Cost & Revenues - Assessment Criteria Inventory Cost & Revenues - Assessment Criteria

Cost & Revenues - Assessment Criteria Inventory Cost & Revenues - Assessment Criteria 2.1S Record cost information for material in accordance with the organisations costing procedures 2.2K Analyse cost information for materials in accordance with the organisations costing procedures 2.3K Define the various stages of inventory 2.4S Value inventory using these methods: First in first out (FIFO) Last in first out (LIFO) Average Cost (AVCO)

(User of the inventory) Inventory Cycle Production Function (User of the inventory) Stores Function External supplier Purchasing Function

What considerations are there when managing inventory? Ordering costs Expected usage Annual demand Lead time Holding costs

Cost of having Inventory Purchase price Ordering costs Holding costs Stock out costs Inventory control record costs Why would it be a problem to hold high level of inventory?

Why would it be a problem to hold high level of inventory? Space Limitations Shelf life May become obsolete Money!!!

How do we make sure we only store an optimum amount of inventory? Four inventory control levels: Economic order quantity Maximum inventory level Minimum inventory level Reorder level

W1S2 – Ordering Inventory Question 1 Worked Example

Economic Order Quantity √2 x Cost of Ordering x Annual Demand Cost of Holding Ordering costs = £10 Holding costs = £2 Usage = 56250 kg √2 x 10 x 56250 2 =1125000 = 562500 Don’t forget to √ (Do this last!!) = 750kg Question 1 in handout

Economic Order Quantity √2 x Cost of Ordering x Annual Demand Cost of Holding √2 x Cost of Ordering x Annual Demand Cost of Holding √2 x COD CHIPs

Question 2 Printers Printing, print posters for which they buy paper in rolls. Each roll costs £12. Each week 15 rolls are used; the company operates every week of the year. Each time an order for more rolls of paper is received it costs the company £50. The estimated cost of storing one roll is £19.65 per annum. What is the economic order quantity? Eagle printing Q Page 8 COBC handout Answer on next slide

√2 x Ordering Costs x Annual Demand Question 2 - EOQ √2 x Ordering Costs x Annual Demand Holding Costs Ordering costs = 50 Holding costs = 19.65 Usage = 780 (52 weeks x 15 rolls) √2 x 50 x 780 19.65 =3969.4656 Don’t forget to √ = 63 rolls

Question 3 Students to do Q3 all parts Answers on next slide

Question 3 - Answers Ordering costs £ 50 Holding costs 7 Usage Units 150,000 EOQ 1464 20 13 191,848 768 40 18 259,309 1074 43 17 320,823 1274 Answers

Question 4 Worked Examples using data below Usage Lead Time Minimum 250kg 2 days Average 300kg 3 days Maximum 350kg 4 days Required: 1. Calculate the reorder level (assume no buffer stock) 2. Minimum stock level 3. Maximum stock level (EOQ is 1500kg)

Max usage x Max lead time (+ buffer stock) 1. Re-order level Usage Lead Time Minimum 250kg 2 days Average 300kg 3 days Maximum 350kg 4 days Max usage x Max lead time (+ buffer stock) 350kg x 4 days + 0

1. Re-order level Usage Lead Time Minimum 250kg 2 days Average 300kg 3 days Maximum 350kg 4 days Max usage x Max lead time (+ buffer stock) 350kg x 4 days + 0 1400kg The quantity of inventory to be ordered

Re-order level – (average usage x average lead time) 2. Minimum stock level Usage Lead Time Minimum 250kg 2 days Average 300kg 3 days Maximum 350kg 4 days Re-order level – (average usage x average lead time)

Re-order level – (average usage x average lead time) 2. Minimum stock level Minimum stock level Usage Lead Time Minimum 250kg 2 days Average 300kg 3 days Maximum 350kg 4 days Re-order level – (average usage x average lead time) 1400 – (300 x 3)

Re-order level – (average usage x average lead time) 2. Minimum stock level Minimum stock level Usage Lead Time Minimum 250kg 2 days Average 300kg 3 days Maximum 350kg 4 days Re-order level – (average usage x average lead time) 1400 – (300 x 3) 1400 – 900

