F2 Management Accounting Chapter 6 Accounting for materials 谢欢 潘静妍 彭阳 陈伟良 2015-3-16

Part 1 What is inventory control? Inventory control includes the functions of inventory ordering and purchasing, receiving goods into store, storing and issuing inventory and controlling levels of inventory. （This chapter will concentrate on an inventory control system for materials.)

Part 2 How can we control inventory? The issue of materials The ordering and receipt of materials The issue of materials The storage of materials

The ordering and receipt of materials stores department purchasing department storekeeper supplier accounts department

Materials Requisition Note The issue of materials Materials Requisition Note Materials Transfer Note & Materials Returned Note

Recording inventory levels The storage of materials Bin cards Recording inventory levels stores ledger accounts Free inventory is really available for future use.

The storage of materials The inventory count Periodic stocktaking is a process all inventory items are physically counted and valued at a set point in time. Continuous stocktaking is counting and valuing selected items at different times on a rotating basis.

Part 3 Inventory costs Purchase costs (eg: one of the largest cost) Holding costs (eg: costs of stroage and stores operation) Ordering costs (eg: transport costs, production run costs) costs of running out inventory(stockout costs) (eg: costs of production stoppages, loss of customer goodwill)

three critical control levels Inventory control levels Part 4 Reorder level=maximum usage × maximum lead time three critical control levels minimum level=reorder level - (average usage × average lead time) maximum level=reorder level + reorder quantity - (minimum usage × minimum lead time) Average inventory=safety inventory + ½ reorder quantity

Part 5 Economic order quantiy (EOQ) EOQ is the order quantity which minimises inventory costs. Annual costs (＄) Total costs Holding costs ordering costs Ordering quantity EOQ= EOQ

Part 6 Economic batch quantiy (EBQ) EBQ is similar to EOQ and is used when resupply is gradual. EBQ=

Part 7 Accounting for material costs In the material control account: inventory increases →→ a debit entry inventory decreases →→ a credit entry … account debit credit 1 2 1 2 … … amounts the same amounts

Part 8 Inventory valuation Valuation of inventory at the lower of cost and net realisable value The correct pricing of issues determined on a consistently applied basis

Part 9 Calculate the value of closing inventory and material issues FIFO (first in, first out) LIFO (last in, first out) Average methods (cumulative weighted average pricing)

FIFO assumes that materials are issued out of inventory in the order in which they're delivered into inventory: issues are priced at the cost of the earliest delivery remaining in inventory. LIFO assumes that material are issued out of inventory in the reverse order to which they were delivered: the most recent deliveries are issued before earlier ones, and issues are priced accordingly.

Cumulative weighted average pricing (AVCO) calculates a weighted average price for all units in inventory. Periodic weighted average pricing method calulates an average price at the end of the period, based on the total purchases in that period.

THANK YOU 谢欢 潘静妍 彭阳 陈伟良 2015-3-16