Paper F2, Management Accounting Lecture by: Mr. Farrukh Abbas

1-Page | 29th

of March 2011 Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI

http://acca.moviezbuzz.com

System for Recording of Inventory

One out of the following 2 systems can be used for the recording of inventory.

Bin Card System:

In this system, the issues & receipts are recorded on a Bin Card. Separate Bin card in maintained for every type of

Inventory

1. Store department is responsible for preparing, maintaining and updating Bin card.

2. Only Quantity of issues & receipts is recorded.

Stores Ledger Control Account System:

In this system issues & receipts are recorded in ledgers. Every inventory has its own ledger account.

1. Costing department is responsible for preparing, maintaining & updating accounts.

2. Quantity as well as value of issues & receipts is recorded here.

Inventory Management System

Two Bin Card System:

In this system two reserves are maintained at all times. If one reserve is emptied, immediately the order is placed to

refill it and the other reserve is used.

Just in Time System:

In this system no reserves are maintained. Inventory is purchased when the production needs to be done. This type

of system is very difficult to maintain.

Controlling Inventory Levels

If a business holds excessive inventory levels its storing cost will rise and if inventory levels are too low there is a risk

that production may stop. So a business has to control its inventory levels.

Free Stock:

Free stock is a tool which controls inventory levels. It is calculated by using the following formula.

Free Stock = Inventory In hand + Inventory on Order Inventory requisition by production department

Example:

If 300kg of material X are available in stock. Business has placed orders for 2000kg with suppliers and production

department has requested 600kg. Calculate the amount of free stock.

Paper F2, Management Accounting Lecture by: Mr. Farrukh Abbas

2-Page | 29th

of March 2011 Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI

http://acca.moviezbuzz.com

Solution:

Free Stock = Inventory In hand + Inventory on Order Inventory requisition by production department

= 300kg + 2000kg 600kg

Free Stock = 1700 kg

Safety Stock / Minimum Stock Level / Buffer Stock:

Stock should be kept at a minimum level required by business at all times.