2011 Paper F2 Study Text Sample Download v1

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Paper F2: Management Accounting
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Paper F2: MANAGEMENT ACCOUNTING Study Textbook

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DOWNLOAD SAMPLE Welcome to our download sample of the Tony Surridge +AddVance E-book publication: ACCA Paper F2 Management Accounting Study Text Thanks for taking time to review a download extract of this Study Text publication which we have developed specially for the ACCA Paper F2: Management Accounting. We hope you like our electronic study material and recognise that at an extremely low price from just 3 (plus VAT where applicable) the complete purchased and downloaded version represents true value for money. This is only a small sample, taken directly from the full version, and as such not all hyperlinks will be active. For illustrative purposes, the selection shown here is Tutorial 3 in full, as highlighted in the table of contents. All hyperlinks are fully functional only in the full downloaded version when purchased. You may like to learn some details about the full version: (please note these details may vary slightly depending on which updated version you have purchased) Pages Activities with answers Diagrams/charts/tables Examples Mnemonics Diagnostic Questions and Answers Thousands of hyperlink connections 626 53 76 39 23 235
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No snowflake in an avalanche ever feels responsible. Voltaire
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Tutorial 3 Materials and inventory control
ACCA Paper F2 Management Accounting
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In this tutorial
Utilisation of stock Inventories are an investment The need for flexibility Benefits of holding high inventories of raw materials Balance between costs and benefits Inventory control. Features of an effective system of inventory control. A discussion of the materials purchase cycle (diagram provided). The Purchase Requisition. The Purchase Order. Receiving orders. Objectives of effective inventory-keeping. Speedy receipt and issue of materials. Fast location of materials. Full identification of materials. Information on quantities on quantities held. Safeguarding of materials. Re-order quantity (ROQ) (including the assessment of quantity discounts) Re-order level (ROL) Maximum inventory level Minimum inventory level Average inventory investment Inventory turnover ratio Efficient use of inventory space. There are two aspects concerning the issuing and pricing of materials Issuing from stores. Perpetual inventory. Continuous inventory-taking. Accounting for materials (a) documents used. (b) the flow of accounts. General discussion on material related reports.
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1.
Utilisation The controlling of the movement of materials into, through and out of a factory (or other part of an organisation) is an extremely important task with which the cost accountant must be fully familiar. Materials, and their associated costs will be found in: (a) inventories of raw materials (for service providers, as well) (b) incomplete work (work in progress) (c) inventories of finished goods awaiting sale. Each of these can represent a substantial part of the working capital of the company. An efficient company will attempt to minimise this investment whilst at the same time ensuring that there is always sufficient: (a) raw materials for the production department (factory) (b) work in progress to maintain continuity within the production department, (c) finished goods to satisfy customer demand.
2.
Inventories are an investment Inventories, like accounts receivable, involve the commitment of a large amount of a firm's resources; more for a manufacturer than a service provider. Their efficient management is of great concern to the financial manager. For a manufacturer, inventories include raw materials, bought-in parts, finished goods awaiting sale and also work-in-progress, although the later element will not be discussed here. Inventories should not be viewed as an idle asset; rather they are an essential part of a firm's investment and operations. The optimum holding of inventories will maximise the benefits less costs involved. The need for flexibility Holding higher levels of finished goods inventory will enable the company to be more flexible in supplying customers. More customers would receive immediate delivery rather than waiting for new items to be produced and they might obtain a greater choice of types of products. There would be a smaller chance of sales being disrupted through interruptions in production. These benefits would have to be balanced against the storage costs incurred, the capital costs of financing the inventory and the cost of inventory becoming obsolete. Flexibility and innovation is also an important consideration. Benefits of holding high inventories of raw materials By holding higher levels of raw material inventory, there is a reduced likelihood of stock-outs. The penalty for stock-outs may be lost sales or customer dissatisfaction. Alternatively, a stock-out may incur a penalty due to delaying the necessary operations within the organisation till the goods arrive. Another benefit of holding higher levels of inventories is that they lead to fewer, but larger, replenishment. If goods are purchased from a supplier, each additional order will have an additional cost associated with it, such as processing the order or handling the purchases when they arrive. If the goods are manufactured internally, larger but less frequent production runs will lead to substantial savings. Our mnemonics on the following two screens may help jog your memory if required: PRAISE TOSS - the benefits of holding high levels of inventory - the disadvantages of holding high levels of inventory
3.
4.
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Benefits of holding high levels of inventory (stocks)

The possible benefits of holding high levels of stock are:
P R A I S E
Purchase discounts can be obtained for large-lot (quantity) purchases. Reduction in annual purchasing costs. Each purchase order will have an incremental cost attached to it, such as processing the order or handling the goods when they arrive. Large purchase orders will reduce the number of purchases made in a period, but will increase stock holding. Adds flexibility and versatility to the firms ability to react to and deal with unexpected orders from customers. Investment value may increase in times of high inflation, or when supplies are purchased from overseas sources and the domestic foreign exchange rate softens (or depreciates) against the rate of the other cross-currency. (Speculation can be a reason for holding stock.) Stock-outs and the associated costs of production down-time are reduced. Enables optimum-size batch runs when stock (raw materials) are manufactured internally. (It might be economic for the firm to produce large batches.)
Memory jog: it might be a matter of PRAISE be that we have a high level of stock!
Reward of an act is to have done it. Ralph Waldo Emerson (1803 1882) Notebook F No 1
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Disadvantages of holding high levels of inventory (stocks)

The benefits obtained from holding higher levels of stock are obtained at the cost of possible disadvantages:
T O S S
Theft, deterioration, damage etc. become bigger threats. Opportunity cost of capital tied up (foregone short-term interest rates, or overdraft interest rates incurred) is increased. Subsequent price reductions (and advantageous foreign currency rate movements) are missed. Stock holding costs occupancy costs, labour costs and other fixed and variable costs are increased.
Memory jog: Because of the potential disadvantages, management might decide to TOSS, out the idea of having high stock levels.
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5.
Balance between costs and benefits The benefits of holding higher levels of inventory are obtained at a price. This is the cost of holding inventory. The total cost of inventory holding is made up of several components. The most important is the cost of capital, although other components of inventory-holding cost include storage cost ( warehousing occupancy costs), handling costs, insurance, obsolescence and deterioration. Many of the components of the inventory-holding cost are proportional to the inventory value and hence it is usually assumed that the annual inventory-holding cost is some percentage of the average inventory value. It should be clear that these are tradeoffs between ordering larger quantities thereby maintaining higher levels of inventory, and ordering smaller quantities thereby reducing inventory levels. A compromise is sought between too small an order and too large an order. The compromise attempts to ensure a balance between the benefits and costs of inventory holding. This is done by finding some size of batch or order which minimises the total costs. Figure 3.1 summarises the main areas involved in inventory and materials management.
6.
Inventory control Inventory (or materials) control is a system to ensure that the required quantity of material of the required quality is provided at the required time with the minimum of capital investment. It includes such management areas as: (a) (b) (c) (d) (e) procurement (purchasing) storage inventory control issuing pricing material to work (jobs, batches, etc.) and inventory valuation
These management areas will be covered in this tutorial. 7. Features of an effective system of inventory control It is generally recognised that an effective system of inventory (materials) control will possess many, if not all, of the following features: budgeted control of material purchases centralised purchasing adequate storage facilities classification and coding of materials operation of efficient inventory control records standardisation of materials used in products planning and scheduling of material requirement use of standard forms, records and computer software departmental co-operation regular reports to management on purchases, issues, inventory turnover, inventory losses, slowmoving inventory, dormant inventory, etc. (k) internal audits. (a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
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Figure 3.1: Management of materials inventory (stock) Not examined in the Paper F2 syllabus Effective stock management Speedy receipt and issue of stock Fast location of stock Full identification of materials Information on stock held Safeguarding of stock Efficient use of storage space
Storage First in, first out (FIFO) Last in, first out (LIFO) Weighted average Periodic weighted average Standard price
Pricing materials to work

