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Transcript of HANDOUT Day5 Materials
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Paper 4 Session 5
MATERIALS
Lecturer: Nguyen Thu Hang
BCom (UNSW)
CPA Australia ASA
Certifed Accounting Technicians
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Readings requirement
Chapter 5 Interactive Kit
Practice & revision Kit pg19-24
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What will be covered
Types of Materials1
Buying materials2
Valuing materials3
Inventory control4
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Reordering inventory5
Recall from last week: Product cost
The cost of an item can be divided into the following cost elements
Materials
Labour
Expenses
Each element can be split into two: direct and indirect
Materials = Direct materials + Indirect materials
+ + +
Labour = Direct labour + Indirect labour
+ + +
Expenses = Direct expense + Indirect expense
Total cost Direct cost Overhead
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Wooden-table manufacture
Raw materials are: pinewood, white paint,screw, glue, varnish, lubricant
WIP: 4 table legs, unpainted table, tablehas not been varnished
Finished good: fully painted table readyfor dispatch for customers or display in
store for sale
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Some other examples
Think of raw materials, WIP and finishedgoods in:
A book publishing company
A music record company
An audit firm
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2. BUYING MATERIALS
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Purchasing procedure
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Material issuance procedure
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Issue requiredmaterials
Purchase documentations
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Purchaserequisition
form
Filled in by department in need of materials Routed to Purchase department
Order form
Filled in by Purchase department Sent to desirable suppliers
Deliverynotes
Prepared by supplier or transporter Copies kept by warehousing department
GRN
Prepared by warehousing department Routed to accounts department and purchase department for
notice
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Example_purchase requisition form
(RQF)
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Example_Purchase Order
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Example_ Goods received Note (GRN)
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Material Input requirement
How much/How many to buy is a key question for bothrequesting department and Purchase department
Usually, organisations have to buy extra materialsbecause wastage may occur as a matter of course insome production process
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3. VALUING MATERIALS
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Inventory policy/approach
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Just in-time(JIT) is anapproach wherethe holding levelof inventory/material isZERO
2 approaches
Buffer Inventoryis an approach tokeep a certainamount ofinventory to copewith flux fromdemand andunstable suppliers
This is themost
importantelement to
study at yourlevel
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Inventory valuation methods
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First in,first out
FIFO
Last in,first out
LIFO
Moving weightedaverage
Periodic weightedaverage
Weighted
average
FIFO
Advantage
It is logical pricing methodwhich probably representswhat is physicallyhappening: in practice, the
oldest inventory is likely tobe used first
It is easy to understandand explain to managers
The closing inventoryvalue can be near to avaluation based on thecost of replacing inventory
Disadvantage
FIFO can becumbersome to operatebecause of the need toidentify each batch ofmaterials seperately
Managers may find itdifficult to compare costsand make decisions whenthey are charged withvarying prices for thesame materials
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LIFO
Advantage
Inventories are issued at aprice which is close tocurrent market value. Thisis not the case with FIFOwhen there is a high rateof inflation
Managers are continuallyaware of recent costs
when making decisions,because the costs beingcharged to theirdepartment or productswill be current costs
Disadvantage
LIFO can be cumbersome tooperate because it sometimesresults in several batches beingonly partly used in the inventoryrecords before another batch isreceived
LIFO is often the opposite towhat is physically happening
and can therefore be difficult toexplain to managers
As with FIFO, decision-makingcan be difficult because ofvariations in prices
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Weighted average pricing method
Advantage
Fluctuations in price aresmoothed out, making iteasier to use the datafor decision making
It is easier to administerthan FIFO or LIFObecause there is noneed to identify eachbatch separately
Disadvantage
The resulting issue price israrely an acutal price thathas been paid for and canrun to several decimal
places. Prices tend to be lag a little
behind current market valueswhen there is gradualinflation
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4. INVENTORY CONTROL
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Inventory cycle
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Store/warehouseto receive and
stockmaterials/inventory
Supplier tosend goods
Purchaseorders
Inventory todeliver to
customers
Reorderinventory
Inventory/Materialsissuance
Materials tobe used inproduction
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Ordering cost
Costs associated with low level ofinventory as more frequent orders willhave to be placed. Includes:
Clerical and administrative costs
Transportation cost
Production run cost
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Holding costs
Costs associated with high level ofinventory. Happens for several reasons:
Cost of storage and store operations
Interest charge
Insurance cost
Risk of obsolescence
Deterioration and damages
Theft
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Stock-out cost
Associated with no stocks available forcustomers sale. Some damages can arise fromstock-out situation: Loss of Customer Goodwill
Extra costs of urgent, small quantity, replenishment orders
Labour frustration over stoppage
Lost Contribution from lost sales
Loss of Future sales due to disgruntled customer
Expense of production stopage
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Objectives of Storing Materials
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How to achieve those objectives?
Inventory recording system: Periodic vs.Perpetual
via Bin Card or Computerised System
Inventory coding and Locating
Stocktaking
Reconcile floor to records
Physical conditions of inventory
Inventory discrepancies Floor more than recordsWhy?
Floow less than recordsWhy?
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5. REORDERING INVENTORY
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Objectives of Optimum level of inventory
Business hold too many inventoriesholding costs
Business hold too few inventories stockout costs
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Inventory control level
Can be calculated in order to maintaininventories at the optimum level
4 critical control levels are: Reorder level
Reorder quantity Min inventory control level
Max inventory control level
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Refer toExample 5.1 Pg84-86 Interactive
Text
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Class exercise 1
Milk powder is used by a company in the manufacture of oneof its product, Fruit Yoghurt. Demand for Fruit Yoghurt foryear 2010 is forecast to be 26,000 units.
Each finished unit of Fruit Yoghurt contains 0.72kg of Milkpowder. There is a preparation of loss of 10% of powderused. It is not planned to change the stock-holding of FruitYoghurt in 2010 but a reduction of 1,000 kgs in the stock ofMilk powder is planned.
Required:
Calculate the quantity of Milk powderthat needs to be purchased in 2010
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Class exercise 2
Fresh milk is used in the making of Fruit cakes and other chocolateproducts. The total annual requirement for Fresh Milk is 120,000litres, used evenly over each year
The costs of ordering stock and holding stock are as follows:
Ordering: $45 per order Holding: $0.30/litre/year
A safety inventory of 2,500 litres of Fresh Milk is held and the avg.lead time is 1.5 weeks
Required: Calculate for Fresh Milk the:
1. Economic Order Quantity
2. Reorder level
3. Total annual cost of ordering inventory
4. Total annual cost of holding inventory
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Next week: Chapter 6 Labour