PowerPoint Slides 5-8 Flashcards
Discuss the advantages of holding high levels of inventory.
Less likely to have “stock outs”
Always have stock available
More likely to be able to fulfil orders
Keeps customers happy
Particularly an issue if long lead time (time taken from order to delivery)
Ability to deal with unforeseen circumstances (such as shortage of product)
Lower ordering costs as fewer orders
Not so reliant on supplier
Can accommodate lack of quality and need to send goods back
Can reschedule production to more profitable items
Can meet peaks in demand
Discuss the disadvantages of holding high levels of inventory.
High holding costs – financing costs Obsolete stock Deterioration of stock condition Pilferage (theft) Security of stock Large storage area required
Why do we need to control our inventories?
We need to have enough to make goods
It costs us a lot if we run out of it
Stockholding costs are high
May deteriorate
We must hold a certain level of inventory that minimises:
Holding costs
Ordering costs
Costs of being without inventory
Documentation involved in the ordering and purchasing of goods:
Purchase requisition authorised Purchase order Receipt Goods with delivery note Goods received note
What does the bin card tell us?
How much stock we have.
What does the job card tell us?
How much inventory has been transferred to work in progress and eventually to finished goods.
When does a periodic inventory check take place?
At least at the end of an accounting period. Periodic checks usually mean that production has to be stopped whilst inventory is checked.
When do continuous inventory checks take place?
A few items of inventory are checked each day on a quasi random basis which ensures that expensive and other pilferable items are checked more often. Continuous stock-taking does not have to stop production and allows the employmeny of specialist stock-checkers.
How are stolen, damaged or obsolete materials and inventory treated?
They are written off as soon as they are discovered. These are treated as factory overhead.
What is perpetual inventory?
It is not a form of inventory check but a means of adjusting inventory records and purchase requirements every time a sale is made. This system is often used by supermarkets so that whenever an item goes through the check-out the inventory and purchase requirements are automatically adjusted.
What should you do with slow-moving inventory?
It should be checked and then we may decide to dispose of this or use it for something else, this will be treated as factory overhead.
Why should we be consistent in the way that we price our stores issues?
So that inventory and cost of sales, and therefore profits, may be comparable over time.
Inventory should be valued at:
the lower of it’s cost or net realisable value.
Which method of value-ing stock is not allowed for financial reporting and tax purposes?
LIFO
LIFO overstates -
LIFE understates -
Overstates COGS and opening inventory
Understates closing inventory & profit
List examples of holding costs.
Security charges
Cost of financing (interest on capital tied up in stock)
Pilferage/theft
Storage costs (including rent of warehouse)
Obsolescent stock
Stock deterioration
Insurance costs of stock and warehouse
Explain the concept of just-in-time in terms of stock management.
Stock level held such that replace only just before needed
State advantages of the just-in-time method.
High levels of stock not held
Decrease in holding costs
Reduces risk of obsolescence
Reduces risk of deterioration etc
State disadvantages of the just-in-time method.
Risk of stock outs
Risk of loss of customers
Inability to get hold of stock
Potentially higher ordering costs
What is an overhead?
An overhead is a cost that cannot be attributed to a specific item – ie is not a direct cost and so is not a direct production cost
Why is allocation and apportionment of fixed production overheads to cost centres and their subsequent absorption by cost units important?
To value inventory correctly
To ensure that the price of a product covers all of its costs
To determine the profitability of our different products
Why is it difficult to work out the share of overheads that each product should be given?
Because the relationship between overheads and output is not clear.
Absorption costing is based on which principle?
that since fixed production costs are incurred to permit output, such costs should be included in the cost per unit of output
Why can it be difficult to share out fixed production overheads?
because they don’t vary in direct proportion with output volume and therefore can’t be traced to individual units of output.
What is the difference between a production and service department?
Production department - actually produce the goods
Service department - don’t produce anything
Non-fixed production overheads such as administration and finance costs, selling and distribution costs, and research and development costs are treated as what? And how is this dealt with in the SCI?
They are treated as periodic costs and written off in the SCI in the period which they have been incurred.
Advantages of absorption costing:
- all fixed production costs included
- inventory valued in accordance with SSAP9
- useful for cost plus pricing
Disadvantages of absorption costing:
- depends on accuracy of forecast
- fixed production overheads carried forward in inventory
- pricing should be market based
- arbitrary
What is contribution?
Selling price less variable costs
What is absorption costing?
All fixed and variable manufacturing costs assigned to units of products
Includes all manufacturing costs – direct and indirect in the cost of production
What is a relevant cost?
A cost that is relevant to making a decision and will affect a decision
For example an opportunity cost
Sunk costs are not relevant costs
What is a sunk cost?
A cost that has already been incurred in the past
Is not a relevant cost
For example research and development costs
What is allocation?
Total/whole costs assigned to a specific department or cost/responsibility centre
What is marginal cost?
excludes fixed costs
Only variable production overheads are included in stock valuation
What is opportunity cost?
Potential benefit lost by rejecting the next best alternative course of action
What is an indirect cost?
A cost that cannot easily be traced to a particular product or unit of output – an overhead
What is apportionment?
Sharing out of common fixed costs (eg service centre costs) between departments or cost/responsibility centres
What is fixed production overhead?
Any fixed cost associated with manufacturing except direct materials and direct labour
Fixed = the cost remains constant in total regardless of changes in level of activity within the relevant range
Often accrue over time
