Materials Costs

• What is materials inventory the cost of?


  raw materials & components bought for use by a manufacturing business, incl WIP & finished goods
• Methods of of planning purchases & inventory

  Perpetual Inventory

  JIT

  Fixed Quantity Method

  Economic Order Quantity Method
• Perpetual Inventory


  • digital
  • reorders are made accordingly
  • barcodes
  • records receipt & issue of inventory
• Just in Time (JIT)


  • favoured by manufacturing business
  • quality suppliers
  • inventory levels are kept very low
  • schedules
  • components are delivered as needed
• Fixed Quantity Method


  Materials are ordered in set amounts. the business needs to know:

  • maximum inv level
  • buffer inv
  • the lead time
  • the reorder level
  • the appropriate re order quantity
• Buffer inventory


  reorder level - (average usage x average lead time)
• Reorder Level


  (average usage x average lead time) + buffer inventory
• Maximum Inventory Level


  buffer inventory + maximum reorder quantity
• Maximum Reorder Quantity


  maximum inventory level - buffer inventory
• Minimum Reorder Quantity


  average usage x average lead time
• Economic Order Quantity


  square root of :

  (2 x annual usage x ordering cost) / inventory holding cost
• Inventory Value at cost


  No. of items held x cost of item
• Purchase of materials on credit


  DR inventory

  CR trade payables control
• Purchase of materials on cash terms


  DR inventory

  CR bank
• Issue of materials to production 


  DR production

  CR inventory
• Return of materials from production


  DR inventory

  CR production