Eoq Or: Yuliana Devi Lukito 121210059

Small Quiz
Lukito
Summary Management Accounting
Yuliana Devi
121210059
1. INVENTORY MANAGEMENT
Managing inventory for competitive advantage includes:
Quality product engineering
Prices
Overtime
Excess capacity
Ability to respond to customers
Lead times
Overall profitability
2. INVENTORY COSTS
Purchasing costs include transportation costs.
Ordering costs include receiving and inspecting the items in the orders.
Carrying costs include the opportunity cost of the investment tied up in
inventory and the costs associated with storage.
Stockout costs occur when an organization runs out of a particular item for
which there is a customer demand.
Quality costs of a product or service is its lack of conformance with a
prespecified standard.
3. EOQ (Economic Order Quantity)
Is a model that calculates the best quantity to order or produce.
Economic-Order-Quantity Decision Model Assumptions:
1. The same quantity is ordered at each reorder point.
2. Demand, ordering costs, carrying costs,and purchase-order lead time are
known with certainty.
3. Purchasing costs per unit are unaffected by the quantity ordered.
4. No stockouts occur.
5. Quality costs are considered only to the extent that these costs affect
ordering costs or carrying costs
for
The EOQ minimizes the relevant ordering costs and carrying costs.
Formula:
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
the
time period used for D
EOQ =
RTC = Annual relevant ordering costs + Annual relevant carrying costs
or
Q can be any order quantity, not just the EOQ

4. ROP identifies the proper time to place an order to avoid stockout.
Reorder point = Number of units sold per unit of time Purchase-order
lead time
5. Safety stock
Safety stock is inventory held at all times regardless of the quantity of inventory
ordered using the EOQ model.
Safety stock = Lead time x (maximum average usage)
Example:
a. Video purchases packages of video tapes from Oaks, Inc., at $15/package.
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?
Relevant ordering cost per purchase order:
$209
Relevant carrying costs per package per year:
Required annual ROI (15% $15)
$2.25
Relevant other costs
Total
EOQ
3.25
$5.50
988 packages
When Q = 988 units,

RTC = (12,844 $209 988) + (988 $5.50 2)
= $5,434 total relevant costs
How many deliveries should occur each time period?
13 deliveries
EOQ = 988 packages
Number of units sold/week = 247
Purchase-order lead time = 2 weeks
Reorder point = 247 2 = 494 packages
b. Videos expected demand is 247 packages per week. Management feels that a
maximum demand of 350 packages per week may occur. How much safety stock
should be carried?
350 Maximum demand 247 Expected demand = 103 Excess demand per
week
103 packages 2 weeks lead time = 206 packages of safety stock.
6. Just-in-time
JIT purchasing is the purchase of goods or materials such that a delivery
immediately precedes demand or use.
Companies moving toward JIT purchasing argue that the cost of carrying
inventories (parameter C in the EOQ model) has been dramatically
underestimated in the past.
JIT Purchasing and EOQ Model Parameters
The cost of placing a purchase order (parameter P in the EOQ model) is also
being re-evaluated.
Three factors are causing sizable reduction in the cost of placing a purchase
order (P):
1. Companies increasingly are establishing long-run purchasing
arrangements.
2. Companies are using electronic links, such as the Internet, to place
purchase orders.
3. Companies are increasing the use of purchase order cards (similar to
consumer credit cards like Visa and Master Card).
Just-in-time (JIT) production systems take a demand pull approach in which
goods are only manufactured to satisfy customer orders.
Major Features of a JIT System:
1. Organizing production in manufacturing cells
2. Hiring and retaining multi-skilled workers
3. Emphasizing total quality management
4. Reducing manufacturing lead time and setup time
5. Building strong supplier relationships
Information May Management Accountants Use:
1. Personal observation by production line workers and managers
2. Financial performance measures,such as inventory turnover ratios
3. Nonfinancial performance measures of time, inventory, and quality.
JIT Strategic Objectives
1. Increase profits
2. Improve competitive position by Controlling costs,Improving delivery
performance and Improving quality
Basic inventory features of JIT address how manufacturing facilities can be
designed to promote employee empowerment & product quality.
Shutdowns are caused by:
Machine failure
Defective material or sub-assembly
Unavailability of material or sub-assembly
JIT
response
Total preventive maintenance
Total quality control (TQC)
Using the Kanban system
LIMITATIONS OF JIT
Time is required to build sound relations with suppliers
Workers experience stress in changing over to JIT
Production may be interrupted because of absence of inventory supply buffer
May place current sales at risk to achieve assurance of future sales
7. Constraint: Is the limitation of resources or product demand.
Theory of constraints (TOC) focuses on 3 measures of organizational
performance:
1. Throughput: rate of generating money through sales
2. Inventory: money spent turning materials into throughput
3. Operating expenses: money spent turning inventory into throughput
Theory of constraint suggests that constraints (and thereby inventory) are
best managed through:
1. Having better, higher quality products
2. Having lower prices
3. Being responsive
4. On-time delivery
5. Shorter lead time
Theory of constraints STEPS:
1. Identify constraints
2. Exploit binding constraints
3. Subordinate everything to decision made in #2 above
4. Elevate binding constraints
5. Repeat process
Binding Constraints: Are those constraints whose available resources are fully
utilized.
Sources:
1. Management Accounting 8th Edition by Hansen & Mowen
2. Cost Accounting 11/e by Hongren

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Small Quiz

RTC = Annual relevant ordering costs + Annual relevant carrying costs

Q can be any order quantity, not just the EOQ

When Q = 988 units,

Unavailability of material or sub-assembly

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