Short Notes

LIFO Method of valuation :- It is opposite to FIFO Method. It assumes that the material, which is acquired last, is issued first. Hence material issues are priced on the basis of the cost of most recent material purchases.
Advantages : The cost of production reflects the current cost of materials better. In a period of rising prices, reported profits are depressed, dividends are kept low and working capital is conserved.
Disadvantages : Issue of material at different prices complicates stores accounting. The pricing of material is not consistent with the commonly followed practice of issuing the oldest material first. Comparison of job costs becomes difficult when similar jobs may be charged for the same materials at different prices

Specific validations in an online financial accounting system :- Financial accounting system is one of the system, which is mechanized in early stages of computerization. The reason being very simple the massive volume of transactions and records. Another reason is the accuracy. To implement a successful computerized financial accounting system, stress to be on following points.
Control over documents : In financial accounting system no transaction will be passed if it is not documented. Hence for every type of transaction, hence must be documented. System must have a control over such documents. I.e. preprinted serial numbers to documents. A senior person must authorize all the documents.
Coding the documents : For computerized accounting system one has to code those documents for various purposes. This coding should be checked and verified by senior person.

Material Requirement Planning ( for a manufacturing Unit ) :- MRP is a process of working out the material requirements for the manufacturing plan for scheduled period and planning the process of acquiring material (buying raw material, bought out components, manufacturing inhouse prepared components and assemblies). Whenever any product is designed in the R&D Department, it gives the detail list of assemblies, components required to produce a unit quantity of the product it called as BOM (Bill of Material).
The study of MRP can be carried out with the help of production plan. It is the quantitative statement prepared in advance for the fourth coming period taking into consideration 1. Annual sales plan for finished goods 2. Plan for sales of spares 3. Business policy.
Sales plan is prepared by the sales or marketing department where as spares parts sales plan is prepared by the spare parts department taking into consideration the pending \ new orders for the spares. Sales order plan is always approved by sales director. A copy of this plan is sent to various departments.

Levels of stock
Reverse stock : an extra amount of stock which is kept on hand to take care of greater than normal usage during the lead time.

Danger level : this is also called as safety stock. This is level below the minimum level. When the stock balance reaches this level urgent action is needed for making available the stock.

Re-order level : it is the stock point laying between minimum level and maximum level at which time it is essential to initiate purchase process for various items. Reorder level depends upon lead-time, rate of consumption and EOQ.
ROL = Average consumption (week) x Min stock per week + Delivery time (week)

Minimum level : The minimum stock level is that quantity below which the stock of any item should not be allowed to fall. Minimum stock level is fixed by taking into account - Reorder level - Avarage rate of consumption - average lead time.
Min Level = ROL - (Avg. usage per period x no of periods to obtain the delivery)

Maximum level : It is that quantity above which stock of any item should not go.
Max level = ROL + EOQ - Min consumption

ABC Analysis
It sands for "Always Better Control". It is also called as proportional parts value analysis. Each material is given A,B,C class depending upon the amount involved and quantity. A category items means - Minimum quantity and maximum cost.
Procedure for carrying out ABC analysis
Determine cost and usage of each material
Multiply unit cost by usage to obtain net cost
List all items with quantity and value and arrange them in descending value
Accumulate value and add up no. of items and calculate percentage on total inventory in value and in no.
Mark the items for the class.

XYZ Analysis
This analysis is carried out to have better control over inventory. As per this theory each item is given specific category depending upon the basic price. The difference is that ABC analysis considers the cost of item in total valuation while XYZ analysis considers basic price.

EOQ : The quantity which is most economical to order to stock considering all factors bearing on the situation. The size of EOQ depends on many factors such as inventor carrying cost, procurement cost, average consumption, interest on capital, quantity discount etc.
EOQ = 2UO / C
U = Annual usage O = Procurement cost C = Inventory carrying cost

Lead Time : average time elapse between the initiation of the order and the receipt of materials. Hence the main components of lead time are ( time taken to convey the purchase indent to purchase department, time taken by purchase department to convert indent into purchase order, transit time for the documents, transportation time, inspection of goods, posting goods in ledgers.)

Item Order levels
LIFO & FIFO method
FSN Analysis (Fast / slow / non moving items)

Types of inventories
Generally there are 6 types of inventories
Raw material : unfabricated materials which haven't undergone any conversion.
Finished goods : produced products
Work in progress : partially completed products
Tools : standard tools used for machines & hand tools
Machinery spare : components required for upkeep of machines such as oil, ball bearing etc.
Consumables : items required in running the plan but which do not themselves go into the final products for eg brooms, cotton waste, brushes etc.

Costs related to inventory
Inventory carrying cost : cost of handling the stock.
Capital cost : capital for inventory
Storage cost : cost of space, building, maintenance
Deterioration cost : reduction in inventory value as some parts may have limited self life and may deteriorate if stored for a long time.
Material handling cost
Obsolescence cost : items becomes useless due to change in design or specifications
Procurement cost
Set up cost

Bin Card
For each kind of material a bin card is maintained and attached to bins or racks, on which material is stored. It given a running record of receipts, issues and balance of stock. An entry will be made from a basic voucher or document at the time of each receipt or issue and final balance is arrived. (Refer format)

Stores ledger
A store ledger is usually a lease leaf or card type and contains an account for each type of material. The ledgers are maintained in costing department. The main difference between bin card and stores ledger that stores ledger is qualitative statement and bin card is a quantitative record. Ledger contains rates and values.