2. Minimum stock level Minimum stock level 1400 – (300 x 3) 1400 – 900 Usage Lead Time Minimum 250kg 2 days Average 300kg 3 days Maximum 350kg 4 days Re-order level – (average usage x average lead time) 1400 – (300 x 3) 1400 – 900 500kg The min level stock can fall

3. Maximum stock level (EOQ = 1500kg) Usage Lead Time Minimum 250kg 2 days Average 300kg 3 days Maximum 350kg 4 days Re-order level + EOQ – (min use x min lead time)

Maximum stock level 3. Maximum stock level (EOQ = 1500kg) Usage Lead Time Minimum 250kg 2 days Average 300kg 3 days Maximum 350kg 4 days Re-order level + EOQ – (min use x min lead time) 1400 + 1500 – (250 x 4)

3. Maximum stock level (EOQ = 1500kg) Usage Lead Time Minimum 250kg 2 days Average 300kg 3 days Maximum 350kg 4 days Re-order level + EOQ – (min use x min lead time) 1400 + 1500 – (250 x 4) 2900 – 1000

3. Maximum stock level (EOQ = 1500kg) Usage Lead Time Minimum 250kg 2 days Average 300kg 3 days Maximum 350kg 4 days Re-order level + EOQ – (min use x min lead time) 1400 + 1500 – (250 x 2) 2900 - 500 2400kg The max stock level

Take care – there are THREE DIFFERENT businesses Complete Question 5 Take care – there are THREE DIFFERENT businesses

Usage (components per day) Question 6 Stamps Ltd manufactures a variety of components to supply the motor trade. One of its components costs £34. Each week 140 of these components are required (52 weeks) and the cost of placing the order, delivery and receiving the goods into inventory has been calculated as £68. The cost of storing one of these components is £5.00 per annum. There is no buffer inventory. Details of usage and lead times are detailed below: 1. Calculate: Reorder level Economic order quantity Minimum inventory level Maximum inventory level Lead time (Days) Usage (components per day) Minimum 3 14 Average 5 28 Maximum 8 36 Q4 in COBC Handout Reorder level - Max use x Max Lead (+ Buffer) EOQ MIN level – Reorder – (Av Use x Av Lead) MAX Level – Reorder level + EOQ – (Min use x max lead) 2. What would the EOQ be if the business only had space for 600 components?

Stock valuation

Stock Valuation It is important for a business to accurately record the movements of stock so it is able to value issues from stock as well as value the stock held at any one time

Valuing Stock Fred is in charge of the stores department for Colemans Toys. There are currently 4 units of materials in stock which cost £1 each Stock value?

3 units are received from the supplier costing £1.20 each Stock value? £1.20 £1 £1 £1 £1.20 £1.20 £1

Production request for 2 units Which units does he issue? What is the value of the issue? What is the value of the remaining units? £1.20 £1 £1 £1 £1.20 £1.20 £1

Request from Production for 2 units of stock What is the value of the issue? FIFO £2.00 LIFO £2.40 What is the value of the remaining units? FIFO £5.60 LIFO £5.20 £1 £1.20 £1 £1 £1.20 £1.20 £1

Methods of stock valuation FIFO - First in First Out (FIFO) LIFO - Last in First out (LIFO) AVCO - Average Cost (AVCO) Once a method of stock valuation has been adopted the business should continue with the same method to ensure consistency

Using FIFO, LIFO, AVCO 1. Select the valuation method to be used & write it at the top of the Stock Valuation Card (SVC) 2. Check for an opening balance. If there is one enter it on the SVC in the ‘balance’ column and rule a line underneath it. 3. Enter the transaction (issue or receipt) on the SVC in the appropriate column (Receipt or Issue) 4. After the transaction has been entered complete a breakdown of stock in the balance column 5. Rule off the month to end the entry and return to step 3 for the next transaction

FIFO Date Receipts Issue Balance Jan 240 5 1200 Feb 40 4 160 280 1360 Quantity Cost per unit Total cost Value per unit Total value Jan   240 5 1200 Feb 40 4 160 280 1360 March 129 645 111 555 151 715 April 30 4.50 135 181 850 May 26 104 14 56 125 611 239

