RSM219H1 Chapter Notes - Chapter 7: Combined Gas And Steam, Stockout, Consignee
INTRODUCTION
Inventory: any item purchased by a company for resale to customers or to be used in the manufacture of a product sold
to customers
Merchandisers / retailers: purchase inventory from publishers & food processors w/ the objective of selling it to
customers at a profit
Manufacturers: companies that make products
Largest asset converted to cash
○
For retailers & manufacturers, inventory = most significant current asset
•
Companies that can provide it on timely basis
□
Location of supplier is important b/c amount of time required between order & delivery date
□
Select suppliers
▪
Estimate how much customers will buy
□
Consider price charged by supplier
□
Stockout: running out of a particular item
Holding inventory = risky & expensive
□
How much inventory to purchase
▪
High enough to provide profit
□
Low enough to remain competitive
□
Set the sale price
▪
Implement safeguards to prevent damage / theft
▪
Steps to achieve
○
Process complicated by # of items in its inventory
○
Management's objective for inventory: sell it to customers at higher price than company purchased
•
Why Inventory is significant to users
All the items required to make the product
□
Eg. Wood, plastic, glue
□
Raw materials
▪
Record the costs of products started but not completed at the end of accounting period
□
Includes costs of raw materials + labour costs + overhead costs (eg. Depreciation)
•
Work-in-process
▪
Finished goods
▪
Raw materials are purchased
1.
Aka work-in-process until completed
a)
Raw materials used & incorporated into manufacture of products
2.
Manufacturing process completed & goods move from work-in-process --> finished goods
3.
Goods are sold & move from finished goods --> COGS
4.
4 transactions as inventory moves through a manufacturer
▪
▪
Manufacturer's inventory
○
Major classifications of inventory
•
Retailer: products purchased to sell to customers
○
Manufacturer: raw materials, work-in-process, finished goods
○
Buyer is responsible for paying shipping & any costs incurred while goods are in transit from the
seller's premises --> buyer's premises
□
Buyer includes these goods in its inventory even though not yet arrived
Buyer owns the inventory when it leaves the seller's premises
□
FOB shipping point (free on board)
▪
Seller is responsible for paying shipping & other costs incurred while goods in transit from
seller's premises --> buyer's premises
□
Does not record inventory until it arrives
Buyer does not own inventory until it reaches buyer's premises
□
FOB destination
▪
Key criterion for determination = ownership
○
When the book sells, student union collects full payment & keeps commission, gives balance to
student selling the book
□
Student union wouldn't report book as inventory b/c they would be inventory of the student
□
Eg. Student (owner of consignor) leaves used textbook w/ student union office (consignee)
▪
Consignment arrangements: other situation that needs to be considered to determine ownership
○
What goods are included in a company's inventory
•
TYPES OF INVENTORY
Account balance carries from one accounting period --> another b/c inventory is a permanent account
○
Quantity & costs are known b/c determined at the end of prior year
○
# of units purchased & costs of purchases can be obtained from invoices
○
Cost of all of the goods company had available to sell to its customers during the period
▪
Decision will be affected by type of inventory system
□
Companies must determine how to allocate COGAS between COGS & COG remaining in inventory
▪
Cost of opening inventory + cost of purchases = cost of goods available for sale (COGAS)
○
Inventory system depends on nature & amount of inventory involved, cost of implementing system
○
Opening inventory / beginning inventory
•
End of each month / quarter / year
▪
Updates happen when company has physically counted its inventory
○
○
Easy to operate
▪
Advantage
○
Periodic inventory system: systems that only update a company's inventory information periodically
•
INVENTORY SYSTEMS
Chapter 7 - Inventory
November 4, 2017
5:26 PM
Textbook Page 1
find more resources at oneclass.com
find more resources at oneclass.com
○
Easy to operate
▪
Cheaper in terms of initial costs
▪
Advantage
○
Methods may require additional wage costs / over/under stocking
Management must develop methods of determining when goods need to be reordered to avoid
stockouts
□
do not provide up-to-date info about inventory quantities / costs
▪
Manual systems
▪
Additional wage costs for staff / payments to outside contractors for regular inventory counts
