Inventory, Wastage

8/12/2019 Inventory, Wastage

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COSTING OF APPAREL PRODUCTS

Inventory Wastage and parameters


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MATERIAL CONTROL

the function of ensuring that sufficient goods

are retained in stock to meet all requirements

without carrying unnecessarily large stocks.

Ref: publication of the Institute of Cost and Management Accountants on Budgetary Control

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MATERIAL CONTROL involves indexing buying, receiving, inspection, storing

and paying of the goods

Objective:

Exact quality to be ascertained no interruption

price paid should be the minimum

no over stocking

Wastage and losses while the materials are in store should be avoided as far as possible;

and

Wastage during the process of manufacture should be the minimum possible.

* information about availability of materials and stores should be continuously available so

that production may be planned properly and the required materials purchased in time.

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Requirements of material control Proper co-ordination of all departments involvedviz., finance, purchasing, receiving, inspection,

storage, accounting and payment.

Determining purchase procedureat the most favourable terms to the firm.

Use of standard formsfor placing the order, noting receipt of goods, authorising issue of the materials etc.

Preparation of budgetsconcerning materials, supplies and equipment to ensure economy in purchasing and useof materials.

Operation of a system of internal checkso that all transactions involving materials, supplies and

equipment purchases are properly approved and automatically checked.

Storage of all materials and suppliesin a well designated location with proper safeguards.

Operation of a system of perpetual inventory together with continuous stock

checkingso that it is possible to determine at any time the amount and value of each kind of material in stock.

Operation of a system of stores control and issue

Development of system of controlling accounts and subsidiary records

Regular reports of materials purchased, issue from stock, inventory balances,

obsolete stock, goods returned to vendors, and spoiled or defective units.

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MATERIALS PROCUREMENT PROCEDURE

Receiving purchase requisitions. Control over Buying: maximum,minimum, reorder level and economic order quantities.

Exploring the sources of materials supply and selectingsuitable material suppliers. : price; quantity; quality offered; time ofdelivery; mode of transportation; terms of payment; reputation of supplier; etc.

Preparation and execution of purchase orders.

Receipt and inspection of materials. :: Under every system ofstores organisation, a distinction is made between the function of receiving andstoring, so that each acts as a check on the other.

Checking and passing of bills for payment.

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Control over buying - For control over buying of

regular stores materials it is necessary to

determine their maximum, minimum, reorder

level and economic order quantities, safety

or buffer stock

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MATERIAL ISSUE PROCEDURE Issue of material must be made on the basis

of FIFO (first in first out) In some exceptions LIFO (Last In First Out may be

exercised

Material requisition note

Bill of Material

The surplus material, when it is returned to the storeroom, should be accompanied by a document known

either as a Shop Credit Note or alternatively as a Stores Debit Note

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MATERIAL STORAGE :Cost associated are of

(i) placing order and

(II) Stock keeping cost, Solution; EOQ

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Inventory

Prime Cost = Direct material + Direct Wages + Direct expenses

Material Consumed = Material purchased + Opening stock of material

Closing stock of material.

Cost of goods sold = Total cost of production + Opening stock of Finished

goodsClosing stock of finished goods

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INVENTORY CONTROL

The main objective of inventory control is to achieve maximum efficiency

in production and sales with the minimum investment in inventory.

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Different classes of stores:central or main stores, sub-stores and

departmental stores

Stores location

Stores layout: Each place (for example, a drawer or a corner) where

materials are kept is called a bin

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STORE RECORD The record of stores may be maintained in

three forms:

(a) Bin Cards

(b) Stock Control Cards,

(c) Stores Ledger.

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Treatment of shortages in stock taking

Unavoidable - cost of the loss or shortage may be treated asoverheads

Avoidable(abnormal losses) should be debited to theCosting Profit and Loss Account

Losses or surpluses arising from errors in documentation, posting

etc., should be corrected through adjustment entries.

Actual losses should be compared with the standard and excess

losses should be analysed to see whether they are due to normal or

abnormal reasons

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Techniques of Inventory control :

(i) Setting of various stock levels.

(ii) ABC analysis. Usually the items are divided into three categories according to their importance, namely, their value and

frequency of replenishment during a period.

(iii) Two bin system.

(iv) Establishment of system of budgets.

(v) Use of perpetual inventory records and continuous stock verification.

(vi) Determination of economic order quantity.

(vii) Review of slow and non-moving items.

(viii) Use of control ratios.

Minimum level of inventory = Re-order level(Average rate of consumption average time of

inventory delivery)

Maximum level of inventory = Re-order-level + Re-order quantity (Minimum consumption

Minimum re-order period)

Re-order level = Maximum re-order period Maximum Usage (or) = Minimum level + (Averagerate of consumption Average time to obtain fresh supplies).