LIFO Date Receipts Issue Balance Jan 240 5 1200 Feb 40 4 160 280 1360 Quantity Cost per unit Total cost Value per unit Total value Jan   240 5 1200 Feb 40 4 160 280 1360 March 151 755 89 445 129 605 April 30 4.50 135 181 890 May 56 95 5.00 475 125 610

AVCO Date Receipts Issue Balance Jan 240 5 1200 Feb 40 4 160 280 4.86 Quantity Cost per unit Total cost Value per unit Total value Jan   240 5 1200 Feb 40 4 160 280  4.86 1360 March 129 4.86 626.94 151 733.86 April 30 4.50 135 181 4.80 868.86  May 125 600 56 268.80

Closing stock value at end May Valuing Inventory Method Cost of issue in March Closing stock value at end May FIFO LIFO AVCO

Closing stock value at end May Valuing Inventory Method Cost of issue in March Closing stock value at end May FIFO 645 239 LIFO AVCO

Closing stock value at end May Valuing Inventory Method Cost of issue in March Closing stock value at end May FIFO 645 239 LIFO 605 280 AVCO

Closing stock value at end May Valuing Inventory Method Cost of issue in March Closing stock value at end May FIFO 645 239 LIFO 605 280 AVCO 626.94 268.80

Closing value (end May) Activity - Cromwells Write up the Inventory Record Cards using LIFO, FIFO and AVCO and complete the table below. January Opening stock 40 units at a cost of £3.00 each February Bought 20 units at £3.60 each March Issued 36 units April Bought 20 units at a cost of £3.75 each May Issued 25 units Value of issue in May Closing value (end May) FIFO LIFO AVCO Answer on next slide

Closing value (end May) Activity - Answer Write up the Inventory Record using LIFO, FIFO and AVCO and complete the table below. January Opening stock 40 units at a cost of £3.00 each February Bought 20 units at £3.60 each March Issued 36 units April Bought 20 units at a cost of £3.75 each May Issued 25 units Value of issue in May Closing value (end May) FIFO 87.75 71.25 LIFO 90.00 57.00 AVCO 86.25 65.55

Calculating Profit Using the answers to ‘Demo’ Sales Revenue is £2300 FIFO LIFO AVCO Revenue Opening inventory Purchases Less closing inventory Cost of Sales Gross Profit

Calculating Profit Using the answers to ‘Demo’ Sales Revenue is £2300 FIFO LIFO AVCO Revenue Opening inventory Purchases Less closing inventory Cost of Sales Gross Profit

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory Purchases Less closing inventory Cost of Sales Gross Profit

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory Purchases Less closing inventory Cost of Sales Gross Profit

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory Purchases Less closing inventory Cost of Sales Gross Profit

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases Less closing inventory Cost of Sales Gross Profit

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases Less closing inventory Cost of Sales Gross Profit

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases Less closing inventory Cost of Sales Gross Profit

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases 305 160+145 Less closing inventory 239 280 268.80 Cost of Sales 1200+305-239 1266 1200+305-280 1225 1200+305-268.80 1236.20 Gross Profit 2300 – 1266 1034 2300 – 1225 1075 2300 – 1236.20 1063.80

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases 305 160+145 Less closing inventory 239 280 268.80 Cost of Sales 1200+305-239 1266 1200+305-280 1225 1200+305-268.80 1236.20 Gross Profit 2300 – 1266 1034 2300 – 1225 1075 2300 – 1236.20 1063.80

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases 305 160+145 Less closing inventory Cost of Sales Gross Profit

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases 305 160+145 Less closing inventory Cost of Sales Gross Profit

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases 305 160+145 Less closing inventory Cost of Sales Gross Profit

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases 305 160+145 Less closing inventory Cost of Sales Gross Profit

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases 305 160+145 Less closing inventory 239 280 268.80 Cost of Sales Gross Profit

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases 305 160+145 Less closing inventory 239 280 268.80 Cost of Sales Gross Profit

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases 305 160+145 Less closing inventory 239 280 268.80 Cost of Sales Gross Profit

