7 C H A P T E R Managing Inventory and Service Costs

Learning Objective 1 Identify the different types of inventory in manufacturing, merchandising, and service organizations and understand how these inventory costs are reflected in the income statement and balance sheet.

What are Cost Flow Patterns of Manufacturing, Merchandising, and Service Organizations?

Learning Objective 2 Analyze the levels of raw materials, work-in-process, and finished goods inventories in a manufacturing organization.

What is the formula for inventory turnover?

What is the formula for days in inventory?

Learning Objective 3 Understand how merchants manage inventory in their organization.

Inventory Management Issues Carrying Too Much Inventory Increased overhead costs Increased financial holding costs Increased risk of loss of market value Decreased inventory flexibility Increased inventory shrinkage Carrying Too Little Inventory Increased risk of lost sales Increased ordering costs Increased risk of supplier price increases Increased exposure to nondelivery Decreased bulk order discounts

Profit margin X Asset turnover Return on Investment It is just as important to manage the money outflow for asset investment as it is to manage the money inflow from profits. Good management accounting can provide real value in the management effort to improve a merchandising operation. Profit margin X Asset turnover ROI = Profit Revenue Profit margin = Revenue Total assets Asset turnover =

Define Net Operating Profit

Learning Objective 4 Measure profitability and personnel utilization in a service organization.

Describe the Characteristics of Service Organizations Professional Services Service Shops Mass Services

Profitability Report # of Prof. Actual Billable Hours Billing Rate Total Revenue Comp. Cost Partners 10 8,200 $500 $4100,000 $4,000,000 Senior Managers 15 20,000 300 6,000,000 1,950,000 20 35,000 225 7,875,000 2,000,000 Seniors 50 120,000 150 18,000,000 2,500,000 Staff 100 250,000 25,000,000 4,000,000 $60,975,000 $14,450,000

What Two Concepts Are Used to Develop Cost Management Evaluation Tools for Service Organizations?

What is the Formula for Profit Percentage from Professionals (PPP)? What is a Personnel Utilization Report (PUR)?

Learning Objective 5 Describe how the concept of just-in-time (JIT) inventory systems is used to improve cost, quality, and timely performance in organizations.

Discuss JIT inventory systems

How do JIT and Value-Added Activities relate?

Learning Objective 6 Calculate and interpret holding costs in merchandising and service businesses.

Match These Terms with Their Correct Formula or Definition The Cost of Using Money Economic Profit Average Investment x Annual Rate x Number of Periods Cost of Capital Net Operating Profit – Holding Cost of Inventory and Other Asset Investments Financial Holding Cost

Define Segment and Economic Value Added

Expanded Material Learning Objective 7 Use classic quantitative tools in inventory management (economic order quantity, reorder point, and safety stock).

Economic Order Quantity What must firms balance? EOQ attempts to answer what questions?

How much inventory should we order? What is the formula for EOQ? Calculating EOQ How much inventory should we order? What is the formula for EOQ? What do the terms mean?

When do we place the inventory order? What is the formula? Reorder Point When do we place the inventory order? What is the formula?

Why does a business want to hold safety stock? Safety stock — calculation has two parts: To handle possible problems in the reorder process. To handle an unexpected spike in sales demand.

Define Safety Stock

EOQ, Reorder Points, and Safety Stock Inventory Levels Inventory (Units) Reorder Point with Safety Stock EOQ Reorder Point Safety Stock 0 units 3 days 6 days 9 days 12 days Average Lead Time (3 days)

Managerial Accounting Chapter 7 Completed Nothing of greatness is ever achieved without enthusiasm. Ralph Waldo Emerson