accounting for materials (adobe)

7/30/2019 Accounting for Materials (Adobe)

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ACCOUNTING FORMATERIALS


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Cost Accounting

Gathering of cost information

Attachment of costs to cost objects

Establishment of budgets, standard costs,actual costs (of operations, processes, activities orproducts)

Analysis of variances, profitability or the socialuse of funds

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Lorence Brown, UTECH


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Cost Object

Anything for which a separate measurement ofcost is desired

(Examples: product, service or department)

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Scope of Cost Accounting

The foundation of the internal financial informationsystem to facilitate:

CONTROL (organization and constituent parts work

efficiently towards agreed objectives)

DECISION-MAKING(choice between alternatives)

PLANNING(what cost will be like in the future, providestandards targets against which to compare actual results)

ESTIMATING & PRICING

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Unit Objectives

1. Describe the different procedures anddocuments necessary for ordering, receivingand issuing materials from inventory

2. Describe the control procedures used tomonitor physical and book inventory to

minimize discrepancies and losses.

3. Interpret the entries and balances in thematerial inventory account


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Unit Objectives

4. Prepare calculations, with explanations, of thecosts of ordering and holding inventory(including buffer inventory)

5. Calculate optimal reorder quantities includingsituations where discounts apply.

6. Interpret optimal reorder quantities includingsituations where discounts apply.


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Unit Objectives

7. Produce calculations to minimize inventory costswhen inventory costs when inventory is graduallyreplenished.

8. Apply appropriate methods for establishing reorderlevels where demand in the lead time is constant

9. Calculate the value of closing inventory andmaterial issues using LIFO, FIFO and averagemethods


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Inventory Control System

Controls should cover the following

functions:

1. The ordering of inventory

2. The purchase of inventory

3. The receipt of goods into stores

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Inventory Functions RequiringControl

4. The storage of goods

5. The issue of inventory.

6. Maintenance of inventory at most

appropriate level


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Reasons for Controlling Inventory

1. Holding costs may be expensive

2. Production will be disrupted if we run out of

raw materials

3. Unused inventory with short shelf life mayincur unnecessary expenses

4. Ensure quality inputs used to maintain goodreputation with customers

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Ordering & Receiving Materials

Every movement of material should bedocumented using the following:

1. Purchase requisition

2. Purchase order

3. Goods received note (GRN)

4. Materials requisition, transfer or returned note.

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Ordering, receipt and issue

Proper records of physical procedures forordering and receiving ensure:

Enough inventory is held

No duplication of ordering

Quality is maintained

Adequate record for accounting purposes


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Ordering & Receiving MaterialsDocuments used (1)

Purchase Requisition

From stores to purchasing department

Request for QuotationsFrom purchasing to potential suppliers to secure thebest mix of quality and prices

Purchase Order From purchasing to supplier, accounts payable,

originating dept, stores/goods receiving dept.

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Ordering & Receiving MaterialsDocuments used (2)

Delivery notesent by supplier with goods which are thenchecked against the purchase order for quality

and quantity

Goods Received Note

From stores to accounts payable

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Goods Receival

Incoming goods taken to central goodsreceiving department facilitates control

Ensure goods arriving actually agree in detailto those ordered (purchase order, deliverynote, counted, inspected)


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Goods Receival

GRN prepared as evidence that goodsordered received and can be paid for)

Copies sent to accounts for comparison withsuppliers invoice and payment to be made.

Basis for entering receipts of materials instores (warehouse) records


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Issuing Materials - Documents used

1. Materials requisition noterecords the quantity of goods issued to differentdepartments (or production jobs)

2. Materials transfers and returnstransfer note prepared where goods are transferred toanother dept or job

3. Materials returnsreturned note prepared where goods not used arereturned to the stores dept.


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Form Purchase Requisition

PURCHASE REQUISITIONDate __________________Serial No._____________Purpose: _____________________ (inventory/special capital

equipment/budget ref)

Qty Description

Mater-ialCode

Job/DeptCode

DeliveryReqd

Purchase Order

Date Place No. Date Suppl-ier

Origination Dept. _________________ Authorization ____________

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Form Purchase Order

PURCHASE ORDERTo________________ Serial No:______________Date____________ Purchase Req. No._______

Qty Descriptio

n

Code Delivery

Date

Price Per (unit)

Your quotation_______________To be delivered carriage paid to _____________________

Please quote our Purchase Order number on all correspondence.

