Appendix CH 20 - طالبة المحاسبة · PDF fileordered!using!the!EOQ!model.!! First: ... Exercises! 20:16!&!20:17!,20:23 ... Appendix CH 20.docx Created Date: 20160321122225Z

أأ. مشاعلل االدداايیلل أأ. سهھامم االمهھيیززعع مهھا االحميیددييأأ.

Chapter 20

Inventory Management, Just-‐in-‐Time, Backflush Costing

Materials management should be taken into consideration because: 1-‐ Material costs represent a significant proportion of the costs in companies. 2-‐ And its impact on several decisions: The timing of the purchase of materials ,Buyback point and Economic-‐Order-‐Quantity Decision …etc.

includes planning, coordinating, and controlling activities Inventory managementrelated to the flow of inventory into, through, and out of an organization.

:Inventory Management in Retail Organizations -‐

Consider this breakdown of operations for three major retailers for which cost of goods sold constitutes their largest cost item. Kroger Costco Wal-‐Mart Revenues 100.0 % 100.0 % 100.0% Deduct costs: Cost of goods sold 76.8% 87.2% 74.7% Selling and administration costs 21.7% 10.2% 19.5% Other costs, interest, and taxes 1.4% 1.1% 2.3% Total costs 99.9% 98.5% 96.5%

%3.5 %1.5 %0.1 Net income The low percentages of net income to revenues mean that improving the purchase and management of goods for sale can cause dramatic percentage increases in net income.

Learning Objective 1 Identify five categories of costs associated with goods for sale.

include transportation costs. Purchasing costs1. include receiving and inspecting the items in the orders. Ordering costs2.

the investment tied up in inventory Of include the opportunity cost Carrying costs3. and the costs associated with storage.

of a particular item for whichoccur when an organization runs out Stockout costs4. there is a customer demand.

of a product or service is its lack of conformance with a prespecified Quality costs5. standard.

not all inventory costs are available in financial accounting systemsthat *Note

are not recorded in these systems and are a rtunity costsoppoFor example significant component in several of these cost categories.

the reliability and timeliness of increases gathering technology-‐* Informationegories.costs in the five cost cat reducesinventory information and


Learning Objective 2 quantity (EOQ)-‐order-‐the economicBalance ordering costs with carrying costs using

:) Assumptions( decision model 1. The same quantity is ordered at each reorder point. 2. Demand, ordering costs, carrying costs, and purchase-‐order lead time are known with certainty. 3. Purchasing costs per unit are unaffected by the quantity ordered. 4. No stockouts occur. 5. Quality costs are considered only to the extent that these costs affect ordering

costs or carrying costs.

carrying costs.and costs relevant orderingthe OQ minimizesThe E*

:)to see how EOQ analysis works( xampleE CD World is an independent electronics store that sells blank compact disks.

ins (each package conta $14 a packageSontek at CD World purchases the CDs from20 disks). Sontek pays for all incoming freight. No inspection is necessary at CD World because Sontek supplies quality merchandise. CD World’s annual demand is

15% CD World requires a .250 packages per weeks, at a rate of package 13,000. order lead time is two weeks-‐The purchasereturn on investment. of annual rate

.$200Relevant ordering cost per purchase order is EOQ = 2DP C

cified time period= Demand in units for a spe D = Relevant ordering costs per purchase order P = Relevant carrying costs of one unit in stock for the time period used for D C

Annual relevant carrying costs+ Annual relevant ordering costs= RTC Annual Relevant Ordering Cost= (D/Q)*P

nual Relevant Carrying Cost = (Q/2)*CAn can be any order quantity, not just the EOQ. Q

order lead time.-‐Purchase ×= Number of units sold per unit of timeReorder Point Expected demand–=Maximum demand Excess demand per week

Required: ?per package per year C)( stRelevant carrying co

Required annual return on investment, 0.15 * $14 $2.10 3.10 +Relevant costs of insurance, materials handling, breakage

, shrinkage, and so on, per year = (c)Total

RULES


What is the EOQ of packages of disks? -‐A Substituting D = 13,000 packages per year, P = $200 per order, and C = $5.20 per

package per year, in the EOQ formula, we get,

=EOQ

B-‐ What is the number of deliveries each period (one year in this example)?

D 13,000 = = 13 deliveries EOQ 1,000 C-‐ Recall the annual relevant total costs (RTC)for Q= 1,000 units?

𝑅𝑇𝐶 = 𝐷 ∗ 𝑃 𝑄

+ 𝑄 ∗ 𝐶 2

13,000 * $200 1,000 * $5.20 RTC = + = $2,600 + $2,600 = $5,200 1,000 2 *See page706, (20-‐1) Graphic Analysis of Ordering Costs and Carrying Costs for Compact Disks at CD World .

NOTE: The second decision in managing goods for sale is when to order a given product. The reorder point is the quantity level of inventory on hand that triggers a new purchase order. The reorder point is simplest to compute when both demand and purchase-‐order lead time are known with certainty. D-‐ In our CD World example, we choose two weeks as the time period in the reorder-‐point formula:-‐ Reorder Point= Number of units sold per unit of time× Purchase-‐order lead time Number of units sold per week 250 packages per week (13,000 Packages / 52 weeks) Purchase-‐order lead time 2 weeks Reorder point = ? = 250 packages per week * 2 weeks = 500 packages**. **See page 707, the graph in Exhibit 20-‐2 shows the behavior of the inventory level of compact disk packages ,assuming demand occurs uniformly during each week.

