Chapter 20 Flashcards
Inventory
COGS is the largest simple expense for a manufacturer or merchandiser
Management of inventory is critical to success
6 Cost Associated with Goods for Sales
Managing inventory to increase net income
requires effectively managing cost that fall in these categories: Purchasing, Ordering, Carrying, Stockout, Qty, Shrinkage Costs
Purchasing Cost
Cost of goods acquired from suppliers, including incoming freight.
Largest cost category in inventory
Ordering Cost
Cost of preparing and issuing P.O., receiving and inspecting the item included in the orders, and matching invoices rec’d, P.O., delivery records to make payments
Carrying Cost
Cost that arise while goods are being held in inventory.
These cost include the opportunity cost of the investment tied up in inventory, and cost associated with storage.
Stockout Cost
Cost that arise when a company runs out of a particular item for which there is customer demand (stockout).
The company must meet the demand or suffer the cost of not meeting it.
Cost of Quality
Cost incurred to prevent and appraise or cost arising as a result of quality issues. Prevention, Appraisal, Internal Failure, and External Failure
Shrinkage Cost
Cost that result from theft by outsiders, embezzlement by employees, misclassification and clerical errors.
Measures the difference between cost of inventory on books and cost of physical count
2 Key Inventory Decisions
How much to order/make. EOQ help us determine the optimal amount
When to order/make
EOQ Formula
square root of (2DP)/C
D-Demand
P- Order or Batch Cost
C-Carrying cost for 1 unit for 1 period
Basic EOQ Assumptions
There are only ordering and carrying cost
Same qty is reordered
no stockout occurs
demand, P.O. , lead-time, ordering cost and carrying cost are known
purchase cost per unit are not affected by qty ordered (no qty discount)
When to Order
2nd decision to manage goods for sale is when to order a given product.
Reorder point-the qty level on hand that triggers a new P.O.
of unit sold per unity of time* P.O. lead time=Reorder pt
Annual order and Reorder Point Formula
Annual - Expected annual demand/EOQ
Reorder Pt -# of unit sold per unity of time* P.O. lead time=Reorder pt
Safety Stock
Inventory held all the time
Regardless of qty of inventory ordered using EOQ
Buffer against unexpected increase in demand or uncertainty about lead time and unavailable stock from supppliers
JIT Purchasing
Managing purchase so the material or good are delivered just as needed for production or sales
decrease amount of RM and WIP INV
Not guided by EOQ model; model emphasizes tradeoff between relevant carrying and ordering costs
