Exam 19: Inventory Cost Management Strategies

The Economic Order Quantity increases with demand and ordering costs and decreases with carrying costs.

What are five features of a just-in-time manufacturing system?

Vision Enterprises manufactures converter boxes for high definition TVs.All processing is initiated when an order is received.For March there were no beginning inventories.Conversion costs and direct materials are the only manufacturing cost accounts.Direct materials are purchased under a just-in-time system and there was no variance.Backflush costing is used with trigger points at completion of finished goods and sale of product.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.

All inventory costs are available in financial accounting systems.

You are the new controller at Ralston Industries and you have noticed that the company seems to carry a lot of inventory,both in direct materials and in finished goods.At a recent management meeting,you raised this observation.The managers agreed with your observation but stated that it was company policy to carry large inventories. Required: Provide three reasons these managers might offer in support of carrying large inventories?

When retailers are uncertain about demand for their products or availability of their products from the suppliers,they often hold a fixed level of safety stock to make sure they will be able to fulfill the customers' needs.

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

If Ferry Company has a safety stock of 160 units and the average daily demand is 20 units,how many days can be covered if the shipment from the supplier is delayed by 12 days?

Arrow Manufacturing Ltd.distributes golf clubs.Its annual demand for next year is forecasted at 14,000 sets at an average cost of $425 per set.In reviewing its historical ordering costs for the past 3 years it noted that costs were $12,900,$16,400 and $20,100 at order volumes of 20,50 and 80 respectively.Arrow is forecasting an increase of 10% in its fixed ordering costs and a 15% increase in its variable ordering costs.The fixed ordering costs relate to allocations of supervisory time,computer time,and warehouse space.In addition to the order processing,the company must receive and inspect the units.Receiving and inspecting activities require 5 hours per order at a direct labour rate of $12 per hour.Variable overhead related to receiving and inspecting activities is applied at a rate of 40% of direct labour dollars. In reviewing its other activities,Arrow came up with the following estimates for next year: The company is closed for two weeks in the summer and again for 2 weeks over Christmas.This results in 48 work weeks in the year and the company operates 5 days per week. Required: a.Determine the Economic Order Quantity (EOQ)for Arrow for next year.What are the total annual inventory costs at the EOQ? b.Determine the reorder point in units assuming that the lead time is 7 days. c.Now assume the company has found a new supplier that is willing to supply on a just-in-time basis.Inspection and receiving time would be lowered to 1.5 hours per order and the annual estimated damage would be cut by 75%.Storage and inventory insurance would drop to $4.50 and $0.60 respectively.The variable ordering cost would drop to $65 due to integrated ordering systems.However,the annual cost to purchase the golf sets will increase to $428.Determine the new EOQ.Should the company go with the new supplier or maintain its current arrangements?

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?

Inventory management is the planning,organizing,and controlling activities that focus on the flow of materials into,through,and from the organization.

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

A backflush costing system that journalizes only when raw materials are purchased and when finished goods are sold,will have which of the following results?

A firm using a backflush costing system will always use actual costs rather than standard costs.

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

Which of the following is NOT a component in a materials requirement planning system?

The management accountant aids in MRP by

Carrying costs arise when a customer demands a unit of product and that unit is not readily available.

The total annual relevant cost equation,TRC,includes all of the following inputs EXCEPT

Just-in-time purchasing requires organizations to place smaller purchase orders with their suppliers.