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Provide a comparative analysis of inventory systems For the manufacturing sector Using management accounting techniques.

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Introduction

ACCA Paper 1.2 Assignment Financial Information for Management Provide a comparative analysis of inventory systems For the manufacturing sector Using management accounting techniques. F.A.O Barry Corner 3rd November 2003 Group: Vikki Josling, Emma Tudor, Julia Roberts, Kelly Threlfall and Zara O'Neill We work for a firm of accountants, which has recently added management consultancy to the list of services available to our clients. One of our clients, from the manufacturing sector, is considering changing from a periodic inventory system to a perpetual inventory system. Therefore this report explains and gives a comparative analysis of both of these inventory systems. We shall discuss different methods able to be adopted in line with accounting standards and suggest recommendations to the company. We shall show the importance of choosing the correct or rather best suited method in order to represent a true and fair view of the accounts. Page 1. Title Page Page 2. Synopsis Page 3. Contents Page 4. Introduction Page 5. Section 1.0 The Importance of Stock Valuation Section 2.0 Stock Valuation Methods Section 3.0 Perpetual Inventory System. Section 4.0 Periodic Inventory System Section 5.0 Perpetual Vs Periodic Section 6.0 Stock Valuations Through Different Methods One of our clients is considering changing from a periodic inventory system to a perpetual inventory system. ...read more.

Middle

The Statement of Standard Accounting Practise on Stock and Work in Progress (SSAP 9) however, states that LIFO does not bear a reasonable relationship to actual costs obtained during the period and implies that that this method is inappropriate for external reporting. In view of this, FIFO or AVCO should be applied. When making the decision of which method to use, it is necessary to consider that the value of stock must give a true and fair view of the state of affairs the business is in. However, there is no precise definition of what a 'true and fair view really is, and is sensitive to individual judgement. There is much controversy regarding material pricing. Although the objectives are clear - "that a charge to production on a consistent and realistic basis for cost of materials used" (Fong, 2003) there are problems with several issues. 1. Rapidly changing prices for purchases, 2. Stock at different prices held, 3. Impossible to identify items with their delivery consignment. 4. Sensitivity of product cost to materials pricing method used. The valuation of materials is important also because if there is an error in the costs assigned to an ending inventory, then this will create an opposite error in the cost of goods sold, thus repetition of the original error in the amount of gross profit. ...read more.

Conclusion

The choice made should reflect a true and fair view of the company's status. For this reason, the accounting standards thus should not be used by the company prohibits LIFO method. FIFO and LIFO appear to produce similar and fair valuations therefore either, could be used. Both the periodic and perpetual system allows either stock valuation to be used. The perpetual system is very time consuming, thus costing the company money. Where as the periodic system is not prepared as often (although regular enough to ensure the company is up to date) and therefore costs less time and money. Such conclusions suggest the periodic inventory system with either a FIFO or AVCO stock valuation method would prove to be the most suitable. Through the discussions in this report it becomes apparent that the most suitable stock valuation method, which abides to accounting standards is FIFO or AVCO. As these can be applied in either inventory system, we suggest the periodic inventory to be chosen, as it is most cost efficient. The company is already using this technique, so no inventory change is recommended. Depending on which stock valuation method is currently in practise depends on whether a change here applies. If they are using LIFO then they must change in order to comply with accounting standards. Otherwise, no change is needed is either LIFO or AVCO is recommended. ...read more.

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