Introduction to Costing Flashcards
Inventory control should cover the following functions:
- The ordering of inventory
- The purchase of inventory
- The receipt of goods into stores
- The storage of goods
- The issue of inventory
- Maintenance of inventory at most appropriate level
Reasons for inventory control
- Holding costs may be expensive
- Production will be disrupted if we run out of raw materials
- Unused inventory with short shelf life may incur unnecessary expenses
- Ensure quality inputs used to maintain good reputation with customers
Every movement of material should be documented using the following:
- Purchase requisition
- Purchase order
- Goods received note (GRN)
- Materials requisition, transfer or returned note.
An Efficient system
An efficient system of material control is one which ensures, availability of the right quantity of material of right quality at the right time in order to maintain an even flow of production and at the same time avoiding excessive investment in inventories.
Proper records of physical procedures for ordering and receiving are kept ensures:
- Enough inventory is held
- No duplication of ordering
- Quality is maintained
- Adequate record for accounting purposes
Periodic stock taking
items are physically counted and valued at a set point in time, usually at the end of an accounting period.
Continues stock taking
counting and valuing selected items at different times on a rotating basis.
Reasons for discrepancies are:
- Quantity errors e.g. miscounts during the stock take.
- Classification errors e.g. stainless steel classified as mild steel
- Pricing errors e.g. a correctly counted and classified item might be priced at $56 for 1000 instead of $56 per 100.
- Recording errors e.g., an omission of the entry of a goods received note.
- Systems error e.g., no adequate recording of returns to stores.
Perpetual inventory
an inventory recording system whereby the records (bin cards and stores ledger accounts) are updated for each receipt and issue of inventory as it occurs.
This means that there is a continuous record of the balance of each item of inventory. The balance on the stores ledger account therefore represents the inventory on hand and this balance is used in the calculation of closing inventory in monthly and annual accounts.
Inventory costs include
- purchase costs,
- holding costs,
- ordering costs and
- costs of running out of inventory.
The reorder level is determined by consideration of the following:
✓ The maximum rate of consumption
✓ The maximum lead time
Reorder level
Maximum Usage x Maximum Lead Time
Minimum Level
Reorder level – (Average usage x Average lead time)
Maximum Level
Reorder level + Reorder quantity – (Minimum Usage x Minimum Lead Time)
Average Inventory
Safety Inventory (Buffer Stock) + 1⁄2 Reorder Qty.
Economic order quantity (EOQ)
is the order quantity which minimizes inventory costs WHEN THERE IS NO DISCOUNT. aka. The optimum order size. It is that Reorder Quantity (ROQ) that minimizes the balance of cost between ordering (Co) and holding (Ch) costs
EOQ Assumptions
❖ Known, constant per unit stockholding cost
❖ Known, constant ordering cost
❖ Rates of demand known
❖ Known, constant price per unit (quantity discounts may be offered)
❖ Replenishment made instantaneously (whole batch is delivered at once) – partial deliveries and delays common
❖ Average stock = Q/2 (violated if constant amount not used per day; there is distinct possibility that seasonal and cyclical factors will produce uneven usage)
EOQ=
√(2CoD)/Ch
CH = cost of holding ONE UNIT of inventory
C0 = cost of placing ONE ORDER
D = demand FOR ONE YEAR
Total cost =
Order cost (Co) + Carrying cost (Ch) + Purchase cost (PC)
Annual Co =
D/Q x (Co)
Annual Ch =
Q/2 x (Ch)
PC =
D x unit cost
