Transcript No Slide Title

Chapter 20
Inventory Management, Just-inTime, and Backflush Costing
Copyright © 2003 Pearson Education Canada Inc.
Slide 20-196
Inventory Management
• In retail organizations, look at purchasing costs,
ordering costs, carrying costs, stockout costs and
quality costs
• Economic order quantity (EOQ) model calculates the
optimal quantity to order
EOQ =
where
2DP
C
D = demand
P = cost of an order
C = carrying costs of one unit for the
time period under consideration
Copyright © 2003 Pearson Education Canada Inc.
Pages 738 - 743
Slide 20-197
Inventory Model
Reorder
Point
1,000
Inventory
In Units
Reorder
Point
500
0
Weeks
Demand = 250 / week
Order lead time 2 weeks
Copyright © 2003 Pearson Education Canada Inc.
1
2
3
Lead
Time
2 Weeks
4
5
6
7
8
Lead
Time
2 Weeks
Pages 741 - 742
Slide 20-198
Just-In-Time Purchasing
• Just-In-Time (JIT) purchasing refers to the
purchase of goods or materials just prior to
demand or use
• Requires a more open relationship with suppliers
and smaller, more frequent orders
• Timely delivery of quality products is crucial in JIT
purchasing environments
• Companies employing JIT choose suppliers
carefully
• Consider the entire supply chain from cradle to
grave (womb to tomb) and share information with
all parties involved in the system
Copyright © 2003 Pearson Education Canada Inc.
Pages 744 - 749
Slide 20-199
Materials Requirements Planning
• Materials requirements planning (MRP) is a pushthrough system that manufactures finished goods for
inventory on the basis of demand forecasts
• MRP uses
• demand forecasts for the final products
• a bill of materials for each product
• the quantities of materials, components and
finished products to predetermine the necessary
outputs at each stage of production
• Enterprise Resource Planning (ERP) systems collects
and manages information into a single database to
support the achievement of the organization’s goals
Copyright © 2003 Pearson Education Canada Inc.
Pages 750 - 755
Slide 20-200
Backflush Costing & Trigger Points
• Sequential (or synchronous) tracking is a product
costing method in which the accounting system
entries occur in the same order as actual
purchases and production
• Trigger point is a stage in the production cycle at
which an accounting entry is made
Traditional Trigger Points
Purchase
of Direct
Materials
Production
of work in
process
Copyright © 2003 Pearson Education Canada Inc.
Completion
of a good
finished unit
Sale of a
finished
unit
Pages 755 - 763
Slide 20-201
Backflush Costing
• Backflush costing is an approach to costing which
delays recording changes in the status of the
product until the finished goods appear
• Backflush costing uses standard costs to work
backward and flush out costs for the units
produced
Direct
Materials
Direct
Finished
Goods Control
Cost of
Goods Sold
Sale
Allocated
Conversion
Cost Control
Unallocated Conversion Costs
Copyright © 2003 Pearson Education Canada Inc.
Pages 755 - 763
Slide 20-202