Exam 19: Inventory Cost Management Strategies

The annual relevant total costs are at a minimum where relevant ordering costs and their relevant carrying costs are equal.

The annual relevant carrying costs of inventory consist of incremental costs plus the opportunity cost of capital.

Key Smith Company manufactures all types of locks for exterior doors.All processing is in batches of 100 and is initiated when an order is received.For August there were no beginning inventories.Each type of knob uses the same direct materials although the processing steps are slightly different.Conversion costs and direct materials are the only manufacturing cost accounts.Direct materials are purchased under a just-in-time system.Standard costs and actual costs were the same for the month.Backflush costing is used with purchase and sale trigger points.Additional information for the month is as follows: Required: Record all journal entries for the monthly activities related to the above transactions based on backflush costing.

When goods and/or materials are purchased in such a manner as to immediately precede demand or use, it is specifically called

Purchase order lead time is the time between the placement of an order and it delivery.

Answer the following question(s)using the information below: Garry's Golf Supplies is a local retail outlet which sells golf balls.Garry's purchases the golf balls from Green Grass Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72, FOB destination.Annual demand is 172,800 golf balls at a rate of 3,322 balls per week.Garry's Golf Supplies earns 12% on its cash investments.The purchase order lead time is one week.The following cost data are available: -Purchasing at the EOQ recommended level, what are the relevant total costs?

Use the information below to answer the following question(s).Office Supply House purchases 4,160 reams of paper per year, ordered in lots of 80 reams per week at $150 per ream.The vendor covers all shipping costs.Office Supply House is not required to inspect the shipment upon entry.Office Supply House earns 20% on its cash investments.The purchase order lead time is two weeks.The following cost data are available: -How many deliveries will be required at the economic order quantity level?

Party Animals orders 5,200 stuffed giraffes per year, at $6 per giraffe, FOB destination.Party Animals earns 3% on its cash investments.The purchase order lead time is 4 weeks.The following data are available: Required: What is the cost of the prediction error?

Which of the following would be expected when using a supply-chain approach to inventory management?

If annual carrying costs are excluded when evaluating the performance of managers, the managers may favour purchasing in larger order quantities.

Pure Sound Ltd.makes musical instruments.One of their products is an acoustic guitar that has an annual demand of 4,000 units.The setup cost for each production batch is $1,500; it costs $12 to carry a guitar in inventory for one year.Required: 1.What is the total annual relevant batch set up and carrying cost if the company uses the economic order quantity? Assume that setup costs are the same as ordering costs.2.The company is switching to a just-in-time system.The average order size is 200 guitars.What is the total annual relevant batch set up and carrying cost? 3.Compare the Enterprise Resource Planning EOQ model with the JIT model.What are the advantages and disadvantages of each?

Backflush costing describes a costing system that omits recording some journal entries.

Backflush costing does not strictly adhere to generally accepted accounting principles.Explain why.Also, describe the types of businesses that might use backflush costing.

Use the information below to answer the following question(s).Office Supply House purchases 4,160 reams of paper per year, ordered in lots of 80 reams per week at $150 per ream.The vendor covers all shipping costs.Office Supply House is not required to inspect the shipment upon entry.Office Supply House earns 20% on its cash investments.The purchase order lead time is two weeks.The following cost data are available: -What are the total relevant costs assuming the quantity ordered equals 80 reams?

Just-in-time purchasing is the purchase of goods or materials such that delivery immediately precedes demand or use.

The purchase order lead time is

A system that comprises a single database that collects data and feeds it into software applications supporting all of a company's business activities is known as a(n)

Financial performance measures are the predominant measures of control in a Just-in-Time system.

Expediting costs of a stockout include the additional ordering costs, plus any associated transportation costs.

Kretzinger Company makes extensive use of financial performance reports for each of its departments.Although most departments have been reporting favourable cost variances with the company's current inventory system, management is concerned about the overall performance of the purchasing and production departments.For example, the following information is for the purchasing of materials for a product the company has been manufacturing for several years: Required: a.Compute the inventory turnover for each year.Can any conclusions be drawn for a yearly comparison of the purchase price variance and the inventory turnover? b.Identify problems likely to be caused by evaluating purchasing only on the basis of the purchase price variance. c.Management has been relying almost exclusively on variances for performance measurement.What recommendations can you suggest to improve the evaluation process?