To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 20 INVENTORY MANAGEMENT, JUST-IN-TIME, AND SIMPLIFIED COSTING METHODS 20-1 Cost of goods sold (in retail organizations) or direct materials costs (in organizations with a manufacturing function) as a percentage of sales frequently exceeds net income as a percentage of sales by many orders of magnitude In the Kroger grocery store example cited in the text, cost of goods sold to sales is 73.7%, and net income to sales is 0.6% Thus, a 10% reduction in the ratio of cost of goods sold to sales (73.7 to 66.3%) without any other changes can result in a 1233% increase in net income to sales (0.6% to 8.0%) 20-2 Five cost categories important in managing goods for sale in a retail organization are the following: purchasing costs; ordering costs; carrying costs; stockout costs; and quality costs 20-3 Five assumptions made when using the simplest version of the EOQ model are: The same quantity is ordered at each reorder point Demand, ordering costs, carrying costs, and the purchase-order lead time are certain Purchasing cost per unit is unaffected by the quantity ordered No stockouts occur Costs of quality are considered only to the extent that these costs affect ordering costs or carrying costs 20-4 Costs included in the carrying costs of inventory are incremental costs for such items as insurance, rent, obsolescence, spoilage, and breakage plus the opportunity cost of capital (or required return on investment) 20-5 Examples of opportunity costs relevant to the EOQ decision model but typically not recorded in accounting systems are the following: the return forgone by investing capital in inventory; lost contribution margin on existing sales when a stockout occurs; and lost contribution margin on potential future sales that will not be made to disgruntled customers 20-6 The steps in computing the costs of a prediction error when using the EOQ decision model are: Step 1: Compute the monetary outcome from the best action that could be taken, given the actual amount of the cost input Step 2: Compute the monetary outcome from the best action based on the incorrect amount of the predicted cost input Step 3: Compute the difference between the monetary outcomes from Steps and 20-1 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-7 Goal congruence issues arise when there is an inconsistency between the EOQ decision model and the model used for evaluating the performance of the person implementing the model For example, if opportunity costs are ignored in performance evaluation, the manager may be induced to purchase in a quantity larger than the EOQ model indicates is optimal 20-8 Just-in-time (JIT) purchasing is the purchase of materials (or goods) so that they are delivered just as needed for production (or sales) Benefits include lower inventory holdings (reduced warehouse space required and less money tied up in inventory) and less risk of inventory obsolescence and spoilage 20-9 Factors causing reductions in the cost to place purchase orders of materials are:  Companies are establishing long-run purchasing agreements that define price and quality terms over an extended period  Companies are using electronic links, such as the Internet, to place purchase orders  Companies are increasing the use of purchase-order cards 20-10 Disagree Choosing the supplier who offers the lowest price will not necessarily result in the lowest total purchase cost to the buyer This is because the price or purchase cost of the goods is only one—and perhaps, most obvious—element of cost associated with purchasing and managing inventories Other relevant cost items are ordering costs, carrying costs, stockout costs and quality costs A low-cost supplier may well impose conditions on the buyer—such as poor quality, or frequent stockouts, or excessively high inventories—that result in high total costs of purchase Buyers must examine all the elements of costs relevant to inventory management, not just the purchase price 20-11 Supply-chain analysis describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers, regardless of whether those activities occur in the same organization or in other organizations Sharing of information across companies enables a reduction in inventory levels at all stages, fewer stockouts at the retail level, reduced manufacture of product not subsequently demanded by retailers, and a reduction in expedited manufacturing orders 20-12 Just-in-time (JIT) production is a “demand-pull” manufacturing system that has the following features:  Organize production in manufacturing cells,  Hire and retain workers who are multi-skilled,  Aggressively pursue total quality management (TQM) to eliminate defects,  Place emphasis on reducing both setup