Inventory
What is inventory, how is it classified,
valued and shown in the
manufacturing accounts
What is inventory
• Inventory is the stock held by the business
• Recorded as:
– Raw Materials *
• Components used to manufacture the finished product
– Finished goods / goods purchased for re-sale
• Products ready for despatch / sale
– Work in progress WIP/ part finished goods
• Product in varying stages of production
• *Consumables are items required for administration
function rather than the manufacturing function
The process of recording inventory
• Materials/ goods ordered from supplier– purchase
order
• Materials/goods are received by the business from the
supplier – invoice and Goods Received Note (GRN)
• Materials/goods logged into the warehouse/ stores –
Inventory record & Stores Ledger Account
• Materials/goods taken for manufacturing/ sales
process –Material/Goods Requisition Form(MR)
• Excess Materials/goods returned to the stores –
Material Returns Note (MRN)
• This process is known as Perpetual Inventory System
and records should be updated continuously
Recording inventory
• Inventory cards
– Each component/ material used the manufacturing of a product
has an Inventory card
– Records held in the stores department
– Gives description of the material/inventory
– Unique code for the item to help identification unit
– Inventory unit, how the item is measured, single, pairs, weights
and measures
– Location of the unit, for stores department
– Inventory control, maximum and minimum levels of the units
held, re-order levels and quantity
– Inventory activity,
• gives details of the number of units taken for production (MR)
• Units received from suppliers (GRN)
• And Balance of remaining units
Recording inventory cont
• Stores ledger accounts
– Held in/by accounts department
– Contains the same information as inventory card
– Also shows the inventory cost values
• Value of the units purchased (GRN)
• Value of the units used in manufacturing (MR)
• Value of the remaining unit (balance )
– Store ledger accounts are used in costing accounting
– Held separately from the stores department
– The accounts can be used as a control to check the
records are accurate
Material requisition form
• Form used by the production function to the
stores department
– Completed to request materials from the stores
– An official form that must be authorised by specific
staff members
– The authorised form is used to
• Update inventory card
• Update stores ledger accounts
• Charging/allocating the costs to job, overhead or
department
– Price details and costs are added by the accounts
department before recording to store ledger accounts
Valuation of inventory
• We know how much the inventory cost when
purchased, as this can be found on the invoice
• The items are used in production
• We re-order the materials but the price has
increased
• How do we value the inventory when we have
varying unit prices?
• We use the following methods:
– FIFO First in First out
– LIFO Last in First out
– AVCO Average cost
FIFO - First in, First out
• First item purchased is the first item issued
• Inventory units are issued at the earliest invoice
price relating to the inventory held
• As the inventory is issued, work forward through
to the later price
• Inventory on hand is valued at the latest price
held, working backwards
• This method is used on perishable goods
• Closing inventory is shown as a higher value
which gives a better profit for the period
LIFO Last in, First out
• LILO is not a permitted method of inventory
valuation so is rarely seen in practise
• Last item purchased is the first item issued
• Items issued are costed at the latest invoice price
and worked backwards to the earlier price
• Inventory on hand is valued at the earliest price
held working forwards
• This method can result in a higher volume of
obsolete stock
– Closing inventory is shown as a lower value
which gives a poorer profit for the period
AVCO Average cost
• An average cost of the inventory is calculated
each time new stock is delivered
• Using a weighted average cost as:
Existing inventory value plus total value of
new inventory
Divided by
Existing units plus additional units received
Manufacturing Account
• For financial and management accounting you must
identify the cost of sales for the actual sales not the
inventory of that period.
• This is prepared on a Manufacturing Account
– Also known as Cost statement for manufactured goods
• To show the cost of sales you must:
– Start with: Cost of inventory held at beginning of
period (raw materials, part finished and finished
goods )
– Add direct costs of raw materials purchased, labour
plus indirect costs & manufacturing
expenses/overheads
– Less cost of inventory (raw materials...) held at the
end of the period
Format of management accounts
Details
Opening inventory of raw materials
Purchases of raw materials
Closing inventory of raw materials
DIRECT MATERIALS USED
Direct labour
DIRECT COST (prime cost)
Manufacturing overheads
MANUFACTURING COSTS (factory manu costs)
Opening inventory of WIP
Closing inventory of WIP
COST OF GOODS MANUFACTURED (factory cost of...)
Opening inventory of finished goods
Closing inventory of finished goods
COST OF GOODS SOLD
Action
Values
Plus
Less
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Plus
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Plus
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Plus
Less
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Plus
Less
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Further calculations
• From the management accounts a business can
calculate the gross profit as:
– Revenue less cost of goods sold = gross profit
• If the business only produces one product it can
calculate the cost per unit/product which is
known as: Unit Product Cost
– Materials – total material cost divided by number of
units
– Labour – total labour cost divided by number of units
– Expenses – differing methods