= 1000 Package !!∗!",!!!∗!""!.!"

= √1000,000


Management feels that a expected demand is 247 packages per week, If CD World-‐Emaximum demand of 350 packages per week may occur.

?carried should bestock safetyHow much

Safety stock is inventory held at all times regardless of the quantity of inventory ordered using the EOQ model.

Finding Excess demand per week First:

Excess demand per week =Maximum demand –Expected demand

.103 Excess demand per weekmand = 247 Expected de –350 Maximum demand

Multiplying Excess demand by lead time to find how many package should Second: be for safety stock

.206 packages of safety stock2 weeks lead time = ×103 packages

a Prediction Error Cost of -‐F

What are the relevant incremental costs of carrying inventory? Only those costs of the purchasing company that change with the quantity of

Predicting relevant costs requires care and is difficult.inventory held.

0$20instead of the $97.84relevant ordering cost is CD World'sthat Assume *?prediction erroris the cost of this what prediction used,

In 3 steps:

from the best action that could have been Compute the monetary outcome Step 1:

(P= 97.84) inputof the cost actual amounttaken, given the

packages 699 = EOQ=

QC +DP : RTC = when EOQ is 699 packages is& the annual relevant total costs Q 2

$5.20 ÷ 2) × 699) + (699$97.84 ÷ ×= (13,000

total relevant costs. 637,= $ 3= $1820+ $ 1817

20.5$84.97000,132 xx


from the best action based on the Compute the monetary outcome: Step 2 amount of the predicted cost input incorrect

200 =Predicted cost (P

,$97.84P= er quantity whenWhat are the annual relevant costs using this ord ? 000 packages,1 = Q, C=5.20$ D=13,000,

$5.20 ÷ 2) × 000,1) + (000,1$97.84 ÷ ×RTC = (13,000

total relevant costs. 872,$3= $ 1272+$ 2600=

between the monetary outcomes from Steps 1 & 2. Compute the difference: Step 3

Step 1 $3,637 Step 2 3,872 Difference $ (235) the cost of prediction error.

= 1000 Package !!∗!",!!!∗!""!.!"

= √1000,000


Learning Objective 3

Identify and reduce conflicts that can arise between EOQ decision model and models used for performance evaluation. (Evaluating 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 (JIT) purchasing is the purchase 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. The cost of placing 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. 2. Companies 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).

4ning Objective Lear

chain approach to inventory management.-‐Use a supply

Supply-‐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.



time (JIT)-‐in-‐justsystems from materials requirements planning (MRP)Differentiate .systems for manufacturing

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 each stage of production. -

:including Management accountants play key roles in an MRP system,-‐

– maintaining accurate and timely information pertaining to materials, work in process, and finished goods. – providing estimates of the setup costs for each production run, the downtime costs, and carrying costs of inventory.


e production system.tim-‐in-‐Identify the features of a just

take a “demand pull” approach in which goods time (JIT) production systems -‐in-‐Justare -

only manufactured to satisfy customer orders.

:System JITMajor Features of a

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

What information 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. -



Use backflush costing

Backflush 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

Where journal entries for one or more stages in the cycle are omitted, the journal entries for a 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.


Describe different ways backflush costing can simplify traditional job-‐costing systems. The term trigger point refers to a stage in a cycle going from purchase of direct materials to sale of finished goods at which journal entries are made in the accounting system.

Littlefield Company uses a backflush costing system with three trigger : Examplepoints:

_ Purchase of direct materials

_ Completion of good finished units of product

_ Sale of finished goods

There are no beginning inventories. Information for April 2011 is as follows:

Direct materials purchased $880,000 Conversion costs allocated $ 400,000 Direct materials used $850,000 Costs transferred to finished goods $1,250,000 Conversion costs incurred $422,000 Cost of goods sold $1,190,000 Required 1. Prepare journal entries for April (without disposing of under allocated or over allocated conversion costs). Assume there are no direct materials variances.


Entry (A1) Materials and In-‐Process Inventory Control 880,000 Accounts Payable Control 880,000 (direct materials purchased) Entry (A2) Conversion Costs Control 422,000 Various accounts (such as Wages Payable Control) 422,000 (conversion costs incurred) Entry (C1) Finished Goods Control 1,250,000 Materials and In-‐Process Inventory Control 850,000 Conversion Costs Allocated 400,000 (standard cost of finished goods completed) Entry (D1) Cost of Goods Sold 1,190,000 Finished Goods Control 1,190,000 (standard costs of finished goods sold)

2. Under an ideal JIT production system, how would the amounts in your journal entries differ from the journal entries in requirement 1? Under an ideal JIT production system, if the manufacturing lead time per unit is very short, there would be zero inventories at the end of each day. Entry (C1) would be $1,190,000 finished goods production [to match finished goods sold in entry (D1)], not $1,250,000. If the marketing department could only sell goods costing $1,190,000, the JIT production system would call for direct materials purchases and conversion costs of lower than $880,000 and $422,000, respectively, in entries (A1) and (A2).

Exercises

20-‐16 & 20-‐17 , 20-‐23.

Documents

Appendix CH 20 - طالبة المحاسبة · PDF fileordered!using!the!EOQ!model.!! First: ... Exercises! 20:16!&!20:17!,20:23 ... Appendix CH 20.docx Created Date: 20160321122225Z