time and manufacturing lead time, and  Carefully select suppliers who are capable of delivering quality materials in a timely manner 20-13 Traditional normal and standard costing systems use sequential tracking, in which journal entries are recorded in the same order as actual purchases and progress in production, typically at four different trigger points in the process Backflush costing omits recording some of the journal entries relating to the cycle from purchase of direct materials to sale of finished goods, i.e., it has fewer trigger points at which journal entries are made When journal entries for one or more stages in the cycle are omitted, 20-2 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com the journal entries for a subsequent stage use normal or standard costs to work backward to “flush out” the costs in the cycle for which journal entries were not made 20-14 Versions of backflush costing differ in the number and placement of trigger points at which journal entries are made in the accounting system: Version Number of Journal Entry Trigger Points Version 2 Stage A Purchase of direct materials Stage D Sale of finished goods Version Stage C Completion of good finished units of product Stage D Sale of finished goods Location in Cycle Where Journal Entries Made Stage A Purchase of direct materials Stage C Completion of good finished units of product Stage D Sale of finished goods 20-15 Traditional accounting systems cost individual products, and separate product costs from selling, general, and administrative costs Lean accounting costs the entire value stream instead of individual products Unused capacity costs and common costs that cannot be reasonably assigned to value streams are excluded from value stream costs In addition, many lean accounting users expense material costs the period they are purchased, rather than storing them on the balance sheet until the products using the material are sold 20-16 (20 min.) Economic order quantity for retailer D = 10,000, P = $200, C = $7 EOQ  DP  C  10,000  $200 = 755.93  756 jerseys 10,000 D = = 13.22  14 orders EOQ 756 Number of orders per year = Demand each working day = Purchase lead time = days Reorder point = 27.40  D 10,000 = = 27.40 jerseys per day Number of working days 365 = 191.80  192 jerseys 20-3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-17 (20 min.) Economic order quantity, effect of parameter changes (continuation of 20-16) D = 10,000, P = $30, C = $7 EOQ  DP  C  10,000  $30 = 292.77 jerseys  293 jerseys The sizable reduction in ordering cost (from $200 to $30 per purchase order) has reduced the EOQ from 756 to 293 The AT proposal has both upsides and downsides The upside is potentially higher sales FB customers may purchase more online than if they have to physically visit a store FB would also have lower administrative costs and lower inventory holding costs with the proposal The downside is that AT could capture FB’s customers Repeat customers to the AT web site need not be classified as FB customers FB would have to establish enforceable rules to make sure it captures ongoing revenues from customers it directs to the AP web site There is insufficient information to determine whether FB should accept AT’s proposal Much depends on whether FB views AT as a credible, “honest” partner 20-18 (15 min.) EOQ for a retailer D = 20,000, P = $160, C = 20%  $8 = $1.60 EOQ = 错误！未指定开关参数。= 错误！未指定开关参数。= 2,000 yards Number of orders per year: Demand each working day D 20‚000 = = 10 orders EOQ 2‚000 D Number of working days 20‚000 = 250 = 80 yards per day = 400 yards per week = Purchasing lead time = weeks Reorder point = 400 yards per week  weeks = 800 yards 20-4 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-19 (20 min.) EOQ for manufacturer Relevant carrying costs per part per year: Required annual return on investment 15%  $60 = Relevant insurance, materials handling, breakage, etc costs per year Relevant carrying costs per part per year With D = 18,000; P = $150; C = $15, EOQ for manufacturer is:  18,000  $150 错误！未指定开关参数。= = 600 units $15 $ $15 Total relevant =  D  P    ordering costs Q   18,000  =  $150   600  = $4,500 where Q = 600 units, the EOQ At the EOQ, total relevant ordering costs and total relevant carrying costs will be exactly equal Therefore, total relevant carrying costs at the EOQ = $4,500 (from requirement 2) We can also confirm this with direct calculation: Q  Total relevant carrying costs =   C  2   600  =  $15    = $4,500 where Q = 600 units, the EOQ Purchase order lead time is half a month Monthly demand is 18,000 units ÷ 12 months = 1,500 units per month Demand in half a month is  1,500 units or 750 units Lakeland should reorder when the inventory of rotor blades falls to 750 units 20-5 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-20 (20 min.) Sensitivity of EOQ to changes in relevant ordering and carrying costs A straightforward approach to the requirement is to construct the following table for EOQ at relevant carrying and ordering costs Annual demand is 10,000 units The formula for the EOQ model is: EOQ = 错误！