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8/2/2019 Management Accounting by Horngren 11th edition chapter 20
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20 - 1©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Inventory Management,
Just-in-Time, andBackflush Costing
Chapter 20
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20 - 2©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 1
Identify five categories of costs
associated with goods for sale.
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20 - 3©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Costs Associated with
Goods 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 cost
of the investment tied up in inventory andthe costs associated with storage.
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20 - 4©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Costs Associated with
Goods for Sale
4. Stockout costs occur when an organization
runs out of a particular item for whichthere is a customer demand.
5. Quality costs of a product or service is its lack
of conformance with a prespecified standard.
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20 - 5©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 2
Balance ordering costs with
carrying costs using the
economic-order-quantity
(EOQ) decision model.
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20 - 6©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Economic-Order-Quantity
Decision Model Assumptions1. 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.
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20 - 7©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Economic-Order-Quantity
Decision Model Assumptions
4. No stockouts occur.
5. Quality costs are considered only to theextent that these costs affect ordering
costs or carrying costs.
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20 - 8©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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.
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20 - 9©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Economic-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?
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20 - 10©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Economic-Order-Quantity
Decision Model Assumptions
Relevant 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
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20 - 11©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Economic-Order-Quantity
Decision Model Example
EOQ =2 D P
C
D = Demand in units for a specified time period
P = Relevant ordering costs per purchase order
C = Relevant carrying costs of one unit in
stock for the time period used for D
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20 - 12©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Economic-Order-Quantity
Decision Model Example
2 12844
50
x x, $209
$5.
97614, = 988 packages
EOQ =
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20 - 13©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Economic-Order-Quantity
Decision 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.
D
Q × P +
Q
2 C×
DP
Q +
QC
2or
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20 - 14©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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?
DEOQ
12,844988= = 13 deliveries
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Economic-Order-Quantity
Decision Model Example
20 - 15
R e
l e v a n t T o t a l C o s t s ( D o l l a r s )
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)
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20 - 16©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Reorder Point
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
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Reorder 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 Time
2 weeks
Lead Time
2 weeks
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20 - 18©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Safety Stock Example
Safety stock is inventory held at all times
regardless of the quantity of inventoryordered using the EOQ model.
Video’s expected demand is 247 packages per week.
Management feels that a maximum demand of 350 packages per week may occur.
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20 - 19©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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 safety stock.
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20 - 20©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
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20 - 22©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Cost of Prediction Error
45696,
EOQ =
EOQ =
Step 1: Compute the monetary outcome
from the best action that could have been
taken, given the actual amount of the cost input.
2 12844 9784
50
x x, .
$5.
= 676 packages
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20 - 23©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
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20 - 24©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Cost of Prediction Error
Step 2: Compute the monetary outcome
from the best action based on the incorrectamount of the predicted cost input.
EOQ = 2 1284450
x x, $209$5.
= 988 packages
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20 - 25©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Cost of Prediction Error
What are the annual relevant costs using
this order quantity whenD = 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
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20 - 26©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Cost of Prediction Error
Step 3: Compute the difference between
the monetary outcomes from Steps 1 & 2.Step 1 $3,718
Step 2 3,989
Difference $ (271)The cost of prediction error is $271.
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20 - 27©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 3
Identify and reduce conflicts
that can arise between EOQ
decision model and models used
for performance evaluation.
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20 - 28©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Evaluating Managers and
Goal-Congruence Issues
The opportunity cost of investment tied up
in inventory is a key input in theEOQ decision model.
Some companies now include opportunity
costs as well as actual costs whenevaluating managers.
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20 - 29©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Just-In-Time Purchasing
Just-in-time (JIT) purchasing is the purchase
of goods or materials such that a deliveryimmediately 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.
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20 - 30©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
JIT Purchasing and EOQ
Model Parameters
The cost of placing a purchase order
(parameter P in the EOQ model) isalso 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.
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20 - 31©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
JIT Purchasing and EOQ
Model Parameters
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).
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20 - 32©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 4
Use a supply-chain approach
to inventory management.
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20 - 33©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Supply-Chain Analysis
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.
“bullwhip effect” or “whiplash effect”
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20 - 34©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 5
Differentiate materials
requirements planning (MRP)
systems from just-in-time (JIT)
systems for manufacturing.
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20 - 35©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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 outputsat each stage of production.
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20 - 36©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Materials Requirement
Planning (MRP)
Management accountants play key roles in
an 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.
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20 - 37©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 6
Identify the features of a
just-in-time production system.
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20 - 38©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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.
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20 - 39©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
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20 - 40©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Major 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 measures
of time, inventory, and quality.
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20 - 41©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 7
Use backflush costing.
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20 - 42©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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.
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20 - 43©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Backflush Costing
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.
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20 - 44©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 8
Describe different ways
backflush costing can simplify
traditional job-costing systems.
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20 - 45©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Trigger Points
The term trigger point refers to a stage in a cycle
going from purchase of direct materials to saleof finished goods at which journal entries are
made in the accounting system.
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Trigger 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
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20 - 47©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Trigger Points
Assume trigger points A, C, and D.
This company would have two inventory accounts:
Type
1. Combined materials
and materials in work in process inventory
2. Finished goods
Account Title
1. Inventory:
Raw and In-processControl
2. Finished Goods Control
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20 - 48©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Trigger 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
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20 - 49©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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 accounting periodUnderallocated or overallocated conversion costs
are written off to cost of goods sold.
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20 - 50©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Trigger Points
What is the journal entry when trigger point C occurs?
Finished Goods Control XXInventory: Raw and
In-Process Control XX
Conversion Costs Allocated XXTo record the cost of goods completed during the
accounting period
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20 - 51©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
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20 - 52©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Trigger Points
Assume trigger points A and D.
This company would have one inventory account:
Type
Combines direct materials
inventory and any directmaterials in work in process
and finished goods inventories
Account Title
Inventory Control
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20 - 53©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Trigger 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.
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20 - 54©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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 accounting periodSame as the A, C, and D example.
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20 - 55©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Trigger Points
What is the journal entry to record the
cost of goods completed during the
accounting period (trigger point C)?No journal entry.
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20 - 56©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Trigger Points
What is the journal entry when trigger point D occurs?
Cost of Goods Sold XXInventory Control XX
Conversion Costs Allocated XX
To record the cost of goods sold during theaccounting period
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End of Chapter 20