A company has obsolete inventories and it must write off these inventories. How does writing off inventories impact on the company's financial statements?1. Stock increases2. Stock decreases3. Profit increases4. Profit decreases
Answer(s): A
An inventory write-off is a process of removing from the general ledger any inventory that has no value.Using the direct write-off method, a business will record a credit to the inventory asset account and a debit to the expense account. For example, say a company with $100,000 worth of inventory decides to write off $10,000 in inventory at the end of the year. First, the firm will credit the inventory account with the value of the write-off to reduce the balance. The value of the gross inventory will be reduced as such: $100,000 - $10,000 = $90,000. Next, the inventory write-off expense account will be increased with a debit to reflect the loss.The expense account is reflected in the income statement, reducing the firm's net income and thus its retained earnings. A decrease in retained earnings translates into a corresponding decrease in the shareholders' equity section of the balance sheet.If the inventory write-off is immaterial, a business will often charge the inventory write-off to thecost of goods sold (COGS) account. The problem with charging the amount to the COGS account is that it distorts the gross margin of the business, as there is no corresponding revenue entered for the sale of the product. Most inventory write-offs are small, annual expenses. A large inventory write-off (such as one caused by a warehouse fire) may be categorized as a non-recurring loss.
- CIPS study guide page 86-90- Inventory Write-OffLO 2, AC 2.1
A manufacturer is making a plan for strategic safety stock. To do so, they must analyse the proba- bility of a stock out occurring and the cost impacts if it does.Which of the following are typical costs the manufacturer may incur in 'out of stock' event? Select TWO that apply.
Answer(s): A,B
The costs of stockouts - the costs of being out of inventory - include:- Loss of production output- Costs of idle time and of fixed overheads spread over a reduced level of output- Costs of any action taken to deal with the stockout, such as buying from another stockist at an enhanced price, switching production, obtaining substitute materials- Loss of customer goodwill due to the inability to supply or late delivery. (Procurement and Supply Chain management - 9th Edition, K. Lysons and B. Farrington, 2016) LO 2, AC 2.2
MRP system is the most suitable IT system to manage which type of items?
Material requirement planning (MRP) is a production planning and material (inventory) control system used in manufacturing. Objectives of MRP are to ensure materials are available for production while minimising inventory and to plan production and procurement activities. Bill of materials (BOM) is an important component of MRP. BOM is also known as product struc-turer.This lists all the items that comprise each assembly and sub-assembly that make up the final product or end item. Therefore, MRP is commonly used to manage dependent demand stock.
CIPS study guide page 116-119LO 2, AC 2.3
Which of the following are recognised as disadvantages of ERP systems? Select TWO that apply.
Implementing a full ERP system is not an easy option. They are complex systems and the disad- vantages include the following:- The installation of the ERP system is costly. ERP consultants are very expensive take approxi-mately 60% of the budget.- The success depends on the skills and experience of the workforce, including education and how to make the system work properly.- Resistance in sharing internal information between departments can reduce the efficiency of the software.- The systems can be difficult to use.- Change of staff, companies can employ administrators who are not trained to manage the ERP system of the employing company, proposing changes in business practices that are not synchro- nized with the system.- Having an ERP system has many advantages, but does not guarantee the total success of the company. Organizational culture, know how to involve staff and anticipate changes that will suffer the organization using this system of administration, are important elements for the completion of the implementation.- The effectiveness of the ERP system may decrease if there is resistance to share information be- tween business units or departments. Due to strong changes that implementation of the ERP system brings in the culture of work, there may be poorly trained or disinterested in making use of the same staff...- The benefits of having an ERP system are not presented immediately with the implementation of the software, they will be evident long after the system is running.- The culmination of the implementation depends on the ability and skill of the workforce, also involves education and training, to make the system is correctly applied.
- What are the Advantages and Disadvantages of ERP System- CIPS study guide page 119-122LO 2, AC 2.3
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