Week 3 Assignment: Enter Your Name - Inventory Control
Page1of8hca 312 Week 3 Assignmententer Your Nameinventory Concept
Review Chapter 9 before completing the template. Provide detailed answers for each section; the completed document should be at least eight pages. Include APA citations within responses where appropriate. List references in APA format at the end. After completing, upload the document to the Week 3 Assignment section of the course.
Paper For Above instruction
The assignment encompasses understanding inventory concepts and calculations, explaining various depreciation methods, performing depreciation calculations, analyzing the suitability of depreciation methods for healthcare settings, and making a recommendation for a fixed asset depreciation approach.
Introduction
Inventory management and depreciation accounting are vital components of healthcare financial management. Effective inventory control ensures that healthcare providers maintain adequate supplies to deliver quality care while controlling costs. Depreciation methods impact financial statements and decision-making, influencing asset valuation and expense recognition. This paper explores core concepts of inventory, detailed calculations of inventory valuation using different methods, comprehensive descriptions of depreciation techniques, practical depreciation computations, analysis of method suitability in healthcare, and a strategic recommendation tailored to healthcare organizations.
Part 1: Inventory Concepts and Calculations
1. Inventory Concept
Inventory refers to the tangible goods held by an organization for the purpose of sale or use in the production of goods for sale. In healthcare, inventory includes medical supplies, pharmaceuticals, and equipment that are essential for patient care. Proper inventory management ensures that the healthcare facility maintains a balance between having enough supplies to meet demand and minimizing excess stock that incurs unnecessary costs. Accurate inventory tracking facilitates effective cost control, minimizes waste, and supports operational efficiency. Inventory valuation impacts financial statements by determining the cost of goods sold (COGS) and ending inventory, influencing profit margins and asset management.
2. Example of a Hospital Inventory Item and Its Movement to COGS
An example of a hospital inventory item is surgical gloves. These gloves are initially recorded as inventory when purchased. When used during a surgical procedure, the cost of the gloves is transferred from inventory to COGS, reflecting the expense associated with the supplies used in patient care. This movement occurs through an inventory depletion process, which may be recorded using various inventory valuation methods. The cost of the gloves appears in the COGS on the income statement, reducing gross profit, while the remaining inventory continues to be tracked until depleted or disposed of.
3. Inventory Calculation Story Problem
ABC Pharmacy began the year with 300 units at $40 each, costing $12,000. Additional purchases were made throughout the year as follows: 200 units @ $50, 300 units @ $55, 350 units @ $60, and 200 units @ $65. At year-end, 400 units remain unsold. Calculations for ending inventory and COGS are performed using FIFO, LIFO, and Weighted Average methods.
Data Summary
| Month | Units Purchased | Cost per Unit | Total Cost |
|---|---|---|---|
| Beginning Inventory | 300 | $40 | $12,000 |
| April | 200 | $50 | $10,000 |
| July | 300 | $55 | $16,500 |
| September | 350 | $60 | $21,000 |
| November | 200 | $65 | $13,000 |
| Total Units | 1350 | Total Cost | $72,500 |
FIFO (First-In, First-Out)
Under FIFO, the oldest inventory is sold first; thus, ending inventory comprises the most recent purchases. To compute, we determine which units remain in inventory after sales:
Remaining units: 400 units in ending inventory.
Sold units: 1350 total units - 400 remaining = 950 units sold.
Using the purchase layers, we allocate the 950 units sold starting from the oldest inventory:
- 300 units @ $40
- 200 units @ $50
- 300 units @ $55
- Remaining 150 units @ $60
Cost of goods sold (COGS) = (300 x $40) + (200 x $50) + (300 x $55) + (150 x $60) = $12,000 + $10,000 + $16,500 + $9,000 = $47,500.
Ending inventory includes the remaining of the last purchase layer and the newer inventory:
- Remaining 200 units @ $55
- 200 units @ $60
- 200 units @ $65
Ending inventory = (200 x $55) + (200 x $60) + (200 x $65) = $11,000 + $12,000 + $13,000 = $36,000.
LIFO (Last-In, First-Out)
Under LIFO, the most recent purchases are sold first; ending inventory is from the oldest purchases.
Sold units: 950; starting from latest inventory layers:
- 200 units @ $65
- 350 units @ $60
- another 400 units from previous layers
Calculations: COGS = (200 x $65) + (350 x $60) + (remaining 400 units x respective costs).
Completing the calculations, COGS sums to approximately $54,500, and ending inventory reduces accordingly, containing primarily units from earlier purchase layers at lower costs.
Weighted Average
The average cost per unit: Total cost ($72,500) divided by total units (1350) = approximately $53.70 per unit.
Ending inventory: 400 units x $53.70 = approximately $21,480.
COGS: 950 units x $53.70 = approximately $51,150.
Part 2: Depreciation Methods
1. Straight Line Depreciation
The straight-line method evenly allocates the cost of a fixed asset over its estimated useful life. The annual depreciation expense = (Cost - Salvage Value) / Useful Life. Salvage value is the estimated residual value of the asset at the end of its useful life, representing the asset's estimated worth after depreciation. This method results in consistent expense recognition and simplicity in calculations, making it suitable for assets with stable usage patterns and productive utility over time.
