Académique Documents
Professionnel Documents
Culture Documents
Cost Accounting
2
Gathering of cost information Attachment of costs to cost objects Establishment of budgets, standard costs, actual costs (of operations, processes, activities or
products)
Cost Object
3
Anything for which a separate measurement of cost is desired (Examples: product, service or department)
The foundation of the internal financial information system 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, provide
standards targets against which to compare actual results)
Unit Objectives
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1.
Describe the different procedures and documents necessary for ordering, receiving and issuing materials from inventory Describe the control procedures used to monitor physical and book inventory to minimize discrepancies and losses.
2.
3.
Unit Objectives
6
4.
Prepare calculations, with explanations, of the costs of ordering and holding inventory (including buffer inventory) Calculate optimal reorder quantities including situations where discounts apply. Interpret optimal reorder quantities including situations where discounts apply.
Lorence Brown, UTECH
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6.
Unit Objectives
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7.
Produce calculations to minimize inventory costs when inventory costs when inventory is gradually replenished. Apply appropriate methods for establishing reorder levels where demand in the lead time is constant Calculate the value of closing inventory and material issues using LIFO, FIFO and average methods
Lorence Brown, UTECH
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9.
2.
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The storage of goods The issue of inventory. Maintenance of inventory at most appropriate level
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6.
1.
Holding costs may be expensive Production will be disrupted if we run out of raw materials Unused inventory with short shelf life may incur unnecessary expenses
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4.
Every movement of material should be documented using the following: 1. Purchase requisition
2.
Purchase order
Goods received note (GRN) Materials requisition, transfer or returned note.
Lorence Brown, UTECH
3.
4.
Enough inventory is held No duplication of ordering Quality is maintained Adequate record for accounting purposes
Lorence Brown, UTECH
Purchase Requisition
Purchase Order
From purchasing to supplier, accounts payable, originating dept, stores/goods receiving dept.
Lorence Brown, UTECH
Delivery note sent by supplier with goods which are then checked against the purchase order for quality and quantity Goods Received Note
From stores to accounts payable
Goods Receival
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Incoming goods taken to central goods receiving department facilitates control Ensure goods arriving actually agree in detail to those ordered (purchase order, delivery note, counted, inspected)
Goods Receival
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GRN prepared as evidence that goods ordered received and can be paid for) Copies sent to accounts for comparison with suppliers invoice and payment to be made. Basis for entering receipts of materials in stores (warehouse) records
Lorence Brown, UTECH
1.
2.
3.
Materials returns
returned note prepared where goods not used are returned to the stores dept.
Lorence Brown, UTECH
PURCHASE REQUISITION Date __________________ Serial No._____________ Purpose: _____________________ (inventory/special capital equipment/budget ref) Qty Descri Mater ption -ial Code Job/ Dept Code Delivery Reqd Date Place Purchase Order No. Date Suppl -ier
PURCHASE ORDER To________________ Serial No:______________ Date____________ Purchase Req. No._______ Qty Descriptio Code n Delivery Date Price Per (unit)
GOODS RECEIVED NOTE To_____________________ Serial No. ________________ Date Issued: _______________Carrier_________________ Date of delivery___________ Purchase Order No. _________
Description
Code
Quantity
INSPECTION REPORT
Qty passed Qty rejected
Remarks
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Data must be input into the system may be from the various forms or the information is keyed directly into the system and hardcopies can be printed
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An inventory master file is maintained i.e. database with details for every category of inventory
The system will generate outputs hardcopy records, VDU screen display or printed reports.
1.
Speedy issue and receipt of materials Full identification of all materials at all times
2.
3.
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5.
Provision of secure stores to avoid pilferage, theft and fire Efficient use of storage space Maintenance of correct inventory levels
6.
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Keeping correct and up-to-date records of receipts, issues and inventory levels
Lorence Brown, UTECH
Most frequently encountered system for recording inventory movements are Bin Card
Kept with the actual inventory and updated with receipts and issues
Shows receipts, issues, $ values, inventory control levels and running balances.
Lorence Brown, UTECH
Bin Card
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Location: ___________________________ Stores Ledger No. ____________________ Issues Balance Req No.
Date
Qty
Material ____________________ Maximum Qty ________________________ Code ______________________ Minimum Qty ________________________ Date GRN Receipts Qty Unit Price $ Amt $
Stores
Scenario: You are the storekeeper. On Monday of this week, the production manager requests 100 pieces of foam. She needs them on Friday but you only have 50 pieces. Give me reasons why you may not be troubled by the insufficient quantity of foam pieces on hand.
Lorence Brown, UTECH
Physical stock
Free Stock
30
FSB provides a full picture of the current inventory position what is really available for future use.
FSB = Materials on hand + Materials on order from suppliers Materials requisitioned, not yet issued.
Question on FSB
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A wholesaler has 8,450 units outstanding for part 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 wholesaler have on order with his supplier?
A: 9,450 B 10,050 C 13,975 D 17,900
Materials held in stores are coded and classified and provide the following advantages
1.
Ambiguity is avoided Time is saved descriptions can be lengthy and time consuming
2.
3.
Production efficiency is improved correct material can be accurately identified from a code number
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4.
Numbered code systems can be designed to be flexible and can be expanded to include more inventory items as necessary
Digits in a code can stand for type of inventory, supplier, department and so forth.
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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Periodic: all items (raw materials, WIP and finished goods) counted and valued at a set time, usually accounting year-end
Continuous: counting and valuing selected items at different times on a rotating basis. Involves a specialist team counting and checking a number of items each day.
Lorence Brown, UTECH
1.
Annual stocktake unnecessary and the disruption it causes Skilled stocktakers employed reduces likely errors More time available reduces errors and allows investigation
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Discrepancies will occur investigate the causes and take corrective action
1.
