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Inventory Management, Just-in-Time, and Backflush Costing. JOIN KHALID AZIZ. ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: - PowerPoint PPT Presentation
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Inventory Inventory Management,Management,
Just-in-Time, andJust-in-Time, andBackflush CostingBackflush Costing
KHALID AZIZ 0322-3385752
JOIN KHALID AZIZJOIN KHALID AZIZ
ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.MODULE D, BBA, MBA & PIPFA.
CONTACT:CONTACT: 0322-33857520322-3385752 0312-23028700312-2302870 R-1173,ALNOOR SOCIETY, BLOCK R-1173,ALNOOR SOCIETY, BLOCK
19,F.B.AREA, KARACHI, PAKISTAN.19,F.B.AREA, KARACHI, PAKISTAN.
KHALID AZIZ 0322-3385752
JOIN KHALID AZIZJOIN KHALID AZIZ
FRESH CLASSESFRESH CLASSES ICMAP STAGE 1 & 2ICMAP STAGE 1 & 2
FUNDAMENTALS OF FUNDAMENTALS OF FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING & COST ACCOUNTING& COST ACCOUNTING
INDIVIDUAL & GROUPSINDIVIDUAL & GROUPS
KHALID AZIZ 0322-3385752
Learning Objective 1Learning Objective 1
Identify five categories of costs
associated with goods for sale.
KHALID AZIZ 0322-3385752
Costs Associated withCosts Associated withGoods for SaleGoods for Sale
1. Purchasing costs include transportation costs.
2. Ordering costs include receiving andinspecting the items in the orders.
3. Carrying costs include the opportunity costof the investment tied up in inventory andthe costs associated with storage.
KHALID AZIZ 0322-3385752
Costs Associated withCosts Associated withGoods for SaleGoods for Sale
4. Stockout costs occur when an organizationruns out of a particular item for whichthere is a customer demand.
5. Quality costs of a product or service is its lackof conformance with a prespecified standard.
KHALID AZIZ 0322-3385752
Learning Objective 2Learning Objective 2
Balance ordering costs with
carrying costs using the
economic-order-quantity
(EOQ) decision model.
KHALID AZIZ 0322-3385752
Economic-Order-QuantityEconomic-Order-QuantityDecision Model AssumptionsDecision Model Assumptions
1. The same quantity is ordered at eachreorder 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.
KHALID AZIZ 0322-3385752
Economic-Order-QuantityEconomic-Order-QuantityDecision Model AssumptionsDecision Model Assumptions
4. No stockouts occur.
5. Quality costs are considered only to theextent that these costs affect orderingcosts or carrying costs.
KHALID AZIZ 0322-3385752
Economic-Order-QuantityEconomic-Order-QuantityDecision Model AssumptionsDecision Model Assumptions
The EOQ minimizes the relevant orderingcosts and carrying costs.
Video store sells packages of blank video tapes.
Video purchases packages of video tapes fromOaks, Inc., at Rs.15/package.
KHALID AZIZ 0322-3385752
Economic-Order-QuantityEconomic-Order-QuantityDecision Model AssumptionsDecision Model Assumptions
Annual demand is 12,844 packages, at therate 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?
KHALID AZIZ 0322-3385752
Economic-Order-QuantityEconomic-Order-QuantityDecision Model AssumptionsDecision Model Assumptions
Relevant ordering cost per purchase order: Rs.209
Relevant carrying costs per package per year:Required annual ROI (15% × Rs.15) Rs.2.25Relevant other costs 3.25
Total Rs.5.50
KHALID AZIZ 0322-3385752
Economic-Order-Quantity Economic-Order-Quantity Decision Model ExampleDecision Model Example
EOQ =2DP
C
D = Demand in units for a specified time period
P = Relevant ordering costs per purchase orderC = Relevant carrying costs of one unit in stock for the time period used for D
KHALID AZIZ 0322-3385752
Economic-Order-Quantity Economic-Order-Quantity Decision Model ExampleDecision Model Example
2 12 84450
x x, $209$5.
