Memorandum

To: Managing Director, Delicious Soup Ltd

From: Trainee, Juhudi Eagles Co.
Subject: Product Costs and Inventory Management

Dear Sir/Madam,
I am writing this memorandum to provide you with information on process costing,
job costing, economic order quantity (EOQ), and just in time (JIT) inventory
management systems.

Process Costing
Process costing is a system of determining the cost of products that are produced on a
continuous basis, such as in a manufacturing process. This system accumulates the
costs of raw materials, labor, and overheads that are incurred in each production
process and then assigns an average cost per unit to the final product. This is done by
dividing the total cost of production by the number of units produced.

Process Costing vs. Job Costing

Job costing is used when products are produced on a one-off or batch basis. The direct
costs relating to the specific job or batch are identified and collected, and then an
appropriate share of the overheads is allocated, resulting in a total cost for each job or
batch. Process costing is used when products are produced on a continuous basis, and
the costs are accumulated over a specific period before being divided by the number
of units produced on that period.

Suitability of Process Costing for Delicious Soup Ltd

Process costing is suitable for Delicious Soup Ltd since it produces soups on a
continuous basis. The cost of raw materials, labor, and overheads that are incurred in
each production process can be tracked and allocated to the final product. This
information can be used to assess the profitability of individual products, and to make
decisions on pricing and production volumes.

Economic Order Quantity (EOQ)

EOQ is a mathematical formula that determines the best amount of inventory to be
ordered at one time to minimize the total costs of ordering and holding inventory. The
formula takes into account the costs of ordering and holding inventory and sets a
reorder point when inventory falls to a certain level.

Limitations of EOQ

EOQ assumes that demand is constant, which may not be the case for seasonal
products like soups. Moreover, it assumes that all orders are received at the same time
and that orders can be placed in any quantity.

Just in Time (JIT) Inventory Management System

JIT is a system that involves ordering inventory only when it is needed, usually in
small quantities. The purpose is to minimize inventory holding costs and to improve
efficiency by reducing waste and making production processes leaner.

Advantages of JIT
JIT helps to minimize inventory holding costs, reduces waste, and improves
efficiency. It also reduces the risk of inventory obsolescence and enables businesses to
respond quickly to changing customer demands.

Disadvantages of JIT
JIT requires accurate forecasting of customer demand and reliable suppliers. It also
places a high level of reliance on the efficiency of the supply chain and may limit the
ability of businesses to take advantage of bulk discounts.

Conclusion
In conclusion, process costing is a suitable cost accounting technique for Delicious
Soup Ltd. EOQ is a useful inventory ordering tool, but it has some