Solution manual cost and managerial accounting by barfield 3rd innovative inventory and production management techniques

Chapter 16 Innovative Inventory and Production Management Techniques Questions The important relationships in the value chain that can be exploited are (1) between the company and its upstream supplier and (2) between the company and its downstream customer It is at the interfaces of these relationships where real opportunities for improvements exist By building improved cooperation, communication, and integration, the entities within the value chain can treat each other as extensions of themselves In so doing, they can enjoy gains in quality, throughput, and cost efficiency Non-value-added activities can be reduced or eliminated and performance of value-added activities can be enhanced Shared expertise and problem solving can be very beneficial Products and services can be provided faster and with fewer defects, and activities can be performed more effectively and reliably with fewer deficiencies and less redundancy The three costs are costs of ordering, purchasing, and carrying inventory These costs are presented in Exhibit 16-1 with examples A push system is a production control system in which work centers produce inventory in excess of current needs because of lead time or economic production/order quantity requirements A pull system of production control is one in which parts are delivered/produced only as needed by the work center for which they are intended Theoretically, there are no stockrooms where work centers "push" completed parts in excess of the current needs of recipient work centers Incremental variable costs associated with preparing, receiving, and paying for an order are called ordering costs and include the cost of forms and a variety of clerical costs In manufacturing companies, ordering costs are incurred for raw material purchases However, if the company intends to produce rather than order a part, direct and indirect setup costs (instead of ordering costs) are created as equipment is readied for each new production run Therefore, setup costs are the conceptual counterpart of ordering costs when parts are to be made rather than purchased 175 Chapter 16 Innovative Inventory and Production Management Techniques 451 Advances in information technology have greatly improved the efficiency and effectiveness of purchasing Bar coding and electronic data interchange (EDI) are expected to significantly reduce procurement costs An extension of EDI is vendormanaged inventory (VMI), a streamlined system of inventory acquisition and management A supplier is empowered to frequently monitor EDI inventory levels and provide its customer company a proposed e-order and subsequent shipment On electronic acceptance, a funds transfer from the buyer’s bank is made when the goods are received Finally, the process of conducting business transactions over the Internet, known as e-commerce, has made possible the use of procurement cards (pcards) These are given to selected employees as a means of securing greater control over spending and eliminating the paper-based purchase authorization process A stockout occurs when a firm runs out of an inventory item Such an item could either be finished goods inventory or a component material A company can estimate the cost of a stockout by estimating * lost customer goodwill, * lost contribution margin, and * additional ordering and shipping costs on special orders A manufacturer could also estimate additional setup costs caused by having to stop the production process and restart it Companies must be aware of where their products are in their life cycles, because in addition to the sales effects, the life-cycle stage may have a tremendous impact on costs and profits Managing production activities and costs requires an understanding of product life cycles in order to effectively and efficiently engage in production planning, controlling, problem solving, and performance evaluation The five stages are development, introduction, growth, maturity and decline Each stage is important because it has an important impact on production costs The types of costs incurred vary from stage to stage and effective cost management must be responsive to how costs are changing as the life cycle progresses Costs, sales, and profits change for several reasons For example, costs change because of the timing of activities and volume In the early stages, costs are being incurred to develop the product and production processes In later stages, production costs are the largest cost component Sales change mostly because of changes in customer demand In the early stages, sales volume is nil or low In the middle stages, volume is high and in the later stages volume stabilizes and then drops Secondarily, sales change because of per-unit price changes Profit changes with the changes in costs and sales 452 10 Chapter 16 Innovative Inventory and Production Management Techniques Target costing is a method of determining what the cost of a product should be by subtracting desired profit from the estimated selling price Once a product's total life-cycle costs are projected, they can be compared to the target cost to determine whether adjustments to the product design and manufacturing process are necessary before product engineers release the final design and specifications 11 Target costing requires that profitability be viewed on a longterm basis The consideration of target cost can impact future opportunities to reduce costs The desired target cost may not be attainable at the start of production, but because learning curve activities and design for manufacturability have been considered up front, the target cost should be reachable within a reasonable time 12 The big factor is the amount of cost that is incurred to launch a new product If the cost to develop and launch a new product is very large, much research must precede the introduction of a product to ensure its success However, if the cost to introduce a new product is relatively low, a company can rely on the market to determine which products will be successful Products that are not well received by the market can simply be discontinued 13 A cost table provides information about the costs of materials, labor, and production processes A cost table is useful in the design of a product because, given alternative materials and conversion operations, the cost table will facilitate determining how product cost is