ACCA PAPER F2 MANAGEMENT ACCOUNTING 管理会计考试讲义笔记 06 Material Costs.doc

CH6 MATERIAL COSTS 　　1. WHAT IS INVENTORY CONTROL　　1.1 inventory control system This chapter will concentrate on a inventory control system for materials. Controls should cover the following functions.　　The ordering of stock　　The purchase of stock　　The receipt of goods into store　　Storage　　The issue of stock and maintenance of stock at the most appropriate level　　1.2 The objective of inventory control The overall objective of stock control is, therefore, to maintain stock levels so that the total of the following costs is minimized:　　Holding costs　　Ordering costs　　Stockout costs　　1.3 Advantages and disadvantages of holding stock　　The basis of the theoretical calculations of an EOQ and an optimal ROL is that there are advantages and disadvantages of holding stock （of buying stock in large or small quantities）. The advantages include:　　the need to meet customer demand　　taking advantage of bulk discounts　　reducing total annual re-ordering cost　　The disadvantages include:　　storage costs 　　insurance costs of stock and warehouse　　rent of warehouse　　rates of ware house　　cost of capital tied up in stock 　　deterioration, obsolescence, and theft. 　　The aim behind the calculations of EOQ and ROL is to weigh up these, and other advantages and disadvantages and to find a suitable compromise level.　　2.EOQ　　2.1 calculation of EOQ When determining how much to order at a time, an organisation will recognise that:　　as order quantity rises, average stock rises and the total annual cost of holding stock rises 　　as order quantity rises, the number of orders decreases and the total annual re-order costs decrease　　The total of annual holding and re-order costs first decreases, then increases. The point at which cost is minimised is the EOQ. This cost behaviour is illustrated by the graph in Figure 1.　　　　The way in which this EOQ is calculated is based on certain assumptions, including:　　constant purchase price　　constant demand and constant lead-time　　hold