Quantity errors eg, miscounts during the stock take. Classification errors eg, a stainless steel part classified as mild steel
2.
3.
Pricing errors e.g., a correctly counted and classified item might be priced at $56 for 1000 instead of $56 per 100
4.
5.
Perpetual Inventory
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This is an inventory recording system whereby the records (bin cards and stores ledger accounts) are updated for each receipt and issue of inventory as it occurs.
There is a continuous record of the balance on hand which is used to calculate the inventory figure for the financial statements
Continuous stocktaking is necessary to ensure the perpetual system is functioning correctly
Obsolete (out-of-date) items should be written off and disposed of if no longer required. Inventory items may be wasted (eg broken, damaged) write-off, update inventory records and accounts. Slow moving (quantity on hand will take a long time to be used up). Excess inventory to be written off as obsolete inventory.
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)
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Ordering and
Stockout (costs of running out of inventory
Ensure sufficient goods are available to meet expected demand Provide a buffer between processes Meet any future shortages
Necessary part of production process (maturing cheese) Deliberate investment policy (expected inflation or shortages)
Lorence Brown, UTECH
Insurance
Risk of obsolescence Deterioration
Lorence Brown, UTECH
Minimum and
Maximum
Reorder Level
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Level at which a replenishment order should be placed Reorder Level = maximum usage (rate of consumption) x maximum lead time Lead time is the time between ordering and replenishment
Lorence Brown, UTECH
Minimum Level
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Warning level that inventories approaching dangerously low level and stockouts are possible
Mininimum level = reorder level (ave usage x ave lead time
Maximum Level
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Warning level that inventories are reaching a potentially wasteful level Maximum level = ROL + reorder quantity (ROQ) (min usage x min lead time)
A large retailer with multiple outlets maintains a central warehouse from which outlets are supplied. 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
Lorence Brown, UTECH
Example
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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)
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 or formula
EOQ Assumptions
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Known, constant ordering cost Rates of demand known Known constant price per unit (quantity discounts
may be offered)
EOQ Assumptions 2
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Replenishment made instantaneously (whole batch is delivered at once) partial deliveries and
delays common
Assumptions unlikely in practice but a useful starting point in establishing appropriate ROQ
EOQ
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Let us say 500k units are needed over a given time 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 increases
Lorence Brown, UTECH
EOQ
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Average inventory = Q/2 (assume no safety stock) 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)
EOQ Formula
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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. (often expressed as a %age p.a. of the unit cost)
Note: at EOQ, Total Ch = Total Co
Example
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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)
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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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
EBQ
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= [Q(1 - D/R) / 2] x Ch
Assumption of known, constant ordering price violated 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
Question
73
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.
Lorence Brown, UTECH
Constant Cycle system VARIABLE QUANTITIES, FIXED TIME INTERVALS Stock levels for all parts reviewed at fixed intervals Where necessary, replacement order issued Quantity not previously set based on likely demand until next review, present levels, lead times
Pre-determined order level set for each item When stock falls to ROL, replenishment order issued Replenishment order invariably EOQ
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Expensive and medium cost materials subject to careful stores control Inexpensive materials stored in large quantities
80% of value is accounted for by only 20% of stores These should be monitored closely
Lorence Brown, UTECH
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XX
XX
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2.
3.
Higher quality staff may be usefully employed to specialize in various aspects of storekeeping
Closer control is possible on a central site.
Lorence Brown, UTECH
4.
79
Possibly more security from pilferage. Some aspects of paperwork may be reduced, eg, purchase requisitions Stocktaking is facilitated. Likelihood that more advanced equipment will be viable, eg, materials handling, visual displays.
Lorence Brown, UTECH
5.
6.
7.
80
Less convenient for outlying branches/departments. Possible loss of local knowledge. Longer delays possible in obtaining materials.
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4.
Access for deliveries and issues. Well organized pathways large enough for loaders, forklift trucks etc. Logical distribution of stocked items with the most frequently required items adjacent to issue points. Sufficient horizontal and vertical space for pallets, containers and racks. Good security features eg, external walls, ceiling, TV scanners etc. Space for making up bulk orders and issues
Lorence Brown, UTECH
Receipts of goods
1/Sep: 50 units @ $10 each 5/Sep: 50 units @ $12 each 13/Sep: 50 units @ $14 each
12/Sep: 50 units sold @ $20 each
Issue of goods
Using LIFO, determine the value of closing inventory at the end of the period.
Lorence Brown, UTECH
Remember
1.
2.
3.
Earlier and lower priced items sold first, therefore CGS is lower and profits higher Conversely, higher priced items make up closing inventory, which lowers CGS and makes profits higher Under LIFO, the opposite occurs
Conditions opposite to those under FIFO Average cost falls between FIFO and LIFO
Lorence Brown, UTECH
CGS
Profit
CI
FIFO
LIFO
L
H
H
L
H
L
CGS
Profit
CI
FIFO
LIFO
H
L
L
H
L
h
FIFO ADVANTAGES
87
Logical pricing method (follows usual physical flow) Easy to understand and explain Inventory valuation near to a valuation based on replacement cost
FIFO Disadvantages
88
Cumbersome to operate (must monitor each batch individually) Managers may find it difficult to compare costs and make decisions due to varying prices
During high inflation, issue prices lag behind current market value
Lorence Brown, UTECH
LIFO Advantages
89
Goods issued at prices close to current market value Managers continually aware of recent costs when making decisions
LIFO Disadvantages
90
Cumbersome to operate (must monitor each batch 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
Lorence Brown, UTECH
AVCO Advantages
91
AVCO Disadvantages
92