and
MANAGEMENT OF MATERIALS INVENTORY (STOCK) 2
Procurement (purchasing)
Stock valuation 4
Levels and measures: Re-order level (ROL) Economic order quantity (EOQ) Maximum stock level Minimum stock level Average stock investment Stock turnover ratio
The purchase-receipt-payment cycle The Purchase (stores) Requisition The Purchase Order Receiving orders Responsibility organisation Stock control
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8.
Materials purchase cycle Figure 3.2 is an outline of a typical materials purchases cycle; Figure 3.3 extends the system to show a simplified purchase invoice-payment system; Figure 3.4 provides an overview of the same logical system but one using a network of computers with a single database file. A computer-based system obviously reduces much of the paperwork. The following comments concern these diagrams: (a) The Cost Accountant (Management Accounting Department) is responsible for the pricing of all issues to work (jobs, batches, etc.) The department will, therefore, receive information from the Stores Department concerning receipts and issues of materials and from the Purchasing Department regarding the cost of materials which have been bought. (b) In practice the Goods Received Department may be combined with the Inspection Department. (c) The Production Department may return surplus materials to the Stores, in which case a Materials Returns Note (or equivalent computer transaction) will be used. Alternatively, materials may be transferred between work within the Production Department which will require a Materials Transfer Note (or computer transaction). (d) The Purchasing Department may have to receive estimates from a number of suppliers before the appropriate supplier is selected. Only then will a Purchase Order be Placed. (e) After checking and authorising for payment, the Supplier's Invoice will be passed for payment to the Accounts Department by the purchasing department. The Accounts Department has not been shown in the Materials Control Cycle since it is not a fundamental part of materials control, although a simplified diagram of what is involved is shown in Figure 3.3.
Procurement
1. The Purchase Requisition The Purchasing Department will initiate its purchasing procedure on the receipt of a Purchase Requisition. This is the normal means of notifying the Purchasing Department that a particular item is required. The Purchase Requisition may be raised by: (a) Design department - for samples of new experimental materials. (b) Stores Department - to replenish inventories of existing materials or obtain supplies of new materials. (c) Other departments - for stationery, other office supplies, capital equipments, etc. 2. The Purchase Order For repeat orders, the Purchasing Department will raise a Purchase order which will be sent to the normal supplier. For materials which have not been used before, the Purchasing Department would normally: (a) obtain a quotation from various suppliers (b) select the most appropriate supplier having considered such facts as price, deliver time (supplier lead time), reputation of supplier, etc. (c) place a Purchase Order with the selected supplier.
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Figure 3.2 : The materials order-purchases cycle
Inventory records maintained by stores staff in quantity values

INVENTORY ITEM INVENTORY ITEM
Request for replenishment of stock to be ordered when inventory balances require it
PURCHASE REQUISITION PURCHASING OFFICE 3
Inventory records are also kept by the cost accountant in quantitative and $ values
INVENTORY ITEM
STOCK LEDGER INVENTORY LEDGER
Request for stock
COPY TO ACCOUNTANT CHASE COPY COPY FOR STORES
STORES REQUISITION STORES 2 STOCK

