1. 7
C H A P T E R
Managing Inventory
and Service Costs

2. 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.

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

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

5. What is the formula for inventory turnover?

6. What is the formula for days in inventory?

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

8. 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

9. 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 =

10. Define Net Operating Profit

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

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

13. 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

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

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

16. 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.

17. Discuss JIT inventory systems

18. How do JIT and Value-Added Activities relate?

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

20. 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

21. Define Segment and Economic Value Added

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

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

24. 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?

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

26. 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.

27. Define Safety Stock

28. 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)

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