▪
May also have to close business to conduct costs
▪
Assumes whatever items not remaining were sold
□
Unable to quantify theft of inventory
▪
Disadvantages
○
When goods are sold, entry records sale to customer, no entries made to Inventory/COGS until end of
period
▪
Record all inventory purchases in a Purchases account (rather than updating Inventory account)
○
Some track physical flow of goods & costs
▪
Some track physical flow of goods
▪
Inventory & COGS updated after each transaction -- systems generally computerized
○
Inventory counts are necessary in order for companies to determine actual amount of physical goods
○
Inventory shrinkage: difference between computer info & actual inventory due to theft of goods
○
○
Up-to-date info on inventory -- COGS info always available
▪
Enables companies to automatically reorder when inventory amounts reach pre-established levels
▪
Enables companies to quantify amount of shrinkage / theft
▪
Eliminates need for frequent inventory counts
▪
Advantages
○
Perpetual inventory system: company's inventory information is updated perpetually
•
Useful for goods w/ short shelf life or inventory high in demand / subject to seasonal fluctuations
▪
Monitor pricing strategies
□
Enables management to determine profits made from sale of goods
▪
Important for eg. Car dealerships
▪
Place card near the bottom of a stack of merchandise
□
Inventory count
□
Other techniques to determine info for periodic system
▪
Assess importance of having complete, timely inventory information
○
Costs of shrinkage can be significant & management won't know how much in periodic systems
▪
Identification of inventory shrinkage
○
Small businesses may not want to make investment in this
□
Perpetual systems have higher costs
▪
Electronic Data Interchange (EDI): automatically generate orders when inventory fall below a specified
point
▪
Assess costs of purchasing & maintaining inventory system
○
Deciding which inventory system to use
•
○
Shipping costs as an expense in the period -- become part of COGS
▪
Practically difficult to assign $ amount of shipping costs to specific item
○
Costs included in inventory
•
Need to determine which unit costs will be allocated to COGS & which allocated to ending
inventory
□
Inventory purchase costs change
▪
COGAS is the same regardless of cost formula used
▪
Necessary b/c
○
Same cost formula must be used for all inventories of similar nature & use
▪
Once chosen, cost formula cannot be easily changed
○
Periodic system -- made only at the end of each accounting period
▪
Perpetual -- made w/ each purchase of inventory
▪
Frequency of calculations
○
BUT allocation of costs between ending inventory & COGS will be different depending on the system if
using W/A
▪
Regardless of perpetual/periodic, results will be the same for specific ID & FIFO cost formulas
○
Specific costs allocated to COGS
Company knows specific cost of items sold b/c specifically identifiable
□
Companies usually have small quantities of high-priced, unique products
Cost / effort required to track cost of items is not too onerous
Eg. Art galleries
Requires company to track purchase cost of each item
□
Specific identification (specific ID)
▪
Inventory cost recalculated every time additional goods purchased
□
Eg. Gas tank is homogenous, does not know exactly which litres were sold
□
□
Weighted-average (W/A)
▪
Types of formulas
○
Cost formulas & why they are necessary
•
COST FORMULAS
Textbook Page 2
find more resources at oneclass.com
find more resources at oneclass.com
7
RSM219H1 Full Course Notes
Verified Note
7 documents
Document Summary
Inventory: any item purchased by a company for resale to customers or to be used in the manufacture of a product sold to customers. Merchandisers / retailers: purchase inventory from publishers & food processors w/ the objective of selling it to customers at a profit. For retailers & manufacturers, inventory = most significant current asset. Management"s objective for inventory: sell it to customers at higher price than company purchased. Companies that can provide it on timely basis. Location of supplier is important b/c amount of time required between order & delivery date. Process complicated by # of items in its inventory. All the items required to make the product. Record the costs of products started but not completed at the end of accounting period. Includes costs of raw materials + labour costs + overhead costs (eg. depreciation) 4 transactions as inventory moves through a manufacturer. Raw materials used & incorporated into manufacture of products a)
