1、Inventory Management,Just-in-Time,and Backflush CostingCHAPTER 20Inventory Management,Just-in-Time,and Backflush CostingInventory Management in Retail OrganizationsInventory Management is planning, coordinating, and controlling activities related to the flow of inventory into, through, and out of an
2、 organizationCosts Associated with Goods for SaleManaging inventories to increase net income requires effectively managing costs that fall into these five categories:Purchasing CostsOrdering CostsCarrying CostsStockout CostsQuality CostsManagement of Inventory CostsPurchasing Costs the cost of goods
3、 acquired from suppliers, including freightOrdering Costs the costs of preparing and issuing purchase orders; receiving and inspecting the items included in the orders; and matching invoices received, purchase orders, and delivery records to make paymentsManagement of Inventory CostsCarrying Costs t
4、he costs that arise while holding inventory of goods for sale. This includes the opportunity cost of the investment tied up in inventory, and costs associated with storageStockout Costs the costs that result when a company runs out of a particular item for which there is customer demand (stockout) a
5、nd the company must act quickly to meet the demand or suffer the costs of not meeting itManagement of Inventory CostsQuality Costs the costs that result when features and characteristics of a product or service are not in conformance with customer specifications. These costs include:PreventionApprai
6、salInternal FailureExternal FailureThe First Step in Managing Goods for SaleThe first decision in managing goods for sale is how much to order of a given productEconomic Order Quality (EOQ) is a decision model that calculates the optimal quantity of inventory to order under a given set of assumption
7、sBasic EOQ AssumptionsThere are only ordering and carrying costsThe same quantity is ordered at each reorder pointDemand, purchase-order lead time, ordering costs, and carrying costs are known with certaintyPurchasing costs per unit are unaffected by the quantity orderedNo stockouts occurEOQ ignores
8、 purchasing costs, stockout costs, and quality costsEOQ FormulaD = Demand in units for specified periodP = Relevant ordering costs per purchase orderC = Relevant carrying costs of one unit in stock for the time period used for DOrdering PointsThe second decision in managing goods for sale is when to
9、 order a given productReorder Point the quantity level of inventory on hand that triggers a new purchase orderInventory Management and Safety StockSafety Stock is inventory held at all times regardless of the quantity of inventory ordered using the EOQ modelSafety stock is a buffer against unexpecte
10、d increases in demand, uncertainty about lead time, and unavailability of stock from suppliersEstimating Inventory-Related Relevant CostsCarrying CostsStockout CostsOrdering CostsCarrying CostsRelevant inventory carrying costs consist of relevant incremental costs and the relevant opportunity cost o
11、f capitalRelevant Incremental Costs those costs of the purchasing firm that change with the quantity of inventory heldOpportunity CostsRelevant Opportunity Cost of Capital the return forgone by investing capital in inventory rather than elsewhere. This cost equals the required rate of return multipl
12、ied by the unit costs that vary with the number of units purchased and are incurred at the time the units are receivedCost of a Prediction ErrorThree steps in determining the cost of a prediction error:Compute the monetary outcome from the best action that could be taken, given the actual amount of
13、the cost per purchase orderCompute the monetary outcome from the best action based on the incorrect amount of the predicted cost per purchase orderCompute the difference between Steps 1 2Just-in-Time PurchasingJust-in-Time (JIT) Purchasing is the purchase of materials or goods so they are delivered
14、just as needed for production or salesJIT is popular because carrying costs are actually much greater than estimated because warehousing, handing, shrinkage, and investment costs have not been correctly estimatedJIT PurchasingJIT reduces the cost of placing a purchase order because:Long-term purchas
15、ing agreements define price and quality terms. Individual purchase orders covered by those agreements require no additional negotiation regarding price or qualityCompanies are using electronic links to place purchase orders at a small fraction of traditional methods (phone or mail)Companies are usin
16、g purchase-order cardsRelevant Costs in JIT PurchasingPurchasing CostsStockout CostsQuality CostsJIT Purchasing and Supply-Chain AnalysisSupply chain describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers (bo
17、th inside and outside the firm)Supply chain members share information and plan/coordinate activitiesSupplier evaluations are critical to JIT purchasing implementationInventory Management and Materials Requirements PlanningMaterials Requirements Planning (MRP) a “push-through” system that manufacture
18、s finished goods for inventory on the basis of demand forecastsMRP Information InputsMRP uses three information sources to determine the necessary outputs at each stage of productionDemand forecasts of final productsA bill of materials detailing the materials, components, and subassemblies for each
19、final productThe quantities of materials, components, and product inventories to determine the necessary outputs at each stage of productionMRPTakes into account lead time to purchase materials and to manufacture components and finished productsSets a master production schedule specifying quantities
20、 and timing of each item to be producedThe output of each department is pushed through the production line whether it is needed or not“Push Through” may result in an accumulation of inventoryInventory Management and JIT ProductionJIT (Lean) Production is a “demand-pull” manufacturing system that man
21、ufactures each component in a production line as soon as and only when needed by the next step in the production lineDemand triggers each step of the production process, starting with customer demand for a finished product and working backwardDemand pulls an order through the production line JIT Pro
22、duction GoalsMeet customer demand in a timely basis,with high-quality products,at the lowest possible cost.JIT Production FeaturesProduction is organized in manufacturing cells, a grouping of all the different types of equipment used to make a given productWorkers are hired and trained to be multi-s
23、killed (cross-trained)Defects are aggressively eliminatedSetup time is reducedSuppliers are selected on the basis of their ability to deliver quality materials in a timely mannerOther Benefits of JIT ProductionLower overhead costsLower inventory levelsHeightened emphasis on improving quality by elim
24、inating the specific causes of rework, scrap, and wasteShorter manufacturing lead timesJIT and Enterprise Resource Planning Systems (ERP)JIT success hinges on the speed of information flows from customers to manufacturers to suppliersERP is a system with a single database that collects data and feed
25、s them into software applications supporting all of a firms business activitiesERP gives managers, workers, customers, and suppliers access to operating informationERP can be expensive, large, and unwieldyPerformance Measures and Control in JITFinancial performance measures such as inventory turnove
26、r ratioNonfinancial performance measures of time, inventory, and quality such as:Manufacturing lead timesUnits produced per hourDays of inventory on handSetup time as a % of total manufacturing timeNumber of defective units as a % of total units producedBackflush CostingBackflush Costing omits recor
27、ding some or all of the journal entries relating to the stages from the purchase of direct materials to the sale of finished goodsSince some stages 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 jo
28、urnal entries were not made Contrasts to traditional normal and standard costing systems using sequential tracking: recording journal entries at each trigger point in the production processSpecial Considerations in Backflush CostingBackflush costing does not necessarily comply with GAAPHowever, inventory levels may be immaterial, negating the necessity for complianceBackflush costing does not leave a good audit trail the ability of the accounting system to pinpoint the uses of resources at each step of the production process