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases 305 160+145 Less closing inventory 239 280 268.80 Cost of Sales 1200+305-239 1266 Gross Profit

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases 305 160+145 Less closing inventory 239 280 268.80 Cost of Sales 1200+305-239 1266 1200+305-280 1225 Gross Profit

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases 305 160+145 Less closing inventory 239 280 268.80 Cost of Sales 1200+305-239 1266 1200+305-280 1225 1200+305-268.80 1236.20 Gross Profit

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases 305 160+145 Less closing inventory 239 280 268.80 Cost of Sales 1200+305-239 1266 1200+305-280 1225 1200+305-268.80 1236.20 Gross Profit

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases 305 160+145 Less closing inventory 239 280 268.80 Cost of Sales 1200+305-239 1266 1200+305-280 1225 1200+305-268.80 1236.20 Gross Profit 2300 – 1266 1034

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases 305 160+145 Less closing inventory 239 280 268.80 Cost of Sales 1200+305-239 1266 1200+305-280 1225 1200+305-268.80 1236.20 Gross Profit 2300 – 1266 1034 2300 – 1225 1075

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases 305 160+145 Less closing inventory 239 280 268.80 Cost of Sales 1200+305-239 1266 1200+305-280 1225 1200+305-268.80 1236.20 Gross Profit 2300 – 1266 1034 2300 – 1225 1075 2300 – 1236.20 1063.80

Calculating Profit Using the answers to ‘Demo’ Revenue FIFO LIFO AVCO Revenue 2300 Opening inventory 1200 Purchases 305 160+145 Less closing inventory 239 280 268.80 Cost of Sales 1200+305-239 1266 1200+305-280 1225 1200+305-268.80 1236.20 Gross Profit 2300 – 1266 1034 2300 – 1225 1075 2300 – 1236.20 1063.80

Cromwell Calculate the profit using you records for Cromwell Revenue is £525 Answer on next side

Calculating Profit Using the answers to ‘Cromwell’ Revenue FIFO LIFO AVCO Revenue 525 Opening inventory 120 Purchases 147 Less closing inventory 71.25 57 65.55 Cost of Sales 120+147-71.25 195.75 120+147-57 210.00 120+147-65.55 201.45 Gross Profit 329.25 315.00 323.55

Book keeping for Material Costs Integrated bookkeeping system Monitors the movement of materials and assesses inventory levels

Book keeping for Material Costs Inventory Records Book keeping Records Materials - Costs Materials (Inventory) - Asset Raw Materials Finished Goods Work in Progress Materials Control Account

1. Initial purchase of materials for £9000 on credit Direct & Indirect Materials Control Account Payables Control 1. Payables 9000 2. WIP 5000 1. Materials 9000 3. WIP 2000 2. Materials valued at £5000 issued to production Work in Progress 3. Unused materials £2000 returned to Stores 2. MCA 5000 3. MCA 2000

Materials Control Account (MCA) 1. Opening balance £1600 2. Purchases (on credit) £65250 3. Issue Direct Materials £60950 4. Issue Indirect Materials £2100 Worked example Materials Control Account (MCA) 1. Op/bal 1600 3. WIP 60950 2. Trade Payables 65250 4. PO 2100 Trade Payables 2. MCA 65250 Work in Progress Production Overheads 3. MCA 60950 4. MCA 2100 Their Q3

Activity Trent Ltd 1. Opening inventory £18500 2. Closing inventory £16100 3. Delivery from suppliers £142000 4. Returns to suppliers £2300 5. Cost of indirect materials used £25200 Using the accounts below calculate the value of the issue of direct materials during the month (this will be your missing figure!) COBC HO P19 (Dollar) T accounts on next slide

Answer (workings) Tent Ltd 1. Opening inventory £18500 2. Closing inventory £16100 3. Delivery from suppliers £142000 4. Returns to suppliers £2300 5. Cost of indirect materials used £25200 Answer (workings) Tent Ltd Materials Control (MCA) Production Overhead Control O/Bal 18500 POC 25200 MCA 25200 Payables 142000 Payables 2300 WIP 116900 Bal c/d 16900 160500 160500 This is the value of the issue of direct materials Work in Progress (WIP) MCA 116900