FILE COPY LEDGER
PRODUCTION POINT 1
STOCK LEDGER PURCHASE ORDER Goods ordered are received To supplier Start here are follow the arrowheads RECEIPT ADVICE
Materials re issued
FILE COPY COPY TO COST ACCT.
Used to update inventory ledger records
COPY TO ACCOUNTANT STOCK
LEDGER GOODS RECEIVED NOTE
STORES RECEIPT AND INSPECTION
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Purchase Invoice is received and authorised by the Purchasing Department and then sent to the Accounts Department AUTHORISED PURCHASE INVOICE RECEIVED BY FINANCIAL ACCOUNTANT
Received from the Goods Received Department (acts as proof of receipt)
PURCHASE INVOICE
Received from the supplier
GOODS RECEIVED NOTE
DOCUMENTS ARE MERGED
PURCHASE STOCK ORDER COPY LEDGER
THE ACCOUNTANT SCHEDULES PAYMENT
A copy of the Purchase Order is received from the Purchasing Department (verifying that the order was made and authorised)
THE ACCOUNTANT WRITES THE CHEQUE AND MAKES PAYMENT TO THE SUPPLIER
REMITTANCE ADVICE STOCK LEDGER CHEQUE
Figure 3.3 : Purchase Invoice-Payment System
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Figure 3.4 : Computer database Purchase Order-Invoice-Payment System
PRODUCTION
INPUT: MATERIALS REQUISITION DATA
APPLICATION SOFTWARE
STORES
INPUT: ORDER REQUEST
PURCHASING OFFICE
INPUT: SELECTION OF SUPPLIER
GOODS RECEIPTS SECTION
INPUT: DATA OF GOODS RECEIVED AND INSPECTED (CONFIRMED)
DATABASE FILES (INCLUDING DATABASE MANAGEMENT SYSTEM (DBMS) SOFTWARE)
ACCOUNTING OFFICE
INPUT: PURCHASE INVOICE DATA APPLICATION SOFTWARE
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Duplicate copies of the Purchase Order could be prepared for: (a) the originator of the Purchase Requisition to confirm that the order has been placed, (b) the Stores and Goods Received department to advise them of impending receipts, (c) filing within the Purchasing Department for eventual checking against the Supplier's Invoice, Goods Received Note and Inspection Report. 3. Receiving orders (a) Good Received Note When materials are received, the details of the actual receipt will be entered on a Goods Received Note. Since part-orders are often despatched by suppliers, it is important that there is a permanent record of the actual receipts of materials so that these can be reconciled with the Purchase Orders. (b) Inspection Report When the Goods Received Department have checked the quantity of materials, the quality of the materials can be determined by the Inspection Department. The Inspection Department will prepare an Inspection Report which can be attached to a copy of the Goods Received Note and both can be passed to the Purchasing Department. (c) Organisation Whether or not separate departments are maintained will depend upon the size of the organisation. However, regardless of the organisation's size, all receipts must be examined for quantity and quality. At this point, the materials will normally be passed into the Stores. To minimise the movement of materials, the Goods Received Department, Inspection Department and Stores should be located as near as practical to each other.
Storage
1. Objectives of effective inventory-keeping The objectives of effective and efficient store-keeping are to provide: speedy receipt and issue of materials fast location of materials full identification of materials information on quantities held safeguarding of materials efficient use of storage space Speedy receipt and issue of materials Some factors which should be considered are: (a) (b) (c) (d) (e) The store should be as close as possible to the point of entry of the materials. The store should be conveniently placed for user departments. Fast moving inventory should be stored near to the issue point. There should be separate receipt and issue points in the store to reduce possible congestion. Separate issue points could be operated for different groups of materials.
2.
Many organisations use an organisation consisting of a central stores linked to sub-stores located at each main production point or area.
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3.
Fast location of materials The layout of the stores needs careful planning, the main requirements being stocking in a logical sequence and an 'address' for each item of material. Full identification of materials Whilst skilled stores assistants will be able to recognise many types of material inventory, on sight, such a system is not infallible. To aid the identification of materials, they should be classified according to their general type and allotted a code number. This combination of classification and coding should do away with long, unwieldy written descriptions and at the same time provide a full and unambiguous identification. Such a coding system is essential for the operation of a computer-based inventory system. In general terms a material inventory system should observe certain principle, in terms of: (a) simplicity (b) brevity (c) flexibility (insertion and deletion of inventory items) (d) unambiguity Example 3.1: Inventory Item Code 1st digit : Main class 1 Raw material 2 Consumable material 3. Component 4 Sub-assembly etc. 1 Metal 2 Glass 3 Plastic etc. 1 Sheet 2 Tube 3 Moulding 4 Casting etc. 1 Steel 2 Iron 3 Copper 4 Brass etc. 01 = 1 mm 06 = 6 mm etc. 03 = 3 cm 25 = 25 cm etc. 036 = 36 cm 210 = 210 cm etc.
4.
2nd digit
Sub-class
3rd digit
Group within sub-class
4th and 5th digits :
Type of material
Thickness in m.m.
Width in c.m.
10 - 12th digits
Length in c.m.
So, for example: Code 11203 0450150 is 'A raw material, Copper tube 4 mm x 50cm x 150cm' End of Example 3.1
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Our mnemonics on the following three screens may help jog your memory if required: LOAD UP SACKS SMART SHALE 5. - the principles of an efficient stores layout - the advantages of using sub-stores - the disadvantages of using sub-stores
Information on quantities held For each type of material in the store, there will be a Bin Card maintained. A typical Bin Card is very similar to the Inventory Ledger Accounts shown later in the tutorial, except that a bin card is normally maintained in quantity terms only. The pricing of issues is carried out by the Costing Department using the Stores Ledger Account. At any time, the balance appearing on the bin card should reflect the physical quantity of material available for issue.
6.
Safeguading of materials All materials must be adequately stored in such a way that they are appropriately protected against: (a) (b) (c) (d) (e) fire rust and corrosion theft deterioration effects of weather
7.
Efficient use of storage space The most appropriate method of storage should be used for the material concerned, e.g. bins, shelves, pallets, etc. As much use as possible should be made of vertical space whilst still keeping materials conveniently available. Where mechanical handling equipment, e.g. fork-lift trucks, is used, there should be clearly marked passageways which should be kept clear at all times. Work study techniques can be used to good effect in the design stage of a new store or as an special analysis of an existing store layout. Congested stores, harassed store staff, long queues at the counter are all indications of lack of stores effectiveness. Valuable time can be lost if there is delay in people being served at a store and this increases costs.
Inventory Control
Control can be effected by the calculation and use of the following for each material item: re-order quantity (ROQ) re-order level (ROL) maximum inventory level minimum inventory level average inventory level/investment inventory turnover ratio 1. Re-order quantity (ROQ) This is the amount that should be ordered from the supplier when the inventory falls to the ROL. This quantity is determined after consideration has been given to: quantity discounts for quantity order (bulk -orders) storage and associated 'inventory holding' costs ordering costs.
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Efficient stores layout

The principles involved in the design of an efficient stores layout are detailed in the following mnemonic.
L O A D
Labelling of bins and racks to ensure quick and accurate identification of stock items. Older stocks which need to be issued first (physical first in first out (FIFO) issue) need to be rotated to the front of the stored materials. Assessment of the quantity in hand needs to be facilitated. For example bulk materials can be packed in smaller units thus allowing ease of stock count. Disposal of out-of-date, redundant or not required stock is required. Such stock items should be segregated until disposal occurs.
U P
Use should be made of the height of the ceiling. This will save storage space and associated occupancy costs. Pallets should be used where possible, particularly for storing heavy stock items. This will facilitate the use of fork-lift trucks.
S A C K S
Slow-moving stock can be stored in close-pack and railed racks which enable relatively quick access to items stored on the racks at the rear. Arrange stock so that material handling equipment, such as fork-lift trucks, is able to gain easy access at any point. Close proximity of stocks items to the point where they are commonly used increases the efficiency of stock issuing. Keep stock packed in units of issue, for example a particular item may be issued in quantities of a dozen at a time. Security of stock is essential, and is achieved by the use of restricted access, security fencing/walls, locks etc.
Memory jog:
Storekeepers often have to
LOAD UP SACKS
and this should be done as efficiently as possible.
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Advantages of using raw materials sub-stores

Some organisation have a policy of using sub-stores which may, or may not, be part of a storage system that includes a central store. Materials of technical complexity or of small value but with rapid turnover would probably be stored close to the point of production. The advantages of having localised sub-stores in addition to the main central store are as follows:
S M A R T
Speed of issue is quicker. The need-issue-usage cycle is much shorter and the increased efficiency might reduce production downtime. Meets the needs of just-in-time (JIT) planning and operating systems. With JIT, materials are usually delivered (by external suppliers) directly to the point of manufacture. Advanced planning is facilitated, such as batching materials or components for manufacture, or by identifying unexpected purchase needs . Reduces the cost of internal transport in terms of labour costs and the depreciation of materials handling equipment. Technical expertise is on hand to deal with materials which have special storage needs, such as the need for certain chemicals to be maintained in a cool condition.
Memory jog: Remember, in some situations it is stores.
SMART
to use sub-
Actions will be judged according to intentions. Muhammad (A.D. 570? 632) The Sayings of Muhammad, 1. Abdullah Al-Suhrawardy, 1941
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Disadvantages of using raw materials sub- stores

The potential disadvantages of using sub-stores, compared with using a main store, are:
S H A L E
Supervision of storekeepers and store documentation is more difficult. Higher numbers of staff are involved in the work of stores thus increasing indirect labour costs. Audit of stores records (e.g. stock counts) is more difficult. Larger stock holding, because of an increased number of safety stock buffers, increase the working capital investment costs. Exacerbates (increases) the problem of stock security - theft, damage, etc.
Memory jog: Remember distilled from shale.
SHALE
is a material. Shale-oil is oil
We do as we are; we become as we do. Saying
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It is possible to calculate an Economic Order Quantity (EOQ) by mathematical means, and we will look at this next. (a) The aim is to minimise the total materials cost The aim of the EOQ calculation is to minimise the total materials cost which is calculated as: Total materials cost in a period = Cost of purchases + Cost of holding inventory + Ordering cost (b) Assumptions used in the formula The EOQ formula is based on the following assumptions: (i) (ii) (iii) (iv) (v) (vi) constant purchase price constant demand even usage constant lead time fixed cost for each order placed holding costs are proportional to average inventories
(c) The formula EOQ is calculated from the following formula: Q where: Q Co D Ch = = = = = 2CoD Ch economic order quantity costs per order period demand (in units) cost of holding one unit in inventory for the same period (often includes an element of cost of capital)
(d) The logic of the EOQ formula The total inventory cost = Holding cost + Order cost The two separate costs increase and decrease inversely with each other. For example, if the holding cost increases because of the volume of order then the order cost will decrease. Mathematical logic shows, that because of this relationship, the total inventory cost occurs when the two separate costs are equal, thus: Our mnemonics on the following two screens may help jog your memory on what costs are incurred holding inventory and the costs of acquiring inventory. DO LOSE RIP the costs associated with holding inventory the costs of acquiring inventory.
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The costs of holding inventory