未指定开关参数。 where D = demand in units for a specified period of time P = relevant ordering costs per purchase order C = relevant carrying costs of one unit in stock for the time period used for D (one year in this problem Relevant Carrying Costs per Unit per Year Relevant Ordering Costs per Purchase Order $300 $200 $10  10,000  $300 = 775 $10  10,000  $200 = 632 $10 15  10,000  $300 = 632 $15  10,000  $200 = 516 $15  10,000  $300  10,000  $200 20 $20 = 548 $20 = 447 For a given demand level, as relevant carrying costs increase, EOQ becomes smaller For a given demand level, as relevant order costs increase, EOQ increases 20-21 (15 min.) Inventory management and the balanced scorecard The incremental increase in operating profits from employee cross-training (ignoring the cost of the training) is: Increased revenue from higher customer satisfaction ($5,000,000 × 2% × 5) $500,000 Reduced inventory-related costs 100,000 Incremental increase in operating profits (ignoring training costs) $600,000 At a cost of $600,000, DSC will be indifferent between current expenditures and increasing employee cross-training by 5% Consequently, the most DSC would be willing to pay for this cross-training is the $600,000 benefit received Besides increasing short-term operating profits, additional employee cross-training can improve employee satisfaction because their jobs can have more variety, potentially leading to unanticipated productivity improvements and lower employee turnover Multi-skilled employees can also understand the production process better and can suggest potential improvements Each of these may lead to additional cost reductions 20-6 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-22 (20 min.) JIT production, relevant benefits, relevant costs Solution Exhibit 20-22 presents the annual net benefit of $315,000 to Champion Hardware Company of implementing a JIT production system Other nonfinancial and qualitative factors that Champion should consider in deciding whether it should implement a JIT system include: a The possibility of developing and implementing a detailed system for integrating the sequential operations of the manufacturing process Direct materials must arrive when needed for each subassembly so that the production process functions smoothly b The ability to design products that use standardized parts and reduce manufacturing time c The ease of obtaining reliable vendors who can deliver quality direct materials on time with minimum lead time d Willingness of suppliers to deliver smaller and more frequent orders e The confidence of being able to deliver quality products on time Failure to so would result in customer dissatisfaction f The skill levels of workers to perform multiple tasks such as minor repairs, maintenance, quality testing and inspection SOLUTION EXHIBIT 20-22 Annual Relevant Costs of Current Production System and JIT Production System for Champion Hardware Company Relevant Relevant Costs under Costs under Current JIT Production Production Relevant Items System System Annual tooling costs – $100,000 Required return on investment: 15% per year  $1,000,000 of average inventory per year $150,000 15% per year  $200,000a of average inventory per year 30,000 Insurance, space, materials handling, and setup costs 300,000 225,000b Rework costs 200,000 140,000c Incremental revenues from higher selling prices – (160,000)d Total net incremental costs $650,000 $335,000 Annual difference in favor of JIT production $315,000 a $1,000,000  (1 – 80%) = $200,000 $300,000  (1 – 0.25) = $225,000 c $200,000  (1 – 0.30) = $140,000 d $4 × 40,000 units = $160,000 b 20-7 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Personal observation by production line workers and managers is more effective in JIT plants than in traditional plants A JIT plant’s production process layout is streamlined Operations are not obscured by piles of inventory or rework As a result, such plants are easier to evaluate by personal observation than cluttered plants where the flow of production is not logically laid out Besides personal observation, nonfinancial performance measures are the dominant methods of control Nonfinancial performance measures provide most timely and easy to understand measures of plant performance Examples of nonfinancial performance measures of time, inventory, and quality include:  Manufacturing lead time  Units produced per hour  Machine