7 STOCK CONTROL SYSTEMS7.1 Re-order level ("Two bin") system

• Determine optimum re-order levels and re-order quantities.
• When stock falls to re-order level ("reserve" bin), place an order for fixed quantity.
• On receipt of order, top up "reserve" bin and put balance into main bin.
• The re-order quantity which minimises total inventory costs is the EOQ.

7.2 Periodic review system

• Determine a review period (eg to fit in with production schedules)and maximum stock levels.
• At the end of each fixed time interval † place an order to replenish stock to maximum.

† The time interval which minimises the annual cost of acquiring and holding stock is called the "economic review period".7.3 Just in time ("JIT")7.3.1 Production

A production planning technique which emphasises acquiring materials and producing goods and services (both internally and externally) at the moment they are required.

• Driven by demand for finished products
• Each component on a production line us produced only when needed for the next processing stage.

7.3.2 Purchasing

A purchasing system in which material purchases are contracted so that receipt and usage coincided to the maximum possible extent.

7.3.3 Necessary conditions

• Co-operation/flexibility of suppliers and internal workers

• Guaranteed quality of raw materials

• Geographically close

• Low stock levels and short production runs

7.3.2	Advantages	7.3.3	Disadvantages
	Stocks kept to absolute minimum (stock holding costs )		Risk of "just too late"
	Space saving		More frequent handling of smaller batches (re-order and set-up costs )
	Less obsolescence on changes in product specification		Higher cost of monitoring and control

7.4 ABC coding systems

• ABC coding systems direct maximum stock control effort to most important (eg highest value) items.

• Total purchase cost of each stock item needs to be estimated for a period

• A items represent top 10% in terms of annual purchase cost

• B items represent next 20%

• C items represent remaining 70%

• Category A items will require greatest inventory control through quantitative techniques.

7.5 Perpetual inventory methods

• Up to date stock balance are always known therefore facilitates continuous stocktaking

• A replenishment point frequently triggers an order system relies on accuracy of records

• Point of sale (POS) terminals may automatically update stock records for each sale.
• System provides data showing fastest moving lines therefore tactical decisions on prices can be made to move slow-moving items.

8 PRICING METHODS8.1 The problem

• The cost of materials purchased will normally be derived from suppliers invoices, but where identical purchases have been made at differing prices, a decision must be taken as to which price is used.

8.2 FIFO

• First in, first out
• First units purchased are deemed to be the first issued to be used in production
• The unit cost for the first batch received (ie "first in") is the issue price until the whole batch has been issued – then the unit cost of the next batch in is the issue price.

8.3 LIFO

• Last in, first out
• Most recently purchased units are deemed to be the first issued to be used in production
• If a new batch is received before the previous batch is fully issued, the new cost becomes the "last in" price until the new batch is fully issued or a new delivery received.

8.4 Weighted average

• An average price is calculated weighted for the number of units purchased at each price
• Average price at any time is total value divided by the balance of units.

8.5 Standard cost

• A predetermined estimate is used as the unit cost of stock. (Any difference between the standard and actual cost is written off separately in the P&L a/c.)

Example 5The following data relates to the receipts and sales of stock during the month of January. There was no opening stock.Required

Calculate the value of closing raw material stock using the following methods to price issues

(i) FIFO
(ii) LIFO
(iii) Weighted average.

8.6 Comparison

Method	Advantages	Disadvantages
FIFO	Up to date closing stock value Realistic reflection of physical movement of materials etc	· Out of date cost of issues (if prices or old stock held) · Tedious record-keeping · Identical jobs may have different costs
LIFO	Up to date cost of issues	· Out of date closing stock value (if purchased some time ago) · Unrealistic – oldest materials etc should be issued first · Tedious record-keeping
Weighted average	A compromise on stock valuation and pricing of issues Assumes identical items have some value Simpler record keeping	· Tedious calculations of weighted average (on every receipt) · Fictitious issue price (ie not actual)
Standard cost	Simpler record keeping	· Only "as good" (ie approx to actual)as standard costs employed ( keep up to date) · Differences from standard need to be written off to P&L a/c.