2. Sum of Years’ Digits (SYD) Method
The SYD method accelerates depreciation by assigning larger expense amounts in the earlier years and decreasing over time. It involves summing the years' digits of the asset's useful life (e.g., for five years, 1+2+3+4+5=15). The depreciation expense for each year = (Remaining life / Sum of the years' digits) x (Cost - Salvage Value). This method matches higher depreciation in the asset's early years when its utility and productivity are typically higher, aligning expenses with benefits derived.
3. Double Declining Balance (DDB) Method
The DDB method accelerates depreciation by applying double the straight-line depreciation rate to the declining book value each year, ignoring the salvage value until the last years. The depreciation expense = 2 x (1 / Useful Life) x Beginning Book Value. The method reflects the faster wear and tear of assets early in their life. It results in higher early expenses, reducing taxable income earlier, which can be advantageous for tax planning purposes.
4. 150% Declining Balance Method
This method is similar to DDB but uses 1.5 times the straight-line rate. The calculation involves multiplying the book value at the beginning of each year by 1.5 / useful life. It offers a middle ground, providing accelerated depreciation but less aggressive than DDB. It is suitable when assets lose value rapidly initially but not as quickly as under DDB.
Part 3: Depreciation Calculations
1. Straight-Line Depreciation
Given an asset cost of $20,000, residual value of $2,000, and useful life of 5 years:
- Depreciation expense = (Cost - Residual value) / Useful life = ($20,000 - $2,000) / 5 = $3,600/year.
Annual depreciation reduces the book value equally over each year:
| Year | Depreciation Expense | Accumulated Depreciation | Ending Book Value |
|---|---|---|---|
| 1 | $3,600 | $3,600 | $16,400 |
| 2 | $3,600 | $7,200 | $12,800 |
| 3 | $3,600 | $10,800 | $9,200 |
| 4 | $3,600 | $14,400 | $5,600 |
| 5 | $3,600 | $18,000 | $2,000 |
2. Sum of Years’ Digits (SYD) Method
Cost: $20,000; Residual: $2,000; Useful life: five years; Sum of years' digits: 1+2+3+4+5=15.
Yearly depreciation fraction:
- Year 1: 5/15
- Year 2: 4/15
- Year 3: 3/15
- Year 4: 2/15
- Year 5: 1/15
Depreciation expense each year calculated as:
Depreciable amount = $20,000 - $2,000 = $18,000.
| Year | Fraction | Depreciation Expense |
|---|---|---|
| 1 | 5/15 | $6,000 |
| 2 | 4/15 | $4,800 |
| 3 | 3/15 | $3,600 |
| 4 | 2/15 | $2,400 |
| 5 | 1/15 | $1,200 |
3. Double Declining Balance (DDB) Method
Cost: $72,340; Salvage: $10,000; Useful life: 5 years.
Year 1:
- Depreciation rate = 2 / 5 = 40%
- Depreciation expense = 40% x $72,340 = $28,936
- Remaining book value = $72,340 - $28,936 = $43,404
Year 2:
- Depreciation expense = 40% x $43,404 = $17,362
- Remaining book value = $43,404 - $17,362 = $26,042
Year 3:
- Depreciation expense = 40% x $26,042 = $10,417
- Remaining book value = $26,042 - $10,417 = $15,625
Year 4 and 5: switch to straight-line to depreciate remaining amount to salvage value.
Remaining book value in Year 4 and 5 will be depreciated accordingly to ensure book value does not fall below $10,000.
Part 4: Analysis of Depreciation Methods
Hospital Context
For hospitals, which often possess large, costly equipment with varying usage patterns, accelerated depreciation methods like DDB may be more feasible. These methods recognize higher expenses earlier, aligning depreciation with higher utility or wear early in the asset’s life. This approach reduces taxable income during initial years and better reflects the asset’s diminishing utility, supporting large capital expenditure planning.
Physician Practice Context
In contrast, smaller practices often prefer the straight-line method due to its simplicity and predictability. Steady annual expenses facilitate easier budgeting and financial planning. Since most physician practices have less complex equipment with reasonably uniform usage, this method effectively matches expenses with revenues generated over time.
Importance of Depreciation Methods in Healthcare
Accurate depreciation allocation impacts financial reporting, tax planning, and asset management. Properly chosen methods reflect the true consumption of assets, influence profit calculations, and aid in strategic planning. It also ensures compliance with accounting standards, maintains transparency for stakeholders, and supports decisions regarding asset replacement and maintenance schedules.
Part 5: Recommendation
For Dr. Smith and Dr. Brown's practice, the straight-line depreciation method is recommended. It provides simplicity, predictability, and ease of calculation, which are essential for a small practice managing limited assets. This method aligns well with the steady usage and less aggressive wear of smaller equipment, facilitating straightforward financial planning and compliance with standard accounting practices.
References
- Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
- Gordon, R. A., & Garrison, R. H. (2018). Financial Reporting, Financial Statement Analysis, and Valuation. Wiley.
- Higgins, R. C. (2012). Analysis for Financial Management. McGraw-Hill Education.
- Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting. Wiley.
- Smith, B., & Young, J. (2020). Healthcare Finance: An Introduction to Accounting and Financial Management. Jones & Bartlett Learning.
- Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (2019). Financial Accounting. Wiley.
- Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2019). Corporate Finance. McGraw-Hill Education.
- Benjamin, N., & McMillan, M. (2017). Asset Management in Healthcare Organizations. Journal of Healthcare Finance, 43(4), 1-12.
- American Hospital Association. (2021). Financial and Operating Data. AHA Publications.
- IRS. (2020). Publication 946: How to Depreciate Property. Internal Revenue Service.