1. Chapter 18: Inventory and Production Management
Cost Accounting Principles, 8e
Raiborn and Kinney
© 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.

2. 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?

3. 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

4. Value Chain Suppliers Production plants Finished goods
Customers and Suppliers
may be internal or external
Suppliers
Production plants
Finished goods
Distribution centers
Customers

5. Production Systems Push Systems Pull Produce as needed Minimal storage
Produce in anticipation of customer orders
Store raw material, work in process, and finished goods inventory
Pull
Produce as needed
Minimal storage

6. Product Life Cycles S A L E
T I M E
Development
Stage

7. Introduction Stage
Substantial costs including engineering changes, market research, advertising, and promotion
Sales price matches similar or
substitute goods
Sales low
Introduction
Stage
T I M E S A L E

8. Growth Stage Increased sales Quality may improve Prices stable Growth
T I M E S A L E

9. Maturity Stage Sales stabilize or decline slowly
Firms compete on selling price
Costs at lowest level
Maturity
Stage
T I M E S A L E

10. Decline Stage Waning sales Dramatic price cuts
Cost per unit increases as fixed costs are spread over fewer units
Decline
Stage
T I M E S A L E

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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?

18. 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