Part Six: The application of quantitative methods to management accounting Chapter Twenty-four: Quantitative models for the planning and control of inventories.

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Presentation transcript:

Part Six: The application of quantitative methods to management accounting Chapter Twenty-four: Quantitative models for the planning and control of inventories

PLANNING AND CONTROL OF STOCKS 24.1 PLANNING AND CONTROL OF STOCKS 1. Reasons for holding stocks • Transaction motive • Precautionary motive • Speculative motive 2. Relevant costs required for determining EOQ • Holding costs • Ordering costs 3. Holding costs • Opportunity cost of investment in stocks • Incremental insurance costs • Incremental warehouse and storage costs • Incremental material handling costs • Costs of deterioration and obsolete stocks 4. Ordering costs • Incremental clerical costs of preparing a purchase order, receiving deliveries and paying invoices.

24.2 Determining the EOQ

24.3 Economic order quantity graph

24.4a EOQ formula

24.4b Determining the optimum quantity of a production run

24.5 Quantity discounts

Determining when to place the order Assume: EOQ = 600 units; Lead time = 2 wks; Usage per wk = 120 units Re-order point = 2 weeks × 120 units = 240 units. With an EOQ of 600 units orders will be placed at five-weekly intervals.

24.6b Uncertain demand If weekly demand exceeds 120 units there will be a stockout. Therefore safety stocks are maintained and re-order point is: (Average usage during average lead time) + (Safety stocks)

24.6c Uncertain demand contd