You are on page 1of 18

3/1/2010

Certifed Accounting Technicians

Paper 4 Session 5 MATERIALS


Lecturer: Nguyen Thu Hang BCom (UNSW) CPA Australia ASA

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

Readings requirement
Chapter 5 Interactive Kit Practice & revision Kit pg19-24

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

3/1/2010

What will be covered


1 2 3 4 5
Types of Materials

Buying materials

Valuing materials

Inventory control

Reordering inventory

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

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 + Labour + Expenses Total cost
3/1/2010

Direct materials +

Indirect materials +

Direct labour +

Indirect labour +

Direct expense Direct cost

Indirect expense Overhead


4

Nguyen Thu Hang (BCom, CPA Australia ASA)

3/1/2010

Materials
Materials are all things becoming parts of finished goods/services Can be classified according to:
Subtance that make them up such as Wood, plastic, metal Measurement such as kg, km, litre, cm, m3 Physical properties such as Color, shape, water resistant, fire-proof

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

Concepts
1
Raw materials are goods purchased for incorporation into products for sale

2
Work in progress (WIP) means some work has been done on the materials purchased as part of the process of producing the finished product, but the production process is not complete

3
Finished goods are products ready for sale or dispatch

Raw materials + WIP + Finished goods = INVENTORY


3/1/2010 Nguyen Thu Hang (BCom, CPA Aus ASA) 6

3/1/2010

Wooden-table manufacture
Raw materials are: pinewood, white paint, screw, glue, varnish, lubricant WIP: 4 table legs, unpainted table, table has not been varnished Finished good: fully painted table ready for dispatch for customers or display in store for sale

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

Some other examples


Think of raw materials, WIP and finished goods in:
A book publishing company A music record company An audit firm

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

3/1/2010

2. BUYING MATERIALS
3/1/2010 Nguyen Thu Hang (BCom, CPA Aus ASA) 9

Purchasing procedure

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

10

3/1/2010

Material issuance procedure

Issue required materials

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

11

Purchase documentations
Purchase requisition form

Filled in by department in need of materials Routed to Purchase department

Order form

Filled in by Purchase department Sent to desirable suppliers

Delivery notes

Prepared by supplier or transporter Copies kept by warehousing department

GRN

Prepared by warehousing department Routed to accounts department and purchase department for notice

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

12

3/1/2010

Example_purchase requisition form (RQF)

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

13

Example_Purchase Order

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

14

3/1/2010

Example_ Goods received Note (GRN)

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

15

Material Input requirement


How much/How many to buy is a key question for both requesting department and Purchase department Usually, organisations have to buy extra materials because wastage may occur as a matter of course in some production process

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

16

3/1/2010

3. VALUING MATERIALS

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

17

Inventory policy/approach
2 approaches
This is the most important element to study at your level
Buffer Inventory is an approach to keep a certain amount of inventory to cope with flux from demand and unstable suppliers

Just in-time (JIT) is an approach where the holding level of inventory/ material is ZERO

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

18

3/1/2010

Inventory valuation methods

First in, first out

Last in, first out

Moving weighted average Periodic weighted average

FIFO

LIFO

Weighted average

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

19

FIFO
Advantage It is logical pricing method which probably represents what is physically happening: in practice, the oldest inventory is likely to be used first It is easy to understand and explain to managers The closing inventory value can be near to a valuation based on the cost of replacing inventory
3/1/2010

Disadvantage FIFO can be cumbersome to operate because of the need to identify each batch of materials seperately Managers may find it difficult to compare costs and make decisions when they are charged with varying prices for the same materials
20

Nguyen Thu Hang (BCom, CPA Aus ASA)

10

3/1/2010

LIFO
Advantage
Inventories are issued at a price which is close to current market value. This is not the case with FIFO when there is a high rate of inflation Managers are continually aware of recent costs when making decisions, because the costs being charged to their department or products will be current costs
3/1/2010

Disadvantage
LIFO can be cumbersome to operate because it sometimes results in several batches being only partly used in the inventory records before another batch is received LIFO is often the opposite to what is physically happening and can therefore be difficult to explain to managers As with FIFO, decision-making can be difficult because of variations in prices
21

Nguyen Thu Hang (BCom, CPA Aus ASA)

Weighted average pricing method


Advantage Fluctuations in price are smoothed out, making it easier to use the data for decision making It is easier to administer than FIFO or LIFO because there is no need to identify each batch separately Disadvantage The resulting issue price is rarely an acutal price that has been paid for and can run to several decimal places. Prices tend to be lag a little behind current market values when there is gradual inflation

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

22

11

3/1/2010

4. INVENTORY CONTROL
3/1/2010 Nguyen Thu Hang (BCom, CPA Aus ASA) 23

Inventory cycle
Purchase orders Supplier to send goods Store/warehouse to receive and stock materials/inventory

Reorder inventory

Inventory/ Materials issuance Inventory to deliver to customers Materials to be used in production

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

24

12

3/1/2010

Ordering cost
Costs associated with low level of inventory as more frequent orders will have to be placed. Includes:
Clerical and administrative costs Transportation cost Production run cost

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

25

Holding costs
Costs associated with high level of inventory. Happens for several reasons:
Cost of storage and store operations Interest charge Insurance cost Risk of obsolescence Deterioration and damages Theft

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

26

13

3/1/2010

Stock-out cost
Associated with no stocks available for customers sale. Some damages can arise from stock-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

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

27

Objectives of Storing Materials

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

28

14

3/1/2010

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 records Floow less than records
3/1/2010

Why? Why?
29

Nguyen Thu Hang (BCom, CPA Aus ASA)

5. REORDERING INVENTORY

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

30

15

3/1/2010

Objectives of Optimum level of inventory Business hold too many inventories holding costs Business hold too few inventories stock out costs

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

31

Inventory control level


Can be calculated in order to maintain inventories at the optimum level 4 critical control levels are:
Reorder level Reorder quantity Min inventory control level Max inventory control level

Refer to Example 5.1 Pg 84-86 Interactive Text

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

32

16

3/1/2010

Class exercise 1
Milk powder is used by a company in the manufacture of one of its product, Fruit Yoghurt. Demand for Fruit Yoghurt for year 2010 is forecast to be 26,000 units. Each finished unit of Fruit Yoghurt contains 0.72kg of Milk powder. There is a preparation of loss of 10% of powder used. It is not planned to change the stock-holding of Fruit Yoghurt in 2010 but a reduction of 1,000 kgs in the stock of Milk powder is planned. Required: Calculate the quantity of Milk powder that needs to be purchased in 2010

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

33

Class exercise 2
Fresh milk is used in the making of Fruit cakes and other chocolate products. The total annual requirement for Fresh Milk is 120,000 litres, 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: Economic Order Quantity Reorder level Total annual cost of ordering inventory Total annual cost of holding inventory

1. 2. 3. 4.

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

34

17

3/1/2010

Next week: Chapter 6 Labour

3/1/2010

Nguyen Thu Hang (BCom, CPA Aus ASA)

35

18