WCM - AR, AP, Inventory & Cash Control

Question 1

What is Trade Receivable days and its formula?

Answer 1

This is the length of time credit is extended to customers.

Average receivables / credit sales X 365

Question 2

Explain Early Settlement Discounts?

Answer 2

Cash discounts are given to encourage early payment by customers. The COST (%) of the discount is balanced against the savings the entity receives from having less capital tied up due to a lower receivables balance and a shorter average collection period. .

Question 3

Calculation of annual cost for Early Settlement Discounts formula?

Answer 3

FIRSTLY calculate number of compounding periods:-
No. of compounding periods = 365 / no of days
(don’t forget this is based on amount left)
365/30=12.167
The simplified formula (1.00/0.97) power to 12.167 = 1.4486 which equals 44.9%

Question 4

What is the annual cost calculation for ESD based on?

Answer 4

The annual cost calculation is always based on the AMOUNT LEFT TO PAY (the amount net of discount)

Question 5

When should ESD not be offered?

Answer 5

The discount should not be offered if the COST of offering the discount exceeds the rate of overdraft interest.

Question 5

What is Trade Payable Days and its formula?

Answer 5

This is the average period of credit extended BY suppliers.

Average payables / credit purchases X 365

Question 6

What is the cost of financing receivables?

Answer 6

Calculate the receivable balance first:-
Receivable balance = sales x receivable day / 365
then
Finance cost = receivable balance x interest (overdraft) rate

Question 7

Explain JIT?

Answer 7

Just In Time is a series of manufacturing and supply chain techniques that AIM to minimise inventory levels and IMPROVE customer service by manufacturing not only at the exact time customers require, but also in the exact quantities they need and at competative prices

Question 8

What are the 3 main systems used to monitor and control inventory levels?

Answer 8

1. REORDER LEVEL SYSTEM - whereby inventory is ordered at a particular set order level.
2. PERIODIC REVIEW SYSTEM - whereby inventory is checked and reordered at set periods in time.
3. MIXED SYSTEMS - incorporating elements of both of the above.

Question 9

Explain Inventory Warning Levels?

Answer 9

2 Warning levels might be used to indicate when the quantity of inventory is either:-
* higher than should be expected, or
* below the buffer stock level
If the quantity of inventory goes above the MAXIMUM level or BELOW the minimum level, the inventory manager should monitor the position carefully and where appropriate take control measures.

Question 10

Explain the Periodic Review System?

Answer 10

AKA Constant Cycle

Inventory levels are reviewed at fixed intervals e.g. every 4 weeks.
The inventory in hand is then made up to a PREDETERMINED LEVEL which takes account of:-
* likely demand before next review
* likely demand during lead time

Replenishment orders issued to pre-set target levels. This means that order sizes are variable.

Question 11

What is ROL?

Answer 11

The Re-Order Level is the quantity of inventory on hand when an order is place.

ROL = demand in the lead time

Question 12

Explain BUFFER inventory?

Answer 12

The basic level of inventory kept for emergencies (insurance). A buffer is required because both DEMAND and LEAD TIIME will fluctuate and predictions can only be based on best estimates.

Buffer stock has a cost. The annual cost of holding buffer stock is the

amount of the buffer stock x annual holding cost for 1 unit of the inventory item.

Question 13

Explain “lead time”?

Answer 13

Is the LAG between when an order is placed and the item is delivered.

Question 14

Explain the criticisms of EOQ?

Answer 14

• it is based on SIMPLIFYING ASSUMPTIONS such as constant & predicted material usage rates;
• it will not indicate the optional purchase quantity when there are price discounts for buying in larger quantities;
• it ignores the problem of managing STOCK OUTS;
  It is INCONSISTENT with the philosophy of JIT management and total quality management.

Question 15

Can you explain?
Ch
Co

Answer 15

Ch - holding cost per unit

Co - order cost per order

Question 16

INVENTORY MANAGEMENT SYSTEMS - What assumptions are CRITICAL and should be discussed when considering the validity of the model and its conclusions?

Answer 16

These assumptions are critical -
* demand & lead times are constant & known;
* purchase price is constant
* no BUFFER inventory held as it is assumed that it is not needed since demand and lead times are known with certainty.

Question 17

In order to MINIMISE THE TOTAL COSTS of holding & ordering inventory it is necessary to balance the relevant costs. Explain these costs?

Answer 17

The relevant costs to balance are:-

• the VARIABLE COSTS of holding inventory
• the FIXED COSTS of placing the order.

Question 18

Explain “the optimum reorder QUANTITY”?

Answer 18

How many items should be ORDERED when the order is place.

In practice this means striking a balance between HOLDING COSTS on one hand and the STOCK OUT & RE-ORDER COSTS on the other hand.

Question 19

Explain “the optimum reorder LEVEL”?

Answer 19

How many items should be LEFT in inventory when the next order is place.

Question 20

What is the EOQ formula?

Answer 20

EOQ = sq root 2 x Co x D / Ch

Question 21

What is the annual cost calculation of settlement discounts ALWAYS based on?

Answer 21

The AMOUNT LEFT TO PAY, the amount net of discount.

Question 22

What can settlement discounts help to reduce?

Answer 22

Discounts may also reduce the number of irrecoverable debts.

Question 23

How to calculate VALUE OF INVENTORY?

Answer 23

VALUE OF INVENTORY Formula
cost of sales x no. of inventory days / 365 =

If there is an increase and they want you to calculate the EXPECTED value of inventory (if it is 10%) Formula
cost of sales x no. of inventory days / 365 x 1010% =

Question 24

Formula to calculate Inventory Days?

Answer 24

Inventory / Cost of Sales x 365 =