1、Inventory Management, Just-in-Time, and Backflush Costing,Chapter 20,Learning Objective 1,Identify five categories of costs associated with goods for sale.,Costs Associated with Goods for Sale,1. Purchasing costs include transportation costs.,2. Ordering costs include receiving andinspecting the ite
2、ms in the orders.,3. Carrying costs include the opportunity costof the investment tied up in inventory andthe costs associated with storage.,Costs Associated with Goods for Sale,4. Stockout costs occur when an organizationruns out of a particular item for whichthere is a customer demand.,5. Quality
3、costs of a product or service is its lackof conformance with a prespecified standard.,Learning Objective 2,Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model.,Economic-Order-Quantity Decision Model Assumptions,1. The same quantity is ordered at eachreor
4、der point.,2. Demand, ordering costs, carrying costs,and purchase-order lead time areknown with certainty.,3. Purchasing costs per unit are unaffectedby the quantity ordered.,Economic-Order-Quantity Decision Model Assumptions,4. No stockouts occur.,5. Quality costs are considered only to theextent t
5、hat these costs affect orderingcosts or carrying costs.,Economic-Order-Quantity Decision Model Assumptions,The EOQ minimizes the relevant ordering costs and carrying costs.,Video store sells packages of blank video tapes.,Video purchases packages of video tapes from Oaks, Inc., at $15/package.,Econo
6、mic-Order-Quantity Decision Model Assumptions,Annual demand is 12,844 packages, at the rate of 247 packages per week.,Video requires a 15% annual return on investment.,The purchase-order lead time is two weeks.,What is the economic-order-quantity?,Economic-Order-Quantity Decision Model Assumptions,R
7、elevant ordering cost per purchase order: $209,Relevant carrying costs per package per year: Required annual ROI (15% $15) $2.25 Relevant other costs 3.25 Total $5.50,Economic-Order-Quantity Decision Model Example,EOQ =,D = Demand in units for a specified time period,P = Relevant ordering costs per
8、purchase order,C = Relevant carrying costs of one unit instock for the time period used for D,Economic-Order-Quantity Decision Model Example,= 988 packages,EOQ =,Economic-Order-Quantity Decision Model Example,What are the relevant total costs (RTC)?,RTC = Annual relevant ordering costs + Annual rele
9、vant carrying costs,RTC =,Q can be any order quantity, not just the EOQ.,D Q,P,+,Q 2,C,DP Q,+,QC 2,or,Economic-Order-Quantity Decision Model Example,When Q = 988 units,RTC = (12,844 $209 988) + (988 $5.50 2) = $5,434 total relevant costs,How many deliveries should occur each time period?,D EOQ,12,84
10、4 988,=,=,13 deliveries,Economic-Order-Quantity Decision Model Example,20 - 15,Relevant Total Costs (Dollars),2,000,4,000,6,000,8,000,10,000,5,434,600,1,200,1,800,2,400,988 EOQ,Annual relevant carrying costs,Annual relevant total costs,Annual relevant ordering costs,Order Quantity (Units),Reorder Po
11、int,Reorder point = Number of units sold per unit of time Purchase-order lead time,EOQ = 988 packages Number of units sold/week = 247 Purchase-order lead time = 2 weeks,Reorder point = 247 2 = 494 packages,Reorder Point,988,494,Weeks,1,2,3,4,5,6,7,8,Reorder Point,Reorder Point,This exhibit assumes t
12、hat demand and purchase-order lead time are certain: Demand = 247 tape packages/week Purchase-order lead time = 2 weeks,20 - 17,Lead Time 2 weeks,Lead Time 2 weeks,Safety Stock Example,Safety stock is inventory held at all times regardless of the quantity of inventory ordered using the EOQ model.,Vi
13、deos expected demand is 247 packages per week.,Management feels that a maximum demand of 350 packages per week may occur.,Safety Stock Example,How much safety stock should be carried?,350 Maximum demand 247 Expected demand = 103 Excess demand per week,103 packages 2 weeks lead time = 206 packages of
14、 safety stock.,Considerations in Obtaining Estimates of Relevant Costs,What are the relevant incremental costs of carrying inventory?, only those costs of the purchasing company that change with the quantity of inventory held,Cost of Prediction Error,Predicting relevant costs requires care and is di
15、fficult.,Assume that Videos relevant ordering cost is $97.84 instead of the $209 prediction used.,What is the cost of this prediction error?,Cost of Prediction Error,EOQ =,EOQ =,Step 1: Compute the monetary outcome from the best action that could have been taken, given the actual amount of the cost
16、input.,= 676 packages,Cost of Prediction Error,The annual relevant total costs when EOQ is 676 packages is:,RTC =,DP Q,+,QC 2,RTC = (12,844 $97.84 676) + (676 $5.50 2) = $3,718 total relevant costs,Cost of Prediction Error,Step 2: Compute the monetary outcome from the best action based on the incorr
17、ect amount of the predicted cost input.,EOQ =,= 988 packages,Cost of Prediction Error,What are the annual relevant costs using this order quantity when D = 12,844 units, P = $97.84, and C = $5.50?,RTC = (12,844 $97.84 988) + (988 $5.50 2) = $ 3,989 total relevant costs,Cost of Prediction Error,Step
18、3: Compute the difference between the monetary outcomes from Steps 1 & 2.,Step 1 $3,718Step 2 3,989Difference $ (271),The cost of prediction error is $271.,Learning Objective 3,Identify and reduce conflicts that can arise between EOQ decision model and models used for performance evaluation.,Evaluat
19、ing Managers and Goal-Congruence Issues,The opportunity cost of investment tied up in inventory is a key input in the EOQ decision model.,Some companies now include opportunity costs as well as actual costs when evaluating managers.,Just-In-Time Purchasing,Just-in-time (JIT) purchasing is the purcha
