What is the minimum inventory level?
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The lowest inventory balance that should be maintained to avoid a stockout.
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What is the minimum inventory level?
The lowest inventory balance that should be maintained to avoid a stockout.
What does the minimum inventory level indicate to management?
That inventories are approaching a dangerously low level and stockouts are possible.
What is inventory often defined as?
A complete listing of merchandise or stock on hand, bought or made each year by a business.
What is the maximum level in inventory control?
The upper limit of stock that should not be exceeded.
How is the minimum inventory level calculated?
Minimum Level = Reorder level – (Average usage x Average lead time).
What are the classifications of inventory?
Raw materials, work in progress, finished goods on hand, spare parts, or consumables.
What is the first document required for ordering materials?
Purchase requisition.
What does the maximum level act as for management?
A warning level that inventories are approaching a potentially wasteful level.
What will the focus be on for the purposes of this unit?
The inventory of materials.
What document is issued to confirm the purchase of materials?
Purchase order.
What does an inventory count (stock take) involve?
Counting the physical inventory on hand and checking it against the inventory records.
What document is used to acknowledge the receipt of goods?
Goods received note (GRN).
How is the maximum level calculated?
Maximum Level = Reorder level + Reorder quantity - (Minimum Usage x Minimum Lead Time).
What does EOQ stand for?
Economic Order Quantity.
When is an inventory count typically conducted?
At a certain date.
What document is used for requesting materials, transferring, or returning them?
Materials requisition, transfer or returned note.
What is the method used to calculate closing inventory and cost of sales in FIFO?
First-In, First-Out method.
What are the two methods of conducting an inventory count?
Continuous or periodic basis.
What is the purpose of calculating EOQ?
To minimize inventory costs when there is no discount.
What is the method used to calculate closing inventory and cost of sales in LIFO?
Last-In, First-Out method.
What is the purpose of comparing physical inventory to inventory records?
To check for discrepancies.
Why is documentation important in material movement?
To ensure accurate tracking and accountability.
What is the method used to calculate closing inventory and cost of sales in AVCO?
Average Cost method.
What is the optimum order size in EOQ?
The Reorder Quantity (ROQ) that minimizes the balance of ordering and holding costs.
How many units were received on May 1?
800 units.
What are the two types of costs balanced in EOQ?
Ordering costs (C o) and holding costs (C h).
What was the unit cost of parts received on May 4?
$24.
What is a key characteristic of an efficient system of material control?
Ensures availability of the right quantity of material.
How many units were issued on May 7?
400 units.
What was the unit cost of parts received on May 18?
$28.
What is one reason for inventory control related to holding costs?
Holding costs may be expensive.
How many units were received on May 25?
360 units.
What quality aspect is important in an efficient material control system?
The right quality of material.
How can running out of raw materials affect production?
Production will be disrupted.
What are the three critical inventory control levels?
Reorder level, minimum level, and maximum level.
What is periodic stocktaking?
A process where all inventory items are physically counted and valued at a set point in time, usually at the end of an accounting period.
How is the maximum inventory level calculated?
Max Level = ROL + EOQ - (minimum usage x minimum lead).
When should materials be available in an efficient material control system?
At the right time.
What is the purpose of calculating inventory control levels?
To maintain inventories at the optimum level that minimizes costs.
What issue can arise from unused inventory with a short shelf life?
It may incur unnecessary expenses.
What is the maximum inventory level in the given solution?
8,600 units.
When is periodic stocktaking typically conducted?
At the end of an accounting period.
What does an efficient material control system help maintain?
An even flow of production.
What does the EOQ formula represent?
The Economic Order Quantity model for inventory management.
How can management assess inventory control levels?
By evaluating past inventory usage and delivery times.
Why is it important to ensure quality inputs in inventory control?
To maintain a good reputation with customers.
What formula is used to calculate average inventory?
Average inventory = minimum level + ½ EOQ.
What is continuous stocktaking?
Counting and valuing selected items at different times on a rotating basis.
What happens when the assumption of a known, constant purchase price is violated in EOQ?
An alternate approach is required.
What is the formula for calculating EOQ ignoring discounts?
EOQ = √(2CoD) / Ch
What does an efficient material control system aim to avoid?
Excessive investment in inventories.
What does C_H represent in the EOQ formula?
Cost of holding one unit of inventory.