The costs associated with holding inventory (sometimes called carrying costs) include the following:
D O
Depreciation of capital equipment used in stores work, such as fork-lift trucks, pulley systems, cranes, conveyor belts. Occupancy costs, such as rents, rates, heating, air-conditioning,
L O S E
Labour costs of storekeeping, and the cost of stores management. These are overhead costs. Opportunity cost of the funds tied up in the stock investment. (The funds could otherwise be used to reduce bank overdraft, or be invested in short-term securities.) Security and protection costs, perhaps including the maintenance of chemical stability and the turning of inventory, etc. Evaporation, stock deterioration and other stock damage, as well as loss of monetary value due to obsolescence.
Memory jog: Firms holding costs.
DO LOSE
profit because of incurring stock
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Costs of acquiring inventory (purchase-order costs)

Activities associated with an order of stock on which costs are incurred include the following:
R I P
Receiving inventory - inspecting and dealing with the inventory received. Inward delivery costs - transport costs, insurance, etc. Purchase order costs - the variable costs incurred by the purchasing staff involved in ordering and chasing supplies.
Memory jog: Such costs can
RIP,
into a companys profits!
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EOQ is when : Cost of holding = = cost of ordering Q x Ch 2 D x Co Q
Cost of holding
Cost of ordering
Thus : Q x Ch 2 = 2CoD Ch
Activity 3.1 A large local government authority places orders for various stationery items at quarterly intervals. In respect of an item of inventory coded S218, data are: - annual usage 2,500 boxes - cost per box $8 Usage of material is on a regular basis and on average, half of the amount purchased is held in inventory. The cost of storage is considered to be 25% of the inventory value. The average cost of placing an order is estimated at $25. The chief executive of the authority has asked you to review the present situation and to consider possible ways of effecting cost savings. You are required to: (a) tabulate the costs of storage and ordering item S218 for each level of orders from four to twelve placed per year; (b) ascertain from the tabulation the number of orders which should be placed in a year to minimise these costs; (c) produce a formula to calculate the order level which would minimise these costs - your formula should explain each constituent part of the formula and their relationships; (d) give an example of the use of the formula to confirm the calculation in (b) above; (e) calculate the percentage saving on the annual cost which could be made by using the economic order quantity system; (f) suggest two other approaches which could be introduced in order to reduce the present cost of storage and ordering of stationery.
End of Activity 3.1

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Activity 3.1: Answer (a) TABLE Average inventory
Number of orders
Number of boxes per order
Boxes
Value at $8 per box $
Storage cost at 25% of inventory value $ 625 500 417 357 313 278 250 227 208
Cost of ordering
Total cost
$ 100 125 150 175 200 225 250 275 300
$ 725 625 567 532 513 503 500 502 508
4 5 6 7 8 9 10 11 12
625 500 417 357 313 278 250 227 208
312.5 250.0 208.5 178.5 156.5 139.0 125.0 113.5 104.0
2,500 2,000 1,668 1,428 1,252 1,112 1,000 908 832
(b) (c)
From the tabulation above, 10 orders for 250 boxes should be placed. There are several different formula which could be given as the answer to this part of the question, therefore, the following should be regarded as one of the possible answers. Continues
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Activity 3.1: Answer Continues

