Inventory Management

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

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Learning Objective 1

InventoryA physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state.

Inventory ManagementIts the planning & controlling of inventories in order to meet the competitive priorities of the organization.

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

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Purposes of Inventory
1. To maintain independence of operations 2. To meet variation in product demand 3. To provide a safeguard for variation in raw material delivery time

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

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Functions of Inventory
To meet anticipated demand To smooth production reqmnts To take advantage of order cycle To help hedge against price increases To permit operations To take advantage of quantity discounts

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

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Types of Inventory
1. Production Inventories
2. MRO Inventories 3. In-process Inventories 4. Finished Goods Inventories
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Learning Objective 2
Inventory Reduction Approach
Cycle inventory Safety Stock Inventory Anticipation Inventory Pipeline Inventory

Inventory Cost
Ordering Cost Carrying Cost Out of stock/Shortage Cost Capacity Cost

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

Benefits of Inventory Mgt. & Ctrl

1. It ensures an adequate supply of materials
2. It keeps down investment in inventories 3. It facilitates purchasing economies 4. It permits a better utilization of available stocks 5. It provides a check against the loss of material 6. It facilitates cost accounting activities

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

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Process of Inventory Mgt. & Ctrl

1. Optimum Inventory Levels 2. Degree of control
3. Planning & Design of Inventory System 4. Organizational Arrangement

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

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Inventory Control Techniques

ABC Classification
HML Classification VED Classification SDE Classification FSN Classification EOQ Model Max-Min System Two-Bin System MRP JIT
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Economic-Order-Quantity Decision Model Assumptions

Annual demand is 12,844 packages, at the rate of 247 packages per week. Video requires a 15% annual return on investment. The purchase-order lead time is two weeks. What is the economic-order-quantity?

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

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Economic-Order-Quantity Decision Model Example

EOQ =
2 DP C

D = Demand in units for a specified time period

P = Relevant ordering costs per purchase order C = Relevant carrying costs of one unit in stock for the time period used for D
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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10,000 Relevant Total Costs (Ruppees)

Economic-Order-Quantity Decision Model Example

Annual relevant total costs

8,000

6,000 5,434 4,000 Annual relevant carrying costs Annual relevant ordering costs

2,000

Order Quantity (Units)

600

988 1,200 EOQ

1,800

2,400

Economic-Order-Quantity
Objective Minimize total variable cost Assumptions of EOQ
1. Demand must be known& constant 2. Delivery time is known & constant 3. Price is constant 4. Holding cost is known & constant 5. Ordering cost is known & constant

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

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Reorder Point
988 Reorder Point 494 Reorder Point

Weeks

3
Lead Time 2 weeks

7
Lead Time 2 weeks

This exhibit assumes that demand and purchase-order lead time are certain:

Demand = 247 tape packages/week

Purchase-order lead time = 2 weeks

Safety Stock
Safety stock is inventory held at all times regardless of the quantity of inventory ordered using the EOQ model.

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

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End of Chapter 20

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

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