setup time ÷ manufacturing time  Number of defective units ÷ number of units completed In addition to personal observation and nonfinancial performance measures, financial performance measures are also used Examples of financial performance measures include:  Cost of rework  Ordering costs  Stockout costs  Inventory turnover (cost of goods sold  average inventory) The success of a JIT system depends on the speed of information flows from customers to manufacturers to suppliers The Enterprise Resource Planning (ERP) system has a single database, and gives lower-level managers, workers, customers, and suppliers access to operating information This benefit, accompanied by tight coordination across business functions, enables the ERP system to rapidly transmit information in response to changes in supply and demand so that manufacturing and distribution plans may be revised accordingly 20-8 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-23 (30 min.) Backflush costing and JIT production (a) Purchases of direct materials (b) Incur conversion costs (c) Completion of finished goods (d) Sale of finished goods Inventory: Materials and In-Process Control Accounts Payable Control 2,754,000 2,754,000 Conversion Costs Control Various Accounts 723,600 Finished Goods Controla Inventory: Materials and In-Process Control Conversion Costs Allocated 3,484,000 Cost of Goods Soldb Finished Goods Control 3,432,000 723,600 2,733,600 750,400 3,432,000 a26,800 × ($102 + $28) = $3,484,000 b26,400 × ($102 + $28) = $3,432,000 Inventory: Finished Goods Control Materials and In-Process Control Direct Materials (a) 2,754,000 (c) 3,484,000 (d) 3,432,000 (c) 2,733,600 Cost of Goods Sold (d) 3,432,000 Bal 52,000 Bal 20,400 Conversion Costs Allocated (c) 750,400 Conversion Costs Conversion Costs Control (b) 723,600 Under an ideal JIT production system, there could be zero inventories at the end of each day Entry (c) would be $3,432,000 finished goods production, not $3,484,000 Also, there would be no inventory of direct materials instead of $2,754,000 – $2,733,600 = $20,400 20-9 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-24 (20 min.) Backflush costing, two trigger points, materials purchase and sale (continuation of 20-23) (a) Purchases of direct materials (b) Incur conversion costs Inventory Control Accounts Payable Control 2,754,000 Conversion Costs Control Various Accounts 723,600 2,754,000 723,600 (c) Completion of finished goods No entry (d) Sale of finished goods Cost of Goods Sold Inventory Control Conversion Costs Allocated 3,432,000 Conversion Costs Allocated Costs of Goods Sold Conversion Costs Control 739,200 (e) Underallocated or overallocated conversion costs 2,692,800 739,200 15,600 723,600 Inventory Control (a) 2,754,000 Direct Materials (d) 2,692,800 Bal 61,200 Conversion Costs Allocated (e) 739,200 (d) 739,200 Conversion Costs Conversion Costs Control (b) 723,600 (e) 723,600 20-10 Cost of Goods Sold (d) 3,432,000 (e) 15,600 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-25 (20 min.) Backflush costing, two trigger points, completion of production and sale (continuation of 20-23) (a) Purchases of direct materials No Entry (b) Incur conversion costs Conversion Costs Control Various Accounts (c) Completion of finished goods (d) Sale of finished goods (e) Underallocated or Overallocated conversion Costs 723,600 723,600 Finished Goods Control 3,484,000 Accounts Payable Control Conversion Costs Allocated 2,733,600 750,400 Cost of Goods Sold Finished Goods Control 3,432,000 3,432,000 Conversion Costs Allocated Costs of Goods Sold Conversion Costs Control 750,400 26,800 723,600 Direct Materials  Conversion Costs  Finished Goods Control (c) 3,484,000 (d) 3,432,000 Bal 52,000 Conversion Costs Allocated (e) 750,400 (c) 750,400 Conversion Costs Control (b) 723,600 (e) 723,600 20-11 Cost of Goods Sold (d) 3,432,000 (e) 26,800 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-26 (30 min.) Effect of different order quantities on ordering costs and carrying costs, EOQ Demand (units) (D) Cost per purchase order (P) Annual carrying cost per package (C) Order quantity per purchase order (units) (Q) Number of purchase orders per year (D  Q) Annual ordering costs (D  Q)  P Annual carrying costs (QC  2) Total relevant costs of ordering and carrying inventory 234,000 $ 81.00 $ 11.70 900 260.00 $21,060 $ 5,265 $26,325 234,000 $ 81.00 $ 11.70 1,500 156.00 $12,636 $ 8,775 $21,411 Scenario 234,000 $ 81.00 $ 11.70 1,800 130.00 $10,530 $10,530 $21,060 234,000 $ 81.00 $ 11.70 2,100 111.43 $ 9,026 $12,285 $21,311 The economic order quantity is 1,800 packages It is the order quantity at which carrying costs equal ordering costs and total relevant ordering and carrying costs are minimized We can also