Professional Documents
Culture Documents
Gail B. Wright
Professor Emeritus of Accounting
Bryant University
MANAGEMENT
ACCOUNTING
8th EDITION
BY
HANSEN & MOWEN
14 INVENTORY MANAGEMENT
1
LEARNING
OBJECTIVES
LEARNING
OBJECTIVES
LEARNING GOALS
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
1. Describe the traditional inventory
management model.
2. Discuss JIT inventory management.
3. Explain the theory of constraints
(TOC) & tell how it can be used to
management inventory.
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Questions to Think About
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
Describe the
traditional inventory
management model.
LO 1
INVENTORY MANAGEMENT
Managing inventory for competitive
advantage includes:
LO 1
INVENTORY COSTS
Costs to acquire
Ordering costs
Setup costs
Carrying costs
Stockout costs
10
LO 1
HOLDING INVENTORY
Traditional reasons for holding inventory are:
Balancing acquisition & carrying costs
Dealing with uncertainty in demand (stockout
costs)
Creating buffers for needed parts, etc.
Producing extra inventory because of unreliable
production processes
Taking advantage of discounts
Hedging against future price increases
11
LO 1
EOQ:
EOQ: Definition
Definition
12
LO 1
LO 1
TOTAL
TOTAL COST:
COST:Background
Background
The
Thetotal
totalcost
cost(TC)
(TC)formula
formulaincludes
includesthe
the
following:
following:
PP==$25
$25per
perorder
order[[cost
costof
ofplacing
placing&&receiving
receiving
order
order(setup
(setup&&production)
production)]]
DD==10,000
10,000[[known
knowndemand
demand]]
Q
Q==1,000
1,000[[order
ordersize
size(or
(orproduction
productionlot
lotsize)
size)]]
CC==$2
$2per
perunit
unit[[carrying
carryingcost
costof
of11unit
unitfor
for11
year
year]]
14
LO 1
= $1,000
TC = $1,250
15
LO 1
16
LO 1
FORMULA: EOQ
EOQ is a calculation intended to lower total
inventory costs.
LO 1
18
LO 1
= $ 500
TC = $1,000
19
LO 1
REORDER
REORDER POINT:
POINT:Background
Background
When
Whenusing
usingthe
theEOQ
EOQmodel,
model,identify
identifythe
the
reorder
reorderpoint
point(ROP)
(ROP)reduces
reducesthe
the
probability
probabilityof
ofaastockout.
stockout.To
Toidentify
identifythe
the
reorder
reorderpoint,
point,you
youneed
needto
toknow:
know:
Rate
Rateof
ofusage
usage
Lead
Leadtime
timerequired
requiredfor
fororder
ordertotobe
beplaced
placed&&
received
received
20
LO 1
21
LO 1
REORDER POINT
Given an optimal
order quantity of 500
units, reordering
should occur when
200 units remain.
EXHIBIT 14-2
22
LO 1
SAFETY
SAFETY STOCK:
STOCK: Definition
Definition
23
LO 1
Safety stock:
= Lead time x (maximum average usage)
= 4 days x (60 50)
= 40 parts
24
LO 1
25
LO 1
MANUFACTURING:
MANUFACTURING: Background
Background
What are the EOQ and ROP for manufacturing based
on information the controller provided the manager.
Ave. demand for blades
80,000
$5
Setup cost
$12,500
Lead time
20 days
26
LO 1
EXHIBIT 14-3
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
Discuss JIT
inventory
management.
28
LO 2
JUST-IN-TIME
JUST-IN-TIME (JIT):
(JIT): Definition
Definition
Is a demand-pull
manufacturing system that
requires goods to be pulled
through the system by present
demand.
29
LO 2
LO 2
EXHIBIT 14-6
JIT
TRADITIONAL
Pull-through system
Push-through system
Insignificant inventories
Significant inventories
Cellular structure
Departmental structure
Multi-skilled labor
Specialized labor
Decentralized services
Centralized services
31
LO 2
32
LO 2
33
LO 2
LO 2
35
LO 2
EXHIBIT 14-4
LO 2
EXHIBIT 14-4
LO 2
38
LO 2
39
LO 2
JIT response
Total preventive maintenance
Total quality control (TQC)
Using the Kanban system
40
LO 2
41
LO 2
LIMITATIONS OF JIT
Time is required to build sound relations with
suppliers
Workers experience stress in changing over to
JIT
Production may be interrupted because of
absence of inventory supply buffer
May place current sales at risk to achieve
assurance of future sales
42
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
43
LO 3
CONSTRAINT:
CONSTRAINT: Definition
Definition
Is the limitation of
resources or product
demand.
44
LO 3
THEORY OF CONSTRAINTS
Theory of constraints (TOC) focuses on 3
measures of organizational
performance:
Throughput: rate of generating money
through sales
Inventory: money spent turning materials
into throughput
Operating expenses: money spent turning
inventory into throughput
45
LO 3
46
LO 3
47
LO 3
TOC STEPS
1. Identify constraints
2. Exploit binding constraints
3. Subordinate everything to decision made in
#2 above
4. Elevate binding constraints
5. Repeat process
48
LO 3
BINDING
BINDING CONSTRAINTS:
CONSTRAINTS:
Definition
Definition
49
LO 3
DRUM-BUFFER-ROPE (DBR)
SYSTEM
EXHIBIT 14-11
Additional
inventory is placed
before the binding
constraint to give a
time buffer.
50
CHAPTER 14
THE
THE END
END
51