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Reorder Point = Normal consumption during lead-time + Safety Stock

Average Inventory Level - This level of stock may be determined by using the following equal

= Minimum level + 1/2 Re-order quantity (or)

= maximum level + minimum level/2

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Use of control ratios:

(i) Input output ratio

(ii) Inventory turnover ratio

Average stock = 1/2 (opening stock + closing

stock)

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EOQ

To determine the minimum point of the total cost curve, partially differentiate the total cost

with respect to Q (assume all other variables are constant) and set to 0:

Q = (2DS/H)1/2; where

P= Purchase Price

OQ= order quantity

Q= optimal order quantity

D= annual demand quantity

S= fixed cost per order (not per unit, typically cost of ordering and shipping and handling. This is

not the cost of goods)

H= annual holding cost per unit (also known as Carrying cost or storage cost) (warehouse space,

refrigeration, insurance, etc. usually not related to the unit cost)

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VALUATION OF MATERIAL ISSUES

Cost Price Methods:

(a)Specific price method.

(b) First-in First-out method.

(c) Last-in-First-out method.

(d) Base stock method.

Average Price Methods :

(e) Simple average price method.

(f) Weighted average price method.

(g) Periodic simple average price method.(h) Periodic weighted average price method.

(i) Moving simple average price method.

(j) Moving weighted average price method.

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Notional Price Methods :

(m) Standard price method.

(n) Inflated price methods.

(o) Re-use Price Method.


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Illustration

Two components, A and B are used as follows :

Normal usage 50 per week each

Maximum usage 75 per week each

Minimum usage 25 per week each

Re-order quantity A : 300; B : 500

Re-order period A : 4 to 6 weeks

B : 2 to 4 weeks

Calculate for each component (a) Re-ordering level, (b) Minimum level, (c)

Maximum level, (d) Average stock level.

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Break even point in units = Fixed cost/ Contribution per unit

Let us consider an example of a company (ABC Ltd) manufacturing a singleproduct, incurring variable costs of Rs 300 per unit and fixed costs of Rs 2,

00,000 per month. If the product sells for Rs 500 per unit, the breakeven

point shall be?

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DIFFERENT TYPES OF BUDGETS

Fixed

Flexible

Functional

Master

Long

Short

Basic

Current

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COST-VOLUME-PROFIT ANALYSIS

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CVP analysis is the analysis of three variables cost, volume and profit.

Such an analysis explores the relationship between costs, revenue, activity

levels and the resulting profit. It aims at measuring variations in cost and

volume.


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Variance

varianceis the difference between a budgeted, planned or standard

amount and the actual amount incurred/sold.

Variances can be computed for both costs and revenues:

Variable cost variancesDirect material variances

Direct labour variances

Variable production overhead variances

Fixed production overhead variances

Sales variances

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http://en.wikipedia.org/wiki/Direct_material_variancehttp://en.wikipedia.org/wiki/Direct_labour_variancehttp://en.wikipedia.org/wiki/Sales_variancehttp://en.wikipedia.org/wiki/Sales_variancehttp://en.wikipedia.org/wiki/Direct_labour_variancehttp://en.wikipedia.org/wiki/Direct_material_variancehttp://en.wikipedia.org/wiki/Direct_material_variance


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Variance

Material Cost variance (MCV) = Material Price Variance (MPV) + Material

Usage variance (MQV)

Selling price variance arises solely from the difference between the actualselling price and the budgeted selling price.

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Let us assume that standard direct material cost of a cotton is as follows:

2 kg of cotton at rs. 60 per kg ( = Rs. 120 per unit).

Let us assume further that during the given period, 100 Jackets were

manufactured, using 212 kg of cotton which cost Rs. 13,144.

Under those assumptions direct material total variance can be calculated

as:

100 units should have cost ( Rs. 120 per unit) Rs. 12,000 but did cost Rs.

13,144; hence; Direct material total variance Rs.1,144(A)Direct material total variancecan be reconciled to DMPV and DMUV by:

(A) Direct material usage variance Rs. 720 (B) Direct material price variance Rs. 424 (C)

Direct material total variance Rs. 1,144

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Incentive Plans

Halsey Plan: Standard time is fixed for each job. Time rate is guaranteed

and worker receive the guaranteed wages irrespective of weather he or

she completes the work within time allowed. If the job is completed in less

time than the standard time, the worker is paid bonus of 50% of the time

saved at time rate in addition to the normal wages.

Earnings = Guaranteed wages + bonus (505 of the time saved) = hours

worked X hourly rate) + (time allowed time taken) X hourly rate

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Defini t ion: The monetary value of an asset decreases over time due to use,

wear and tear or obsolescence. This decrease is measured as depreciation.

Descr ipt ion:

Accounting estimates the decrease in value using the information regarding theuseful life of the asset. This is useful for estimation of property value for

taxation purposes like property tax etc. For such assets like real estate, market

and economic conditions are likely to be crucial such as in cases of economic

downturn.

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Inventory, Wastage

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