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Management accounting techniques > Material costs > Flashcards

Material costs Flashcards

1
Q

What types of materials are in inventory ? P41

A
  • Raw materials - components
  • brought for resale
  • service/ consumable items
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2
Q

Who normally buys materials within a company ? P41

A
  • Purchasing/ procurement department
  • job - inventory control policies
  • lowest possible costs - quality, quantity, sustainability measures
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3
Q

What would the adopted method on planning purchases and inventory control depend on ? P42

A
  • Size and sophistication of business
  • IMPORTANT - how much inventory
    1. physical count
    2. computerised records (physical verification)
    3. when - reordering
    4. quantity - reordering
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4
Q

What are the main methods of inventory control ? P42

A
  • Perpetual inventory
  • just in time
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5
Q

What is perpetual inventory ? P42

A
  • Records receipts and issues of inventory - pass in/out
  • reorders made
  • Inventory records digitally kept by computers - activiated barcodes
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6
Q

What is just in time method ? P42

A
  • components delivered- just when needed
  • quality suppliers - manufacturing schedules
  • inventory levels = kept low
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7
Q

What are formulas ? P43

A
  • When to order and how much to order
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8
Q

What is the fixed quantity method of ordering ? P43

A
  • in set amounts
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9
Q

What should the business know when ordering in fixed quantity? P43

A
  • Maximum inventory level - storage space available
  • Buffer inventory - not below
  • Lead time -time it takes - new inventory delivery
  • Reorder level - point new order placed
  • Appropriate reorder quantity - maximum and minimum reorder quantity
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10
Q

How do you calculate the buffer inventory ? P44

A
  • Reorder level - (average usuage * average lead time)
  • meet unexepcted emergencies
  • lead time known
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11
Q

How is the reorder level calculate ? P44

A
  • (average usuage * average lead time) + buffer inventory
  • replacement materials delivered - falls to buffer inventory
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12
Q

How is the maximum inventory level calculated ? P44

A
  • Buffer inventory + maximum reorder quantity
  • highest level
  • obsolescnece
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13
Q

How is the maximum reorder quantity calculated ? P44

A
  • Maximum inventory level - buffer inventory
  • restores inventory - maximum level
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14
Q

How is the minimum reorder quantity calculated ? p44

A

Average usuage * average lead time
restore to re-order level ( further order placed )

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15
Q

What is critical to the efficiency of inventory holding? P45

A
  • the reorder quantity
  • too large = too much inventory = expense
  • too small = costs of reordering < costs of saving for lower inventory = run out
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16
Q

What is the economic order quantity ? P19

SMALL BOOk

A
  • optimum (most economical) amount
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17
Q

What is the formula for EOQ ? P46

A

2 * CO * D / CH

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18
Q

What do the different symbols in most economic calculation stand for ? P46

A
  • CO - Ordering costs
  • D - Annual usuage
  • CH - inventory holding costs
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19
Q

How would businsses keep records of their inventories ? P47

A
  • Computerised
  • manual - individual inventory records
20
Q

When are separate records of inventory kept ? P47

A
  • For each type of inventory
21
Q

What are the different systems of inventory for - materials resold by retailer , production use manufactureer ? P47

A

non different - Same system

22
Q

Why must inventory be valued at the end of the financial year? P48

A
  • material inventory - ties up alot of money
  • valuation essetial - use in calculation of profit in financial statements
23
Q

How is inventory counted and what then happens ? P48

A
  • stock taking - physical checked
  • compared with inventory records
24
Q

How is the inventory held calculated ? P48

A

Number of items held * cost per item = inventory value at cost

25
Q

According to auditors , what can inventory be valued as ? P48

A
  • At costs
  • At net realisable value
26
Q

What is the definition of a valuation of inventory by costs ? P48

A
  • Cost to buy
  • cost to bring to present location, condition
27
Q

What is the net realisable value of holdingh inventory ? P48

A
  • Actual / estimated selling price (less extra costs: selling nd distribution)
28
Q

What is inventory valuation based on ? P48

A
    1. Lower of costs and net realisable value
    1. International Accounting Standard (IAS)
29
Q

How do you record in fifo ? P51

A
  • balance column - new list quantities and costs - after each issue / receipt
  • inventory issued - top of list downwards
30
Q

How do you record in avco ? P52

A
  • weighted average cost per unit - quantity issued
  • weighted average costs per unit - balance
  • Lists of different costs - not rewritten
  • often rounding issues
31
Q

How is the weighted average costs calculated P52

A

Value / quantity of inventory

32
Q

What is a way of obtaining the cost of sale figure in a statement of p/l ? P53

A
  • adding up values - issues column in inventory record
    *
33
Q

Whhat effect does inventory valuation have on profit ? P53

A
  • over life of business = total profit same in total
34
Q

Why must accounting staff resist pressure to use different inventory valuation to manipulate profits? P53

A
  • Ethical considerations in accounting
  • objectivity
35
Q

What must the inventory valuation rule be applied to ? P57

A
  • Separate items of inventory
  • group of similar items
  • NOT - total costs to total net realisable value
36
Q

The principle of the lower of costs and net realisable value applies to a manufacturer for what ? P57

A
  • Three types of inventory
  • Raw materials
  • Part- finished goods/ work in progress
  • finished goods
37
Q

How is the method of inventory valuation selected when dealig with raw materials ? P57

A
  • Comparison of costs (FIFO / AVCO) to net realisable value
38
Q

How is the inventory valuation method selected when dealing with partt finished.finished goods ? P57

A
  • Costs valuation includes:
  • expenditure on (direct material + labour + expenses+ production overheads )
  • production costs
  • compared net realisable value - fuerther costs
39
Q

What must you remember when bookkeeping what does this represent ? P60

A
  • double bookkeeping
  • debit - gain in value - asset / expense
  • credit - gain in value - liability/ income
40
Q

What is the double entry for materials purchased on credit ? P60

A
  • Debit inventory ( asset gained)
  • credit trade payables ( liability incurred)
41
Q

What is the double entry for materials purchased on cash ? P60

A
  • Debit inventory ( asset gained)
  • Credit bank ( bank balance reduced)
42
Q

Double entry for Issuing materials to production P60

A
  • Debit production (assets gained)
  • credit inventory ( value of materials to production)
43
Q

Return of materials from production to inventory ? P60

A
  • Debit inventory (asset gained)
  • credit production (value from production)
44
Q

What are the four main accounts involved in bookkeeping for materials ? P60

A
  • Inventoy account
  • Production account
  • trade payable account
  • bank account
45
Q

What is the double entry for the issue of indirect materials ? P60

A
  • Debit production overheads
  • credit inventory

Management accounting techniques (9 decks)

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