confirm this from direct calculation Using D = 234,000; P = $81 and C = $11.70  234,000  $81 EOQ = = 1,800 packages $11.70 It is interesting to note that Koala Blue faces a situation where total relevant ordering and carrying costs not vary very much when order quantity ranges from 1,500 packages to 2,700 packages When the ordering cost per purchase order is reduced to $49:  234,000  $49 EOQ = = 1,400 packages $11.70 The EOQ drops from 1,800 packages to 1,400 packages when Koala Blue’s ordering cost per purchase order decreases from $81 to $49 D   234,000  And the new relevant costs of ordering inventory =   P  =   $49  = $8,190  Q   1,400  Q   1,400  $11.70  = $8,190 and the new relevant costs or carrying inventory =   C  =  2    The total new costs of ordering and carrying inventory = $8,190  = $16,380 As summarized below, the new Mona Lisa web-based ordering system, by lowering the EOQ to 1,400 packages, will lower the carrying and ordering costs by $4,680 Koala Blue will spend $2,000 to train its purchasing assistants on the new system Overall, Koala Blue will still save $2,680 in the first year alone Total relevant costs at EOQ (from Requirement 2) Annual cost benefit over old system ($21,060 – $16,380) Training costs Net benefit in first year alone 20-12 $16,380 $ 4,680 2,000 $ 2,680 234,000 $ 81.00 $ 11.70 2,700 86.67 $ 7,020 $15,795 $22,815 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-27 (30 min.) EOQ, uncertainty, safety stock, reorder point point EOQ  DP 120,000  $250  C $2.40 = 5,000 pairs of shoes Weekly demand = Monthly demand ÷ = 10,000 ÷ = 2,500 pairs of shoes per week Purchasing lead time = week Reorder point = 2,500 pairs of shoes per week × week = 2,500 pairs of shoes Safety stock = 20% ×10,000 = 2,000 pairs of shoes Reorder point = Weekly demand + Safety stock = 2,500 + 2,000 = 4,500 pairs of shoes EOQ = 5,000 pairs of shoes (since neither annual demand, ordering cost, nor carrying cost have changed, the EOQ will not change) a Total relevant = ordering costs b Total relevant = ordering costs D   Q  P    Q   (  Safety Stock)  C    c Total Relevant Cost (a + b) Without Safety Stock With Safety Stock  120, 000   5, 000  $250  = $6,000    5, 000   $2.40  = $6,000     120, 000   5, 000  $250  = $6,000    5, 000   2,000)  $2.40  =$10,80 (   $12,000 20-13 $16,800 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-28 (25 min.) MRP, EOQ, and JIT Under a MRP system: Annual cost of producing and carrying J-Pods in inventory = Variable production cost + Setup cost + Carrying cost = $50 × 48,000 + ($50,000 × 12 months) + [$20 ì (4,000 ữ 2)] = $2,400,000 + 600,000 + 40,000 = $3,040,000 Using an EOQ model to determine batch size: EOQ  DP  C  48,000  $50,000 $20 = 15,492 J-Pods per batch Production of 48,000 per year divided by a batch size of 15,492 would imply J-Pods would be produce 3.1 batches per year Rounding this up to the nearest whole number yields batches per year Annual Cost of producing and carrying J-Pods in inventory = Variable production cost + Setup cost + Carrying cost = $50 × 48,000 + ($50,000 ì 4) + [$20 ì (15,492 ữ 2)] = $2,400,000 + 200,000 + 154,920 = $2,754,920 Under a JIT system Annual Cost of producing and carrying J-Pods in inventory = Variable production cost + Setup cost + Carrying cost = $50 × 48,000 + ($5,000 × 96 a) + [$20 ì (500 ữ 2)] = $2,400,000 + 480,000 + 5,000 = $2,885,000 a production of 48,000 per year divided by a batch size of 500 would imply 96 setups per year The EOQ system resulted in the lowest costs, despite the fact that carrying costs were lower for the JIT model However, the EOQ model, in this case, limits production to only once every four months This would not allow managers to react quickly to changing market demand or economic conditions The JIT model provides management with much more flexibility JIT systems might also lead managers to improve processes, reduce costs and increase quality 20-14 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-29 (30 min.) Effect of management evaluation criteria on EOQ model EOQ  DP  C  500,000  $800 $50 = 4,000 computers Number of orders per year = D 500,000  = 125 orders EOQ 4,000 Total relevant =  D  P  =  500,000  $800  = $100,000   4,000  ordering costs  Q    Total relevant =  Q  C  =  4,000  $50  = $100,000     carrying costs 2    Total relevant cost = $100,000 + $100,000 = $200,000 EOQ  DP  C  500,000  $800 $30 = 5,164 computers D   500,000   Q  P  =  5,164  $800  = $77,459     Total relevant =  Q  C  =  5,164  $50  = $129,100    carrying costs     Total relevant = ordering costs Total relevant cost = $77,459 + 129,100 = $206,559 Thus, the EOQ quantity and total relevant costs are higher if the company ignores holding costs when evaluating managers, but only by about 