MAPS - Chapter 2 - Material Costs

Question 1

Why is it important to be in control of inventory?

Answer 1

• Holding materials is expensive
• May have to borrow money to buy
• Storage costs like rent

Question 2

What type of materials are held by a manufacturing business?

Answer 2

• Raw materials and components
• Work-in-progress
• Finished goods

Question 3

What methods can a business use to know when to order more inventory and how much they need?

Answer 3

• Perpetual Inventory
• Just in Time
• Formulas

Question 4

What is perpetual inventory?

Answer 4

Often used in supermarkets as items are sold reorders are made accordingly to always have enough stock

Question 5

What is Just in Time (JIT)?

Answer 5

Often used by manufacturing businesses, supplies are delivered just as they are needed to keep inventory low

Question 6

What formulas help with inventory management?

Answer 6

• Maximum inventory level
• Buffer inventory
• Lead time
• Reorder level
• Reorder quantity

Question 7

What is maximum inventory level?

Answer 7

Maximum inventory that can be held at once so you don’t over order

Question 8

What is the buffer inventory?

Answer 8

Minimum level that inventory should not fall below before a new order is delivered

Question 9

What is lead time?

Answer 9

How long it takes for new inventory to be delivered after being ordered

Question 10

What is the reorder level?

Answer 10

The point a new order is the be placed

Question 11

How do you calculate buffer inventory?

Answer 11

Reorder level - (average usage x average lead time)

Question 12

How do you calculate reorder level?

Answer 12

(average usage x average lead time) + buffer inventory

Question 13

How do you calculate maximum inventory level?

Answer 13

Buffer inventory + maximum reorder quantity

Question 14

How do you calculate maximum reorder quantity?

Answer 14

Maximum inventory level - buffer inventory

Question 15

How do you calculate minimum reorder quantity?

Answer 15

Average usage x average lead time

Question 16

What other factors should be considered when completing inventory calculations?

Answer 16

• Needs of the business and if they change
• Obsolescence of inventory
• Seasonal variations affecting usage and inventory levels

Question 17

Why is the reorder quantity so important?

Answer 17

If you order too large amounts too much will be held costing the business. If too little is ordered the expense of constantly ordering will outweigh the savings of lower inventory levels, also can run out

Question 18

What is the most economic reorder quantity called?

Answer 18

The economic order quantity (EOQ)

Question 19

What is the formula for Economic Order Quantity (EOQ)?

Answer 19

(2 x annual usage x ordering cost) / inventory holding cost. All square rooted

Question 20

What are the two ways in which inventory can be valued?

Answer 20

• Cost (what it cost to buy)
• Net realisable value (what you could sell it for)

Question 21

How is it decided whether to value inventory at cost or NRV?

Answer 21

Whichever is lower

Question 22

What does FIFO stand for?

Answer 22

First in, first out

Question 23

What does AVCO stand for?

Answer 23

Weighted Average Cost

Question 24

How do you calculate weighted average cost?

Answer 24

Total cost of inventory held / number of items held

Question 25

What is important about choosing an inventory valuation policy?

Answer 25

Should be consistent, choose one and not change without a good reason.

Question 26

Which international accounting standard sets out the principle of inventory valuation?

Answer 26

2

Question 27

How is cost valuation different for work-in-progress and finished goods?

Answer 27

These should include direct materials, labour, expenses and production overheads