affected by alternative product and process designs 14 A major distinction between kaizen costing and target costing is seen in the life-cycle stages in which each is used Kaizen costing is used to reduce the cost of products in later stages of the product life cycle Target costing is applied in the product development/design stage 15 A substitute good (service) is a product (service) that could be used in lieu of using another product (service) For example, public bus service could be a substitute for private taxi service If the price of travel by taxi rises, riders may switch to use of bus services to avoid paying the higher taxi fees 16 Research and development costs are treated as product costs of life-cycle costing, whereas they are expensed as period costs for financial accounting Treating R&D as product costs gives a more accurate and complete picture of costs relevant to the product over its life cycle 17 Chapter 16 Innovative Inventory and Production Management Techniques 451 Primary goals of JIT are * elimination of any process that does not add value to the product; * continuous improvement of production efficiency; and * reduction of total cost of production rather than merely the cost of purchasing JIT attempts to achieve these goals by working to * eliminate the acquisition/production of inventories in excess of current needs; * reduce lead/setup times; and * minimize product defects 18 The following changes are needed to effectively implement JIT in a production environment: * Selection of a vendor should consider the following items in addition to the invoice prices: consistent quality of materials/parts to minimize product defects; reliable delivery schedules with short lead times to allow for maintaining little or no inventory and for flexibility and speed in setting up production runs; maintaining long-term relationships with fewer vendors to improve communications, ensure quality and service, obtain quantity discounts, and reduce operating costs; obtaining suppliers who are close to the plant to reduce lead times and shipping costs * Small quantities should be ordered to minimize inventory carrying costs * Product components and tools should be standardized to lower costs and increase production efficiency * The number of product components should be minimized to lower costs and increase production efficiency * Products should be carefully designed to reduce subsequent change orders * Setup times should be shortened to allow for quicker, more flexible production * Production workers are used to continually ensure quality control in order to reduce costs and approach zero defects * The plant layout should be designed in a manner that is conducive to the flow of goods and organization of workers in order to minimize cycle time from material input to finished product * Employee suggestions for improving production should be sought; these individuals often have a wealth of information that goes untapped * Utilize multiprocess handling to improve worker flexibility and interest JIT is a pull system because products are only produced when demanded 452 19 Chapter 16 Innovative Inventory and Production Management Techniques One aspect of JIT (being located near vendors) is more difficult in the United States because the area is much larger and vendors might be located in a completely different geographical section of the country Another reason for less effective implementation is the differing attitudes between Japanese and American workers toward their jobs and between Japanese and American employers toward their employees 20 Since JIT represents a philosophy of how to things rather than how to produce things, many aspects of JIT can be used by nonmanufacturers The following elements from solution 18 can be adopted by nonmanufacturers in relation to their purchasing techniques and employee base: * Selection of a vendor should consider the following items in addition to the invoice prices: reliable delivery schedules with short lead times to allow for maintaining little or no inventory and for flexibility and speed in meeting customer needs; maintaining long-term relationships with fewer vendors to improve communications, ensure quality and service, obtain quantity discounts, and reduce operating costs; obtaining suppliers that are close to the company to reduce lead times and shipping costs * Small quantities should be ordered to minimize inventory carrying costs * Workers are trained to continually ensure quality control to reduce costs and approach zero errors * The workspace layout should be designed in a manner that is conducive to the flow of goods and organization of workers * Employee suggestions for improving operations should be sought; these individuals often have a wealth of information that goes untapped * Utilize job enhancement to improve worker flexibility and interest 21 In a lights-out factory, all production is accomplished by an integrated system of machines The only involvement of workers is to monitor and maintain the machines The term "lights-out" is simply a metaphor for an environment where one can simply close the factory doors, turn out the lights, and let the tireless machines produce 22 In an FMS, each employee is charged with operating or overseeing several machines Although the automation requires fewer workers than traditional production systems, FMS requires its workers to have more training than those in a traditional environment Also, the employees need to be given the authority and responsibility to make decisions because the environment is too fast paced for people "off the floor" to make certain production decisions 23 The primary areas in which implementation of a JIT system will Chapter 16 Innovative Inventory and Production Management Techniques 451 impact the cost accounting system are as follows: * Variance analysis should be made sooner in the production process and variances should be smaller because of continual monitoring of production * A new inventory account RIP (raw and in process) will combine the two traditional categories of raw material and work in process because few or no materials will be stored · Because more costs can be traced directly to their related output, fewer costs must be allocated to products This improves the usefulness of measures for cost control and performance evaluation Backflush costing is used because it is a less expensive accounting technique than those used in traditional production environments It is