Embed Size (px)
Citation preview
Managing Inventoryand Service CostsManaging Inventoryand Service Costs
C H A P T E R 21
Learning Objective 1
Identify the different types of inventory in manufacturing, merchandising, and service organizations and understand how these inventory costs are reflected in the income statement and balance sheet.
What are Cost Flow Patterns of Manufacturing, Merchandising, and
Service Organizations?Manufacturing
Merchandising
Service
Learning Objective 2
Analyze the levels of raw materials, work-in-process, and finished goods inventories in a manufacturing organization.
What is the formula for inventory turnover?
What is the formula for days in inventory?
Learning Objective 3
Understand how merchants manage inventory in their organization.
Inventory Management Issues
Carrying Too Much Inventory
Increased overhead costs
Increased financial holding costs
Increased risk of loss of market value
Decreased inventory flexibility
Increased inventory shrinkage
Carrying Too Little Inventory
Increased risk of lost sales
Increased ordering costs
Increased risk of supplier price increases
Increased exposure to nondelivery
Decreased bulk order discounts
Return on Investment
It is just as important to manage the money outflow for asset investment as it is to manage the money inflow from profits.
Good management accounting can provide real value in the management effort to improve a merchandising operation.
Profit margin X Asset turnoverROI =
Profit
RevenueProfit margin =
Revenue
Total assetsAsset turnover =
Define Net Operating Profit
Learning Objective 4
Measure profitability and personnel utilization in a service organization.
Describe the Characteristics of Service Organizations
Professional Services
Service Shops
Mass Services
Profitability Report
# of
Prof.
Actual
Billable
Hours
Billing
Rate
Total
Revenue
Total
Comp.
Cost
Partners 10 8,200 $500 $4100,000 $4,000,000
Senior
Managers
15 20,000 300 6,000,000 1,950,000
Managers 20 35,000 225 7,875,000 2,000,000
Seniors 50 120,000 150 18,000,000 2,500,000
Staff 100 250,000 100 25,000,000 4,000,000
Total $60,975,000 $14,450,000
What Two Concepts Are Used to Develop Cost Management
Evaluation Tools for Service Organizations?
What is the Formula for Profit Percentage from Professionals
(PPP)?
What is a Personnel Utilization Report (PUR)?
Learning Objective 5
Describe how the concept of just-in-time (JIT) inventory systems is used to improve cost, quality, and timely performance in organizations.
Discuss JIT inventory systems
How do JIT and Value-Added Activities relate?
Learning Objective 6
Calculate and interpret holding costs in merchandising and service businesses.
Match These Terms with Their Correct Formula or Definition
Economic Profit
Cost of Capital
Financial Holding Cost
The Cost of Using Money
Average Investment x Annual Rate x Number of Periods
Net Operating Profit – Holding Cost of Inventory and Other Asset Investments
Define Segment and Economic Value Added
Segment
Economic Value Added
Expanded MaterialLearning Objective 7
Use classic quantitative tools in inventory management (economic order quantity, reorder point, and safety stock).
%%
Economic Order Quantity
What must firms balance?
EOQ attempts to answer what questions?
Calculating EOQHow much inventory should we order?
What is the formula for EOQ?What do the terms mean?
How much inventory should we order?What is the formula for EOQ?
What do the terms mean?
Reorder Point
When do we place the inventory order? What is the formula?
Safety Stock
Safety stock — calculation has two parts:
1. To handle possible problems in the reorder process.
2. To handle an unexpected spike in sales demand.
Why does a business want to hold safety stock?
Define Safety Stock
EOQ, Reorder Points, and Safety Stock Inventory Levels
EOQReorder
Point
Safety Stock
Inventory (Units)
0 units
3 days
6 days
9 days
12 days
Average Lead Time (3 days)
Reorder Point with Safety Stock
Managerial Accounting Chapter 7 Completed