EOQ = 2CoD PCh
where
D = annual demand in units Co = cost of an order Ch = cost of storage as a percentage of value P = price
Mathematical relationships : Annual ordering cost can be formulated : CoD Q where Q is the re - order quantity Annual storage cost can be formulated : QPCh 2 The optimal re - order quantity will occur when cost of holding is equated with cost of ordering material i.e. where CoD Q Therefore : Q = 2CoD PCh = QPCh 2
(d)
EOQ
2 x 2,500 x 25 8 x 0.25 125,000 2 62,500 250
= =
Continues
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Activity 3.1: Answer Continues (e) Assuming the authority places four orders for 625 boxes on each order, the total costs from the tabulation in (a) above are $725 but if this were changed to 10 orders per year for the economic order quantity of 250 boxes per order, the resultant annual savings would be: $725 - $500 225 x 100 725 (f) = $225
= 31.034%
If orders increase from 4 to 10 per year, some of the savings achieved by the authority will be at the expense of the supplier, who may have to shorten production run or need to carry larger inventories. An approach could be made by asking the supplier to consider quantity discounts if larger orders were placed; this could result in savings equal to the cost reduction gained by the more frequent deliveries. An analysis of usage could be undertaken - many users of the stationery might draw excessive amounts of stationery to keep in their private desks or in unauthorised sub-stores. A limit on internal issue quantities could be introduced which could lead to lower inventories being held, for example, average inventory could be 25% of the order quantity instead of 50% of the order quantity. The above are two other approaches which could be introduced in order to reduce the present cost of storage and ordering of stationery.
End of Answer for Activity 3.1
Activity 3.2 Tiger Golfing Goods shop buys golf balls at $30 per dozen from its supplier. Tiger Golfing Goods wills ell 40,000 dozen balls evenly throughout the year. The shop desires an 11% annual return on investment on its inventory (i.e. $3.30 per dozen balls). In addition, rent and insurance for each 100 dozen golf balls in inventory is $6 per year. The order cost is $8. Calculate the shops economic order quantity to the nearest dozen golf balls. End of Activity 3.2
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Activity 3.2: Answer EOQ = 2 x $8 x 40,000 $6/100 + (0.11 x $30) 262 dozens
(e) The economic batch quantity When an organisation manufactures its own inventory items in batches, it will produce a supply of the items as a batch quantity. The economic batch size is then the quantity that minimises the combined total of the costs of inventory-holding and the cost of setting up the batch for manufacture. Note, the cost of setting up the batch replaces the normal order cost for external supplies. The formula used is similar to that of the EOQ we have already discussed, except that when inventory is manufactured internally in a batch, units of the inventory item can start to be delivered into stores before the batch production run has been completed. The first units of the batch will therefore be delivered into stores before the final units have been manufactured, and these units can be used immediately. The average inventory level is therefore not Q/2, because this is the average inventory level when the maximum inventory level is Q. With internal batch production, the maximum inventory level is just: Maximum inventory level = Q(1 - D/R) where: Co = Fixed costs per batch R = the rate at which inventory can be manufactured (replenishment rate) With the other variables being notated in the same way as the EOQ model, the economic batch quantity is therefore: EBQ = 2CoD Ch(1 - D/R)
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Activity 3.3 XYZ Company uses 10,000 of components C each month. It manufactures these components itself, and can produce them at a rate of 480,000 components per year. The cost of holding a unit in inventory for one year is $6, and the cost of ordering and setting up a batch production run for component C is $4,200. Calculate the economic batch quantity for component C. End of Activity 3.3
Activity 3.3: Answer = 2CoD Ch (1 - D/R)
EBQ
Thus : = 2 x 4,200 x (12 x 10,000) 6(1 - [(12 x 10,000) / 480,000]) 1,008,000, 000 4.5 14,967 components
= =
(f)
The effect of quantity (bulk-buying) discounts When a company has the opportunity to accept a quantity discount from its supplier it becomes necessary to calculate whether the discount is economically worthwhile. The technique involves THREE steps: (i) (ii) (iii) calculate total cost at EOQ calculate total cost at the level where the discount sets in select minimum cost
(Take care, if the cost of holding (Ch) depends on purchase price.)
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Activity 3.4 Demand for one of X companys products averages 1,000 per month. It costs $60 each time a delivery of goods is received and $4 to store a unit for a year. Each product uses a unit of raw material that costs $2 to buy in from the supplier, who offers a 5% discount for orders of 1,000 units of raw material, or more. How many units of raw material should the company now order at a time to minimise total costs? End of Activity 3.4
Activity 3.4: Answer Step 1: Calculate the EOQ without the discount 2 x $60 x (12 x 1,000) $4 600 units
EOQ
Step 2: Calculate the total purchase and stocking cost with Q = 600 units Holding cost = Ordering cost = Cost of purchases = Total cost Q/2 x Ch = 600/2 x 4 D/Q x Co = [(60 x 12,000) / 600] 12,000 x $2 = = = $ 1,200 $ 1,200 $ 24,000 $ 26,400
Step 3: Calculate the total purchase and stocking cost with Q = 1,000 units Holding cost = Ordering cost = Cost of purchases = Total cost Q/2 x Ch = 1,000/2 x 4 = D/Q x Co = [(60 x 12,000) / 1,000] = 12,000 x $2 x 0.95 = $ 2,000 $ 720 $ 22,800 $ 25,520
Conclusion The discount offers an annual savings in cost of $880. Hence the company should order 1,000 units at a time. End of Answer for Activity 3.4
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2.
Re-order level (ROL) This is the level to which inventory is allowed to fall before an order for further supplies is placed. In setting this level, consideration is given to the maximum daily or weekly use, and the maximum lead time. (Lead time is the period which elapses between placing and order and actually receiving the item in inventory). The formula is: ROL = maximum usage (say per day) x maximum lead time (days) Both the usage and lead time must be expressed using the same time-scale.
3.
Maximum inventory level This is the largest quantity of a material which should ever be held. It gives an idea of how much storage space, shelves, bins etc. may be required. It must never be exceeded without management permission. The formula is: Maximum inventory level = ROL + ROQ - (minimum usage x minimum lead time)
4.
Minimum inventory level This level is lower than the ROL. On a material reaching the minimum inventory level, the order that has been placed at the ROL should be 'progress' (chased up). If short-term delivery is confirmed by the supplier, there is no problem. If there is an exceptional delay, an alternative source of material supply should be found quickly to ensure that a inventory-out does not arise. The formula is: Minimum inventory level = ROL - (average usage x average lead time)
5.
Average inventory level/investment This can be calculated in quantity terms as follows: Average inventory level = minimum inventory level + 0.5ROQ If it is required in financial terms then it is only necessary to multiply the average inventory level by the cost per unit of the material.
All mankind is divided into three classes the immovable, the moveable, and those who move. Arab saying
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Activity 3.5 Two materials, P and Q, are used in a company. Details of the materials are: Maximum usage Average usage Minimum usage : : : 600 kg per week 400 kg per week 200 kg per week P 2,000 kg Q 2,500 kg P 6 8 weeks Q 4 6 weeks
Re-order quantity :
Lead time
You are required to calculate for each material: (a) (b) (c) (d) Re-order level (ROL) Maximum inventory level Minimum inventory level Average inventory level
End of Activity 3.5
Activity 3.5: Answer (a) ROL = maximum usage x maximum lead time P: Q: 600 x 8 600 x 6 = = 4,800 kg 3,600 kg
(b) Maximum inventory level = ROL + ROQ - (minimum usage x minimum lead time) P: Q: 4,800 + 2,000 - (200 x 6) 3,600 + 2,500 - (200 x 4) = = 5,600 kg 5,300 kg
(c) Minimum inventory level = ROL - (average usage x average lead time) P: Q: 4,800 - (400 x 7) 3,600 - (400 x 5) = = 2,000 kg 1,600 kg
(d) Average inventory level = minimum inventory level + 0.5ROQ P: Q: 2,000 + (0.5 x 2,000) 1,600 + (0.5 x 2,500) = = 3,000 kg 2,850 kg
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Activity 3.6 Demand for one of X Company's products, Product N, averages 10,000 per month. Product N requires 2 kilogrammes of material M. Each kilogramme of material M costs $2 to buy in from the supplier. The supplier's lead-time is between one and three weeks, but on average delivers in 2 weeks. Daily usage of material M can range between 600 kgms and 1,000 kgms, but on average is 900 kgms. The cost of storage is 15% per annum of inventory value and it costs $100 each time a purchase is placed. The company works a five-day week. The supplier has just offered a 1.5% discount on purchases for orders placed of 20,000 kilogrammes of material M, or more. You are required to answer the following five questions. All answers should be rounded to the nearest kilogramme or $. 1. The economic order quantity (ignore the discount offer) is A 12,629 B 12,649 C 12,669 D 12,689 The reorder level is A 13,000 kgms B 14,000 kgms C 15,000 kgms D 16,000 kgms The minimim inventory level is A 6,000 kgms B 6,200 kgms C 6,400 kgms D 6,600 kgms The maximum inventory level is A 24,349 B 24,449 C 24,549 D 24,649 By taking the discount the total annual cost of material would A increase by $6,839 B reduce by $6,839 C increase by $6,439 D reduce by $6,439
2.
3.
4.
5.
End of Activity 3.6
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Activity 3.6: Answer 1. B Economic order quantity EOQ = 2CoD Ch 2 x $100 x (12 x 10,000 x 2) $2 x 0.15 2 x $100 x 240,000 0.3 160,000,00 0 12,649 kgms
= = 2. C Reorder level ROL = = = 3. A
Maximum lead-time (weeks) x Maximum usage per week 3 x (1,000 x 5 days) 15,000 kgms
Minimum inventory level ML = = = ROL - Average lead-time (weeks) x Average usage per week 15,000 - (2 x (900 x 5)) 6,000 kgms
4.
D Maximum inventory level ML = = = ROL + EOQ - (Minimum lead-time (weeks) x Minimum usage per week) 15,000 + 12,649 - (1 x 600 x 5) 24,649 kgms continues
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Activity 3.6: Answer continuation 5. B EOQ with discount (i) Total annual cost without the discount: Order quantity - 12,649 kgms $ Cost of supplies: 10,000 units x 12 months x 2 kgms x $2 = 480,000 Cost of holding inventory: Q/2 x CH: 12,649/2 x $2 x 0.15 = 1,897 Cost of ordering inventory: D/Q x Co: (10,000 x 12 x 2) / 12,649 x $100 = 1,897 Total annual cost 483,794
(ii) Total annual cost with the discount: Order quantity - 20,000 kgms Cost of supplies: 10,000 units x 12 months x 2 kgms x $2 x 0.985 Cost of holding inventory: Q/2 x CH: 20,000/2 x $2 x 0.15 x 0.985 Cost of ordering inventory: D/Q x CO: (10,000 x 12 x 2)/20,000 x $100 Total annual cost $ = 472,800 = = 2,955 1,200 476,955
Conclusion Taking advantage of the discount and setting the order quantity at 20,000 kgms reduces the total annual cost by $6,839 ($483,794 - $476,955). The discount is recommended. End of Answer for Activity 3.6 The limitations of using the EOQ model is shown in our mnemonic SHOVE on the next screen. 6. Inventory turnover ratio If this ratio is calculated regularly, it will indicate any trends in material usage. It can be calculated as follows: Inventory turnover percentage = Quantity issued in the period Average inventory level in the same period
The calculation of the inventory turnover ratio should help to: (a) (b) (c) validate the ROQ, ROL and other inventory levels, highlight obsolete inventory (inventory having no further use), and highlight dormant inventory (inventory of no immediate further use).
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Problems when using EOQ formula

