5 Handout 1 Flashcards
This is literally defined as a stock of goods which a business manages to produce products or perform services.
Inventory
This is represented by an item whose demand is linked directly to the demand or production level of another item.
Dependent demand
This refers to the inventory requirement for finished goods or a product available for customers’ consumption or use.
Independent demand
These are made up of the resources a business uses to produce its own goods.
Raw materials and components
These are materials and parts that have been partially transformed from raw materials but are not yet finished goods and can include partially assembled items that are waiting to be completed.
Work in process (WIP)
These are products that are ready to be shipped directly to customers, including wholesalers and retailers.
Finished goods
These are items a business needs to operate, such as office equipment, packing boxes, and tools and parts to repair equipment.
Maintenance, repair, and operations (MRO)
These are also known as holding costs. These are costs involved in the acquisition and storage of inventory items.
Carrying costs
The value of this cost depends on current interest rates which can range from 5% to 25%.
Capital or opportunity cost
It is derived from the interest rates of borrowed finances
Capital cost
It is derived from the return that a money would generate if it is invested in other things.
Opportunity cost
The value of this cost ranges from 3% to 10%. This includes building rent or depreciation, utility costs, insurance, and taxes among others.
Physical space occupied by the inventory
The value of this cost ranges from 4% to 10%. This includes equipment lease or depreciation, power, and operating costs.
Handling of inventory
The value of this cost ranges from 2% to 5%. The longer the period an inventory item is stored in the warehouse, the greater the costs associated with deterioration or obsolescence.
Pilferage and scrap
These include fixed and variable costs associated with placing an order to purchase additional inventory.
Ordering costs
These are expenses that are independent of output and are incurred no matter what, such as rent, building, and machinery among others.
Fixed costs
Thes are expenses that vary with output.
Variable costs
These are costs associated with changing production over, known as setup, which includes labor and parts as well as downtime.
Setup costs
It minimizes total inventory costs by optimizing the tradeoffs between holding and ordering costs. It is the optimal inventory size that should be ordered with the supplier to minimize the total annual inventory cost of the business. Other names used for economic order quantity are optimal order size and optimal order quantity.
Economic Order Quantity (EOQ) Model
Symbol for Annual demand in units for the inventory item
D
Symbol for Setup or ordering cost for each order
S
Holding or carrying cost per unit per year
H