976 144, = 988 packages
EOQ =
KHALID AZIZ 0322-3385752
Economic-Order-Quantity Economic-Order-Quantity Decision Model ExampleDecision Model Example
What are the relevant total costs (RTC)?
RTC = Annual relevant ordering costs+ Annual relevant carrying costs
RTC =
Q can be any order quantity, not just the EOQ.
DQ × P +
Q2 C×
DPQ +
QC2or
KHALID AZIZ 0322-3385752
Economic-Order-Quantity Economic-Order-Quantity Decision Model ExampleDecision Model Example
When Q = 988 units,
RTC = (12,844 × Rs.209 ÷ 988) + (988 × Rs.5.50 ÷ 2)= Rs.5,434 total relevant costs
How many deliveries should occur each time period?
DEOQ
12,844988= = 13 deliveries
KHALID AZIZ 0322-3385752
JOIN KHALID AZIZJOIN KHALID AZIZ
FRESH CLASSESFRESH CLASSESMA-ECONOMICSMA-ECONOMICS
MICRO, Macro & MICRO, Macro & STATISTICSSTATISTICS
INDIVIDUAL & GROUPSINDIVIDUAL & GROUPS
Economic-Order-Quantity Economic-Order-Quantity Decision Model ExampleDecision Model Example
20 - 15
Rel
evan
t Tot
al C
osts
(D
olla
rs)
2,000
4,000
6,000
8,000
10,000
5,434
600 1,200 1,800 2,400988EOQ
Annual relevant carrying costs
Annual relevant total costs
Annual relevant ordering costs
Order Quantity (Units)
KHALID AZIZ 0322-3385752
Reorder PointReorder Point
Reorder point= Number of units sold per unit of time
× Purchase-order lead time
EOQ = 988 packagesNumber of units sold/week = 247
Purchase-order lead time = 2 weeks
Reorder point = 247 × 2 = 494 packages
Reorder PointReorder Point988
494
Weeks 1 2 3 4 5 6 7 8
Reorder Point
Reorder Point
This exhibit assumes that demand and purchase-order lead time are certain:
Demand = 247 tape packages/week Purchase-order lead time = 2 weeks20 - 17
Lead Time2 weeks
Lead Time2 weeks
KHALID AZIZ 0322-3385752
Safety Stock ExampleSafety Stock Example
Safety stock is inventory held at all timesregardless of the quantity of inventory
ordered using the EOQ model.
Video’s expected demand is 247 packages per week.
Management feels that a maximum demand of350 packages per week may occur.
KHALID AZIZ 0322-3385752
Safety Stock ExampleSafety 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 safety stock.
KHALID AZIZ 0322-3385752
Considerations in ObtainingConsiderations in ObtainingEstimates of Relevant CostsEstimates of Relevant Costs
What are the relevant incremental costsof carrying inventory?
– only those costs of the purchasing companythat change with the quantity of inventory held
KHALID AZIZ 0322-3385752
Cost of Prediction ErrorCost of Prediction Error
Predicting relevant costs requires careand is difficult.
Assume that Video’s relevant ordering costis Rs.97.84 instead of the Rs.209 prediction used.
What is the cost of this prediction error?
KHALID AZIZ 0322-3385752
Cost of Prediction ErrorCost of Prediction Error
456 966,
EOQ =
EOQ =
Step 1: Compute the monetary outcomefrom the best action that could have been
taken, given the actual amount of the cost input.
2 12 844 97 84
50
x x, .
$5.
= 676 packages
KHALID AZIZ 0322-3385752
Cost of Prediction ErrorCost of Prediction Error
The annual relevant total costs when EOQ is676 packages is:
RTC =DPQ
+QC2
RTC = (12,844 × Rs.97.84 ÷ 676) + (676 × Rs.5.50 ÷ 2)= Rs.3,718 total relevant costs
KHALID AZIZ 0322-3385752
Cost of Prediction ErrorCost of Prediction Error
Step 2: Compute the monetary outcomefrom the best action based on the incorrectamount of the predicted cost input.
EOQ =2 12 844
50x x, $209
$5.= 988 packages
KHALID AZIZ 0322-3385752
Cost of Prediction ErrorCost of Prediction Error
What are the annual relevant costs usingthis order quantity when
D = 12,844 units, P = Rs.97.84, and C = Rs.5.50?