Q = 2COD Ch , is based on minimising the total cost of storage
The economic order quantity (EOQ),
holding and the ordering/acquisition of materials. However, there are problems associated with the use of the formula.
S H O V E
Suppositions are simplistic, for example the assumption that there is no buffer stock and that average stock held would therefore be Q/2 is difficult to accept in practice. Holding costs are difficult to calculate and these are assumed to be constant throughout the forecast period. For example, holding costs include the opportunity cost of capital tied up in the stock investment and the rate is difficult to predict. Order costs may also be difficult to calculate in advance. Value (or benefit) of discounts for quantity (large-lot) purchases is not reflected in the equation. Calculations which assess the benefits of quantity discounts need to be dealt with separately. Even consumption, and thus steady-rate purchases, of materials is assumed. This is unlikely in practice.
Memory jog: Use word association here. The problems of using this formula might make managers SHOVE it to one side and deal with purchasing decisions in other ways.
Well done is better than well said. Benjamin Franklin (1706 1790) Poor Richards Almanack.
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Activity 3.7 Material X has been monitored for two periods and the following results obtained: January - March 160,000 40,000 April - June 120,000 40,000
Issues (kilos) Average inventory level Required:
(a) Calculate the inventory turnover ratio (b) State your conclusions concerning the figures used. End of Activity 3.7
Activity 3.7: Answer (a) Inventory turnover ratio: January - March April - June (b) Conclusions: Even though the usage has reduced, no action has been taken to reduce the ROQ. We know this because the average inventory level is the same. An investigation is required to ensure that the ROL, Maximum inventory level, Minimum inventory level and ROL are still appropriate top the reduced level of production. End of Answer for Activity 3.7
= 25% = 33%
Issuing and pricing

1. There are two aspects There are two aspects to issuing materials from inventory: (i) (ii) 2. The actual issuing of the materials from stores. The pricing of the issues, which have been made, by the Costing Department.
Issuing from stores (a) The control of issues of materials to production should be effected by the use of Stores Requisitions (sometimes called Material Requisitions). These should only be accepted by the store-keeper if they have been properly authorised by a responsible person, e.g. a foreperson or supervisor.
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(b)
An effective system of storekeeping will ensure that materials are always issued on a FIFO (first in, first out) basis. This should result in the oldest inventory being used up first. This method of issuing physical inventory must not be confused with the FIFO method of pricing which will be covered in due course. Notes: (i) Any returns to store should be documented by using a Stores Returns Note (or Materials Returns Note). This will show the quantity and code number of the material and the job for which the materials were originally issued. Any transfer from one job to another should be recorded on a Materials Transfer Note. This will ensure that the job giving up the materials is relieved of the cost and the job receiving the materials is charged with the cost. The stores, of course, will not be involved in the transaction since the material issue has already been recorded.
(ii)
Inventory recording and inventory-taking

1. Perpetual Inventory In order to use control levels effectively it is necessary to know the inventory levels at any time. A system of Perpetual Inventory records shows all receipts, issues and balances for each line of inventory, often using inventory ledger records of the type discussed previously in this tutorial. The perpetual inventory system may also give inventory values and will give details of control levels (such as reorder, maximum and minimum levels) and other related information. Continuous inventory-taking A system of control cannot be regarded as efficient unless the physical inventory-holding agrees with the inventory balance shown in the accounting records. To ensure that this is achieved, the regular checking of inventory-holding against the records is often used. The personnel selected for the inventory-taking team should be of the highest integrity and should be responsible to the Financial Controller or Senior Internal Auditor (if the enterprise operates an internal audit system) and not someone connected with the stores. The audit or checking programme should be designed to ensure that a pre-selected number of items is fully checked each day. The stores staff should have no prior knowledge of the particular items which are to be checked each day. This system is known as 'Continuous Inventory-taking' with each item in the store being checked at least once each year. Continuous inventory-checking should not be confused with Perpetual Inventory; continuous inventory-checking is used to confirm that the perpetual inventory system is operating efficiently.
2.
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Accounting for materials

1. Documents used The following documents are typical in a materials costing system: (a) (b) (c) (d) (e) (f) Purchase invoices are used to write up the accounts payable ledger accounts. Purchase invoices are also used to write up the stores ledger. Purchase day-book totals are used to write up the control totals. Materials requisitions are used to write up the stores ledger accounts. Materials requisitions for direct materials are used to write up job (or process) work-in-progress accounts. The stores day-book summarises the materials requisitions. The total issues of direct materials are posted to the work-in-progress ledger control accounts and the total issues of indirect materials are posted to the overhead control account.
2.
The flow of accounts The flow of accounts used in the materials costing system is shown in Figure 3.5.
Materials and inventory reports

Regular reports should be prepared to indicate the effectiveness and efficiency (or otherwise) of materials and inventory. These will include: (a) (b) (c) (d) (e) inventory turnover report comparison of material costs with output slow moving inventory reports dormant inventory reports inventory losses reports
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Purchase invoices might be dealt with through a computer inter-change system (electronic invoicing) but the update and payment system is the same as used in a manual system
Material (store) requisitions are raised by production staff and provide stores staff with the authority to issue materials, and the cost accountant with information for posting to accounts using job/ departmental codes
Work-in-Progress Ledger (Job or process ledger accounts)
ACCOUNTS PAYABLE LEDGER ACCOUNTS PURCHASE INVOICES
INVENTORY LEDGER ACCOUNTS MATERIAL (STORE) REQUISITIONS
Accounts Accounts Payable Payable Ledger Ledger a/c Control A/c
Inventory Inventory Ledger Ledger Control A/c Control a/c Purchase Day-book total
Stores Day-book total
Direct costs
Work-inWork-in-progress Progress Ledger Ledger Control a/c Control A/c
Indirect costs
Overhead Cost Ledger Cost Ledger a/c Control A/c
The day-book logic is usually maintained in a computer system although the logic structure of the computer system is not transparent to the user.
Figure 3.5: Cost accounting for materials
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The tutorial has dealt with the following topics and concepts:
Summary of the tutorial