For ABC Ltd. ____________________________________

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Form - Goods Received Note

GOODS RECEIVED NOTETo_____________________ Serial No. ________________Date Issued: _______________Carrier_________________Date of delivery___________ Purchase Order No. _________

DescriptionCode Quantity Packages GrossWeight

INSPECTION REPORT Recd by ____________Reqd by ____________Qty passed Qty

rejected

Remarks

Accepted:___________Date: _______________Inspector______________ Date __________

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Computerized Inventory ControlSystems (1)

Many systems are computerized and most havethe following features:

Data must be input into the system may befrom the various forms or the information iskeyed directly into the system and

hardcopies can be printed


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Computerized Inventory ControlSystems (2)

An inventory master file is maintained i.e.database with details for every category ofinventory

The system will generate outputs hardcopyrecords, VDU screen display or printedreports.


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Objectives of Storing Materials 1

1. Speedy issue and receipt of materials

2. Full identification of all materials at all times

3. Correct location of all materials at all times

4. Protection of materials from damage and

deterioration

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Objectives of Storing Materials 2

5. Provision of secure stores to avoid pilferage,theft and fire

6. Efficient use of storage space

7. Maintenance of correct inventory levels

8. Keeping correct and up-to-date records ofreceipts, issues and inventory levels


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Recording Inventory Levels

Most frequently encountered system forrecording inventory movements are

Bin Card Kept with the actual inventory and updated with

receipts and issues

Stores Ledger Account Shows receipts, issues, $ values, inventory

control levels and running balances.


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Bin Card


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Part No._________________ Location: ___________________________

Bin No. ________________ Stores Ledger No. ____________________

Receipts Issues BalanceDate Qty GRN Date Qty Req No.


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Stores Ledger Account


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Material ____________________ Maximum Qty ________________________

Code ______________________ Minimum Qty ________________________

Date Receipts Issues InventoryGRN Qty Unit

Price$

Amt$

Stores

Req.No.

Qty

UnitPrice

$

Amt$

Qty UnitPrice

$

Amt$


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Free InventoryFree Stock Balance (FSB)

Scenario:

You are the storekeeper. On Monday of thisweek, the production manager requests 100

pieces of foam. She needs them on Friday butyou only have 50 pieces.

Give me reasons why you may not betroubled by the insufficient quantity offoam pieces on hand.


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Physical stock

Useful for issuing, stocktaking, controlling stock

levels

Free Stock

Useful for replenishment ordering


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FSB provides a full picture of the currentinventory position what is really available forfuture use.

FSB = Materials on hand+ Materials on order from suppliers

Materials requisitioned, not yet issued.


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Question on FSB

A wholesaler has 8,450 units outstanding forpart X100 on existing customers orders; there

are 3,925 units in inventory and the calculated

free inventory is 5,525 units.

How many units does the wholesalerhave on order with his supplier?

A: 9,450 B 10,050 C 13,975 D 17,900


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Identification of Materials (1)(inventory/materialscodes)

Materials held in stores are coded andclassified and provide the following advantages

1. Ambiguity is avoided

2. Time is saved descriptions can be lengthyand time consuming

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3. Production efficiency is improvedcorrect material can be accuratelyidentified from a code number

4. Computerized processing is made easier


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4. Numbered code systems can bedesigned to be flexible and can beexpanded to include more inventory

items as necessary

Digits in a code can stand for type ofinventory, supplier, department and so forth.


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The Inventory Count(Stocktake)

Involves counting the physical inventory on

hand at a certain date, and then checking

this against the balance shown in the

inventory records.

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Th I t C t


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The Inventory Count(Stocktake)

There are 2 approaches:

Periodic:

all items (raw materials, WIP and finished goods)

counted and valued at a set time, usuallyaccounting year-end

Continuous:

counting and valuing selected items at differenttimes on a rotating basis. Involves a specialistteam counting and checking a number of itemseach day.


