University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

150

Pages:

2
Author:

stud_ice13

Effective management of raw materials inventory is crucial for optimizing costs and ensuring production runs smoothly. Managerial accounting provides specific metrics to assess and improve inventory management practices: Raw Materials Inventory Turnover • • • • • Definition: This ratio measures how many times a company uses up its raw materials inventory within a given period, offering insight into the efficiency of inventory management. Calculation: Raw Materials Inventory Turnover is calculated by dividing the cost of raw materials used during the period by the average raw materials inventory: Raw Materials Inventory Turnover=Direct Materials Used Example: For Rocky Mountain Bikes, if the direct materials used are $85,500, with a beginning inventory of $8,000 and ending inventory of $9,000, the average raw materials inventory is: Average Raw Materials Inventory=8,000+9,0002=8,500 Therefore, the turnover ratio would be: Raw Materials Inventory Turnover=85,5008,500=10.06 times Interpretation: A higher turnover rate is generally preferable as it indicates efficient use of raw materials, assuming inventory levels are sufficient to meet production demands. Days’ Sales in Raw Materials Inventory • • • Definition: This measure shows the number of days it takes for a company to use its raw materials in production, providing an indicator of inventory adequacy. Calculation: Days' Sales in Raw Materials Inventory is calculated by dividing the ending raw materials inventory by the average daily usage of raw materials: Days’ Sales in Raw Materials Inventory=Ending Raw Materials Inventory Average Daily Usage of Raw Materials Example: For Rocky Mountain Bikes, with an ending inventory of $9,000 and annual direct materials used of $85,500, the average daily usage is: Average Daily Usage=85,500365≈234.25 Thus, the days' sales in raw materials inventory would be: Days’ Sales in Raw Materials Inventory=9,000234.25≈38.4 days Interpretation: A lower value here is preferable if it can still meet production needs, as it minimizes costs associated with excess inventory. However, maintaining very low levels, such as 2 days, could lead to stockouts and production delays unless a reliable JIT system is in place. These metrics, along with tools like just-in-time (JIT) inventory management, help companies balance inventory costs with production needs. Managerial accounting insights help companies make data-informed decisions to optimize inventory turnover, reduce costs, and maintain smooth production flow.