1. PART B Cost accounting methods and systems

2. Chapter 6 Accounting for materials

3. Study guide
Describe the different procedures and documents necessary for the ordering, receiving and issuing of materials from inventory.[k]
Describe the control procedures used to monitor physical and ‘book’ inventory and to minimise discrepancies and losses.[k].
Interpret the entries and balances in the material inventory account.[s].
Identify, explain and calculate the costs of ordering and holding inventory (including buffer inventory).[s]

4. Calculate and interpret optimal reorder quantities.[s]
Calculate and interpret optimal reorder quantities when discounts apply. [s]
Produce calculations to minimise inventory costs when inventory is gradually replenished. [s]
Describe and apply appropriate methods for establishing reorder levels where demand in the lead time is constant. [s]
Calculate the value of closing inventory and material issues using LIFO, FIFO and average methods. [s]

5. 1. Introduction Classifications of inventories Raw materials 原材料
Spare parts/consumables 零件配件
Work in progress 在产品
Finished goods 完工产品
This chapter will concentrate on an inventory control system for materials, but similar problems and considerations apply to all forms of inventory.

6. The reasons of the inventory control
Holding costs(持有成本) is expensive
Unused inventory with short shelf life(保存期、保质期) may incur unnecessary expense
Production will be disrupt running out of materials.
High quality of material to maintain good reputation

7. receiving goods into store
inventory ordering and purchasing
storing and issuing inventory
controlling levels of inventory
Inventory control system

8. 2. The ordering, receipt and issue of raw materials
Every movement of material should be documented in order that a proper physical record is kept and the correct entries can be entered in the ‘books’ of the company.

9. 2.1 Ordering and receiving materials
(1) Purchase requisition 请购单
When the stores department need more materials they issue a purchase requisition.
Purchase requisition Req. No.
Department/ job number： Date
Suggested Supplier：
Requested by:
Latest date required:
quantity
Code number
description
Estimated cost
Authorised signature：
Sent to purchasing department.

10. (2) Purchase order (PO，订货单，订单) The purchasing department raise a PO
Purchase Order No.
Order ref: Date 略
Sent to supplier /accounts departments /store

11. (3) Quotations 报价单
The purchasing department may have to obtain a number of quotations if either a new inventory line is required, the existing supplier's costs are too high or the existing supplier no longer stocks the goods needed. Trade discounts (reduction in the price per unit given to some customers) should be negotiated where possible.
(4) Delivery note 交货单，提货单

12. Good Received note (5) Goods received note (GRN) 收货单，验收单
Received with the goods into the stores department; Signed off to confirm quantity and quality
Good Received note
Sent to purchasing department
/accounts departments

13. 2.2 Issue of raw materials (6) Materials requisition note 请料单
This document must record not only the quantity of goods issued, but also the cost centre or the job number for which the requisition is being made.
(7) Materials transfers and returns 退料单

14. purchasing supplier Stores Cost centre accounts
Purchase order
订货单
purchasing
supplier
Purchase
requisition
请购单
Delivery note
交货单
Stores
Materials requisition note 请料单
Goods received note收货单
Materials returned note 退料单
Cost centre
accounts

15. 3. The storage of raw materials 3.1 Objective of storing materials
Speedy issue and receipt of materials
Full identification of all materials at all times
Correct location of all materials at all times
Protection of materials from damage and deterioration
Provision of secure stores to avoid pilferage, theft and fire
Efficient use of storage space
Maintenance of correct inventory levels
Keeping correct and up-to-date records of receipts, issues and inventory levels

16. 3.2 Free inventory (备用、可用存货)
Managers need to know the free inventory balance in order to obtain a full picture of the current inventory position of an item.
Free inventory represents what is really available for future use and is calculated as follows.
Materials in inventory X
+ Materials on order from suppliers X
- Materials requisitioned, not yet issued (X)
Free inventory balance X

17. 3.3 Identification of materials: inventory codes (materials codes)

18. 3.4 The inventory count (stocktake) 盘存
One of the objectives of storekeeping is to maintain accurate records of current inventory levels.
This involves accurately monitoring inventory movements in order that the physical inventory is reflected in the company’s books.
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.

19. The count can be carried out on a continuous or periodic basis.
Periodic stocktaking is a process whereby all inventory items are physically counted and valued at a set point in time, usually at the end of an accounting period.
Continuous stocktaking is counting and valuing selected items at different times on a rotating basis. This involves a specialist team counting and checking a number of inventory items each day, so that each item is checked at least once a year. Valuable items or items with a high turnover could be checked more frequently.

