2012最新ACCA考试-F2管理会计讲义

2012最新ACCA考试-F2管理会计讲义


Session 4 Material cost
Main contents: 1. Holding costs
　　 2. Ordering costs
　　 3. Re-ordering quantity （EOQ, EBQ）
　　 4. Re-order level
　　Purchase cycle
　　The inventory control should include the function of inventory purchase cycle.
　　● The ordering of inventory
　　● The purchase of inventory
　　● The receipt of goods into store
　　● Storage
　　● The issue of inventory and maintenance of inventory at the most appropriate level
　　
　　Every movement of material in a business should be documented using the following as appropriate:
　　● Purchase requisition note
　　● Purchase order note
　　● Goods received notes （GRN）
　　● Material requisition note
　　● Material transfer note and materials returned note
　　
　　

　　The storage of inventory
　　● Materials held in stores are coded and classified in order to be identified easily.
　　● Bin cards and stores ledger accounts are used to record inventory movements in order to maintain accurate records of current inventory levels.
　　● Perpetual inventory refers to an inventory recording system whereby the records （bin cards and stores ledger accounts） are updated for each receipt and issue of inventory as it occurs.
　　● Free inventory balance = available for future use
　　Materials in inventory
　　+ Materials on order from suppliers
　　- Materials requisitioned, not yet issued
　　= Free inventory balance
　　●Inventory valuation
Material Inventory Account
　　
Dr 　 $ Cr 　 $
　 Purchase X 　 Issue to production X
　 Returns to stores X 　 Returns to suppliers X
　 　 X 　 　 X
　　● First in First Out – FIFO assumes that materials are issued out of stock in the order in which they were delivered into inventory.
　　● Weighted average cost – AVCO values all items of inventory and issues at an average price. They average price is calculated after each receipt of goods.
　　● Periodic stocktaking is a process whereby all inventory items are physically counted and valued at a set point in time, usually at the end of an accounting period.
　　● Continuous stocktaking is counting and valuing selected items at different times on a rotating basis, usually each day. Valuable items or items with a high turnover could be checked more frequently.
　　How much to order?
　　The total costs associated with stocks include the following costs:
　　● Purchase costs
　　● Ordering cost:
　　- Documentation
　　- Telephone calls
　　- Payment of invoices
　　- Receiving goods into stores
　　
　　● Holding cost
　　- Cost of storage and stores operations
　　- Interest charges
　　- Insurance costs
　　- Risk of obsolescence and deterioration
　　
　　● Cost of running out of inventory （stock out costs）
　　- Lost of contribution from lost sales
　　- Loss of future sales
　　- Loss of customer goodwill
　　- Cost of production stoppages
　　- Labour frustration over stoppages
　　- Extra costs of urgent, small quantity, replenishment orders
　　4.1 The costs of holding inventory
　　● Buffer inventory is a basic level of inventory held for emergencies and to prevent stock-outs from occurring. It is also known as safety inventory or the minimum inventory level.
　　● Holding cost can be distinguished between fixed holding costs and variable holding costs.
　　- Fixed holding costs include the cost of storage space. Note that the cost of storage space may be a stepped fixed cost if increased warehousing is needed when higher volumes of inventory are held.
　　- Variable holding costs include interest on capital tied up in inventory. The more inventories that is held, the more capital that is tied up.
　　- Holding costs are often stated as being valued at a certain percentage of the average inventory held.
　　- Holding costs can be reduced by keeping stock levels to a minimum

　　4.2 Ordering costs
　　Every time an order is placed to purchase materials an order cost is incurred. The costs associated with placing orders are known as ordering costs and include administrative costs and delivery costs.
　　
　　Order cost can be reduced by placing orders only at infrequent interval. However, this means that order quantities need to be large, to avoid the risk of running out of stock between orders. Such a policy would result in high average levels of stock, which increases holding costs.
　　
　　There is a conflict between the need to minimize holding costs （small orders, at frequent intervals） and the need to minimize order costs （large orders, at infrequent intervals）
　　