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Advantages of Continuous Stocktaking(1)

1. Annual stocktake unnecessary and thedisruption it causes

2. Skilled stocktakers employed reduces likelyerrors

3. More time available reduces errors and

allows investigation

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Ad t f C ti St kt ki


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4. Deficiencies and losses revealed soonerfor corrective action to be taken

5. Production hold-ups are eliminated as storesstaff always available to deal with issues


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6. Staff morale improved and standards raised

7. Control over inventory levels is improvedless likelihood of overstocking or stockouts


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Reasons for Inventory Discrepancies 1

Discrepancies will occur investigate thecauses and take corrective action

1. Quantity errors eg, miscounts during thestock take.

2. Classification errors eg, a stainless steel part

classified as mild steel

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Reasons for Inventory Discrepancies 2

3. Pricing errors e.g., a correctly counted andclassified item might be priced at $56 for1000 instead of $56 per 100

4. Recording errors e.g., an omission of theentry of a goods received note.

5. Systems error e.g., no adequate recording ofreturns to stores.


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Perpetual Inventory

This is an inventory recording system whereby therecords (bin cards and stores ledger accounts) areupdated for each receipt and issue of inventory as itoccurs.

There is a continuous record of the balance onhand which is used to calculate the inventory figure

for the financial statements

Continuous stocktaking is necessary to ensure theperpetual system is functioning correctly

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Ob l t d t i ti d l


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Obsolete, deteriorating and slowmoving inventories and wastage

Obsolete (out-of-date) items should be writtenoff and disposed of if no longer required.

Inventory items may be wasted (eg broken,damaged) write-off, update inventory recordsand accounts.

Slow moving (quantity on hand will take a longtime to be used up). Excess inventory to bewritten off as obsolete inventory.

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Preparation for Next Class

We will be looking at inventory control levels

which will cover the following topics:

Inventory costs

Minimum, maximum and reorder levels Reorder quantity

Economic order quantity (EOQ)

Economic order quantity (EBQ)

Read textbook pages 104-113


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INVENTORY CONTROLLEVELS

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Elements of Inventory Costs

Purchase

Holding (or carrying)

Ordering and

Stockout (costs of running out of inventory


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Reasons for Holding Inventories (1)

Ensure sufficient goods are available to meetexpected demand

Provide a buffer between processes

Meet any future shortages

Take advantage of any bulk purchasingdiscounts


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Reasons for Holding Inventories (2)

Absorb seasonal fluctuations in usage/demand

Allow production processes to flow smoothly

Necessary part of production process(maturing cheese)

Deliberate investment policy (expectedinflation or shortages)


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Holding Costs


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Holding Costs(driven by inventory levels)

Storage and stores operations

Interest charges

Insurance

Risk of obsolescence

Deterioration


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Ordering Costs


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Ordering Costs(driven by frequency of orders)

Clerical and administration

Transport

Production run

(for inventory manufactured internally)


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Stockout Costs (1)

Lost contribution from lost sales

Loss of future sales

Loss of customer goodwill


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Stockout Costs (2)

Cost of production stoppages

Labour frustration over stoppages

Extra costs of urgent, small quantity

replenishment orders


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Objective of Inventory Control

Maintain inventory levels so that sum total of

holding, ordering and stockout costs are

minimized.


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Inventory Control Levels

There are 3 critical control levels

Reorder

Minimum and

Maximum


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Reorder Level

Level at which a replenishment order shouldbe placed

Reorder Level= maximum usage (rate of consumption) x

maximum lead time

Lead time is the time between ordering andreplenishment


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Minimum Level

Warning level that inventories approachingdangerously low level and stockouts are

possible

Mininimum level

= reorder level (ave usage x ave lead time


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Maximum Level

Warning level that inventories are reaching apotentially wasteful level

Maximum level= ROL+ reorder quantity (ROQ)

(min usage x min lead time)


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Question - Maximum Level

A large retailer with multiple outlets maintainsa central warehouse from which outlets aresupplied. The following is available for part #

SF525. Ave. usage = 350 per day

Min. usage = 180 per day

Max. usage = 420 per day

Lead time for replenishment = 11-15 days

Reorder qty. = 6,500 units

Reorder level = 6,300 units


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Question - Maximum Level (contd)

Based on the above,

A. What is the maximum level?

A: 5,250 B: 6,500 C: 10,820 D: 12,800

B. What is the approx. no. of SF525 carried asbuffer inventory?

A: 200 B: 720 C: 1,680 D: 1,750


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Example60

The following data relates to a particular stock item: Maximum Usage 130 units per day