What do inventory control levels determine?
'When to order' and 'how many to order'.
What is the average inventory calculated in the solution?
4,200 units.
What is the formula for Total Cost in EOQ with discounts?
Total Cost = (D/Q x Co) + (Q/2 x Ch) + (D x Unit Price).
What is the main purpose of stocktaking?
To ensure accurate inventory balance by physically counting and valuing items.
What was the total value of raw materials issued by Sandy Bay Sweets Limited?
$20,000,000.
What is the first function of an inventory control system?
The ordering of inventory.
What are the values used in the EOQ calculation in this example?
Co = 180, D = 30,000, Ch = 1.20
What does C_0 represent in the EOQ formula?
Cost of placing one order.
What does LIFO stand for in inventory valuation?
Last In, First Out.
What are the three key inventory control levels?
Minimum, Maximum, and Reorder Level.
What should be prepared to analyze total cost at different order quantities?
A table showing total cost at alternate values of Q.
What percentage of the materials issued can be directly traced to the production process?
40%.
What is the calculated EOQ ignoring discounts?
3,000 units.
What is the second function of an inventory control system?
The purchase of inventory.
What is the reorder level in inventory control?
The level at which stock should be replenished.
What is the total value of raw materials issued by Sandy Bay Sweets Limited?
$20,000,000.
What does D represent in the EOQ formula?
Demand for one year.
What is the annual demand for the product in pounds?
50,000 pounds.
What does FIFO stand for in inventory valuation?
First In, First Out.
What does the average inventory formula assume?
That inventory levels fluctuate evenly between the minimum and maximum inventory levels.
How is the optimum reorder quantity (ROQ) determined?
By selecting the value of Q at which total cost is at a minimum.
What are the three inventory control levels?
Minimum, maximum, and reorder level.
What is the formula for calculating Selling Price (SP) using Cost Price (CP) and markup percentage?
SP = CP + %CP.
What is the third function of an inventory control system?
The receipt of goods into stores.
What should be considered to determine if the entity will divert from the current EOQ?
Discounts.
What should be done if discrepancies occur after a stock take?
They should be investigated and corrective actions taken.
What is the journal entry to record the issue of materials from stores?
Debit Work in Process Inventory 12,000,000; Credit Raw Materials Inventory $20,000,000.
What is the formula for calculating the Re-Order Level (ROL)?
ROL = maximum usage x maximum lead.
What factors determine the reorder level?
The maximum rate of consumption and the maximum lead time.
What percentage of the material issued can be directly traced to the production process?
100%.
What is the cost per order (Co) calculated in the example?
$30 per order.
What is the maximum inventory level?
The amount of inventory on hand immediately after an order is received (safety inventory + reorder quantity).
What is the Re-Order Level (ROL) calculated for maximum usage of 300 units and maximum lead of 14 days?
4,200 units.
What are the four types of inventory costs?
Purchase costs, holding costs, ordering costs, and costs of running out of inventory.
How much of the issued materials is allocated to Work in Process Inventory?
$8,000,000.
What is an advantage of the AVCO method regarding price fluctuations?
Fluctuations in prices are smoothed out, making it easier to use the data for decision making.
If SP is 450 and the markup percentage is 20%, what is the Cost Price (CP)?
CP = 375.
What is the formula for total cost in inventory management?
Total cost = Order cost (Co) + Carrying cost (Ch) + Purchase cost (PC).
What is the fourth function of an inventory control system?
The storage of goods.
What does AVCO stand for in inventory valuation?
Average Cost.
What is one reason for discrepancies in inventory?
Quantity errors, such as miscounts during the stock take.
What is the journal entry to record the issue of materials from stores?
Debit: Work in Process Inventory 20,000,000.
What is the holding cost per unit (Ch) in the example?
$3 per unit.
How is the reorder level calculated?
Reorder level = Maximum Usage x Maximum Lead Time.
How much of the issued materials is allocated to Manufacturing Overhead?
$12,000,000.
How is the Minimum Level calculated?
Min Level = ROL – (average usage x average lead).
Why is purchasing inventory considered a significant cost for organizations?
Because it is usually one of the largest costs faced by an organization.
What is buffer stock in inventory control?
Buffer stock is equivalent to the minimum inventory level.
How does AVCO simplify administration compared to FIFO?
