of items held
What is important about choosing an inventory valuation policy?
Should be consistent, choose one and not change without a good reason.
Which international accounting standard sets out the principle of inventory valuation?
2
How is cost valuation different for work-in-progress and finished goods?
These should include direct materials, labour, expenses and production overheads