　　4.3 Re-order quantity
　　● The re-order quantity is the amount of the item of stock to be ordered each time the re-order level is reached.
　　● The re-order quantity will be the same amount each time an order is placed.
　　To minimize stockholding and stock ordering costs, it should be the EOQ.
　　
　　Formula
　　Economic Order Quantity （EOQ）
　　
　　EOQ = √ 2Co D （ Given in the exams）
　　 Ch
　　
　　Holding costs Q/2 * Ch
　　Ordering cost D/Q * Co
　　
　　Total cost √ 2D Co Ch
　　
　　Co = Cost of placing one order
　　Ch = Cost of holding one unit for one year
　　D = Annual demand for stock item
　　Q = the order quantity
　　● Annual stockholding costs = average stock * holding cost for one unit per annum
　　 = Q/2 * Ch
　　Note: average stock = safety stock + 1/2 reorder quantity
　　● Annual stock ordering costs = No. of orders x ordering costs per order
　　= D/Q x Co

　　Example 1:
　　W Ltd. is a retailer of beer barrels. The company has an annual demand of 36750 barrels. The barrels cost $12 each. Fresh supplies can be obtained immediately, but ordering costs and the cost of carriage inwards are $200 per order. The annual cost of holding one barrel in stock is 10% of the purchase cost.
　　
　　Require: the total annual cost of EOQ
　　Solution:
　　D = 36750
　　Ch = 12 x 10% = 1.2
　　Co = 200
　　
　　EOQ = √ 2Co D
　　 Ch
　　
　　= √ 2 x 200 x 36750
　　1.2
　　= 3,500 barrels
　　Total annual costs = holding cost + reordering costs
　　= average stock x Ch + Number of order per annual x Co
　　= 3500 x $1.2 + 36750 x $200
　　2 3500
　　= $2100 + $2100 = $4200
　　EOQ and Bulk Purchase Discounts
　　Frequently, discounts are offered for large quantity orders. These are often called bulk purchase discounts. The problem to consider is that if the order quantity to obtain the bulk discount is larger than the EOQ, is the discount worth taking?

　　The steps involved are as follows:
　　（1）. Calculate EOQ, ignoring discounts
　　（2）. If the EOQ is smaller than the minimum purchase quantity to obtain a bulk
　　discount, calculate the total for the EOQ of the annual stockholding costs,
　　ordering costs and purchase cost
　　（3）. Recalculate annual stockholding costs, ordering costs and purchase costs for a
　　purchase order size that is only just large enough to qualify for the bulk discount.
　　（4）. Compare the total costs of EOQ and the order quantity just large enough to obtain
　　the discount.
　　Example 1 continued:
　　In the earlier example of W Ltd., suppose additionally that a 2% discount is available on orders of at least 5,000 barrels and that a 2.5% discount is available if the order quantity is 7,500 barrels or above. Would the least-cost order quantity still be 3,500 barrels?
　　Solution: $
　　● Order quantity = EOQ of 3500 barrels
　　Total annual costs: purchase costs: 36750 units x $12 = 441,000
　　Annual stockholding costs = 2,100
　　Annual ordering costs = 2,100
　　445,200
　　● Ordering quantity = 5,000 barrels
　　Total annual costs: purchase costs: 36750 units x $12 x 98% 432,180
　　Annual stockholding costs = $12 x 10% x 98% x 5000 units/2 2,940
　　Annual ordering costs = $200 x 36750 units/ 5000 units 1,470
　　436,590
　　● Order quantity = 7500 barrels
　　Total annual costs: purchase costs: 36750 units x $12 x 97.5% 429,975
　　Annual stockholding costs = $12 x 10% x 97.5% x 7500 units/2 4387.5
　　Annual ordering costs = $200 x 36750 units/ 7500 units 980
　　435,342.50
　　Total costs are minimized with an order size of 7500 barrels.
　　The economic batch quantity
　　The economic batch size is the quantity that minimizes the combined total of the costs of stockholding and the cost of setting up the batch for manufacture.
　　
　　Note: An amended EOQ （EBQ） formula is required, because average inventories are not Q/2, but Q（1-D/R） / 2, because resupply is gradual instead of instantaneous.
　　
　　EBQ = √ 2Co D （Given in the exams）
　　Ch （1-D/R）
　　Q = the amount produced in each batch
　　D = demand per annum
　　Ch = cost of holding one unit for one year
　　Co = cost of setting up a batch ready to be produced
　　R= the production rate per time period （which must exceed the inventory usage）
　　　　Example 2:
　　The following is relevant for item X:
　　●Production is at a rate of 500 units per week.
　　●Demand is 10000 units per annum, evenly spread over 50 working weeks
　　●Set up cost is $2700 per batch
　　●Storage cost is $2.5 per unit for a year
　　
　　Required: calculate the economic batch quantity （EBQ） for item X.
　　Solution:
　　
　　EBQ = √ 2Co D
　　Ch （1-D/R）
　　
　　EBQ = √ 2 x 2700 x 10000 = 6000 units
　　2.5 x （1 – 10000/500 x 50）
　　
　　EOQ EBQ
　　Maximum stock level Q Q（1-D/R）
　　Average stock level Q/2 Q/2/（1-D/R）
　　
　　Q √ 2Co D/Ch √ 2Co D/Ch （1-D/R）
　　
　　When demand and lead-time are known with certainty
　　Example 3
　　In the earlier example of W Ltd., assume that the company adopts the EOQ of 3500 barrels as its order quantity and it now takes two weeks for an order to be delivered.
　　How frequently will the company place an order? How much stock will it have on hand when the order is placed?
　　Solution:
　　Frequency: annual demand is 36750, EOQ is 3500, the company will therefore place an order （36750/3500） 10.5 times every year, which is once every 3500/36750 x 365 days ≈ 35 days.
　　Frequency = 365/ （D/Q）
　　Reorder level:
　　The company must be sure that there is sufficient stock on hand when it places an order, to last the two weeks’ lead time. It must therefore place an order when there is two weeks’ worth of demand in stock 2 weeks/52weeks x 36750 = 1413 units
　　Reorder level = Lead time/52 weeks x Demand
　　When demand and or lead time are not known with certainty
　　
　　4.4 Reorder level
　　The re-order level is the level of stockholding at which a fresh order is placed with a supplier.
　　Re-order level = maximum supply lead time （in days or weeks） maximum daily or weekly demand for the item.
　　Example 4:
　　The daily demand for stock item is expected to be not less than 60 tons and not more than 100 tons. The lead time between placing an order and receiving delivery from the supplier will be between one and three days. What should be the re-order level?
　　Solution:
　　Minimum demand = 60 Maximum demand = 100
　　Minimum lead time = 1 days Maximum lead time = 3 days
　　Reorder level = 100 tons x 3 days = 300 tons
　　What stock control system to use?
　　Minimum stock level
　　The minimum stock level for an item of stock is a warning level.
　　Minimum stock level = re-order level – （average demand for the item each
　　day/month x average length of lead time in days/months）
　　
　　Maximum stock level
　　The maximum stock level is a stock level that should never be exceeded.
　　Maximum stock level = reorder level + reorder quantity – （minimum usage per day x Minimum lead time per order）
　　

