Exam 19: Inventory Cost Management Strategies

A financial benefit of a just-in-time system is that inventory carrying costs are reduced.

Garden Equipment Manufacturing Ltd.(GEM)has introduced a just-in-time production process and is considering the adoption of lean accounting principles to support its new production philosophy.The company has two product lines: lawnmowers and weed whackers.Two individual products are made in each line.The company's traditional cost accounting system allocates all plant-level overhead costs to individual products.Product-line overhead costs are traced directly to product lines, and then allocated to the two individual products in each line.Equipment costs are directly traced to products.The latest accounting report using traditional cost accounting methods included the following information (in thousands of dollars). GEM has determined that each of the two product lines represents a distinct value stream.It has also determined that $90,000 of the allocated plant-level overhead costs represents plant occupancy costs associated with the products.Of this Product A occupies 30% of the plant's square footage, Product B occupies 30%, Product C occupies 20%, and Product D occupies 20%.The remaining square footage is occupied by plant administrative functions or is not being used.Finally GEM has determined that direct materials should be expensed in the period in which they are purchased, rather than when the material is used.According to purchasing records, direct material purchase costs during the year were: Required: a.What are the cost objects in GEM's lean accounting system? Which of GEM's costs would be excluded when computing operating income for these cost objects? b.Compute the operating income for the cost objects identified in requirement b.using lean accounting principles.Why does operating income differ from the operating income computed using traditional accounting methods? c.Which competitive strategy is best served by lean accounting principles?

Answer the following question(s)using the information below: The following information has been gathered for Product A: -What is the economic order quantity for Product A?

An inventory item of XYZ Manufacturing has an average daily demand of 10 units with a maximum daily demand of 12 units.The economic order quantity is 200 units.The reorder point is 50 units.Safety stocks are set at 94 units.Required: a.Determine the inventory level at the time of reordering. b.Determine the purchase order lead time. d.Determine the maximum purchase order lead time that the company can experience before it has a stockout.

Safety stock is the buffer inventory held as a cushion against unexpected increases in demand or lead time, and unexpected unavailability of stock from suppliers.

Answer the following question(s)using the information below: The following information has been gathered for Product A: -The economic order quantity decision model

All inventory costs are available in financial accounting systems.

A trigger point in backflush costing refers to the inventory level at which a reorder is generated.

Just-in-Time (JIT)Production is also called "lean production."

Party Animals orders 3,000 stuffed hippos per year, at $4 per hippo, FOB destination.Party Animals earns 2% on its cash investments.The purchase order lead time is 3 weeks.The following data are available: Required: What is the cost of the prediction error?

Answer the following question(s)using the information below: The Wood Furniture Company produces a specialty wood furniture product, and has the following information available concerning its inventory items: Annual demand is 10,000 packages per year.The purchase price per package is $16. -Wilson's Deli can predict with virtual certainty the demand for its products.Wilson's sells 20 hams per week.Purchase order lead time is 2 weeks and the economic order quantity is 50 hams.What is the reorder point?

Answer the following question(s)using the information below: Owen-King Company sells optical equipment.Lens Company manufactures special glass lens.Owen-King Company orders 5,200 lens per year, 100 per week at $20 per lens.Lens Company covers all shipping costs.Owen-King Company earns 30% on its cash investments.The purchase order lead time is 2.5 weeks.Owen-King Company sells 125 lens per week.The following data is available: -What is the reorder point for Owen-King Company?

Answer the following question(s)using the information below: The Wood Furniture Company produces a specialty wood furniture product, and has the following information available concerning its inventory items: Annual demand is 10,000 packages per year.The purchase price per package is $16. -If Jackson Collectibles, Inc.has a safety stock of 35 units and the average weekly demand is 14 units, how many days can be covered if the shipment from the supplier is delayed?

Answer the following question(s)using the information below: The following information has been gathered for Product A: -The total annual relevant cost equation, TRC, includes all of the following inputs EXCEPT

Answer the following question(s)using the information below: The following information has been gathered for Product A: -What are the annual ordering costs for Product A if the company orders at the EOQ amount?

The reorder point is simplest to compute when either demand or lead time is certain.

Answer the following question(s)using the information below: Complete Microfilm Products manufactures microfilm cameras.For October there were no beginning inventories of direct materials, and no beginning or ending work-in-process.Only one indirect manufacturing cost category is currently in use, "Conversion Costs." Journal entries are recorded when materials are purchased and when units are sold using backflush costing. -Which of the following journal entries would be recorded for the units that are sold by Complete Microfilm Products in October?

Backflush costing uses normal or standard costs.

What are the principles of lean accounting? Are there any limitations? Discuss.

The lack of buffer inventory in a demand-pull system means production staff has extra time to solve problems.