3% The square root in the EOQ model reduces the sensitivity of the ordering decision to errors in parameter estimates Since managers will choose to order 5,164 computers instead of 4,000, the cost to the company will be $6, 559 ($206,559 - $200,000) higher than it would be if managers were evaluated based upon all carrying costs Computers U probably does not include the opportunity costs of carrying inventory because it is not tracked by the financial accounting system The company could change the evaluation model to include a cost of investment in inventory Even though this would involve an additional calculation, it would encourage managers to make optimal decisions 20-15 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-30 (25 min.) Effect of EOQ ordering on supplier costs (continuation of Problem 20-29) i) Set up cost = Cost per setup × annual setups Alternative A: $1,000 ×50 setups = $50,000 Alternative B: $1,000 × 250 setups = $250,000 ii) Carrying Cost = Average inventory level × carrying cost Alternative A: 10,000 ữ ì $50 = $250,000 Alternative B: Assumed to be $0 (because computers are shipped on the day they are produced) iii) Total relevant cost Alternative A: $50,000 + $250,000 = $300,000 Alternative B: $250,000 + $0 = $250,000 Costs would be lower if IMBest produced computers every day Let C = carrying costs per unit Alternative A: Total cost = $50,000 + (10,000 ữ 2) ì C Alternative B: Total cost = $250,000 + $0 Equating these costs, $50,000 + $5,000C = $250,000 $5,000C = $200,000 C = $40 If carrying costs fall below $40 per unit, IMBest would be better off producing the computers once a week 20-16 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-31 (30 min.) JIT purchasing, relevant benefits, relevant costs Solution Exhibit 20-31 presents the $37,500 cash savings that would result if Margro Corporation adopted the just-in-time inventory system in 2008 Conditions that should exist in order for a company to successfully adopt just-in-time purchasing include the following: • Top management must be committed and provide the necessary leadership support to ensure a company-wide, coordinated effort • A detailed system for integrating the sequential operations of the manufacturing process needs to be developed and implemented Direct materials must arrive when needed for each subassembly so that the production process functions smoothly • Accurate sales forecasts must be available for effective finished goods planning and production scheduling • Products should be designed to maximize use of standardized parts to reduce manufacturing time and costs • Reliable vendors who can deliver quality direct materials on time with minimum lead time must be obtained 20-17 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTION EXHIBIT 20-31 Annual Relevant Costs of Current Purchasing Policy and JIT Purchasing Policy for Margro Corporation Relevant Relevant Costs under Costs under Current JIT Purchasing Purchasing Policy Policy Required return on investment 20% per year  $600,000 of average inventory per year $120,000 20% per year  $0 inventory per year $ Annual insurance and property tax costs 14,000 Warehouse rent 60,000 (13,500)a Overtime costs No overtime Overtime premium 40,000 Stockout costs No stockouts $6.50b contribution margin per unit  20,000 units 130,000 Total incremental costs $194,000 $156,500 Difference in favor of JIT purchasing $37,500 a$(13,500) = Warehouse rental revenues, [(75%  12,000) of unit contribution margin Selling price ($10,800,000 ÷ 900,000 units) Variable costs per unit : Variable manufacturing cost per unit ($4,050,000 ÷ 900,000 units) Variable marketing and distribution cost per unit ($900,000 ÷ 900,000 units) Total variable costs per unit Contribution margin per unit  $1.50] bCalculation $12.00 $4.50 1.00 5.50 $ 6.50 Note that the incremental costs of $40,000 in overtime premiums to make the additional 15,000 units are less than the contribution margin from losing these sales equal to $97,500 ($6.50  15,000) Margro would rather incur overtime than lose 15,000 units of sales 20-18 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-32 (25 min.) Supply chain effects on total relevant inventory costs The relevant costs of purchasing from Maji and Induk are: Cost Category Purchase costs 10,000 boards × $93 per board 10,000 boards × $90 per board Ordering costs 50 orders × $10 per order 50 orders × $8 per order Inspection costs 10,000 boards × 5% × $5 per board 10,000 boards × 25% × $5 per board Required annual return on investment 100 boards × $93 per board × 10% 100 boards × $90 per board × 10% Stockout costs 100 boards × $5 per board 300 boards × $8 per board Return costs 50 boards × $25 per board 500 boards × $25 per board Other carrying costs 