Coverage 1. 2. 3. 4.
The tutorial has dealt with the following topics and concepts:
Main topic
1 Introduction to materials element of costs.
2 3
Ways by which materials are issued, ordered and received. Procurement of materials.
4.
Storage
Utilisation of stock Inventories are an investment The need for flexibility Benefits of holding high inventories of raw materials 5. Balance between costs and benefits 6. Inventory control. 7. Features of an effective system of inventory control. A discussion of the materials purchase cycle (diagram provided). 1. The Purchase Requisition. 2. The Purchase Order. 3. Receiving orders. 1. Objectives of effective inventorykeeping. 2. Speedy receipt and issue of materials. 3. Fast location of materials. 4. Full identification of materials. 5. Information on quantities on quantities held. 6. Safeguarding of materials. 7. Efficient use of inventory space. 1. Re-order quantity (ROQ) (including the assessment of quantity discounts) 2. Re-order level (ROL) 3. Maximum inventory level 4. Minimum inventory level 5. Average inventory investment 6. Inventory turnover ratio 1. There are two aspects. 2. Issuing from stores. 1. Perpetual inventory. 2. Continuous inventory-taking. 1. Documents used. 2. The flow of accounts. General discussion.
5.
Inventory Control
6. 7. 8. 9.
Issuing and pricing Inventory recording and inventory-taking Accounting for materials Materials and inventory reports
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ACCA Paper F2 Management Accounting
Diagnostic Test: Materials and inventory control

Computer-based Assessment: Questions
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Question 1 A company determines its order quantity using the basic economic order quantity model. If the cost of ordering a batch of materials increases, how will this affect the economic order quantity (EOQ) and annual inventory holding costs (Ch)? EOQ Ch Cost A Higher Higher B Higher No effect C Lower Lower A D Lower No effect Question 2 The EOQ (Economic Order Quantity) model is used to minimise A B C D costs associated with stock-outs inventory ordering costs inventory holding costs the sum of inventory ordering and holding costs
Question 3 Holderco Company uses the standard EOQ model for controlling its investment in inventory. The annual demand for one product so controlled has just increased by approximately 20%. What will be the effect on the rate of inventory turnover (annual demand divided by average inventory)? A B C D Decrease by 20% Decrease by 9.5% Increase by 20% Increase by 9.5%
Question 4 A company has correctly calculated its economic order quantity as 800 units, but management would prefer to order in batches of 700 units. How will the company's total purchase order cost (Co) and total inventory holding cost (Ch) change if the economic order quantity is altered from 800 to 700 units? Co Cost Lower Lower Higher Higher Ch Cost Higher Lower Higher Lower
A B C D
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Question 5 If the economic order quantity model is employed, what will be the effect of increasing the re-order level? There will be a decrease in A holding costs B stock-out costs C the total of holding and order costs D order costs Question 6 A company requires 20,000 units of a certain component every year. The purchase price per unit is $40 and it costs $64 to place and receive delivery of an order irrespective of its size. The company's cost of holding inventory is 10% of inventory value per annum. The company currently places orders for 800 units, although a discount scheme for larger units exists which work as follows: Minimum order quantity 1,000 4,000 8,000 Discount rate 1% 2% 3%
What size of order should the company place if its aim is to minimise costs? A B C D 800 units 1,000 units 4,000 units 8,000 units
Question 7 Which one of the following may be thought of as a inventory holding cost? A B C D Disruption of production schedules Loss of customer goodwill Shipping and handling costs Inventory obsolescence
Question 8 Annual demand for an item is 10,000 units and ordering costs are $50 per order. The cost of holding inventory is 10% per annum of the purchase price which is currently $10 per item. The economic order quantity is 1,000 units but the supplier offers a discount of 2% on orders for 2,500 or more items at a time. Accepting the discount opportunity and ordering 2,500 items will cause total annual costs to: A B C D increase by $450 increase by $425 decrease by $1,550 decrease by $1,575
A
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Question 9 In the formula Q = 2CoD/Ch, if Co = $50, D = 40,000 and Q = 1,000, then Ch is closest in value to: A B C D $4.00 $4.10 $4.80 $5.00
Question 10 The demand for a product is 18,750 units for a three month period. Each unit of product has a purchase price of $22.50 and ordering costs are $30 per order placed. The annual holding cost of one unit of product is 15% of its purchase price. What is the Economic Order Quantity (to the nearest highest unit)? A B C D 1,282 1,175 1,138 1,155
Question 11 A company determines its order quantity for a raw material by using the Economic Order Quantity (EOQ) model. What would the effects on the EOQ and the total annual holding cost of a decrease in the cost of ordering a batch of raw material? EOQ Higher Higher Lower Lower Total annual holding cost Lower Higher Higher Lower
A B C D
Question 12 A company uses the Economic Order Quantity (EOQ) model to establish reorder quantities. The following information relates to the forthcoming period: Order costs = $37.50 per order Holding costs = 10% of purchase price = $6 per unit per annum Annual demand = 20,000 units Purchase price = $60 per unit No safety inventories are held. What are the total annual costs of inventory (i.e. the total purchase cost plus total order cost plus total holding cost)?
A
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A B C D
$1,215,000 $1,201,500 $1,203,000 $1,204,500
The following information is to be used for questions 13 and 14. A local supermarket inventories a popular tin of vegetables for which the following information is available: Average usage: Minimum usage: Maximum usage: Replenishment lead time: Re-order quantity: Question 13 Based on the data above, at what level of inventories should a replenishment order be issued? A B C D 3,500 3,800 2,950 3,220 280 tins per day 180 tins per day 350 tins per day 6-10 days 2,000 tins
Question 14 Based on the data above, what should be the maximum level of inventory possible? A B C D 2,800 4,400 4,420 5,280
Question 15 Which of the following procedures would not be regarded as an aspect of inventory control? A B C D Forecasting demand for inventory items Protecting stores from theft and damage Determination of reorder levels Deciding when and how much of a inventory item to order
Question 16 A routine check of inventory records shows that the current inventory level of item 12788 is over 1.5 times the maximum that has been set for it. Any of the following might be causes for this high inventory level EXCEPT A B C D an error in the quantity of the item delivered in the month an error in the re-order quantity for the item a reduction in the usage rate for the item an increase in the supply lead time for the item
A
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The following data refers to Questions 17 - 20 The following data relates to an item of raw material that is used by PRQ Company. Cost of raw material Normal usage per week Maximum usage per day Minimum usage per day Minimum lead time Maximum lead time Cost of ordering material, per order Annual cost of holding inventory, as a % of cost A year consists of 48 weeks. Question 17 The economic order quantity for the raw material is A B C D 2,191 units 2,500 units 4,899 units 5,000 units $20 250 units 66 units 40 units 10 days 20 days $400 10%
Question 18 The re-order level is A B C D 1,320 units 525 units 3,111 units 2,191 units
Question 19 The maximum inventory level for the raw material is A B C D 3,625 units 4,218 units 3,111 units 2,191 units
Question 20 The minimum inventory level for the raw material is A B C D 715 units 525 units 425 units 650 units
A
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Question 21 The following details relate to component 1256 Maximum usage per day Minimum usage per day Maximum lead time Minimum lead time Ordering cost Inventory holding cost Annual demand 10 units 4 units 5 days 3 days $50 per order $2 per item per year 1,750 units
The budget for December is currently being revised to take account of these details. The inventory is budgeted to be 170 units on 1 December, and the production manager has requested that the inventory be at maximum on 31 December. Assuming that the usage of this component is expected to be 140 units during December, the number of units to be purchased during December is closest to A B C D 296 units 304 units 334 units 350 units
Question 22 CAS Premier Company uses 90,000 units of product C every year. It manufactures units of C internally, and can produce them at a rate of 360,000 units per year. The cost of holding a unit of C in inventory for one year is $4, and the cost of ordering and setting up a batch production run for C is $3,038. The economic batch quantity for product C, to the nearest $ is A B C B 13,301 13,401 13,501 13,061
Question 23 Which of the following statements are correct? (i) (ii) (iii) (iv) The opportunity cost of funds invested in inventory is interest paid for bank overdraft or interest foregone on short-term yield bearing securities. The cost of holding inventory and the cost of acquiring inventory both increase when an organisation increases the order quantity of a material. Possible future obsolescence of inventory is not taken into account in the economic order quantity (EOQ) formula. Depreciation of capital equipment used in stores work does not affect cash flow and is therefore not considered relevant when the economic order quantity (EOQ) is calculated.
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A B C D
(i) only (i) and (ii) only (i), (ii) and (iii) only (i), (ii) and (iv) only
Question 24 Which of the following statements are correct? (i) The cost of holding stock over a period is calculated as 2Q x ch. (ii) The cost of acquiring stock over a period is calculated as D/Q x Co. (iii) The total cost of purchasing material over a period is calculated as: D x p. (iv) The total cost of using material over a period is calculated as: Purchase cost + holding cost acquisition cost. (The reason why the acquisition cost is subtracted is because it changes inversely with the change in holding cost.) Where: Q Ch D Co p = = = = = Quantity of purchase Cost of holding one item of inventory for a period Demand over the same period Cost of one order Price of one item of material.
A B C D
(i), (ii) and (iii) only (ii) and (iii) only (ii), (iii) and (iv) only (i), (ii), (iii) and (iv)
Question 25 The purchase price of an inventory item is $12.50 per unit. In each three month period the usage of the item is 10,000 units. The annual holding costs associated with one unit equate to 6% of its purchase price. The cost of placing an order for the item is $10. What is the Economic Order Quantity (EOQ) for the inventory item to the nearest whole unit? A B C D 253 516 824 1,033
Question 26 Newington Company always determines its order quantity for a raw material by using the Economic Order Quantity (EOQ) model. What would be the effects on the EOQ and the total annual holding cost for a decrease in the cost of ordering a batch of raw material? EOQ Annual holding cost A Lower Higher B Lower Lower C Higher Lower D Higher Higher
A
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+AddVance
Route map
Screen Number Introduction, management, finance and accountancy Diagnostic Test Costing principles, cost classification and cost behaviour Diagnostic Test Materials and inventory control Tutorial 3 Only Tutorial 3 is hyperlinked for this Free Sample Diagnostic Test Labour costs and direct expenses Tutorial 4 Diagnostic Test Overhead costs Tutorial 5 Diagnostic Test Marginal costing Tutorial 6 Diagnostic Test Cost accounting Tutorial 7 Diagnostic Test Methods of costing Tutorial 8 Diagnostic Test Cost-volume and break-even analysis Tutorial 9 Diagnostic Test Relevant costing Tutorial 10 Diagnostic Test 391 407 439 355 371 294 298 269 278 241 255 194 208 28 54 59 93 108 146 160
Tutorial 1
Tutorial 2
The Contents continue on the next screen
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+AddVance
Route map
Screen Number Linear programming Tutorial 11 Diagnostic Test Budgets and budgetary control Tutorial 12 Diagnostic Test Standard costing Tutorial 13 Diagnostic Test Business mathematics and spreadsheets systems Diagnostic Test 537 549 590 604 617 475 485 455
Tutorial 14
Trust in Allah, but tie your camel first. Arabic proverb
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The computer-based examination
ACCA Paper F2 Management Accounting:

