SAC 2 outcome 1 Flashcards
distinguish between product and period cost
the product cost is a cost incurred in getting the inventory into a location or condition ready for sale and can be direly allocated to each individual item of a logical basis. e.g modifications and import duties. period cost is the cost incurred in getting the inventory into a condition or location ready for sale but cannot be directly allocated to each individual item as there is no logical basis to do so. e.g insurance on delivery.
the lower cost and net realisable value
cost is valved at its original purchase price plus any cost incurred in getting it ready for sale, which upholds verifiability and faithful representation. when inventory is damaged or the with has come down as better products have come out it no longer provides a faithful representation of the right value. whereas cost represents its value at the time of purchase the NRV represents what the inventory would be worth if it was sold today.
net realisable value equation
net realisable value = estimated selling price - direct selling expenses
strategies to improve management of inventory
important to both profit and liquidity. taste and preferences change so owner has to keep onto of trends and innovations and what lines should expand and reduce.
inventory write down
he expense incurred when the Net Realisable Value (NRV) of an item of inventory falls below its Cost or original purchase price. it is written under gross profit in the income statement. it means the cost price currently recorded no longer provides and faithful representation
inventory loss
is when the number of units counted is less than the quantity shown. in the balance. this may be because of theft, damage and under supply from the supplier of oversupply to a customer.
inventory gain
when the number of units counted is more than the quantity shown. due to oversupply from supplier to undersupply to customer.
cost of inventory
includes all the costs of getting inventory into a condition and location ready for sale
inventory turnover
the average number of days it takes for a business to sell its inventory to convert it into sales. sales to a business is their main source revenue which states hoe effectively a firm has managed their inventory. assessed against previous. periods, budgeted. performance and competitors. faster means inventory is sold quicker and will enhance the firms ability to earn profit and generate cash for sales of inventory. slower means the inventory is sold slower leading to. slower cars flows, its a decrease in sales has. a negative. affect to profit and worsens liquidity.
inventory turnover equation
inventory turnover = average number of days/ cost of goods sold x 365
complementary goods
support other goods sold to generate extra sales e.g tennis racket and tennis balls
inventory is up to date
they have the most current version as their are changes in fashion and technology
rotate of inventory
older products moved to the front so they are sold first .
appropriate level of inventory on hand
too little could loss sales and too high has a risk of other costs like storage cost which comes to the risk of a product being damaged.
market strategically and effectively and ethically
advertising increases sales and faster turnover. loyal customers are less likely to change company if there are changes in price. marketing must be ethical and provide honest representation of goods. making promises that the product can not for fill can lead to sales returns
