SCHOOL OF COMPUTER SCIENCE ANDINFORMATION TECHNOLOGY BSC (HONS) BUSINESS INFORMATION SYSTEMS MODULE NAME: INFORMATION SYSTEM MODELLING AND DESIGN ASSIGNMENT TITLE: INVENTORY MANAGEME…Full description
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This would be very beneficial to students to help them practice solving problems about Inventory.
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INVENTORY VALUATION COSTING • Historical Cost is used as primary basis (“cost” component of LCM rule) • Includes all costs incurred related to bringing merchandise into a condition and location for sale • Ex: Purchasing, freight in, insurance, warehousing, handling costs are all added to the historical cost • NOTE: If F.O.B. “destination”, cost are borne by seller and are not inventoriable by the buyer • Goods on consignment à costs to send goods to consignee are inventoriable LCM Rules: • Market can never be higher than NRV (ceiling) or lower than floor 1) Ceiling (NRV) = [Sell price (-) disposal costs] 2) Floor = [NRV (-) normal G.P. on sale] 3) Replacement cost ***Number in the middle of (1, 2, and 3) above is MARKET • Next, compare MARKET to HISTORICAL COST • Use the lower of the two to value inventory!!! MEASURING INVENTORY Periodic system – Uses a “purchases account” Purchases xx A/P xx Perpetual system – Physical count still required even in perpetual! Inventory xx A/P xx To record a sale… CGS Inventory
xx xx
VALUING (ending) INVENTORY Specific Identification – go thru warehouse item by item and value each one there Gross Profit Method • Can use when EI has been destroyed by fire or for interim statements • Gross Profit % = [Sales – COGS] / [Sales] • G.P. % is = [1 – COGS %] • Markup on Cost % à [COST * (100% + markup %)] = Sell Price • Shortcut to convert this to G.P. % à (Markup %) / [100% + Mkup % Retail Method • LCM (a.k.a. "conventional retail) o (BI + purch @ cost) / (BI + purch + net markups @ retail) = cost to retail %
o (BI = purch @ retail) - (Sales + markups - markdowns - spoilage) = Est. Ending Inventory @ cost FIFO à B/S method • COGS and EI are identical under periodic or perpetual when using FIFO LIFO à most accurately represents the I/S Weighted Average Cost/Unit • Use for periodic INV system = CGAS / # units available for sale Moving Average à Must revalue the weight avg cost/unit every time units are purchases • Use for perpetual INV system Dollar-Value LIFO method: “Double Extension approach” à Price index is inflation over base year dollars “Linked Chain approach” à year-to-year inflation given, must calculate index relative to base year for each layer • Take previous year index and multiply it by current year inflation Base Year Index = 1.00 (always true) 12/31/xx
INV @ y/e prices
Price Index
INV @ base- Layer in base- Layer value INV on B/S yr $ yr $ (indexed)
2010 2011 2012 2012 (adj) 2013
300K 363K 420K 420K 430K
1.0 1.1 1.2 1.2 1.25
300K 330K (1) 350K 350K 344K
30K (2) 20K 14K DECREASE
33K (3) 24K 16,800 *** (4)
300K 333K 357K 349,800 (5)
***Must reduce previous layer by 6K base year $’s. ***Must reduce previous layer by 6K base year $’s. ***Must reduce previous layer by 6K base year $’s. ***Must reduce previous layer by 6K base year $’s. ***Must reduce previous layer by 6K base year $’s. ***Must reduce previous layer by 6K base year $’s. ***Must reduce previous layer by 6K base year $’s. *Green = GIVEN Steps: 1. Convert EI @ y/e prices to INV @ base year prices by dividing by index a. 330K = 363K / (1.1) 2. Layer = Increase in base yr prices from previous year a. 30K = 330K – 300K 3. Multiply layer by price index for specific year of layer a. 33K = 30K * 1.1 4. DECREASE IN EI (base year $’s) a. Reduce previous layer (20K) by 6K 5. EI on B/S is sum of base year EI and all layers (indexed)
a. 12/31/13 EI (DV LIFO) = 300K + 33K + 16,800 = 349,800