Inventory Management,

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 1

 Assignment
The Chiz Manufacturin Company has a cycle of 2.0 days,
Uses a Raw and In Process account (RIP) and charges all
Conversion cost to Cost of Goods Sold. At the end of each
month, all inventories are counted, their conversion cost
Components are estimated and inventory account balances
Are adjusted. Raw materials cost is backflushed from RIP to
Finished Goods. The following is for the month of May.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 2

 Assignment
RIP beginning, including P12,000 of conversion costs P 40,000
FG beginning, including P8,800 of conversion costs 35,000
Materials purchased on credit 230,000
RIP end, including P15,700 of conversion costs 28,500
FG end, including P13,100 of conversion costs 19,800
Conversion cost – P180,000 direct labor and P225,000 overhead

Requirements
1. Amount of materials backflushed from RIP to FG.
2. Amount of materials backflushed from FG to COGS.
3. Journal entries to record the above transactions.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 3

 IMPORTANT SETS OF RELATIONSHIPS IN
THE VALUE CHAIN

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 4

 IMPORTANT SETS OF RELATIONSHIPS IN
THE VALUE CHAIN

Consider the following opportunities for improvement

between entities:
limproved communication of requirements and specifications,
lgreater clarity in requests for products or services,
limproved feedback regarding unsatisfactory products or services,
limprovements in planning, controlling, and problem solving, and
lshared managerial and technical expertise, supervision, and training.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 5

Basic cost associated with Inventory
Costs
• Purchasing/production
• Ordering/setup
• Carrying/not carrying
 Inventory
Types
• Raw material
• Work in process
• Finished goods
• Indirect materials
(supplies)
• Merchandise
inventory
 Purchasing cost

The purchasing cost for inventory is the quoted

purchase price minus any discounts allowed,
plus shipping charges.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 8

 Production cost

For a manufacturer, production cost refers to the costs

associated with purchasing direct material, paying
for direct labor, incurring traceable overhead, and
absorbing allocated fixed manufacturing overhead.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 9

 Purchasing/Production cost

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 10

 Ordering/Set up cost

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 11

 Carrying/Not Carrying

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 12

 Production cost

Which of the following is not an ordering cost?

a. cost of receiving inventory
b. cost of preparing the order
c. cost of the merchandise ordered
d. cost of storing the inventory

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 13

 Production cost

Which of the following is not an ordering cost?

a. cost of receiving inventory
b. cost of preparing the order
c. cost of the merchandise ordered
d. cost of storing the inventory

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 14

 Production cost

lThe cost of receiving inventory is regarded as

a. an ordering cost.
b. a carrying cost.
c. a purchasing cost.
d. a cost of not carrying goods in stock.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 15

 Production cost

lThe cost of receiving inventory is regarded as

a. an ordering cost.
b. a carrying cost.
c. a purchasing cost.
d. a cost of not carrying goods in stock.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 16

 Production Systems
• Push Systems
– Produce in anticipation of customer orders
– Store raw material, work in process, and
finished goods inventory
• Pull
– Produce as needed
– Minimal storage
Push Systems
Push Systems
Push Systems
Push Systems
Push Systems
Push Systems
Push Systems
Push Systems
Push Systems
Pull Systems
 MCQ

A _____________ system of production control is

paced by product demand.
a. EOQ
b. ABC
c. Push
d. Pull
 MCQ

A _____________ system of production control is

paced by product demand.
a. EOQ
b. ABC
c. Push
d. Pull
 MCQ

_____________ is a "pull" system of production and

inventory control.
a. EDI
b. EOQ
c. JIT
d. ABC
 Product Life Cycles
• The product life cycle model depicts the
stages through which is a product class (not
each product) passes from the time that an
idea is conceived until production is
discontinued.
 Product Life Cycles

S
A
L
E
S

TIME
Product Life Cycles
 Target Costing
• In contrast, since the early 1970s, a
technique called target costing has been
used by some companies (especially
Japanese ones) to view the costing process
differently
 Target Costing
• Target costing develops an “allowable”
product cost by analyzing market research
to estimate what the market will pay for a
product with specific characteristics. This is
expressed in the following formula:
 Target Costing – ex.
• A market survey indicates that the
metropolitan area could sustain an annual
500-order volume and that customers
believe $18 is a reasonable fee per service.
The print shop manager believes that a
reasonable profit for this service is $8 per
customer order.
 Target Costing – ex.
• ESP = $18 per service
• APM = $8 per customer order.

