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Cost and management accounting (mgt 402).........Start date : 12 may 2016.........End date : 18 may 2016 )...Marks 10

Cost & Management Accounting (MGT402)

GDB # 01

Total Marks: 10

Case:

Following are the inventory turnover ratios of Global Company, Cosmos Company, SunStar Company and Galaxy Company for the financial year 2010, 2011 and 2012. SunStar and Galaxy Company manufacture heavy machinery whereas Global and Cosmos Company are retailers of general merchandise.

Company

FY-2010

FY-2011

FY-2012

Global Co.

?

6.78

6.81

Cosmos Co.

11.34

10.97

10.74

SunStar Co.

1.83

1.59

1.9

Galaxy Co.

3.97

3.78

4.12

 

 

Financial information of Global Company for financial year 2010 is as follows:

  • Opening inventories-----------------Rs.  30,000
  • Closing inventories------------------Rs.  41,000
  • Cost of goods manufactured-------Rs. 261,000

Required:

  1. In general, higher inventory turnover ratio indicates efficient operations carried out by an organization but a very high ratio is not considered good. Why is it so?                                                        
  2. Calculate the missing figure for inventory turnover ratio of Global Company for year 2010 with the help of given data?                                                                                                  
  3. Can we compare inventory turnover ratio of Global Company with that of SunStar and Galaxy Company? Justify your answer with logical argument.                       

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Replies to This Discussion

first you find average inventory 

opening inventory + closing inventory/2

and then you find cost of good sold 

cost of good manufactured

+opening finished goods inventory

cost of good to be sold

-closing finished goods inventory

cost of good sold 

and then you calculate inventory turnover ratio=costof good sold/average inventory and you find the figure 7.0422 of 2nd question

this is correct method

pls share the ans of 3

پارٹ اے کا جواب بہت آسانی ویب سرچ پر مل جائے گا۔ اور پھر اس کو اپنے الفاظ اور آئیڈیے میں ڈھال کر جواب فائنل کر لیں۔

plz search higher inventory turnover ratio.

پارٹ سی: کا آسان جواب ہے کہ انونٹری کمپیر کرنے کے لئے دونوں کمپنیوں کا ایک یہ انڈسٹری یعنی بزنس میں ہونا لازمی ہے۔

plx translate in eng?

 ejaz part c ka jawab ko achi tarikay say ghoro fikar karey aur plz english mein jawab day ...urdu mein mein nahin samaj aa rahi k kya kehna cha rahay hain

caompanies hain 3 to business already hoo gi na 

As you don't understand my reply in Urdu, here is the English one.

Part A: Please just search on internet to get the answer.  Search with "higher inventories turnover ratio" read out some articles and literature then prepare your own answer in simple words. (FYI, I did the same)

PART C: Its very easy.  To compare inventory both firms/companies should be from same industry/business whereas in the given question one is from Heavy Machinery manufacturer and other one's business is general merchandiser.

Please note this is only idea and discussion, prepare your answer in your own words.

yes ejaz part c mein yehi baat likhi ja sakti hai 2 same level ki companies mein compare hoo sakta hai ,ya 1 hi business say talaq rakhnay walay business mein comparison hoo sakta hai .....soo iss ka ans yehi hoo ga ...no there is no comparison between them.......

part c ka jawab to nikal aaya ...ab part a ko net say search kar k btata hoon k iss ka kya jawab hoo ga

ap sara solution send kr du na ....plzzz

A high turnover is typically preferred and shows strong sales performance. Turning over inventory quickly also improves your company's liquidity, or ability to keep up with near-term debt obligations. High turnover also can be misleading, however. Your high ratio may result because you buy too little inventory to keep up with customer demands. Buying smaller inventory amounts regularly means you pay higher price points. This inflates your cost of goods sold, which makes for a higher turnover ratio. Along with looking at your ratio, you also need to review your inventory buying practices.

In general, low inventory turnover ratios indicate a company is carrying too much inventory, which could suggest poor inventory management or low sales. Excess inventory ties up a company's cash and makes the company vulnerable to drops in market prices. Conversely, high inventory turnover ratios may indicate a company is enjoying strong sales or practicing just-in-time inventory methods. High inventory turnover also means a company is replenishing cash quickly and has a lower risk of becoming stuck with obsolete inventory. However, higher is not always better, and exceptionally high inventory turnover may indicate a company is running out of items frequently or making ineffective purchases and therefore losing sales to competitors.

It is important to understand that the timing of inventory purchases, particularly those made in preparation for special promotions or new-product introductions, can suddenly and somewhat artificially change the ratio.

Different choices in inventory accounting methods can also affect inventory turnover ratios. In periods of rising prices, companies using the last-in-first-out (LIFO) inventory method show higher costs of goods sold and lower inventories than companies using the first-in-first-out (FIFO) method. Thus, LIFO companies generally report higher inventory turnover ratios than FIFO companies, even when the companies are very similar. Additionally, companies using LIFO also tend to carry more inventory than FIFO companies; the LIFO method increases cost of goods sold, which reduces profits and in turn lowers tax liabilities.

Inventory turnover ratios vary by company as well as by industry. Low-margin industries tend to have higher inventory turnover ratios than high-margin industries because low-margin industries must offset lower per-unit profits with higher unit-sales volume.

For all of these reasons, comparison of inventory turnover ratios is generally most meaningful among companies within the same industry, and the definition of a "high" or "low" ratio should be made within this context.

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