Question

Scenario You have been considered for appointment as an Assistant Management Accountant by MKL 5050 LLC, a manufacturer of electronic items which is based in Abu Dhabi and one of your major task is to help review the costing techniques and methods in the company. In addition, you need to support management of MK 5050 LLC to apply and select the best inventory valuation methods and the best costing techniques suitable to the company to enable them meet the Accounting reporting standards in the UAE and to ensure that they are profitable. As part of your interview process, the HR Department of MKL 5050 LLC has outlined the following tasks for you to answer appropriately and enable them to decide whether you are the best candidate / applicant for the role of Assistant Management Accountant. The following tasks are outlined by the owner to enable her assess your competency to achieve your objectives as the new cost accountant for MKL 5050 LLC. Undertake further research and answer the tasks assigned to you appropriately.

Answer 1

1.1

1. Purchase requisition

   When the Current inventories run down to the level, which requires replenishment, it can be said that reoder level has been reached i.e. time has come to reorder the inventory to avoid stock - out.

   The stores department issues a purchase requisition for the quantities required to be replenished, which is sent to the purchasing department, authorising the department to order further inventory.

2. Purchase order

   The purchasing department draws up a Purchase Order which is sent to the supplier. Copies of the purchase order must be sent to the accounts department and the storekeeper (or goods receiving department), in order to keep everyone on the same page and for the purposes of cross-checking.

3. Quotation

   The Purchasing department may have to obtain a number of quotations, if a new inventory line is required, the existing supplier's costs are too high or the existing supplier no longer stocks the goods needed. Similar procedure can be replicated for existing inventory too.

4. Delivery note

   The Supplier delivers the consignment of materials, and the storekeeper signs a delivery note for the carrier. The packages must then be checked against the copy of the purchase order, to ensure that the supplier has delivered the types and quantities of materials which were ordered.

5. Goods received note

   If the delivery is acceptable, the storekeeper prepares a goods received note (GRN). A copy of the GRN is sent to the accounts department, where it is matched with the copy of the purchase order.

   The supplier's invoice is checked against the purchase order and GRN, and the necessary steps are taken to pay the supplier and to make necessary entries in the Books.

1.2 Carrying cost of inventory p.a. = 13500000*25% = AED 3375000

1.3 Optimal Reorder Quantity = [(2*Annual usage*Order cost)/Annual carrying cost]^0.5

=[(2*200000*10/3)]^0.5 = 1155 kg

1.4

a) Avoid Minimum Order Quantities and know your Reorder point

A minimum order quantity (MOQ) is the smallest amount or number of a product that a company will supply. MOQs are very common, and they’re used by suppliers and manufacturers to unload more of their inventory on retailers and wholesalers – reducing their cost of inventory but increasing yours.

They might offer you deals like “buy 50 units and receive 10 units widgets,” but this only adds extra widgets to your inventory you may not be able to sell.

There are a few ways to avoid the burden of MOQs.

• Pool your cash and buy the units together (with other businessman in same business as yours) and then split it between yourselves.
• Try negotiating with supplier for less inventory, enticing them to forego their MOQ policy – which could save you more money in the long run.

A reorder point will help you determine when you need to order your next shipment of stock. Knowing your reorder point can ensure you never order too much and risk obsolescence, but never order too little and risk stock-outs.

b) Get Rid of Obsolete Stock

Holding too much inventory increases the chance that the stock you thought would sell, is now taking up space in your warehouse and costing you more money than you paid for it.

The essence of reducing the cost of inventory is inventory reduction. The less you have, the less your costs will be. And obsolete stock is the most costly inventory one can have.

If there is already lot of obsolete stock, try product bundling to sell more of it, or try discounting them individually.

If it cannot be sold, try donating your obsolete stock for a tax write-off.

c) Implement a Just-in-Time Inventory System

Just-in-time inventory (JIT) management is a method for keeping almost no inventory in your warehouse at all, but instead, ordering everything you need the moment you need it.

It’s a form of lean manufacturing that would mostly eliminate the cost of inventory.

It requires to:

• Develop a strong relationship with the supplier
• Find a long-term supplier for each of the inventory
• Shorten production cycle
• Separate repetitive orders from one-stop business
• Institute or improve your quality control program