20. 3.5 Inventory discrepancies
There will be occasions when inventory checks disclose discrepancies between the physical amount of an item in inventory and the amount shown in the inventory records. When this occurs, the cause of the discrepancy should be investigated, and appropriate action taken to ensure that it does not happen again.

21. 3.6 Perpetual inventory 永续盘存
Perpetual inventory refers to a inventory recording system whereby the records (bin cards and stores ledger accounts) are updated for each receipt and issue of inventory as it occurs.
3.7 Obsolete，deteriorating and slow-moving inventories and wastage

22. 4 Economic order quantity (EOQ)
The inventory control should include the functions of inventory purchase cycle :
ordering of inventory .
The purchase of inventory .
The receipt of goods into store
Storage
The issue of inventory and maintenance of inventory at the most appropriate level

23. Inventory control levels can be calculated in order to maintain inventories at the optimum level (a level with minmised costs).
These levels will determine 'when to order' and ‘how many to order'

24. 4.1 Inventory costs
The overall objective of inventory control is to maintain inventory levels so that the total of the following costs is minimised .
Purchase costs
Holding costs
Ordering costs
Costs of running out inventory

25. 4.1.1 Purchase costs
Purchase costs are unaffected by stock policy unless bulk discounts are available.
Purchase costs = Purchase price × annual demand
= P×D
不受存货政策的影响，除非大量采购有优惠

26. 4.1.2 Ordering costs 订货成本
If inventories are kept low, small quantities of inventory will have to be ordered more frequently, thereby increasing the following ordering or procurement costs.
Clerical and administrative costs 行政管理成本
Transport costs 运输成本
Production run costs 生产组织成本
Ordering costs = cost per order ×number of orders pa (per annum)
= Co×(D/Q)
(Q = order quantity per order)

27. 4.1.3 Holding Costs 存储成本
Holding costs Will consist of some costs which are fixed per annum and therefore irrelevant to inventory policy and those which vary with the number of units held in inventory and are thus relevant to any decision.
Costs of storage and stores operations
Interest charges
Insurance costs
Risk of obsolescence
Deterioration
It is of great importance to distinguish between fixed holding costs and variable holding costs

28. = CH × （Q/2） costs of holding one unit for one year
Holding costs = ×
costs of holding one unit for one year
Average inventory throughout the year
There is a conflict between the need to minimize holding costs ( small orders , at frequent intervals ) and the need to minimize order costs ( large orders , at infrequent
interval) .
= CH × （Q/2）
inventory
time

29. 4.1.4 Stockout costs 缺货成本 (running out of inventory)
Lost contribution（边际贡献） from lost sales
Loss of future sales due to disgruntled customers
Loss of customer goodwill
Cost of production stoppages
Labour frustration over stoppages
Extra costs of urgent, small quantity, replenishment orders

30. Costs associated with holding inventory tend to increase with the level of inventories, and so could be reduced by ordering smaller amounts from suppliers each time.
On the other hand, there are costs associated with ordering from suppliers: documentation, telephone calls , payment of invoices , receiving goods into stores and so on. These costs tend to increase if small orders are placed , because a larger number of orders would then be needed for a given annual demand.
Annual Costs
Total Costs
Holding Costs
Ordering Costs
Average inventory

31. 4.2 Economic order quantity (EOQ) ( 经济订货批量)
Purchase costs
The economic order quantity is the order quantity which minimises inventory costs
Costs of running out inventory
Holding costs
Ordering costs

32. Annual Costs
Total Costs
Holding Costs
Ordering Costs
Average inventory

33. 4.2.1 EOQ formula
结论：when ordering costs = holding costs, the total cost is minimised.
此时，
EOQ =
2COD CH
其中，
CH = cost of holding one unit of inventory for one time period
CO = cost of ordering a consignment from a supplier
D = demand during the time period

34. 4.2.2 What to be aware of in calculation
(1)Relevant costs（相关成本）
Only include those costs affected by order quantity.
(2)Consistent units（单位一致）
Ensure that figures inserted have consistent units. Annual demand and cost of holding a unit for a year. Both holding costs and re-ordering costs should be in ￡, or both in pence.

