1. Copyright © 2003 Pearson Education Canada Inc. Slide 20-196 Chapter 20 Inventory Management, Just-in- Time, and Backflush Costing

2. Copyright © 2003 Pearson Education Canada Inc. Slide 20-197 Inventory Management In retail organizations, look at purchasing costs, ordering costs, carrying costs, stockout costs and quality costs Economic order quantity (EOQ) model calculates the optimal quantity to order Pages 738 - 743 EOQ= where D = demand P = cost of an order C = carrying costs of one unit for the time period under consideration 2DP C

3. Copyright © 2003 Pearson Education Canada Inc. Slide 20-198 Inventory Model Inventory In Units Pages 741 - 742 1,000 500 0 Weeks 1 2 3 4 5 6 7 8 Lead Time 2 Weeks Lead Time 2 Weeks Reorder Point Reorder Point Demand = 250 / week Order lead time 2 weeks

4. Copyright © 2003 Pearson Education Canada Inc. Slide 20-199 Just-In-Time Purchasing Just-In-Time (JIT) purchasing refers to the purchase of goods or materials just prior to demand or use Requires a more open relationship with suppliers and smaller, more frequent orders Timely delivery of quality products is crucial in JIT purchasing environments Companies employing JIT choose suppliers carefully Consider the entire supply chain from cradle to grave (womb to tomb) and share information with all parties involved in the system Pages 744 - 749

5. Copyright © 2003 Pearson Education Canada Inc. Slide 20-200 Materials Requirements Planning Materials requirements planning (MRP) is a push- through system that manufactures finished goods for inventory on the basis of demand forecasts MRP uses demand forecasts for the final products a bill of materials for each product the quantities of materials, components and finished products to predetermine the necessary outputs at each stage of production Enterprise Resource Planning (ERP) systems collects and manages information into a single database to support the achievement of the organization’s goals Pages 750 - 755

6. Copyright © 2003 Pearson Education Canada Inc. Slide 20-201 Sequential (or synchronous) tracking is a product costing method in which the accounting system entries occur in the same order as actual purchases and production Trigger point is a stage in the production cycle at which an accounting entry is made Backflush Costing & Trigger Points Pages 755 - 763 Traditional Trigger Points Purchase of Direct Materials Production of work in process Completion of a good finished unit Sale of a finished unit

7. Copyright © 2003 Pearson Education Canada Inc. Slide 20-202 Backflush Costing Pages 755 - 763 Backflush costing is an approach to costing which delays recording changes in the status of the product until the finished goods appear Backflush costing uses standard costs to work backward and flush out costs for the units produced Finished Goods Control Cost of Goods Sold Direct Allocated Unallocated Conversion Costs Direct Materials Conversion Cost Control Sale