It is easier to administer than FIFO because there is no need to identify each batch separately.
How is the order cost (Co) calculated?
Co = D/Q x (Co) = 25,000/6,250 x (32) = $128.
How do you calculate CP when given SP and a markup percentage?
CP = SP / (1 + markup percentage).
What is the fifth function of an inventory control system?
The issue of inventory.
What is an example of a classification error in inventory?
Stainless steel classified as mild steel.
What are deflationary conditions characterized by?
Falling prices.
What is the formula to calculate Selling Price (SP) using Cost Price (CP) and Mark-Up?
SP = CP + %CP
What date is relevant for the journal entry of Sandy Bay Sweets Limited?
December 31, 2013.
What does maximum rate of consumption refer to?
The highest amount of stock used over a specific period.
What is the journal entry to record materials issued from store for production?
Debit: WIP (Direct) 20,000,000.
What is the Minimum Level when ROL is 4,200 units, average usage is 250 units, and average lead is 10 days?
1,700 units.
What must be done once inventory is obtained?
It has to be carefully controlled and checked.
What is the formula for calculating EOQ?
EOQ = √(2CoD)/Ch.
How is average inventory calculated?
Average Inventory = Safety Inventory (Buffer Stock) + ½ Reorder Quantity.
What is the selling price of a gel ink pen at Xcel Company?
$450.
What is the carrying cost (Ch) for the given data?
Ch = Q/2 x (Ch) = 6,250/2 x 6.40 = $20,000.
What is the Selling Price (SP) if CP is 360 and the markup percentage is 20%?
SP = 450.
What is a pricing error in inventory management?
A correctly counted and classified item priced at 56 per 100.
What is a disadvantage of the AVCO method related to issue pricing?
The resulting issue price is rarely an actual price that has been paid and can run to several decimal places.
What is the sixth function of an inventory control system?
Maintenance of inventory at the most appropriate level.
How do price movements affect FIFO and LIFO?
Conditions are opposite under FIFO compared to LIFO.
If SP is $400 with a mark-up of 25%, what is the Cost Price (CP)?
CP = $320.
What does maximum lead time refer to?
The longest time it takes to receive stock after placing an order.
What account is debited when materials are issued for production?
WIP (Work in Progress) account.
What is a perpetual inventory system?
An inventory recording system that updates records for each receipt and issue of inventory as it occurs.
What is the average usage multiplied by average lead in the Minimum Level calculation?
2,500 units.
What is the formula for calculating EOQ?
EOQ = √(2CoD) / Ch
What is the calculated EOQ prior to considering discounts?
1,000 units (pounds).
What is the mark-up percentage on the gel ink pens?
20%.
How is the purchase cost (PC) calculated?
PC = D x unit cost = 25,000 x 800,000.
Where does the average cost fall in relation to FIFO and LIFO?
It falls in between FIFO and LIFO.
What is a recording error in inventory?
An omission of the entry of a goods received note.
What does FIFO stand for in inventory valuation?
First In, First Out.
What is the relationship between markup and margin?
Markup is a percentage of CP, while margin is a percentage of SP.
How does AVCO pricing respond to gradual inflation?
Prices tend to lag a little behind current market values when there is gradual inflation.
What types of records are used in a perpetual inventory system?
Bin cards and stores ledger accounts.
What is the formula to calculate Selling Price (SP) using Cost Price (CP) and Margin?
SP = CP + %SP
What is the formula for average inventory in the EOQ model?
Average inventory = (Q/2) + safety stock.
What account is credited when materials are issued from the store?
Material control account.
What are the main components of inventory costs?
Purchase costs, holding costs, ordering costs, and costs of running out of inventory.
What does LIFO stand for in inventory valuation?
Last In, First Out.
How do you calculate the cost price from the selling price with a mark-up?
Cost Price = Selling Price / (1 + Mark-up Percentage).
What is the total cost at the current policy?
Total cost = 20,000 + 820,128.
What is a systems error related to inventory discrepancies?
Inadequate recording of returns to stores.
What is the average annual usage of the component?
4,000 units.
What is the EOQ prior to considering discounts?
4,000 units.
How do you calculate the number of orders in the EOQ model?
Number of orders = D/Q.
How much is the total amount recorded for materials issued?
$20,000,000.
What does a perpetual inventory system provide?
