Management Information MA1

Management InformationMA1 Ibrahim Hameem (CIMA (exam complete), ACCA (Exam complete), Diploma in Economics (distinction) , Third year undergraduate reading for BSc. Mathematics and Economics (university of London)

Management Information Number of units to be produced • Opening inventory = 20,000 units. Units to be sold = 90,000 Closing inventory to be 10,000 units. • How many units must be bought or produced? • We saw that the equation to determine the production units is

Management Information Number of units to be produced • Production units = units to be sold + closing stock of finished goods – opening stock of finished goods • Thus the answer is 90,000 +10,000 – 20,000 = 80,000 units

Management Information Materials to be purchased • Opening inventory of raw material = 1,000 kg Units to be made = 5,000 (each takes 3kg of material) Closing inventory of raw materials to be 1,500 kg

Management Information Materials to be purchased Then how much of raw materials must be ordered? Again the same calculation as above First find the material usage 5000 * 3 = 15,000 The we know material purchases = usage + closing stock of raw materials – opening stock of raw materials 15,000 + 1500 - 1000 = 15,500

Management Information Question 01 • Opening inventory of raw material = 2,000 kg Units to be made = 5,000 (each takes 3kg of material) Closing inventory of raw materials to be 2,500 kg • How many kilograms of raw material must be bought? • A! 5,500 • B! 14,500 • C! 15,500 • D! 4,500

Management Information • The calculation of the amount of material needed for production can be complicated if there is wastage. • For example, to produce 80kg of good output, it might be necessary to input 100kg. The loss of $10 does not necessarily mean that someone has been careless; a loss might be an inevitable part of the production process (for example, evaporation or removing impurities).

Management Information • Obtaining 80kg from 100kg can be called a yield of 80%; alternatively, it can be deﬁned as having a wastage rate of 20%. • So: Input – Wastage = Output 100 – 20 = 80 The wastage is 20% of input but 25% (20/80) of output

Management Information • If the required output is top be 1,000kg, the input can be worked out using the above model: • Input – Wastage = Output 100 – 20 = 80 • 1,250 – 250 = 1,000

Management Information Question 02 • Opening inventory of raw material = 1,000 kg Units to be made = 5,000 (each weights 3kg) Closing inventory of raw materials to be 1,500 kg The yield is 75% by weight • How many kilograms of raw material must be bought? • A! 20,500 • B! 19,500 • C! 11,750 • D! 10,750

Management Information Inventory purchase, use and sale • The purchasing process will normally start with a purchase requisition note that will normally show the following: • Sequential document number • Date of requisition • Our stock code • Quantity needed • Supplier • Supplier’s product/stock code

Management Information Inventory purchase, use and sale Signatures authorizing the requisition The purchase requisition notes are passed to the purchasing department where they will be examined and approved or queried. Sometimes, despite the supplier being entered on the purchase requisition, the purchasing department might ask several suppliers for quotations.

Management Information Purchase order • A purchase order is then raised (created). This will typically show: • Our name, address and contact details • Purchase order number • Date • Details of goods required: product codes, description, unit price and total price. • Authorization The order will have at least two copies: one for the supplier one for the stores to inform them that a delivery is expected

Management Information • When goods are received, they will usually be accompanied by a delivery note. This will show the information that is on the purchase order, except for the value of the goods. Goods should not be accepted before checking to a copy of the order that they have, in fact, been ordered. One copy of the delivery note is signed and kept by the supplier. Usually the receiving company will create a standard goods received note from the delivery note. The goods will be stored in the warehouse and stock records on bin cards (see below) will be updated from the goods received note.

Management Information • A purchase invoice showing the payment due will be received from the supplier, and before this is approved for crediting to the suppliers account and subsequent payment, it should be matched to the order and goods received note to ensure that the correct goods have been received.

Management Information • When materials are needed for production a materials requisition note should be created requesting the release of material from the stores: part/material code, quantity, job number and so on. This should be signed by the person requesting the goods. Stock records will be updated as goods are issued.

Management Information Inventory management • There might be production order setting out goods and labor needed for the production of the goods ordered by customers. As goods are produced they will be transferred from the production line to the ﬁnished goods store. Stock records there should be updated with goods description, quantities and costs.

Management Information Inventory management • As goods are sold, customer orders will be received and from those, dispatch (or delivery notes) produced. These can be used as the basis for taking goods from stores, updating the bin card (see below) packing and dispatching them. There will usually be three copies of the delivery note: two go with the goods and of those one stays with the customer and one is signed by the customer and returned as proof of delivery receipt. One copy will stay in the dispatch department in case of later queries.

Management Information Inventory management • Central to the material control cycle is the recording of the amount of inventory as this will determine when goods need to be ordered and will also record the receipt and issue of goods.

