Material costs Flashcards
What types of materials are in inventory ? P41
- Raw materials - components
- brought for resale
- service/ consumable items
Who normally buys materials within a company ? P41
- Purchasing/ procurement department
- job - inventory control policies
- lowest possible costs - quality, quantity, sustainability measures
What would the adopted method on planning purchases and inventory control depend on ? P42
- Size and sophistication of business
- IMPORTANT - how much inventory
1. physical count
2. computerised records (physical verification)
3. when - reordering
4. quantity - reordering
What are the main methods of inventory control ? P42
- Perpetual inventory
- just in time
What is perpetual inventory ? P42
- Records receipts and issues of inventory - pass in/out
- reorders made
- Inventory records digitally kept by computers - activiated barcodes
What is just in time method ? P42
- components delivered- just when needed
- quality suppliers - manufacturing schedules
- inventory levels = kept low
What are formulas ? P43
- When to order and how much to order
What is the fixed quantity method of ordering ? P43
- in set amounts
What should the business know when ordering in fixed quantity? P43
- Maximum inventory level - storage space available
- Buffer inventory - not below
- Lead time -time it takes - new inventory delivery
- Reorder level - point new order placed
- Appropriate reorder quantity - maximum and minimum reorder quantity
How do you calculate the buffer inventory ? P44
- Reorder level - (average usuage * average lead time)
- meet unexepcted emergencies
- lead time known
How is the reorder level calculate ? P44
- (average usuage * average lead time) + buffer inventory
- replacement materials delivered - falls to buffer inventory
How is the maximum inventory level calculated ? P44
- Buffer inventory + maximum reorder quantity
- highest level
- obsolescnece
How is the maximum reorder quantity calculated ? P44
- Maximum inventory level - buffer inventory
- restores inventory - maximum level
How is the minimum reorder quantity calculated ? p44
Average usuage * average lead time
restore to re-order level ( further order placed )
What is critical to the efficiency of inventory holding? P45
- the reorder quantity
- too large = too much inventory = expense
- too small = costs of reordering < costs of saving for lower inventory = run out
What is the economic order quantity ? P19
SMALL BOOk
- optimum (most economical) amount
What is the formula for EOQ ? P46
2 * CO * D / CH
What do the different symbols in most economic calculation stand for ? P46
- CO - Ordering costs
- D - Annual usuage
- CH - inventory holding costs
How would businsses keep records of their inventories ? P47
- Computerised
- manual - individual inventory records
When are separate records of inventory kept ? P47
- For each type of inventory
What are the different systems of inventory for - materials resold by retailer , production use manufactureer ? P47
non different - Same system
Why must inventory be valued at the end of the financial year? P48
- material inventory - ties up alot of money
- valuation essetial - use in calculation of profit in financial statements
How is inventory counted and what then happens ? P48
- stock taking - physical checked
- compared with inventory records
How is the inventory held calculated ? P48
Number of items held * cost per item = inventory value at cost
According to auditors , what can inventory be valued as ? P48
- At costs
- At net realisable value
What is the definition of a valuation of inventory by costs ? P48
- Cost to buy
- cost to bring to present location, condition
What is the net realisable value of holdingh inventory ? P48
- Actual / estimated selling price (less extra costs: selling nd distribution)
What is inventory valuation based on ? P48
- Lower of costs and net realisable value
- International Accounting Standard (IAS)
How do you record in fifo ? P51
- balance column - new list quantities and costs - after each issue / receipt
- inventory issued - top of list downwards
How do you record in avco ? P52
- weighted average cost per unit - quantity issued
- weighted average costs per unit - balance
- Lists of different costs - not rewritten
- often rounding issues
How is the weighted average costs calculated P52
Value / quantity of inventory
What is a way of obtaining the cost of sale figure in a statement of p/l ? P53
- adding up values - issues column in inventory record
*
Whhat effect does inventory valuation have on profit ? P53
- over life of business = total profit same in total
Why must accounting staff resist pressure to use different inventory valuation to manipulate profits? P53
- Ethical considerations in accounting
- objectivity
What must the inventory valuation rule be applied to ? P57
- Separate items of inventory
- group of similar items
- NOT - total costs to total net realisable value
The principle of the lower of costs and net realisable value applies to a manufacturer for what ? P57
- Three types of inventory
- Raw materials
- Part- finished goods/ work in progress
- finished goods
How is the method of inventory valuation selected when dealig with raw materials ? P57
- Comparison of costs (FIFO / AVCO) to net realisable value
How is the inventory valuation method selected when dealing with partt finished.finished goods ? P57
- Costs valuation includes:
- expenditure on (direct material + labour + expenses+ production overheads )
- production costs
- compared net realisable value - fuerther costs
What must you remember when bookkeeping what does this represent ? P60
- double bookkeeping
- debit - gain in value - asset / expense
- credit - gain in value - liability/ income
What is the double entry for materials purchased on credit ? P60
- Debit inventory ( asset gained)
- credit trade payables ( liability incurred)
What is the double entry for materials purchased on cash ? P60
- Debit inventory ( asset gained)
- Credit bank ( bank balance reduced)
Double entry for Issuing materials to production P60
- Debit production (assets gained)
- credit inventory ( value of materials to production)
Return of materials from production to inventory ? P60
- Debit inventory (asset gained)
- credit production (value from production)
What are the four main accounts involved in bookkeeping for materials ? P60
- Inventoy account
- Production account
- trade payable account
- bank account
What is the double entry for the issue of indirect materials ? P60
- Debit production overheads
- credit inventory
