Reconciling demand for resources and outputs with their supply is associated most closely with which of the following?
A Inventory management
B Production planning and control
C Capacity planning and control
D Quality control
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Entity G uses 105 units of an item of inventory every week. These cost GH₵150 per unit. They are stored in special storage units and the variable costs of holding the item is GH₵4 per unit each year plus 2% of the inventory’s cost.
Required
(a) If placing an order for this item of material costs GH₵390 for each order, what is the optimum order quantity to minimise annual costs? Assume that there are 52 weeks in each year.
(b) Suppose that the supplier offers a discount of 1% on the purchase price for order sizes of 2,000 units or more. What will be the order size to minimise total annual costs?
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Ravens Limited (RV) imports a high-value component for its manufacturing process. The following data, relating to the component, has been extracted from RV’s records for the last twelve months:
| Maximum usage in a month | 300 units |
|---|---|
| Minimum usage in a month | 150 units |
| Average usage in a month | 225 units |
| Maximum lead time | 6 weeks |
| Minimum lead time | 2 weeks |
Required
Calculate the average stock level for the component.
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Kweku Ltd, a manufacturer of groundnut paste, is evaluating whether to continue with its economic order quantity (EOQ) or accept a special order from a foreign supplier for groundnut purchases. The relevant financial data is provided below:
| Description | Value |
|---|---|
| Purchase price per bag of groundnut | GH¢360 |
| Holding cost per annum (10% of the cost of a bag of groundnut) | GH¢36 |
| Ordering cost per order | GH¢7.70 |
| Annual demand of groundnut paste | 6,240 bags |
| Normal usage per month | 520 bags |
| Minimum usage per month | Not specified |
| Maximum usage | Not specified |
Required:
The foreign supplier offers an 8% reduction in the price per bag of groundnut if Kweku Ltd orders 3,000 bags each time. Advise Kweku Ltd on whether to accept the supplier’s offer.
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The working capital (or cash operating) cycle of a business is the length of time between the payment for purchased materials and the receipt of payment from selling the goods made with the materials.
The table below gives information extracted from the annual accounts of Entity N for the past three years.
Entity N – Extracts from annual accounts
| Year 1 | Year 2 | Year 3 | |
|---|---|---|---|
| GH¢ | GH¢ | GH¢ | |
| Inventory: | |||
| Raw materials | 108,000 | 145,800 | 180,000 |
| Work in progress | 75,600 | 97,200 | 93,360 |
| Finished goods | 86,400 | 129,600 | 142,875 |
| Purchases | 518,400 | 702,000 | 720,000 |
| Cost of goods sold | 756,000 | 972,000 | 1,098,360 |
| Sales | 864,000 | 1,080,000 | 1,188,000 |
| Trade receivables | 172,800 | 259,200 | 297,000 |
| Trade payables | 86,400 | 105,300 | 126,000 |
Required
(a) Calculate the length of the working capital cycle (assuming 365 days in the year).
(b) List the actions that the management of Entity N might take to reduce the length of the cycle.
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The financial performance of Nexus Enterprises is summarised below. ‘Now’ is the end of Year 3.
| Year 1 | Year 3 | Year 4 (forecast) | |
|---|---|---|---|
| Cost of sales/Sales | 63% | 70% | 70% |
| Marketing costs/sales | 9% | 6% | 5% |
| Distribution costs/sales | 13% | 8% | 6% |
| Administration costs/sales | 2% | 2% | 2% |
| Interest charges/Sales | 0% | 4% | 8% |
| Operating profit/sales | 13% | 10% | 9% |
| Loans/Sales revenue | 0% | 50% | 67% |
| Inventory/Sales | 10% | 14% | 18% |
| Sales/Non-current assets | 4.7 times | 1.9 times | 1.2 times |
| Average sales per employee | 600,000 | 1,032,000 | 686,000,000 |
| Average sales per product | 281,000 | 185,000 | 234,000 |
| Average sales per supplier | 750,000 | 726,000 | 651,000 |
Required:
Use this information to evaluate the financial performance of Nexus Enterprises.
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Your firm has been invited to tender for the audit of Marvelous Retail, a chain of twenty stores operating a sophisticated computerised inventory control and re-ordering system. Four other firms have also been invited to tender. As part of the tendering process, you have been asked to produce a written presentation.
Given the complex systems within its business, Marvelous Retail is particularly anxious to establish the ability of your audit procedures to deal with the business risks and has asked you to set out as part of your presentation, your approach concerning the following:
(1) Audit risk, and how your procedures would seek to address it to their business.
(2) Materiality, and how this might be applied.
Required
Draft the sections of the presentation to Marvelous Retail which deal with these two aspects of the audit approach.
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21 Golden LLC
Golden LLC designs, manufactures and retails traditional Ghanaian jewellery. Inventory is held at the design warehouse and at three shops. Inventory is also sometimes sent to customers for approval prior to a sale being made. Your firm has been re-appointed as auditors for the year ended 31st December 20X8.
Golden LLC has had a difficult year. A recession has caused a fall in revenue and the future is uncertain. A fourth shop was closed during the year and the premises are still up for sale. The financial director was dismissed half way through the year and is pursuing a claim for unfair dismissal. A replacement has not yet been found.
The managing director is due to retire next year and is likely to require loans he has made to the business to be repaid. Negotiations with the bank in respect of loans to cover these repayments have started.
Required
(a) State what you understand by audit risk and why it is important to the auditor.
(b) Identify the risks arising from the above that will need to be considered when planning the audit of Golden LLC. Explain why these risks need to be considered.
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