Minimum Usage 70 units per day

Lead Time 20-26 days EOQ 5000 units

Calculate:

ROL (Ans = 3,380) Minimum Level (Ans = 1,080)

Maximum Level (Ans = 6,980)


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Reorder Quantity & Ave. Inventory

ROQ is the quantity of inventory ordered whenthe ROL is reached

Average inventory (assuming inventory is usedevenly)

= safety inventory + ROQ


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Economic Order Quantity

EOQ = The optimum order size

EOQ is that ROQ that minimizes the balance

of cost between ordering (Co) and holding(Ch) costs

Can be calculated using a table, graph orformula


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EOQ Assumptions

Known, constant per unit stockholding cost

(some costs may increase on a step basis, eg hiring of

storekeepers)

Known, constant ordering cost

Rates of demand known

Known constant price per unit (quantity discounts

may be offered)

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OQ


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EOQ Assumptions 2

Replenishment made instantaneously (wholebatch is delivered at once)partial deliveries anddelays common

Average stock = Q/2 (violated if constant amount notused per day; distinct possibility seasonal and cyclical factorsproduce uneven usage)

Assumptions unlikely in practice but a useful startingpoint in establishing appropriate ROQ

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EOQ


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EOQ

Let us say 500k units are needed over a giventime period:

5 orders of 100k units incur less ordering costs

than 10 orders of 50k 5 orders of 100k units incur more holding costs

than 10 orders of 50k

As ROQ increases, Ch increases and Co falls

As ROQ decreases, Ch falls and Co increasesLorence Brown, UTECH

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EOQ


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EOQ

Average inventory = Q/2 (assume no safetystock)

No. of orders = D/Q

Annual holding cost = Q/2 x Ch(i.e., ave. inventory x cost to hold 1 unit for a year)

Annual order cost = D/Q x Co(i.e. No. of orders x cost to place 1 order)


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EOQ F l


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EOQ Formula

EOQ = 2 x Co x D / Ch

Co = ordering cost per order

D = demand p.a. (hence @12k per month, D =

144k) or during given time period

Ch = holding cost per item p.a. (oftenexpressed as a %age p.a. of the unit cost)

Note: at EOQ, Total Ch = Total Co

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E l


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Example68

The following data relates to a particular stock item: Demand 1000 units per month

Ordering Cost $350 per order

Unit Cost $8 Carrying Cost 15% per annum

Calculate (a) The EOQ (Ans = 2,646)

(b) Total holding cost (Ans = $1,587.60) (c) Total ordering costs (Ans = $1,587.60)

(d) Total cost (Ans = $3,174.90)

Factors Influencing Choice of Order


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Factors Influencing Choice of OrderQuantity

Shortage of future supplies

Future price increases

Obsolescence

Steps to reduce safety stocks (eg new supplier

with promise of quicker and more reliable

delivery)

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Economic Batch Quantity


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Economic Batch Quantity(EBQ) Formula

EOQ = 2 x Co x D / Ch (1 D/R)

R = production rate per time period

Q = the amount produced in each batch

D = usage per time period

Co = the set up cost per batch Ch = holding cost per unit of inventory per

period of time

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EBQ


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EBQ

Ave. Inventory

= Q(1 - D/R) / 2

Total Holding Cost

= [Q(1 - D/R) / 2] x Ch


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I t f Q tit Di t


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Impact of Quantity Discount

Assumption of known, constant ordering priceviolated and so alternate approach required

Total Cost= (D/Q x Co) + (Q/2 x Ch) + (D x Unit Price)

Table prepared showing total cost at alternate

values of Q Value of Q at which total cost is at a minimum is

selected as the optimum ROQ

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Q ti


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Question

A company uses an item of inventory as follows:

Purchase price = $96 per unit

Annual demand = 4,000 units

Ordering cost = $300 Annual holding cost = 10% of purchase price

EOQ = 500 units.

Required:Ascertain whether the company should order the item

1,000 units at a time in order to secure an 8% discount.