20、se of goods or materials such that a delivery immediately precedes demand or use.,Companies moving toward JIT purchasing argue that the cost of carrying inventories (parameter C in the EOQ model) has been dramatically underestimated in the past.,JIT Purchasing and EOQ Model Parameters,The cost of pl
21、acing a purchase order (parameter P in the EOQ model) is also being re-evaluated.,Three factors are causing sizable reduction in the cost of placing a purchase order (P).,1. Companies increasingly are establishing long-run purchasing arrangements.,JIT Purchasing and EOQ Model Parameters,2. Companies
22、 are using electronic links, such as the Internet, to place purchase orders.,3. Companies are increasing the use of purchase order cards (similar to consumer credit cards like Visa and Master Card).,Learning Objective 4,Use a supply-chain approach to inventory management.,Supply-Chain Analysis,Suppl
23、y-chain analysis describes the flow of goods, services, and information from cradle to grave, regardless of whether those activities occur in the same organization or other organizations.,“bullwhip effect” or “whiplash effect”,Learning Objective 5,Differentiate materials requirements planning (MRP)
24、systems from just-in-time (JIT) systems for manufacturing.,Materials Requirement Planning (MRP),Materials requirements planning (MRP) systems take a “push-through” approach that manufactures finished goods for inventory on the basis of demand forecasts.,MRP predetermines the necessary outputs at eac
25、h stage of production.,Materials Requirement Planning (MRP),Management accountants play key roles in an MRP system, including., maintaining accurate and timely information pertaining to materials, work in process, and finished goods, and., providing estimates of the setup costs for each production r
26、un, the downtime costs, and carrying costs of inventory.,Learning Objective 6,Identify the features of a just-in-time production system.,Just-In-Time Production Systems,Just-in-time (JIT) production systems take a “demand pull” approach in which goods are only manufactured to satisfy customer orders
27、.,Major Features of a JIT System,1. Organizing production in manufacturing cells,2. Hiring and retaining multi-skilled workers,3. Emphasizing total quality management,4. Reducing manufacturing lead time and setup time,5. Building strong supplier relationships,Major Features of a JIT System,What info
28、rmation may management accountants use?,Personal observation by production line workers and managers,Financial performance measures, such as inventory turnover ratios,Nonfinancial performance measures of time, inventory, and quality.,Learning Objective 7,Use backflush costing.,Backflush Costing,Back
29、flush costing describes a costing system that delays recording some or all of the journal entries relating to the cycle from purchase of direct materials to the sale of finished goods.,Backflush Costing,Where journal entries for one or more stages in the cycle are omitted, the journal entries for a
30、subsequent stage use normal or standard costs to work backward to flush out the costs in the cycle for which journal entries were not made.,Learning Objective 8,Describe different ways backflush costing can simplify traditional job-costing systems.,Trigger Points,The term trigger point refers to a s
31、tage in a cycle going from purchase of direct materials to sale of finished goods at which journal entries are made in the accounting system.,Trigger Points,Stage A: Purchase of direct materials,Stage B: Production resulting in work in process,Stage C: Completion of good units of product,Stage D: Sa
32、le of finished goods,Trigger Points,Assume trigger points A, C, and D.,This company would have two inventory accounts:,Type 1. Combined materialsand materials in workin process inventory 2. Finished goods,Account Title 1. Inventory:Raw and In-processControl 2. Finished Goods Control,Trigger Points,W
33、hat is the journal entry when trigger point A occurs?,Inventory: Raw and In-process Control XXAccounts Payable Control XX To record direct material purchased during the period,Trigger Points,What is the journal entry to record conversion costs?,Conversion Costs Control XXVarious accounts XX To recor
34、d the incurrence of conversion costs during the accounting period,Underallocated or overallocated conversion costs are written off to cost of goods sold.,Trigger Points,What is the journal entry when trigger point C occurs?,Finished Goods Control XXInventory: Raw andIn-Process Control XXConversion C
35、osts Allocated XX To record the cost of goods completed during the accounting period,Trigger Points,What is the journal entry when trigger point D occurs?,Cost of Goods Sold XXFinished Goods Control XX To record the cost of goods sold during the accounting period,Trigger Points,Assume trigger points
36、 A and D.,This company would have one inventory account:,Type Combines direct materials inventory and any direct materials in work in process and finished goods inventories,Account TitleInventory Control,Trigger Points,What is the journal entry when trigger point A occurs?,Inventory: Raw and In-proc
37、ess Control XXAccounts Payable Control XX To record direct material purchased during the period,Same as the A, C, and D example.,Trigger Points,What is the journal entry to record conversion costs?,Conversion Costs Control XXVarious accounts XX To record the incurrence of conversion costs during the
38、 accounting period,Same as the A, C, and D example.,Trigger Points,What is the journal entry to record the cost of goods completed during the accounting period (trigger point C)?,No journal entry.,Trigger Points,What is the journal entry when trigger point D occurs?,Cost of Goods Sold XXInventory Control XXConversion Costs Allocated XX To record the cost of goods sold during the accounting period,End of Chapter 20,