35. 　 4.3 Bulk Discounts 批量折扣
Bulk discounts (quantity discounts) may be available if the order quantity is above a certain size.
When bulk discounts (quantity discounts) are taken, prices reduce, but annual holding costs will increase if more inventory is ordered at a time.

36. To decide mathematically whether it would be worthwhile taking a discount and ordering larger quantities it is necessary to minimise the total of the following：
Total material costs
Inventory holding costs
Ordering costs
The total cost will be minimised at one of the following:
At the pre-discount EOQ level, so that a discount is not worthwhile
At the minimum order size necessary to earn the discount

37. steps Calculate EOQ in normal way.
If the EOQ is smaller than the minimum purchase quantity to obtain a bulk discount, calculate the total annual costs using the formula at EOQ.
Calculate annual costs at the lower boundary of each discount band above the EOQ.
Compare the total costs of EOQ and the order quantity just large enough to obtain the discount, select order quantity that minimises costs.

38. 5. Inventory control levels
‘Lead-time’
(交货递延时间)
is the interval between placing an order with a supplier and that order arriving.
inventory
Lead time
time

39. If Lead-time were zero , a re-order level of zero could be adopted
If Lead-time were zero , a re-order level of zero could be adopted. An organisation could simply wait until it ran out of inventory, click fingers in corporate, and inventory would arrive instantaneously.

40. 5.1 Reorder level 再订货点量
When inventories reach this level, an order should be placed to replenish inventories. The reorder level is determined by consideration of
the maximum rate of consumption
the maximum lead time.
Reorder level = maximum usage x maximum lead time

41. 5.2 Minimum level 最低存储量（安全存储量）
Minimum level is a warning level to draw management attention to the fact that inventories are approaching a dangerously low level and that stockouts are possible . It is also known as safety inventory level or buffer inventory level.
Minimum level = ( × )
reorder level
average usage
average lead time
Buffer :缓冲

42. 5.3 Maximum level
Maximum level also acts as a warning level to signal to management that inventories are reaching a potentially wasteful level.
inventory
time

43. Maximum level = ( × )
reorder level
minimum usage
minimum lead time
reorder quantity
This is the quantity of inventory Which is to be ordered when inventory reaches the reorder level . If it is set as to minimise the total costs associated with holding and ordering inventory, then it is known as the economic order quantify .

44. 5.4 Average inventory
The average inventory assumes that inventory levels fluctuate evenly between the minimum (or safety or buffer) inventory level and the highest possible inventory level (the amount of inventory immediately after an order is received , i.e., safety inventory + reorder quantity ) .

45. inventory
Maximum inventory ?
time

46. inventory
Maximum inventory
safe inventory
time

47. = CH × （Q/2 + minimum inventory)
Holding costs = ×
costs of holding one unit for one year
Average inventory throughout the year
= CH × （Q/2 + minimum inventory)
inventory
safe inventory
time
time
Average inventory
= safety inventory ＋1/2× reorder quantity

48. 6 Economic batch quantity （EBQ，经济批量）
回顾：pattern of inventory
When resupply is instantaneous 瞬间的
When resupply is gradual instead of instantaneous. EBQ is calculated.

49. This approach is used where a company is manufacturing inventory for its own use rather than ordering from an external supplier. Alternatively EBQ is used if the external supplier is willing to deliver gradually.
For example (例6.4), A company is able to manufacture its own components for inventory at the rate of 4,000 units a week. Demand for the components is at the rate of 2,000 units a week.

50. Maximum inventory levelQ
average inventory
Q(1-D/R)
Q(1-D/R)/2
time
消耗ing
生产ing

51. =
2CO D CH
(1－ D R )
EBQ
CH= cost of holding a unit of inventory for a time period
CO= the set up cost per batch
D = the usage per time period
R = the production rate per time period
注意：期间要统一、单位要统一

52. 例 6.4
A company is able to manufacture its own components for inventory at the rate of 4,000 units a week. Demand for the components is at the rate of 2,000 units a week. Set up costs for each production run are ﹩50. The cost of holding one unit of inventory is ﹩0.001 a week.

53. Solution
CH = cost of holding a unit of inventory for a time period= ﹩0.001
CO= the set up cost per batch=﹩50
D = the usage per time period=2,000 units
R = the production rate per time period = 4,000 units
代入公式，EBQ=20,000 units.

