PowerPoint Slides 5-8

Question 1

Discuss the advantages of holding high levels of inventory.

Answer 1

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

Question 2

Discuss the disadvantages of holding high levels of inventory.

Answer 2

High holding costs – financing costs
Obsolete stock
Deterioration of stock condition
Pilferage (theft)
Security of stock
Large storage area required

Question 3

Why do we need to control our inventories?

Answer 3

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

Question 4

We must hold a certain level of inventory that minimises:

Answer 4

Holding costs
Ordering costs
Costs of being without inventory

Question 5

Documentation involved in the ordering and purchasing of goods:

Answer 5

Purchase requisition authorised
Purchase order
Receipt
Goods with delivery note
Goods received note

Question 6

What does the bin card tell us?

Answer 6

How much stock we have.

Question 7

What does the job card tell us?

Answer 7

How much inventory has been transferred to work in progress and eventually to finished goods.

Question 8

When does a periodic inventory check take place?

Answer 8

At least at the end of an accounting period. Periodic checks usually mean that production has to be stopped whilst inventory is checked.

Question 9

When do continuous inventory checks take place?

Answer 9

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.

Question 10

How are stolen, damaged or obsolete materials and inventory treated?

Answer 10

They are written off as soon as they are discovered. These are treated as factory overhead.

Question 11

What is perpetual inventory?

Answer 11

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.

Question 12

What should you do with slow-moving inventory?

Answer 12

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.

Question 13

Why should we be consistent in the way that we price our stores issues?

Answer 13

So that inventory and cost of sales, and therefore profits, may be comparable over time.

Question 14

Inventory should be valued at:

Answer 14

the lower of it’s cost or net realisable value.

Question 15

Which method of value-ing stock is not allowed for financial reporting and tax purposes?

Answer 15

LIFO

Question 16

LIFO overstates -

LIFE understates -

Answer 16

Overstates COGS and opening inventory

Understates closing inventory & profit

Question 17

List examples of holding costs.

Answer 17

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

Question 18

Explain the concept of just-in-time in terms of stock management.

Answer 18

Stock level held such that replace only just before needed

Question 19

State advantages of the just-in-time method.

Answer 19

High levels of stock not held
Decrease in holding costs
Reduces risk of obsolescence
Reduces risk of deterioration etc

Question 20

State disadvantages of the just-in-time method.

Answer 20

Risk of stock outs
Risk of loss of customers
Inability to get hold of stock
Potentially higher ordering costs

Question 21

What is an overhead?

Answer 21

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

Question 22

Why is allocation and apportionment of fixed production overheads to cost centres and their subsequent absorption by cost units important?

Answer 22

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

Question 23

Why is it difficult to work out the share of overheads that each product should be given?

Answer 23

Because the relationship between overheads and output is not clear.

Question 24

Absorption costing is based on which principle?

Answer 24

that since fixed production costs are incurred to permit output, such costs should be included in the cost per unit of output

Question 25

Why can it be difficult to share out fixed production overheads?

Answer 25

because they don’t vary in direct proportion with output volume and therefore can’t be traced to individual units of output.

Question 26

What is the difference between a production and service department?

Answer 26

Production department - actually produce the goods

Service department - don’t produce anything

Question 27

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?

Answer 27

They are treated as periodic costs and written off in the SCI in the period which they have been incurred.

Question 28

Advantages of absorption costing:

Answer 28

• all fixed production costs included
• inventory valued in accordance with SSAP9
• useful for cost plus pricing

Question 29

Disadvantages of absorption costing:

Answer 29

• depends on accuracy of forecast
• fixed production overheads carried forward in inventory
• pricing should be market based
• arbitrary

Question 30

What is contribution?

Answer 30

Selling price less variable costs

Question 31

What is absorption costing?

Answer 31

All fixed and variable manufacturing costs assigned to units of products
Includes all manufacturing costs – direct and indirect in the cost of production

Question 32

What is a relevant cost?

Answer 32

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

Question 33

What is a sunk cost?

Answer 33

A cost that has already been incurred in the past
Is not a relevant cost
For example research and development costs

Question 34

What is allocation?

Answer 34

Total/whole costs assigned to a specific department or cost/responsibility centre

Question 35

What is marginal cost?

Answer 35

excludes fixed costs

Only variable production overheads are included in stock valuation

Question 36

What is opportunity cost?

Answer 36

Potential benefit lost by rejecting the next best alternative course of action

Question 37

What is an indirect cost?

Answer 37

A cost that cannot easily be traced to a particular product or unit of output – an overhead

Question 38

What is apportionment?

Answer 38

Sharing out of common fixed costs (eg service centre costs) between departments or cost/responsibility centres

Question 39

What is fixed production overhead?

Answer 39

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