RTC = (12,844 × Rs.97.84 ÷ 988) + (988 × Rs.5.50 ÷ 2)= Rs. 3,989 total relevant costs
KHALID AZIZ 0322-3385752
Cost of Prediction ErrorCost of Prediction Error
Step 3: Compute the difference betweenthe monetary outcomes from Steps 1 & 2.
Step 1 Rs.3,718Step 2 3,989Difference Rs. (271)
The cost of prediction error is Rs.271.
KHALID AZIZ 0322-3385752
Learning Objective 3Learning Objective 3
Identify and reduce conflicts
that can arise between EOQ
decision model and models used
for performance evaluation.
KHALID AZIZ 0322-3385752
Evaluating Managers andEvaluating Managers andGoal-Congruence IssuesGoal-Congruence Issues
The opportunity cost of investment tied upin inventory is a key input in the
EOQ decision model.
Some companies now include opportunitycosts as well as actual costs when
evaluating managers.
KHALID AZIZ 0322-3385752
Just-In-Time PurchasingJust-In-Time Purchasing
Just-in-time (JIT) purchasing is the purchaseof goods or materials such that a delivery
immediately precedes demand or use.
Companies moving toward JIT purchasingargue that the cost of carrying inventories(parameter C in the EOQ model) has beendramatically underestimated in the past.
KHALID AZIZ 0322-3385752
JIT Purchasing and EOQJIT Purchasing and EOQModel ParametersModel Parameters
The cost of placing a purchase order(parameter P in the EOQ model) is
also being re-evaluated.
Three factors are causing sizable reductionin the cost of placing a purchase order (P).
1. Companies increasingly are establishinglong-run purchasing arrangements.
KHALID AZIZ 0322-3385752
JIT Purchasing and EOQJIT Purchasing and EOQModel ParametersModel Parameters
2. Companies are using electronic links,such as the Internet, to place purchase orders.
3. Companies are increasing the use ofpurchase order cards (similar to consumercredit cards like Visa and Master Card).
KHALID AZIZ 0322-3385752
Learning Objective 4Learning Objective 4
Use a supply-chain approach
to inventory management.
KHALID AZIZ 0322-3385752
Supply-Chain AnalysisSupply-Chain Analysis
Supply-chain analysis describes the flowof goods, services, and information from
cradle to grave, regardless of whetherthose activities occur in the same
organization or other organizations.
“bullwhip effect” or “whiplash effect”
KHALID AZIZ 0322-3385752
JOIN KHALID AZIZJOIN KHALID AZIZ
FRESH CLASSESFRESH CLASSES ICMAP STAGE 1 & 2ICMAP STAGE 1 & 2
FUNDAMENTALS OF FUNDAMENTALS OF FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING & COST ACCOUNTING& COST ACCOUNTING
INDIVIDUAL & GROUPSINDIVIDUAL & GROUPS
KHALID AZIZ 0322-3385752
Learning Objective 5Learning Objective 5
Differentiate materials
requirements planning (MRP)
systems from just-in-time (JIT)
systems for manufacturing.
KHALID AZIZ 0322-3385752
Materials RequirementMaterials RequirementPlanning (MRP)Planning (MRP)
Materials requirements planning (MRP)systems take a “push-through” approach
that manufactures finished goods forinventory on the basis of demand forecasts.
MRP predetermines the necessary outputsat each stage of production.
KHALID AZIZ 0322-3385752
Materials RequirementMaterials RequirementPlanning (MRP)Planning (MRP)
Management accountants play key roles inan MRP system, including...
– maintaining accurate and timely informationpertaining to materials, work in process,
and finished goods, and...
– providing estimates of the setup costs for eachproduction run, the downtime costs,
and carrying costs of inventory.
KHALID AZIZ 0322-3385752
Learning Objective 6Learning Objective 6
Identify the features of a
just-in-time production system.
KHALID AZIZ 0322-3385752
Just-In-Time Production Just-In-Time Production SystemsSystems
Just-in-time (JIT) production systems take a“demand pull” approach in which goods are
only manufactured to satisfy customer orders.
