សាកលវិទ្យាល័យមេគង្គកេពុជា

CAMBODIAN MEKONG UNIVERSITY

2020 Edition

LECTURE 1: MATERIALS

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 LECTURE OUTLINES
2020 Edition

1. Introduction
2. Types of Material
3. Inventory Control
4. Inventory Valuation
5. Inventory Levels

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 MATERIALS
2020 Edition

INTRODUCTION

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 INTRODUCTION
2020 Edition

 The investment in inventory is a very important one

for most business.
 It is therefore vital that management establish and
maintain an effective inventory control system
which covers the following:
 The ordering of inventory
 The purchase of inventory
 The receipt of goods into store
 The storage of inventory
 The issue and maintenance of inventory level

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 MATERIALS
2020 Edition

TYPES OF MATERIAL

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 TYPES OF MATERIAL
2020 Edition

• goods purchased for incorporation into

products for resale
• basic materials such as chemicals, flour, or
Raw lengths of wood
Materials • Items have been manufactured by supplier,
(RM) such as components and parts for use in
production
• Wood, Glue, Polish, Fabric for covering the
chair

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 TYPES OF MATERIAL
2020 Edition

Work-in- • Refers to partly made products

Progress • Have progressed from the bought in stage
(WIP) (raw materials) but are not yet complete

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 TYPES OF MATERIAL
2020 Edition

Finished • Products are completed or ready for sale

Good • Chair, car, pure drinking water…
(FG)

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 TYPES OF MATERIAL
2020 Edition

 Direct Materials (DM)  Indirect Materials (IDM)

 easily identified with or  Not easy to trace to a unit
traced to a unit of of production
production
 microprocessor chips
being incorporated into
laptop computers

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 MATERIAL

2020 Edition

INVENTORY CONTROL

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 INVENTORY CONTROL
2020 Edition

 Ordering Inventory
 Inventory levels reach reorder level
 Stores department issues purchase requisition (PR)
 Purchase department draws up a purchase order
(PO)
o 1 copy for accounting department
o 1 copy for receiving department/stores

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 INVENTORY CONTROL
2020 Edition

 Receiving Inventory
 Goods delivered and delivery note (GDN) signed
 Delivery checked to purchase order
 Goods received note (GRN) prepared
 GRN sent to accounts and matched with PO
 Invoice checked against PO and GRN
 Supplier paid

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 INVENTORY CONTROL
2020 Edition

 Material Requirements
Formula 1:
RM purchased = RM used + Closing Stock –Opening Stock

Example 1:
Opening inventory of raw material 1,000 kg
Units to be made (each takes 3kg of material) 5,000 units
Closing inventory of raw materials to be 1,500 kg
How many kilograms of raw material must be purchased?

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 INVENTORY CONTROL
2020 Edition

 Material Requirements
Formula 2:
Units produced=Units sold + Closing stock –Opening stock

Example 2:
Opening inventory 20,000 units
Units to be sold 90,000 units
Closing inventory to be 10,000 units
How many units must be produced?

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 INVENTORY CONTROL
2020 Edition

 Free Inventory
Formula 3:
Free inventory = Qty on hand + units ordered–units allocated for use

Example 3:
There are currently 120 units of an item in inventory. There
are material requisitions amounting to 40 units that have not
yet been acted on and there are 90 units on order.
What is the free inventory?

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 MATERIAL
2020 Edition

INVENTORY VALUATION

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 INVENTORY VALUATION
2020 Edition

 FIFO First-In, First-Out

 LIFO Last-In, First-Out

 WAP Weighted Average Pricing

 Cumulative
 Periodic
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 INVENTORY VALUATION
2020 Edition

 FIFO
 Goods arrived first are used first
 Recent goods are in stock
Example 4: Consider the following
12/Mar/2019 Purchase 1,000 units at $5 each
21/Mar/2019 Purchase 500 units at $6 each
31/Mar/2019 Sell 800 units at $12 each
Calculate the COGS and closing inventory using FIFO?

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 INVENTORY VALUATION
2020 Edition

 LIFO
 Goods arrived last are used first
 Old goods are in stock
Example 4: Consider the following
12/Mar/2019 Purchase 1,000 units at $5 each
21/Mar/2019 Purchase 500 units at $6 each
31/Mar/2019 Sell 800 units at $12 each
Calculate the COGS and closing inventory using LIFO?

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 INVENTORY VALUATION
2020 Edition

 WAP
 Cumulative WAP
 Periodic WAP
Example 4: Consider the following
12/Mar/2019 Purchase 1,000 units at $5 each
21/Mar/2019 Purchase 500 units at $6 each
31/Mar/2019 Sell 800 units at $12 each
Calculate the COGS and closing inventory using WAP?

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 Practical Exercise
2020 Edition

Recent results of a division are:

Date Units Unit Price
1 Apr Opening 1,000 5.00
5 Purchased 500 6.00
9 Sold 200 NA
14 Purchased 600 5.50
21 Sold 1,200 NA
Calculate the cost of inventory used and the cost of the
inventory remaining using:
(a) FIFO; (b) LIFO;
(c) Cumulative WAP; (d) Periodic WAP
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 MATERIAL
2020 Edition

INVENTORY LEVELS

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 INVENTORY LEVELS
2020 Edition

 Why hold inventory?

 To ensure any unexpected demands can be met
 To provide a buffer
 To meet any future shortages
 To get a bulk purchasing discounts
 High inventory levels increased holding costs
 Low inventory levels increased ordering costs

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 INVENTORY LEVELS
2020 Edition

 Reorder Level (ROL)

 ROL = Maximum Usage x Maximum Lead Time
 Minimum Inventory Control Level (Min.L)
 Min.L=ROL – (Average usage x average LT)
 Maximum Inventory Control Level (Max.L)
 Max.L =ROL + ROQ – (min.usage x min.LT)
 Average inventory (AVG Inv)
 AVG Inv= safety inventory + ½ reorder quantity
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 Practical Example
2020 Edition

Inventory statistics are:

Maximum usage/day 20
Minimum usage/day 12
Average usage per day 15
Maximum lead time 11 days
Minimum lead time 4 days
Average lead time 6 days
Reorder quantity 1,000 units
Calculate (a) Reorder level; (b) Minimum stock; (c)
Maximum stock

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 INVENTORY LEVELS
2020 Edition

Co =cost of ordering

CH=cost of holding

D= Demand

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 Practical Example
2020 Edition

The following information is given:

Monthly demand 3,000 units
Annual ordering costs $600
Order quantity 6,000 units
Holding cost $6 per unit per year
Required
What is the economic order quantity?

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 Chapter Ended-Questions
2020 Edition

(1) If JH Co produces 1 unit of Product L from 2kg of

Material W, and wastage equates to 5% of material
input, how many kg of Material W should JH Co buy in
order to produce 4,000 units of Product L?

(2) Average usage of a raw material is 200 kg per day, the

average ordering lead time is 5 days, the reorder level is
1,600kg and the reorder quantity is 2,800 kg.
What is the average raw material inventory?

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 Thank You for
Your Attention and Participation

Respect for People 30