CHAPTER ONE
INTRODUCTION
Stock work-in- progress otherwise known as inventories are defined by the international accounting standards (IAS)
(a) Held for resale in the ordinary cause of business
(b) In the process of production for such sale or
(c) To be consumed in the production of goods or services for such sale.
This stock and work-in-progress cannot be the stock of raw materials, finished goods, component parts utilized in the production process and the items that have begun the production cycle are yet to complete the production process.
Survey carried out by the accountants of international study groups in 1968 showed that stock and work-in-progress broadly called inventories, generally constitute after fixed assets, the largest balance sheet in the financial report of manufacturing firms. Expressed as percentage of net assets after depreciation, the size of such inventories is assessed at twenty six percent (26%). According to J.Fred Welton and Eugene F. Brigham,, although various occur, inventories to sale ratio is usually concentrate in 12%-20% range. As we know in accounting, opening stock plus purchase less closing stock equal the cost of goods sold this figure when subtracted from sales produces the gross party. Thus, accounting for stock and work-in-progress is of particular importance to the management of a firm since such treatment will affect both income measurement and financial statement. Adequate management and control policies enhance the growth and working capital policy of any firm
Inventories must be maintained so that a customer may be served immediately or at least quickly enough so that he does not turn to another source of supply on the other hand, production operation cannot flow smooth without inventories or work-in-progress, direct materials, finished parts and supplies. Thus inventories are used to absorb expected fluctuations in demand. This help the different part of the organization to be less dependent on each other enabling each to function effectively. The accounting task is essentially one of keeping track of all production cost incurred “under the factory roof” from the time raw materials are purchased to the time finished goods are shipped to customers. This, however includes the over heads incurred in bringing the inventories to their present location and condition which form part of the conversion cost. The necessity for adequate stock and work-in-progress recognizes the importance of optimum investment in stock and work-in-progress.
This helps to avoid the problems and cost of carrying too bulk or too large inventories.
According to J. Fred Weston and F. Eugene Brigham “ the major determinants of investment in inventory are the level of sales, length and technical nature of the production process as well as durability versus perishability in the end product”. The movement of inventories from both receipts, issue and use need care and a measure of internal control. Usually a bincard system is used and from the records a new running balance is always maintained closely related to this perpetual inventory system is then compared with those of the bin-cards and store-keeper by a store audit check
Discrepancies are investigated and adjustments made. The basis on which inventories are value for both charging to the manufacturing account and inclusion in the balance sheet may vary. Different method will suit firms in different industries and situations. But it must be stressed that once a firm has close to use the method, then, it should act consistently and not changing from one method to another without good reason. This is because the valuation of current assets, working capital and the financial position in general. However, the choice of valuation base will consider the requirements of the Nigeria Accounting standards and those of the board of inland revenue. The author of this project work deeded to under take the study stock and work-in-progress because of the far reaching effects of such stock and work-in-progress on the manufacturing firms, their owners and other users of the information.
1.2 STATEMENT OF PROBLEM
As aforementation, stock and work-in-progress constitute after fixed assets, the largest balance sheet item in the financial report dog manufacturing firms planning for stock and work-in-progress is an important function of the management which aims at avoiding stock- out or carrying excessive stock production purpose. Stock-out costs are the costs incurred when there is a shortage of materials and consequently stoppage of production including:
(a) Loss of goodwill
(b) Loss of sales revenue
(c) Payments of wages to idle workers and
(d) High cost of replenishment
On the hand, excessive stock leads to a high holding cost which is represented by