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Cost Management ACCOUNTING AND CONTROL

21-2. . Inventory Management: Economic Order Quantity, JIT, and the Theory of Constraints. . 21-3. Three types of inventory costs can be readily identified with inventory:. The cost of acquiring inventory.The cost of holding inventory.The cost of not having inventory on hand when needed.. 21-4.

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Cost Management ACCOUNTING AND CONTROL

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    1. 21-1 HANSEN & MOWEN Cost Management ACCOUNTING AND CONTROL

    2. 21-2 Inventory Management: Economic Order Quantity, JIT, and the Theory of Constraints

    3. 21-3

    4. 21-4 1. Ordering Costs: The costs of placing and receiving an order. Examples: Clerical costs, documents, insurance for shipment, and unloading. 2. Setup Costs: The costs of preparing equipment and facilities so they can be used to produce a particular product or component. Examples: Setup labor, lost income (from idled facilities), and test runs.

    5. 21-5 3. Stock-Out Costs: The costs of not having sufficient inventory. Examples: Lost sales, costs of expediting (extra setup, transportation, etc.) and the costs of interrupted production. 4. Carrying Costs: The costs of carrying inventory. Examples: Insurance, inventory taxes, obsolescence, opportunity cost of capital tied up in inventory, and storage.

    6. 21-6

    7. 21-7

    8. 21-8 An EOQ Illustration

    9. 21-9 Reorder point = Rate of usage x Lead time Example: Assume that the average rate of usage is 100 parts per day. Assume also that the lead time is 4 days. What is the reorder point? Reorder point = 4 x 100 = 400 units Thus, an order should be placed when inventory drops to 400 units.

    10. 21-10

    11. 21-11

    12. 21-12

    13. 21-13 JIT reduces the costs of acquiring inventory to insignificant levels by: 1. Drastically reducing setup time 2. Using long-term contracts for outside purchases Carrying costs are reduced to insignificant levels by reducing inventories to insignificant levels.

    14. 21-14

    15. 21-15

    16. 21-16 What is the Kanban System? A withdrawal Kanban A production Kanban A vendor Kanban

    17. 21-17

    18. 21-18

    19. 21-19

    20. 21-20 Discounts and Price Increases: JIT Purchasing versus Holding Inventories Careful vendor selection Long-term contracts with vendors Prices are stipulated (usually producing a significant savings) Quality is stipulated The number of orders placed are reduced

    21. 21-21

    22. 21-22

    23. 21-23

    24. 21-24

    25. 21-25

    26. 21-26

    27. 21-27

    28. 21-28 Throughput Inventory Operating expenses

    29. 21-29 1. Identify an organization’s constraints. 2. Exploit the binding constraints. 3. Subordinate everything else to the decisions made in Step 2. 4. Elevate the organization’s binding constraints. 5. Repeat the process as a new constraint emerges to limit output.

    30. 21-30

    31. 21-31

    32. 21-32

    33. 21-33 End of Chapter 21

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