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P i di R i S t


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Periodic Review System

Constant Cycle systemVARIABLE QUANTITIES, FIXED TIME

INTERVALS

Stock levels for all parts reviewed at fixedintervals

Where necessary, replacement order issued

Quantity not previously set based on likelydemand until next review, present levels, leadtimes

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R d L l S t


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Reorder Level System

Two-Bin System

FIXED QUANTITIES, VARIABLE TIME INTERVALS

Pre-determined order level set for each item

When stock falls to ROL, replenishment order issued

Replenishment order invariably EOQ

Organizations adopting ROL maintain system that

triggers replenishment order when predetermined

reorder level reached. (explain 2-bin concept).

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Other Systems for Stores Control &


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yReordering

Classification of materials (ABC method) Expensive and medium cost materials subject to

careful stores control

Inexpensive materials stored in large quantities

Pareto (80/20) distribution

80% of value is accounted for by only 20% of

stores These should be monitored closely


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Accounting Entries for Materials


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gCosts

Material Control Account

Payables Control (purchases) X Payable Control(returns to suppliers))

X

WIP(return to stores of materials

issued to production)

X WIP(direct materials issues to

production)

X

Factory Overheads(issues not directly related toproduction)

X

Closing Inventory

(balancing figure)

x

XX XX


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CENTRALIZED STORAGE


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Advantages I (bonus slide)

1. Lower stock on average

2. Less risk of duplication.

3. Higher quality staff may be usefully employedto specialize in various aspects ofstorekeeping

4. Closer control is possible on a central site.

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CENTRALIZED STORAGE


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Advantages 2 (bonus slide)

4. Possibly more security from pilferage.

5. Some aspects of paperwork may be reduced,eg, purchase requisitions

6. Stocktaking is facilitated.

7. Likelihood that more advanced equipment willbe viable, eg, materials handling, visualdisplays.

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CENTRALIZED STORAGE


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Disadvantages (bonus slide)

1. Less convenient for outlyingbranches/departments.

2. Possible loss of local knowledge.

3. Longer delays possible in obtaining materials.

4. Greater internal/external transport costs infetching and carrying materials.

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Example (FIFO LIFO AVCO)


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Example (FIFO, LIFO, AVCO)

Receipts of goods 1/Sep: 50 units @ $10 each

5/Sep: 50 units @ $12 each

13/Sep: 50 units @ $14 each Issue of goods

12/Sep: 50 units sold @ $20 each

Using LIFO, determine the value of closinginventory at the end of the period.


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FIFO LIFO & AVERAGE COST


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FIFO, LIFO & AVERAGE COST

Remember1. You cannot issue/sell what you do not have

2. Transactions must be processed in strict dateorder

3. After each transaction, you must determine the

make-up of your inventory balance

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FIFO, LIFO & AVERAGE COST


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,(impact of price movements)

Inflationary conditions - rising prices Earlier and lower priced items sold first, therefore

CGS is lower and profits higher

Conversely, higher priced items make up closinginventory, which lowers CGS and makes profitshigher

Under LIFO, the opposite occurs

Deflationary conditions - falling prices Conditions opposite to those under FIFO

Average cost falls between FIFO and LIFO

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Comparison of LIFO vs FIFO


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(inflationary conditions)

CGS Profit CI

FIFO L H H

LIFO H L L


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Comparison of LIFO vs FIFO


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(deflationary conditions)

CGS Profit CI

FIFO H L L

LIFO L H h


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FIFO Disadvantages


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FIFO Disadvantages

Cumbersome to operate (must monitor eachbatch individually)

Managers may find it difficult to comparecosts and make decisions due to varyingprices

During high inflation, issue prices lag behindcurrent market value


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LIFO Advantages


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LIFO Advantages

Goods issued at prices close to current marketvalue

Managers continually aware of recent costswhen making decisions


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LIFO Disadvantages


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LIFO Disadvantages

Cumbersome to operate (must monitor eachbatch individually)

Often opposite to the physical flow of goods(where earlier items used first)

Decision-making difficult because of variations in

prices)

Not accepted by IAS


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AVCO Advantages


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AVCO Advantages

Fluctuations in prices smoothed out

Easier to administer than FIFO or LIFO asthere is no need to identify each batchseparately.


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AVCO Disadvantages


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AVCO Disadvantages

Resulting issue price is rarely an actual price

Prices tend to lag behind current marketvalues under inflationary conditions.

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