TC = ESP – APM
TC = $18 - $8
TC = $10
 Target Costing – ex.
• The projected sales price for a new product (which
is still in the development stage of the product life
cycle) is $50. The company has estimated the life-
cycle cost to be $30 and the first-year cost to be
$60. On this type of product, the company requires
a $12 per unit profit. What is the target cost of the
new product?
a. $60
b. $30
c. $38
d. $42
 Target Costing – ex.
• The projected sales price for a new product (which is still
in the development stage of the product life cycle) is $50.
The company has estimated the life-cycle cost to be $30
and the first-year cost to be $60. On this type of product,
the company requires a $12 per unit profit. What is the
target cost of the new product?
a. $60
b. $30
c. $38
d. $42
 Target Costing – ex.
• Which of the following formulas is the best
representation of the concept of target costing?
a. target cost + profit margin = selling price
b. selling price - target cost = profit margin
c. selling price - profit margin = target cost
d. target cost - standard cost = profit margin
 Target Costing – ex.
• Which of the following formulas is the best
representation of the concept of target costing?
a. target cost + profit margin = selling price
b. selling price - target cost = profit margin
c. selling price - profit margin = target cost
d. target cost - standard cost = profit margin
 Value Engineering
• Value engineering is an important step in
successful product development.
• It involves a disciplined search for various
feasible combinations of resources and
methods that will increase product
functionality and reduce costs
 Value Engineering
• Value engineering is an important step in
successful product development.
• It involves a disciplined search for various
feasible combinations of resources and
methods that will increase product
functionality and reduce costs
 MCQ
• Value engineering seeks to obtain increased
a. product life-cycle and reduced direct labor
inputs.
b. planning team membership and reduced time-to-
market.
c. product performance ratio and reduced substitute
goods.
d. product functionality and reduced costs.
 MCQ
• Value engineering seeks to obtain increased
a. product life-cycle and reduced direct labor
inputs.
b. planning team membership and reduced time-to-
market.
c. product performance ratio and reduced substitute
goods.
d. product functionality and reduced costs.
 Kaizen Costing
• Kaizen costing involves ongoing efforts for
continuous improvement to reduce product costs,
increase product quality, and/or improve the
production process after manufacturing activities
have begun.
• These cost reductions are designed to keep the
profit margin relatively stable as the product price
is reduced over the product life cycle.
Target costing vs. Kaizen Costing
Target costing vs. Kaizen Costing
Target costing vs. Kaizen Costing
Target costing vs. Kaizen Costing
Target costing vs. Kaizen Costing
Target costing vs. Kaizen Costing
 Kaizen Costing
• Kaizen costing involves ongoing efforts for
continuous improvement to reduce product costs,
increase product quality, and/or improve the
production process after manufacturing activities
have begun.
• These cost reductions are designed to keep the
profit margin relatively stable as the product price
is reduced over the product life cycle.
 Kaizen Costing
• Kaizen means
a. doing it the Japanese way.
b. continuous improvement.
c. employee empowerment.
d. implementation of a centralized organizational
structure.
 Kaizen Costing
• Kaizen means
a. doing it the Japanese way.
b. continuous improvement.
c. employee empowerment.
d. implementation of a centralized organizational
structure.
 MCQ
• Which approaches to costing should be associated with
each of the following life-cycle stages?
Development Introduction Maturity
a. Kaizen Target Standard
b. Target Standard Kaizen
c. Target Kaizen Standard
d. Kaizen Standard Target
 MCQ
• Which approaches to costing should be associated with
each of the following life-cycle stages?
Development Introduction Maturity
a. Kaizen Target Standard
b. Target Standard Kaizen
c. Target Kaizen Standard
d. Kaizen Standard Target
Demonstration Problem
 End of Discussion

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 76