Management Information The Bin Card

Management Information The Bin Card A particularly important ﬁgure to calculate is free inventory. This is Free inventory = Quantity on hand plus units ordered less units allocated for use The calculation of free inventory has the advantage of anticipating stock movements so that receipts and issues that are known about are taken into account when assessing the need to order. Stock counts must be carried out

Management Information Question 03 • What document shows the amount due to a supplier for goods bought? • A! Purchase invoice • B! Purchase requisition • C! Goods received note • D! Purchase order

Management Information Free Inventory • There are currently 120 units of an item in inventory. There are material requisitions amounting to 40 units that have not yet been acted on and there are 90 units on order. What is the free inventory? • A! 70 • B! 170 • C! 120 • D! 250

Management Information Different methods used to price materials issued from inventory and to value closing inventory • Consider the following: 12 March 20X4: buy 1000 units at $5 each 21 March 20X4: buy 500 units at $6 each 31 March 20x4: sell 800 units at $12 each. • Clearly revenue will be 800 x $12 = $9,600 But what is the cost of the units sold? Which have been sold? What is their value and the value of the inventory left?

Management Information Methods • You have to know four approaches: • FIFO • LIFO • Cumulative weighted average • Periodic weighted average

Management Information Question 01 • When goods are received, what is the name given to the document that is raised (created) at that stage. A! Delivery note B! Purchase requisition C! Goods received note D! Purchase invoice

Management Information FIFO • This method assumes that the goods that arrive ﬁrst are the ﬁrst to be used. It is only an assumption: apart from their price all goods of a given type are identical and therefore you don’t know, or care, how they are physically used. • So, in the above case, all 800 units sold would be assumed to be those delivered on 12 March. They would have a cost of 800 x $5 = $4,000 and the value of the inventory remaining would be

Management Information FIFO • 200 x $5 + 500 x $6 = $4,000. • Note that receipts and sales are handled on a strict time basis.

Management Information LIFO • LIFO (Last-in, ﬁrst out) This method assumes that the goods that arrive last are the ﬁrst to be used. As before It is only an assumption: apart from their price all goods of a given type are identical and therefore you don’t know, or care, how they are physically used. • So, in the above case, the 800 units sold would be assumed to be all 500 of those delivered on 21 March plus 300 from the March 12 delivery.

Management Information LIFO They would have a cost of 500 x $6 plus 300 x $5 = $4,500, and the value of the inventory remaining would be 700 x $5 = $3,500. Note that receipts and sales are handled on a strict time basis.

Management Information Question 02 • Will LIFO and FIFO result in two separate closing stock values during times of inflation or deflation? • Yes

Management Information

Management Information Question 03 Which method of stock valuation results in a higher profit during times of inflation? FIFO method

Management Information Cumulative weighted average Every time units are added, a new average price is calculated. Any time goods are removed they are removed at the prevailing average. • 12 March 20X4: buy 1000 units at $5 each • 21 March 20X4: buy 500 units at $6 each • 31 March 20x4: ! sell 800 units at $12 each.

Management Information Cumulative weighted average • Note: Sales do not alter the average cost. • Receipts and sales are handled on a strict time basis.

Management Information Periodic weighted average • Periodic weighted average Here, a new inventory value is calculated at the end of a set period. The cost of goods used is given by: • So, all units used in the period will have the same cost. In the above simple example this method would give the same result as the cumulative weighted average approach

Management Information Question 01 • Can the periodic or cumulative weighted average method used to manipulate closing inventory values during times of inflation or deflation? • No, not necessarily

Management Information Illustrations

Management Information Illustrations Calculate the cost of inventory used each time and the cost of the inventory remaining at the end of the period using: FIFO (b) LIFO

Management Information Answer to illustration • FIFO Sale of 200 on 9 April: assumed to be units from opening inventory: 200 @ $5 = $1,000 Sale of 1,200 on 21 April: assumed to be the 800 remaining from opening stock plus 400 from the purchase on 5 April: 800 @ $5 + 400 @ $6 = $6,400

Management Information Answer to illustration Closing inventory will be all the 600 purchased on 14 April plus 100 left from the 5 April purchase = 600 @ $5.50 + 100 @ $6.00 = 3,900.

Management Information LIFO • Sale of 200 on 9 April: assumed to be units purchased on 5 April: 200 @ $6 = $1,200 • Sale of 1,200 on 21 April: assumed to be the 600 from the purchase on 14 April (600 x 5.5 = $3,300) plus 300 remaining from the purchase on 5 April: 300 @ $6 = $1,800, plus 300 from opening stock @$5 = $1,500. Total cost of those sales = $6,600 • Closing inventory will be all from opening stock: 700 @ $5.00 = $3,500

Management Information Question 02 • In the previous illustration, why does FIFO give a higher closing stock value than LIFO? Because the price of raw materials are increasing

Management Information Illustrations

Management Information Illustrations Calculate the cost of inventory used each time and the cost of the inventory remaining at the end of the period using: Cumulative weighted average method

Management Information Answer

Management Information Question 03 • The cumulative weighted average method is disallowed by IAS 2 inventories. True or false? • False

Management Information MA1