0840037031_209378 - CHAPTER 2 ACCOUNTING FOR MATERIALS...

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CHAPTER 2 ACCOUNTING FOR MATERIALS Review Summary 1. Materials control includes physical control of materials and control over the investment in materials. Effective physical control of materials involves limiting the access to stored materials, segregating the duties of employees who handle materials and materials reports, and establishing an accurate recording system for materials purchases and issues. Only authorized personnel should be permitted in material storage areas, and procedures for moving materials into and out of these areas should be well established. The following functions of materials control should be segregated to minimize opportunities for employee misappropriation: purchasing, receiving, storage, use, and recording. To ensure the accurate recording of purchases and materials issues, inventory records should document the determination of inventory quantities on hand, and cost records should provide the data needed to assign a cost to inventories to be used in the preparation of financial statements. 2. Controlling the materials inventory investment requires analysis and planning to determine when orders should be placed and the number of units to be ordered. The point at which the predetermined minimum level of inventory is reached, requiring the item to be ordered, is called the order point . Calculating the order point is based on the following: Usage —The anticipated rate at which the materials will be used. Lead time —The estimated time interval between placing the order and receiving the materials ordered. Safety stock —The estimated minimum level of inventory needed to protect against stockouts . The order point can be calculated as follows: (Expected Daily Usage × Lead Time) + Safety Stock 3. The optimal quantity of materials to order at one time, called the economic order quantity , is the order size that minimizes the total costs of placing orders and of carrying inventory in stock. Order costs include purchasing, receiving and inspection salaries and wages, communication costs, and record keeping. Carrying costs include storage and handling; interest, insurance, and property taxes on inventories; and losses due to theft, spoilage, or obsolescence. Annual order costs decrease when order size increases while annual carrying costs increase with increases in order size. The economic order quantity formula is: inventory) of unit per cost (carrying required) units of number ual order)(ann an placing of cost ( 2 × The economic order quantity is the point where total order costs equal total carrying costs, unless there is a provision for safety stock. 4. Materials control personnel include (a) the purchasing agent who is responsible for purchasing the materials needed at the most economical price; (b) the receiving clerk who is responsible for supervising incoming shipments of material; (c) the storeroom keeper who is responsible for storing and maintaining the goods received; and (d) the production department supervisor
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0840037031_209378 - CHAPTER 2 ACCOUNTING FOR MATERIALS...

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