A continuous record of the balance of each item of inventory.
If SP is $400 with a margin of 25%, what is the Cost Price (CP)?
CP = $300.
Which inventory cost is usually one of the largest faced by an organization?
Purchase costs.
What is the journal entry to record materials issued from store when 40% is directly related to production?
Debit WIP (Direct) 12,000,000, Credit Material control account $20,000,000.
What does FIFO stand for in inventory valuation?
First In, First Out.
What does AVCO stand for in inventory valuation?
Average Cost Method.
What is the cost price for one unit of the gel ink pen?
$375.
What are the savings if EOQ is adopted?
Savings = 803,200 = $16,928.
What is the production rate for the components?
400 units per week.
What is the formula for annual holding cost in the EOQ model?
Annual holding cost = Q/2 x Ch (assuming safety stock is zero).
What values are used in the EOQ calculation?
Co = 100, D = 52,000, Ch = 0.65.
What percentage of the materials issued is directly related to the production process?
100%.
What is the difference between Mark-Up and Margin?
Mark-Up is a percentage of Cost Price, while Margin is a percentage of Selling Price.
How is the balance on the stores ledger account used?
It represents the inventory on hand and is used in the calculation of closing inventory.
What is the formula for calculating cost of sales?
Opening inventory + Purchases - Closing inventory.
Why is it important to control and check inventory after purchase?
To manage costs and ensure availability.
What is a key assumption regarding stockholding cost in the EOQ model?
The per unit stockholding cost is known and constant.
What is an advantage of the LIFO inventory method?
Inventories are issued at a price close to current market value.
How much is debited to WIP (Direct) in the journal entry?
$8,000,000.
What is the margin percentage applied to calculate the cost price?
20%.
What is the cost of holding one item for the year?
$1.50.
What does EBQ stand for?
Economic Batch Quantity.
How is the annual order cost calculated in the EOQ model?
Annual order cost = D/Q x Co.
What is a key principle regarding inventory transactions?
You cannot issue/sell what you do not have.
When is the closing inventory calculated in relation to the perpetual inventory system?
In monthly and annual accounts.
How does FIFO impact Cost of Goods Sold (CGS) during inflationary conditions?
CGS is lower because earlier and lower priced items are sold first.
What does 'Co' represent in the EOQ formula?
Cost per order.
What is one benefit of keeping proper records for ordering and receiving materials?
Ensures enough inventory is held.
What is the total amount of purchases made?
$39,360.
What are holding costs in inventory management?
Costs associated with storing unsold goods.
What is the average usage of the component produced by ACME Ltd. per annum?
2,000 units.
What is assumed about the ordering cost in the EOQ model?
The ordering cost is known and constant.
What is the annual demand for barrels at Crystal Supplies Limited?
30,000 barrels.
What is a disadvantage of the LIFO inventory method?
The method can be cumbersome to operate due to several batches being only partially used.
What is the formula for calculating the Reorder Level (ROL)?
ROL = [max usage x max lead time].
How much is debited to Production Overheads (Indirect) in the journal entry?
$12,000,000.
How do you calculate the cost price from the selling price with a margin?
Cost Price = Selling Price * (1 - Margin Percentage).
What is the purpose of the EBQ?
To determine the number of items that should be produced in a batch.
How many weeks is the factory open per year?
50 weeks.
What is the formula for purchase cost in the EOQ model?
Purchase cost = D x UC.
How must transactions be processed in inventory management?
In strict date order.
What does 'D' represent in the EOQ formula?
Annual demand.
How does proper record-keeping affect ordering?
It prevents duplication of ordering.
What are ordering costs in inventory management?
Costs incurred when placing orders for inventory.
What is the effect of FIFO on profits during rising prices?
Profits are higher due to lower CGS.
What is the FIFO cost of sales?
$26,560.
What is the cost per setup for ACME Ltd.?
$320.
What is assumed about the rates of demand in the EOQ model?
The rates of demand are known.
What is the Reorder Level (ROL) for part ABCD?
10,000 units.
What is the cost per barrel for Crystal Supplies Limited?
$12.
How does LIFO benefit managers in decision-making?
Managers are continually aware of recent costs, as the costs charged are current costs.
What is the formula for calculating Economic Batch Quantity (EBQ)?
EBQ = √[2CoD/Ch(1 - D/R)]