KHALID AZIZ 0322-3385752
Major Features of a JIT SystemMajor 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
KHALID AZIZ 0322-3385752
Major Features of a JIT SystemMajor Features of a JIT System
What information may management accountants use?
Personal observation by productionline workers and managers
Financial performance measures,such as inventory turnover ratios
Nonfinancial performance measuresof time, inventory, and quality.
KHALID AZIZ 0322-3385752
Learning Objective 7Learning Objective 7
Use backflush costing.
KHALID AZIZ 0322-3385752
Backflush CostingBackflush Costing
Backflush costing describes a costingsystem that delays recording some orall of the journal entries relating to thecycle from purchase of direct materials
to the sale of finished goods.
KHALID AZIZ 0322-3385752
Backflush CostingBackflush Costing
Where journal entries for one or more stagesin the cycle are omitted, the journal entries
for a subsequent stage use normal or standardcosts to work backward to flush out the costs in
the cycle for which journal entries were not made.
KHALID AZIZ 0322-3385752
Learning Objective 8Learning Objective 8
Describe different ways
backflush costing can simplify
traditional job-costing systems.
KHALID AZIZ 0322-3385752
Trigger PointsTrigger Points
The term trigger point refers to a stage in a cyclegoing from purchase of direct materials to saleof finished goods at which journal entries are
made in the accounting system.
KHALID AZIZ 0322-3385752
Trigger PointsTrigger Points
Stage A:Purchase of
direct materials
Stage B:Production resultingin work in process
Stage C:Completion of good
units of product
Stage D:Sale of
finished goods
KHALID AZIZ 0322-3385752
Trigger PointsTrigger Points
Assume trigger points A, C, and D.
This company would have two inventory accounts:
Type1. Combined materials
and materials in workin process inventory
2. Finished goods
Account Title1. Inventory:
Raw and In-processControl
2. Finished Goods Control
KHALID AZIZ 0322-3385752
Trigger PointsTrigger Points
What 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
KHALID AZIZ 0322-3385752
Trigger PointsTrigger Points
What is the journal entry to record conversion costs?
Conversion Costs Control XXVarious accounts XX
To record the incurrence of conversion costs duringthe accounting period
Underallocated or overallocated conversion costsare written off to cost of goods sold.
KHALID AZIZ 0322-3385752
Trigger PointsTrigger Points
What is the journal entry when trigger point C occurs?
Finished Goods Control XXInventory: Raw and In-Process Control XXConversion Costs Allocated XX
To record the cost of goods completed during theaccounting period
KHALID AZIZ 0322-3385752
Trigger PointsTrigger 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 theaccounting period
KHALID AZIZ 0322-3385752
Trigger PointsTrigger Points
Assume trigger points A and D.
This company would have one inventory account:
TypeCombines direct materialsinventory and any direct
materials in work in processand finished goods inventories
Account Title
Inventory Control
KHALID AZIZ 0322-3385752
Trigger PointsTrigger Points
What 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
Same as the A, C, and D example.
KHALID AZIZ 0322-3385752
Trigger PointsTrigger Points
What is the journal entry to record conversion costs?
Conversion Costs Control XXVarious accounts XX
To record the incurrence of conversion costs duringthe accounting period
Same as the A, C, and D example.
KHALID AZIZ 0322-3385752
Trigger PointsTrigger Points
What is the journal entry to record thecost of goods completed during theaccounting period (trigger point C)?
No journal entry.
KHALID AZIZ 0322-3385752
Trigger PointsTrigger 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 theaccounting period
KHALID AZIZ 0322-3385752
JOIN KHALID AZIZJOIN KHALID AZIZ
ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.MODULE D, BBA, MBA & PIPFA.
CONTACT:CONTACT: 0322-33857520322-3385752 0312-23028700312-2302870 R-1173,ALNOOR SOCIETY, BLOCK R-1173,ALNOOR SOCIETY, BLOCK
19,F.B.AREA, KARACHI, PAKISTAN.19,F.B.AREA, KARACHI, PAKISTAN.