The syllabus is assessed by a two hour paper-based or computer-based examination. Questions will assess all parts of the syllabus and will Include both computational and non-computational elements. The examination will consist of 40 two mark questions, and 10 one mark questions.
Formulae Sheet
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Sorry... But that link will not work in this free sample copy. To buy the full Study Text version, complete with all links, for your ACCA F2 studies, please go to www.TonySurridge.co.uk
Dedicated to the Accountancy and Finance Profession
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MAIN PAGE CONTENTS FORMULAE

Paper F2: Management Accounting

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Paper F2: Management Accounting

Paper F2: MANAGEMENT ACCOUNTING Study Textbook

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Paper F2: Management Accounting

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Paper F2: Management Accounting

No snowflake in an avalanche ever feels responsible. Voltaire

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Paper F2: Management Accounting

Tutorial 3 Materials and inventory control

ACCA Paper F2 Management Accounting

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Paper F2: Management Accounting

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Paper F2: Management Accounting

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Paper F2: Management Accounting

Benefits of holding high levels of inventory (stocks)

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Paper F2: Management Accounting

Disadvantages of holding high levels of inventory (stocks)

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Paper F2: Management Accounting

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Paper F2: Management Accounting

Pricing materials to work

MANAGEMENT OF MATERIALS INVENTORY (STOCK) 2

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Paper F2: Management Accounting

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Paper F2: Management Accounting

Figure 3.2 : The materials order-purchases cycle

Inventory records maintained by stores staff in quantity values

Request for replenishment of stock to be ordered when inventory balances require it

PURCHASE REQUISITION PURCHASING OFFICE 3

STOCK LEDGER INVENTORY LEDGER

Request for stock

COPY TO ACCOUNTANT CHASE COPY COPY FOR STORES

STORES REQUISITION STORES 2 STOCK

Used to update inventory ledger records

COPY TO ACCOUNTANT STOCK

LEDGER GOODS RECEIVED NOTE

STORES RECEIPT AND INSPECTION

Tony Surridge Online Limited, 2011

Paper F2: Management Accounting

Received from the Goods Received Department (acts as proof of receipt)

Received from the supplier

GOODS RECEIVED NOTE

DOCUMENTS ARE MERGED

PURCHASE STOCK ORDER COPY LEDGER

THE ACCOUNTANT SCHEDULES PAYMENT

REMITTANCE ADVICE STOCK LEDGER CHEQUE

Figure 3.3 : Purchase Invoice-Payment System

Tony Surridge Online Limited, 2011

Paper F2: Management Accounting

Figure 3.4 : Computer database Purchase Order-Invoice-Payment System

INPUT: ORDER REQUEST

GOODS RECEIPTS SECTION