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Cost & Revenues - Assessment Criteria

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

2 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)

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

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

5 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?

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

7 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

8 W1S2 – Ordering Inventory
Question 1 Worked Example

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

10 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

11 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

12 √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 = Don’t forget to √ = 63 rolls

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

14 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

15 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)

16 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

17 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

18 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)

19 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)

20 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

21 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

22 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)

23 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) – (250 x 4)

24 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) – (250 x 4) 2900 – 1000

25 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) – (250 x 2) 2400kg The max stock level

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

27 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?

28 Stock valuation

29 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

30 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?

31 3 units are received from the supplier costing £1.20 each
Stock value? £1.20 £1 £1 £1 £1.20 £1.20 £1

32 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

33 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

34 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

35 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

36 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

37 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

38 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

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

40 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

41 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

42 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

43 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

44 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

45 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

46 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

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

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

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

50 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

51 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

52 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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

71 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 195.75 210.00 201.45 Gross Profit 329.25 315.00 323.55

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

73 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

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

75 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 3. WIP 2. Trade Payables 65250 PO Trade Payables 2. MCA 65250 Work in Progress Production Overheads 3. MCA 4. MCA Their Q3

76 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

77 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 POC MCA 25200 Payables Payables 2300 WIP 116900 Bal c/d 160500 160500 This is the value of the issue of direct materials Work in Progress (WIP) MCA

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