　　Example 4:
　　Z Ltd. places an order of 500 units, to replenish its stock of a particular component
　　Whenever the stock balance is reduced to 300 units. The order takes at least four days
　　to be delivered and Z ltd. uses at least 50 components each day. What is the maximum
　　stock level?
　　Solution:
　　Reorder level : 300 units
　　Reorder quantity: 500 units
　　Minimum usage: 50 units （minimum usage） x 4 days （minimum lead time） = 200 units
　　Total = 300 + 500 – 200 = 600 units
　　The maximum level is 600 units.
　　Example 5:
　　Calculate the re-order level, minimum stock level and maximum stock level from the
　　Following date.
　　Minimum lead time 4 days
　　Average lead time 5 days
　　Maximum lead time 7 days
　　Maximum usage 500 units/day
　　Minimum usage 300 units/day
　　Re-order quantity 5,400 units
　　Solution:
　　Reorder level = Maximum usage x Maximum lead time
　　= 500 units x 7 days = 3500units
　　
　　Minimum stock level = Reorder level – average demand for items x average lead time
　　= 3500 – 400 units x 5 days
　　= 1,500 units
　　
　　Maximum stock level = Reorder level + reorder quantity – minimum lead time x
　　Minimum usage
　　= 3500 + 5400 – 300units x 4 days
　　= 7700 units
　　Example for the whole session:
　　1. A company 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 of a decrease in the cost of ordering a batch of raw material?
　　EOQ Total annual holding cost
　　A. Higher Lower
　　B. Higher Higher
　　C. Lower Higher
　　D. Lower Lower
　　Solution is D.
　　If there is a decrease in the cost of ordering a batch of raw material, then the EOQ will also be lower（ as the numerator in the EOQ equation will be lower）. If the EOQ is lower, than average inventory held （EOQ /2） with also be lower and therefore the total annual holding costs will also be lower.
　　
　　2. What is the economic batch quantity used to establish?
　　Optimal
　　A. reorder quantity
　　B. reorder level
　　C. cumulative production quantity
　　D. inventory level for production
　　Solution is C
　　The economic batch quantity is used to establish the cumulative production quantity.