In periods of rising prices, FIFO shows higher profits than LIFO and vice versa.Solution 1 – Annual total cost(a) Q = 200Annual ordering cost = = 2 = £400Annual holding cost = = 1 = £100Total cost = 400 + 100 = £500(b) Q = 400Annual ordering cost = 2 = £200Annual holding cost = 1 = £200Total cost = 200 + 200 = £400(c) Q = 600Annual ordering cost = 2 = £133.33Annual holding cost = 1 = £300Total cost = 133.33 + 300 = £433.33Summary

	(i) Order	(ii) Holding	(iii) Total
(a) (b) (c)	£400 £200 £133	£100 £200 £300	£500 £400 £433

Solution 2 – EOQ(a) EOQ = = = = 400(b) 40,000 items are required p.a. = 100 orders need to be placed p.a.(c) 100 orders to be placed during 300 working days = 3Orders should be placed every 3 daysAlternatively, usage rate = = 133.33 per dayItems are ordered in batches of 400= 3 days worth of stockSolution 3 – Maximum stock levelsThe problem is to find a value for C_H which can be used in the EOQ formula.Sundry holding costs £3 – based on average stock as normal.Warehousing cost – each unit’s worth of space which is used has an opportunity cost of the lost rental of £4.25 2 = £8.50BUT x units worth of space must be retained, not ^X/₂ units worth, ie the cost of warehousing is £8.50 (= £17 ^X/₂).Therefore the total value for C_H to be put in the formula is £3 + £17 = £20EOQ = = 1,000 unitsSolution 4 – ROLROL = 4 30 = 120 unitsSolution 5 – Pricing material issues(a) FIFO

Date	Receipts	Issues	Balance
5/1	100 @ £5 = £500		100	£500
16/1	50 @ £5.50 = £275		150	£775
17/1		40 @ £5 = £200
20/1		60 @ £5 = £300
		10 @ £5.50 = £55	40	£220
23/1	50 @ £6 = £300		90	£520
30/1		40 @ £5.50 = £220
		30 @ £6 = £180	20	£120

(b) LIFO

Date	Receipts	Issues	Balance
5/1	100 @ £5 = £500		100	£500
16/1	50 @ £5.50 = £275		150	£775
17/1		40 @ £5.50 = £220	110	£555
20/1		10 @ £5.50 = £55
		60 @ £5 = £300	40	£200
23/1	50 @ £6 = £300		90	£500
30/1		50 @ £6 = £300
		20 @ £5 = £100	20	£100

(c) Weighted average

Date	Receipts	Issues	Balance
5/1	100 @ £5 = £500		100 @ £5 =	£500
16/1	50 @ £5.50 = £275		150 @ £5.17 =	£775
17/1		40 @ £5.17 = £207	110 @ £5.17 =	£568
20/1		70 @ £5.17 = £362	40 @ £5.17 =	£206
23/1	50 @ £6 = £300		90 @ £5.62 =	£506
30/1		70 @ £5.62 = £394	20 @ £5.62 =	£112

1 LABOUR1.1 Direct v indirect labour cost

can be specifically traced to or identified with a particular product/service	· not charged directly to a product
· Egs · wages of operatives assembling parts into finished products · machine operatives engaged in production process.	· Eg · instruction and supervision · idle time

1.2 Accounting categories

1.2.1 Payroll accounting	1.2.2 Labour cost accounting
records amounts due to employees, taxing authorities (eg Inland Revenue), etc	· identifies amounts to be charged to individual jobs and overhead accounts

2 PAYROLL ACCOUNTING2.1 Payroll

• A record showing, by each employee

• gross wages/salaries

• deductions (eg tax, social security employees’ pension contributions, etc).

• May include details of employer’s associated employment costs (eg employer’s pension contributions).

2.2 Accounting entries

• Monthly (or weekly) ledger entries

• Periodically (eg monthly/quarterly) the employer pays the balance on the PAYE/SS account to the taxation authorities

2.3 Source documents

• Attendance records (eg clockcards, absenteeism reports).

2.4 Payroll analysis

• Gross wages
• per department or operation
• per labour classification
• by product
• chargeable and non-chargeable, etc.

3 LABOUR COST ACCOUNTING3.1 Source documents

• Clock cards
• Time sheets
• Job cards
• Idle time records

3.2 Job costing system 4 LABOUR TIME AND WAGE ROUTINES4.1 Clockcards

• "Gate timekeeping" records are needed to record time at work.

• Modern time-recording systems may not use physical cards.