100 boards × $2.50 per board per year 100 boards × $2.50 per board per year Total Cost Maji Induk $930,000 900,000 500 400 2,500 12,500 930 900 500 2,400 1,250 12,500 250 $935,930 250 $928,950 While Induk will save Cow Spot $6,980 ($935,930 − $928,950), Cow Spot may still choose to use Maji for the following reasons: a The savings are less than 1% of the total cost of the mother boards b With ten times the number of returns, Induk will probably have a negative effect on Cow Spot’s reputation c With Induk’s higher stockouts, Cow Spot’s reputation for availability and on time delivery will be effected d The increased number of inspections may necessitate the hiring of additional personnel and the need for additional factory space and equipment 20-19 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-33 (20 min.) Blackflush costing and JIT production (a) Purchases of direct materials (b) Incur conversion costs (c) Completion of finished goods (d) Sale of finished goods Inventory: Materials and In-Process Control Accounts Payable Control 550000 Conversion Costs Control Various Accounts 440000 Finished Goods Controla Inventory: Materials & In-Process Control Conversion Costs Allocated 945000 Cost of Goods Soldb Finished Goods Control 900000 550000 440000 525000 420000 900000 a 21000 × $45 ($25 + $20) = $945000 b 20000 × $45 = $900000 Direct Materials Inventory Materials and In-Process Control ( a ) 50 ,00 (c ) 25 ,00 B al 5,0 00 Conversion Costs Finished Goods Control (c ) 45 ,0 00 (d ) Ba l 5, 00 Conversion Costs Allocated (c ) 20 ,0 00 Conversion Costs Control (b ) 40 ,0 00 20-20 00 ,00 Cost of Goods Sold (d ) 00 ,00 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-34 (20 min.) Backflush, two trigger points, materials purchase and sale (continuation of 20-33) (a) Purchases of direct materials Inventory Control Accounts Payable Control (b) Incur conversion costs 550,000 550,000 Conversion Costs Control 440,000 Various Accounts (such as Accounts Payable Control and Wages Payable Control) (c) Completion of finished goods No entry (d) Sale of finished goods Cost of Goods Sold Inventory Control Conversion Costs Allocated 900,000 Conversion Costs Allocated Cost of Goods Sold Conversion Costs Control 400,000 40,000 (e) Underallocated or overallocated conversion costs 440,000 500,000 400,000 440,000 Inventory Control Direct Materials (a) 550000 (d) 500000 Cost of Goods Sold (d) 900000 Bal.50000 Conversion Costs Allocated (e) 400000 (d) 400000 Conversion Costs (e) 40000 Conversion Costs Control (b) 440000 (e) 440000 20-21 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-35 (20 min.) Backflush, two trigger points, completion of production and sale (continuation of 20-33) (a) Purchase of direct materials No entry (b) Incur conversion costs Conversion Costs Control 440,000 Various Accounts (such as Accounts Payable Control and Wages Payable Control) 440,000 (c) Completion of finished goods Finished Goods Control Accounts Payable Control Conversion Costs Allocated 945,000 (d) Sale of finished goods Cost of Goods Sold Finished Goods Control 900,000 Conversion Costs Allocated Cost of Goods Sold Conversion Costs Control 420,000 20,000 (e) Underallocated or overallocated conversion costs 525,000 420,000 900,000 440,000 Finished Goods Control D ir ect M a t e ri a l s (c) 45 ,00 (d ) 00 ,0 00 Cost of Goods Sold (d ) 00 ,0 00 Bal 45,000 C o n v er s io n Co s t s A l l o ca t ed (e ) 20 ,0 00 (c) 20 ,0 00 Co n v ers i o n Co s t s (e ) Co n v er si o n C o s ts Co n t ro l (b ) 40 ,0 00 (e ) 40 ,0 00 20-22 20 ,0 00 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-36 (20 min.) Lean accounting The cost object in lean accounting is the value stream, not the individual product FSD has identified two distinct value streams: Mechanical Devices and Electronic Devices All direct costs are traced to the value streams However, not all plant-level overhead costs are allocated to the value streams when computing operating income Value streams are only charged for the percentage of space they actually use, only 85% of the $120,000 occupancy costs are charged to the two value streams The remaining 15%, or $18,000, is not used to compute value stream profits, nor are other plant-level overhead costs Operating income under lean accounting are the following (in thousands of dollars): Sales ($700 + $500; $900 + $450) Costs Direct material purchased ($190 + $125; $250 + $90) Direct manufacturing labor ($150 + $75; $200 + $60) Equipment costs ($90 + $125; $200 + $100) Product-line overhead ($110 + $60; $125 + $50) Occupancy costs ($120,000 × 40%) ($120,000 × 45%) Value stream operating income Mechanical Devices $1,200 Electronic Devices $1,350 315 340 225 260 215 300 170 175 48 $ 227 54 $ 221 In addition