© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost Accounting: Foundations & Evolutions, 8e Kinney and Raiborn Chapter 18: Inventory and Production Management © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objectives What value chain relationships are important to organizations? What costs are associated with buying, producing, and carrying inventory? How do push and pull systems control production? Why do product life cycles affect profitability? What is target costing, and how does it influence production cost management? What is the just-in-time philosophy and what modifications does JIT require in accounting systems? What are flexible manufacturing systems? Why are lean enterprises important in today’s business environment? How can the theory of constraints help in determining production flow? (Appendix) How are economic order quantity, order point, and safety stock determined and used?

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Inventory Items  Inventory is often a firm’s largest investment  Merchandise for resale  Manufacturing raw materials, work-in- process and finished goods  Firms today should minimize inventory while meeting customer demands

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Value Chain Customers and Suppliers may be internal or external Suppliers Production plants Finished goods Distribution centers Customers

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. T I M E SALESSALES Product Life Cycles Development Stage

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Introduction Stage T I M E SALESSALES Substantial costs including engineering changes, market research, advertising, and promotion Sales price matches similar or substitute goods Sales low Introduction Stage

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Growth Stage Increased sales Quality may improve Prices stable T I M E SALESSALES Growth Stage

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Maturity Stage Sales stabilize or decline slowly Firms compete on selling price Costs at lowest level T I M E SALESSALES Maturity Stage

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Decline Stage Waning sales Dramatic price cuts Cost per unit increases as fixed costs are spread over fewer units T I M E SALESSALES Decline Stage

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Just-in-Time Eliminate any process or operation that does not add value Continuous improvement in production/performance efficiency Reduction in total cost of production/performance while increasing quality

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Traditional Manufacturing Smooth operating activity  steady use of workforce  continuous machine utilization Spread overhead over a maximum number of products Inventory levels high enough to cover up inefficiencies in acquisition and/or production

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. JIT Plants Minimize material handling time, lead time, movement of goods Use manufacturing cells which allow for visual controls, greater teamwork, quick exchange of vital information Reduce storage Increase throughput Develop multiskilled workers Use automation—programmed factory equipment

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Manufacturing Methods Flexible Manufacturing System (FMS) Network of robots and material conveyance devices monitored and controlled by computers Modular factories Customization Quick, inexpensive production changes Computer-Integrated Manufacturing (CIM) Two or more FMSs connected via host computer and information system

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Theory of Constraints (TOC) Flow of goods through a production process cannot be at a faster rate than the slowest bottleneck in the process Eliyahu Goldratt

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Constraints Constraint—anything that confines or limits a person or machine’s ability to perform a project or function  Human constraints  Material constraints  Machine constraints Place quality control points before bottlenecks

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Questions What is the difference between push and pull systems of production? What is target costing? What is the just-in-time philosophy? How does JIT affect production?

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Potential Ethical Issues Producing inventory not needed driven by achieving operating profits Avoiding innovative production and inventory driven by avoiding short-run costs Blaming suppliers for inventory mistakes caused by management Failure to write down obsolete or spoiled inventory in a timely manner Using coercion to force supplies to give price concessions Using the adoption of emerging production and inventory methods to fire workers