4.2 Time sheets

• Made out for each employee.
• A common method of relating time to activities.
• Two kinds

4.3 Job cards

• Made out for each job.

5 REMUNERATION METHODS5.1 Fixed salaries

• For a calendar period (week, month or year).
• Will be fixed for any production level, so cost per unit will decrease as production increases.
• Management will be paid on this basis, as may most of the permanent workforce.

5.2 Time rate

• A fixed amount per unit of attendance time eg hour or day.
• Method used where payment based on quantities produced would be unsuitable (eg temporary secretaries and maintenance workers).
• If production rate is fairly standard, labour cost will be approximately constant per unit. If not, it could vary widely from unit to unit.
• Advantages
• easy to administer
• simple to negotiate.
• Potential problems
• employees are not motivated to increase productivity
• constant supervision may be required
• encourages laziness.

5.3 Piecework rate

• A fixed amount per unit of output achieved.

• Often operated based on standard time per unit (eg bricklaying) (although a higher rate may be paid for higher levels of output).

Illustration 2Tim Kowalski carves wooden animals for a small company supplying the tourist market. In week 26 his production was as follows.He is paid £6 per standard hour of production (irrespective of actual time worked).RequiredCalculate Tim’s earnings for week 26

Solution

		£
Deer Mink Owls Eagles	6 2 £6 5 1.5 £6 12 1 £6 6 2 £6	72 45 72 72 ___ 261 ___

• Advantages
• Constant labour cost per unit
• Encourages efficient work.
• Disadvantages
• Lack of income security (demotivating)
• Quality may fall or inspection costs increase
• Labourers may suffer financially due to factors they cannot control (eg faulty materials).
• If production is low, the piecework rate method of payment may be accompanied by a guaranteed minimum payment (weekly or daily).

Illustration 3Standard rate per hour = £4Guaranteed minimum per week = 35 hoursActual production in week 6: 10 units @ 3 hours per unitPiecework rateStandard hours = 10 × 3 = 30 hoursPay = 30 × 4 = £120Subject to guaranteed minimum pay = 35 × 4 = £140 Therefore week 6 pay = £140

5.5 Overtime

• Usually arise from working outside normal hours, including weekends and national holidays.
• Is usually paid at some rate over the normal (time and a half or double time). The excess over the normal rate is overtime premium. Charging of the overtime premium will vary according to the circumstances.
• Examples
• Allocate directly to the job – if overtime worked on customer’s specific instructions
• Allocate to a separate general production overhead a/c – if arising from general pressure of work
• Allocate to the department responsible for the delay which necessitated working overtime
• Charge directly to costing P&L a/c – if due to circumstances beyond the control of any department (eg power failure, fire, national strike, etc).

6 MEASURES6.1 Labour turnover6.1.1 Meaning

• Is the rate at which employees who have to be replaced leave

= 100%6.1.2 Reasons for

• Low rates of pay
• Lack of supervision and/or training
• No job and/or promotion prospects.

6.1.3 Costs arising

• Leaving costs – administering documentation and possible disruption of work

• Recruitment costs – advertising, selection and engagement.

• Learning costs – retraining costs and lower productivity (initially)

• Lower productivity – due to low morale and/or high incidence of absenteeism

Illustration 5An assembly department employs 30 direct workers and a supervisor at the beginning of a period. During the period six workers left, only four were replaced.RequiredCalculate labour turnover for the period.

SolutionAverage number of direct workers = 1/2 (30 + 28) = 29Labour turnover = 4/29 100 = 13.8%

• % can be compared with past figures, targets, industry averages etc.

• Usually closely linked to

• remuneration
• working conditions
• training opportunities
• promotion.

• Other contributory factors – retirement, illness, death, pregnancy.

6.2 Efficiency and utilisation 6.2.1 Production volume ("activity") ratio

• Measures volume of output against budget.
• A standard hour = output (production units) achievable in an hour

6.2.2 Efficiency "productivity" ratio

• Measures efficiency of direct labour.

6.3 Idle time

• Non-productive hours (that are nevertheless paid for) should obviously be prevented as far as possible.
• It is important to analyse causes of idle time so that necessary corrective action can be taken.
• Three types of causes
• Productive causes (eg machine breakdown, power failure or time spent waiting for tools, materials etc)
• Administrative causes (eg surplus capacity, unforeseen drop in demand)
• Economic causes (eg seasonal fluctuations in demand).