to the differences discussed in Requirement 1, FSD’s lean accounting system treats all direct material costs as expenses in the period they are purchased The following factors explain the differences between traditional operating income and lean accounting income for the two value streams: Traditional operating income ($100 + $105; $45 + $140) Additional cost of direct materials ($315 − $300; $340 − $325) Decrease in allocated plant-level overhead ($85 − $48; $105 − $54) Value stream operating income 20-23 Mechanical Devices Electronic Devices $205 $185 (15) (15) 37 $227 51 $221 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-37 (35–40 min.) Backflushing Glendale has successfully implemented JIT in its production operations and, as a result, minimized work-in-process inventory However, it still has a fair amount of raw material and finished goods inventory Glendale should, therefore, adopt a backflush costing system with two trigger points, as follows: a Direct materials purchases charged to Inventory: Materials and In-Process Control b Completion of finished goods recorded as Finished Goods Control The backflush approach described closely approximates the costs computed using sequential tracking There is no work in process so there is no need for a Work in Process inventory account Further, by maintaining a Materials and In-Process Inventory Control and Finished Goods Control account, Glendale can keep track of and control the inventories of direct materials and finished goods in its plant 2a Glendale should adopt a backflush costing system with trigger points at completion of finished goods and at the sale of finished goods This would approximate the sequential tracking approach since the question assumes Glendale has no direct materials or work-in-process inventories There is, therefore, no need for these inventory accounts b A backflush costing system with two trigger points—when purchases of direct materials are made (debited to Inventory Control), and when Finished Goods are sold—would approximate sequential tracking, since the question assumes Glendale has no work-in-process or finished goods inventories c A backflush costing system with a single trigger point when finished goods are sold would approximate sequential tracking, since the question assumes Glendale has no direct material, work-in-process or finished goods inventories This is a further simplification of the examples in the text The principle here is that backflushing of costs should be triggered at the finished goods inventory stage if Glendale plans to hold finished goods inventory If Glendale plans to hold no finished goods inventory, backflushing can be postponed until the finished goods are sold In other words, the trigger points for backflushing relate to the points where inventory is being accumulated As a result, backflushing matches the sequential tracking approach and also maintains a record for the monitoring and control of the inventory Some comments on the quotation follow: a The backflush system is a standard costing system, not an actual costing system b If standard costing is used, an up-to-date, realistic set of standard costs is always desirable––as long as the set meets the cost-benefit test of updating c The operating environments of “the present JIT era” have induced many companies toward more simplicity (backflush) and abandoning the typical standard costing system (sequential tracking) d Backflush is probably closer to being a periodic system than a perpetual system However, a periodic system may be cost-effective, particularly where physical inventories are relatively low or stable e The textbook points out that, to be attractive, backflush costing should generate the same financial measurements as sequential tracking––and at a lower accounting cost f The choice of a product costing system is highly contextual Its characteristics should be heavily affected by its costs, the preferences of operating managers, and the underlying operating processes Sweeping generalizations about any cost accounting system or technique are unjustified 20-24 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20-25 ... entire value stream instead of individual products Unused capacity costs and common costs that cannot be reasonably assigned to value streams are excluded from value stream costs In addition, many... product Stage D Sale of finished goods 20-15 Traditional accounting systems cost individual products, and separate product costs from selling, general, and administrative costs Lean accounting costs... manufacturing lead time, and  Carefully select suppliers who are capable of delivering quality materials in a timely manner 20-13 Traditional normal and standard costing systems use sequential