Chapter 5 - Controlling Inventory And Overhead Costs Flashcards Preview

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Flashcards in Chapter 5 - Controlling Inventory And Overhead Costs Deck (15):
1

Inventory

Defined as items which had been purchased with the intention of selling it at a profit

Consists of three categories;

Direct material: basic material that is converted during production process


Work in process: materials not ready to be sold because they are still in the production process where labour and and overhead costs have been added


Finished goods: Products for sale after the production process


2

Define Stock piling

Keeping inventory of raw materials due to the time difference between the acquisition of the material and the use thereof in the production process.


Inventory must be available when required otherwise production will come to a standstill

3

Stock piling terminology

NORMAL STOCK - material which is in the process of production

BUFFER STOCK - material which for,s a buffer between production and usage

SAFETY STOCK - emergency reserve stock

SPECULATIVE STOCK - stock held for financial gain

STOCK TRANSIT - stock ordered and paid for but still being delivered

OVERSTOCKING - the amount of stock held is not justified by volume of inventory needed for production

UNDERSTOCKING - the amount of stock held is too low for volume of production

AVERAGE STOCK - opening stock-closing stock /2

MAXIMUM STOCK - highest amount of stock a business can keep sue to restraints in storage space

4

Methods of valuing inventory : FIFO METHOD

According to this method the inventory units first bought must be first sold.

Closing inventory reflects prices of items bought closer to the end of trading period.

5

PERPETUAL INVENTORY SYSTEM

VALUE OF INVENTORY IS CALCULATED AFTER EACH TRANSACTION

6

PERIODIC INVENTORY SYSTEM

VALUE OF INVENTORY ONLY CALCULATED AT THE END OF A SPECIFIED PERIOD

7

Cost categories of trading inventory

PURCHASING COSTS

- costs involving in acquiring the goods from suppliers e.g. Carriage, Railage, Freight

ORDERING COSTS

- costs of preparing, issuing and paying purchase orders for receiving and inspecting items.

STOCK OUT COSTS-

These costs occur when a company runs out of a item that is in high demand.

Like additional ordering costs
Or losing out of a sale

Opportunity costs is the loss of future sales as a result of the lack of stock and poor customer service.

8

Contribution margin

The difference between sale revenue minus variable costs.


This is used to cover fixed costs and contributes to profit.

9

4 categories of Quality costs

Prevention costs : costs used to prevent the production of inferior products

Appraisal costs: costs incurred to ensure that the products meet quality standards. Audits, inspections etc

Internal failure costs: costs incurred due to the failure of products to meet quality standards. Eg. Loss of production, scrapping raw materials

External failure costs: costs incurred when inferior products are delivered to customers.

10

ECONOMIC ORDERING QUANTITY (EOQ)

The most cost effective order size for an item of inventory.

As ordering quantity increases, carrying costs increase but ordering costs decrease

FORMULA

2DO/H + (Pxi)

11

Reorder point

Indicates a level of inventory at which an order should be initiated as to prevent exhausted inventory.

Reorder point = lead time X average daily/weekly usage

With safety stock = lead time X average daily/weekly usage + safety stock


12

ACTIVITY BASED COSTING

A cost model used to assign manufacturing overheads to different products produced based on the premise that products consume activities and activities consume resources which incur costs

ABC costing helps in reducing product cost distortion by creating a cost pool for activities that can be identified as cost drivers and then assigning overheads to products based in the actual number of separate activities they require to become finished goods.

13

ABC COSTING HELPS AN ENTERPRISE

IDENTIFY INEFFICIENT AND UNNECESSARY ACTIVITIES

IDENTIFY PROFITABLE PRODUCTS AND ACTIVITIES

FACILITATING PRODUCT CONTROL AND PRICING

IDENTIFYING AMD ELIMINATING UNPROFITABLE PRODUCTS

14

ADVANTAGES OF ABC COSTING

IMPROVED COST ESTIMATION AND PRODUCT PRICING

IMPROVED UNDERSTANDING OF OVERHEADS

IDENTIFYING INEFFICIENT ACTIVITIES

IMPROVING PRODUCT RANGE

15

ABC COSTING LIMITATIONS

TIME CONSUMING TO COLLECT ALL THE DATA AND COST ALL THE ACTIVITIES


THEREFORE ITS AN EXPENSIVE SYSTEM TO ADOPT

ASSIGNING SOME OVERHEAD COSTS MAY PROVE DIFFICULT AND GIVE RISE TO IRRELEVANT COST DRIVERS

MAY BE LIMITED BECAUSE IT USES HISTORICAL DATA