54. Maximum inventory level
EBQ
quantity
20,000
consumed
Maximum inventory level
10,000
10th
weeks
5th

55. 7 Other systems of stores control and reordering
Order cycling method（订单循环法）
Two-bin system（双卡系统）
Classification of materials（材料分类）
Pareto（帕累托） distribution（二八分布法）

56. 8 Inventory Valuation 存货计价
The correct pricing of issues and valuation of inventory are of the utmost importance because they have a direct effect on the calculation of profit.

57. 8.1 FIFO (first in, first out 先进先出)
FIFO assumes that materials are issued our of inventory in the order in which they were delivered into inventory: issues are priced at the cost of the earliest delivery remaining in inventory.

58. In practice the oldest inventory is likely to be used first.
Easy to understand and explain to managers
The inventory valuation can be near to a valuation based on replacement cost (重置成本).
Advantages
Need to identify each batch of material separately.
Managers may find it difficult to compare costs and make decisions when they are charged with varying prices for the same materials.
In a period of high inflation, inventory issue prices will lag behind current market value.
Disadvantages

59. 8.2 LIFO （last in, first out, 后进先出）
LIFO assumes that materials 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.

60. Advantage Disadvantage
It sometimes results in several batches being only part-used in the inventory records before another batch is received.
Opposite to what is physically happening and therefore be difficult to explain managers.
As with FIFO, decision making can be difficult.
Inventories are issued at a price which is close to current market value
Managers are continually aware of recent costs when making decisions, because the costs being charged to their department or products will be current costs.

61. 8.3 AVCO (cumulative weighted average pricing 移动加权平均)
AVCO calculates a weighted average price for all units in inventory. Issues are priced at this average cost, and the balance of inventory remaining would have the same unit valuation.
A new weighted average price is calculated whenever a new delivery of materials is received into store.

62. Advantages
Fluctuation in prices are smoothed out, making it easier to use the data for decision making
No need to identify each batch separately
Disadvantages
The resulting issue price is rarely an actual price that has been paid, and can run to several decimal places.
Prices tend to lag a little behind current market values when there is a gradual inflation.

63. 8.4 Periodic weighted average 一次加权平均
The periodic weighted average pricing method calculates an average price at the end of the period, based on the total purchases in the period.
Periodic weighted average
Cost of opening inventory + total cost of receipts =
Units of opening inventory + total units received

64. 9. Accounting for material costs
Any increases in materials inventory will result in a debit entry 借方分录 in the material control account whilst any reductions in materials inventory will be shown as a credit entry贷方分录 in the material control account.

65. Work in progress account Material control account
Payables control account
Factory overheads account

66. Chapter roundup
Inventory control includes the functions of inventory ordering and purchasing, receiving goods into store, storing and issuing inventory and controlling the level of inventories.
Every movement of material in a business should be documented using the following as appropriate: purchase requisition, purchase order, GRN, materials requisition note, materials transfer note and materials returned note.
The inventory count (stock take) involves counting the physical inventory on hand at a certain date, and then checking this against the balance shown in the inventory records. The inventory count can be carried out on a continuous or periodic basis.

67. Perpetual inventory refers to a inventory recording system whereby the records (bin cards and stores ledger accounts) are updated for each receipt and issue of inventory as it occurs.
Obsolete inventories are those items which have become out of date and are no longer required. Obsolete items are written off and disposed of.
Inventory costs include purchase costs, holding costs, ordering costs and costs of running out of inventory.
Inventory control levels can be calculated in order to maintain inventories at the optimum level. The three critical control levels are reorder level, minimum level and maximum level.

68. The economic order quantity (EOQ) is the order quantity which minimises inventory costs. The EOQ can be calculated using a table, graph or formula.
The economic batch quantity (EBQ) is a modification of the EOQ and is used when resupply is gradual instead of instantaneous.
The correct pricing of issues and valuation of inventory are of the utmost importance because they have a direct effect on the calculation of profit. Several different methods can be used in practice.

69. FIFO assumes that materials are issued our of inventory in the order in which they were delivered into inventory: issues are priced at the cost of the earliest delivery remaining in inventory.
LIFO assumes that materials 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.

70. The cumulative weighted average pricing method (or AVCO) calculates a weighted average price for all units in inventory. Issues are priced at this average cost, and the balance of inventory remaining would have the same unit valuation. The average price is determined by dividing the total cost by the total number of units.
A new weighted average price is calculated whenever a new delivery of materials is received into store.