justified on the basis that, at any point in time, inventory is relatively small compared to the amount of goods that have been completed and sold Thus, on a cost-benefit basis, small inventory levels not justify more expensive continuous cost-tracking systems 24 The theory of constraints states that production cannot take place at a rate faster than the slowest machine or person in the process The theory of constraints can be used in either a manufacturing or service firm to focus management's attention on the elimination of the bottlenecks so that the best use of existing capacity can be made 25 Quality control inspections should be placed in front of bottlenecks so that the limited time of the constraint won't be wasted processing defective units 26 Total ordering cost declines as order size increases Carrying costs increase, in total, as order size increases At some point the two costs are equal and it is at this point that the EOQ point is located To the right of this point, total carrying costs exceed total ordering costs 27 EOQ is the optimal size of an order that is expected to minimize the total costs of ordering and carrying inventory Order point is the level of inventory on hand that triggers a placement of an order for additional units Thus, once the order point is reached, the economic order quantity should be ordered 28 Safety stock is the basic quantity (or cushion) of inventory kept on hand in the event of fluctuating usage or unusual delays in lead time It is necessary because of the uncertainties associated with the rate of usage and the lead time between placing and receiving an order 29 Pareto inventory analyses requires that all inventory items be placed into one of three classes: A, B, or C The three categories are distinguished from one another by their 452 Chapter 16 Innovative Inventory and Production Management Techniques cost-to-volume ratio High-value, low-volume items are placed in the A category; at the other extreme, low-value, high-volume items are placed in the C category All other items are placed in category B A red-line system or a twobin system is frequently used to control inventory levels of C items 30 Inventory is one of many investments made by an organization and should be expected to earn the same rate of return as other investments The cost of capital is considered to be an indication of a reasonable rate of return for an organization and represents an opportunity cost of holding inventory 31 Inspection of the two formulas (economic production runs and economic order quantity) shows the many similarities; the main difference is that, in the EPR formula, the terms are redefined as production costs rather than purchasing costs Q = annual quantity produced rather than purchased S = cost of setting up rather than placing an order C = cost of carrying one unit in stock for one year and is the same in either formula Use of the EOQ formula will help Joe minimize his costs of ordering and carrying if he has a reasonable idea of how many VCRs to order in total for the year Chapter 16 Innovative Inventory and Production Management Techniques 451 Exercises 32 b c d e f g h i j k l a 11 12 10 33 10 11 12 13 14 15 16 17 18 O O O N/A (Purch.) N O N/A (Purch.) C O O N C N/A (Purch.) C C C N C 34 Storage Handling Insurance Opp cost Carrying cost $0.06 0.04 0.02 0.43 $0.55 (Production labor costs are omitted.) 35 Life-cycle revenue: Year 18,000 × $9 Year 38,000 × Year 70,000 × Year 30,000 × Total 156,000 Required profit 156,000 × $1.50 Total target cost Target cost per unit: $ 162,000 304,000 420,000 150,000 $1,036,000 (234,000) $ 802,000 $802,000 ÷ 156,000 = $5.14 Chapter 16 Innovative Inventory and Production Management Techniques 36 a Life-cycle revenues Year 4,000 × $250 $ 1,000,000 Year 3,600 × $250 900,000 Year 4,700 × $250 1,175,000 Year 5,000 × $175 875,000 Year 1,500 × $175 262,500 Totals 18,800 $ 4,212,500 452 Variable selling costs (18,800 × $30) Fixed selling and administrative Required profit ($4,212,500 × 0.20) Target manufacturing cost Target manufacturing cost per unit (564,000) (1,750,000) (842,500) $ 1,056,000 $ 56.17 b Total target manufacturing cost $1,056,000 Year mfg cost (4,000 × $65) (260,000) Total target manufacturing cost 796,000 $ Target unit mfg cost ($796,000 ÷ 14,800) $53.78 c The company’s engineers could redesign the product to make it less costly to produce by lowering both material and conversion costs or redesign the process to reduce conversion costs Also, they could use kaizen techniques, which could lower costs after production has started 37 The student’s memo should address the following issues: Target cost = $175 - 10 = $165 Given that the target cost is $165 and the anticipated actual first-year cost is $180, it is apparent that it will be impossible to realize the required profit of $10 per unit unless changes are made There are two major courses of action First, management should ask the product engineers to review product design and specifications with the purpose of reducing expected average total life-cycle cost to the required $165 target cost Failing success in this endeavor, management could consider launching the product with the objective of achieving longterm price reductions through kaizen costing techniques If management is pessimistic about the company’s ability to achieve the required long-term reductions in cost, the plans for the product should be abandoned Chapter 16 Innovative Inventory and Production Management Techniques 451 38 a Material usage variance: Actual cost of materials this month: (A) 22,000 lbs × $2.25 per lb = $49,500 (B) 20,500 lbs × $3.40 per lb = 69,700 $119,200 Current materials standard: (A) 3,000 × × $2.25 per lb = (B) 3,000 × × $3.40 per lb = Material usage variance Annual materials standard: (A) 3,000 × × $2.25 per lb = (B) 3,000 × × $3.40 per lb = Current standard ENC variance $47,250 71,400 118,650 550 U $ $40,500 81,600 $122,100 118,650 $ 3,450 F b The effect of the engineering change was to change the mix of material inputs to favor the less expensive material, A For July, this engineering change generated cost savings of $3,450 39 a SP × AQ $0.10 × 250,000 = $25,000 $0.25 × 108,000 = 27,000 $52,000 | | SP × SQ $0.10 × 240,000 = $24,000 $0.25 × 120,000 = 30,000 $54,000 | $2,000 F | Material Usage Variance (Material X, $1,000 U; Material Y, $3,000 F) b Current SP × SQ $0.10 × 240,000 = $24,000 $0.25 × 120,000 = 30,000 $54,000 | | Annual SP × SQ $0.10 × 300,000 = $30,000 $0.25 × 60,000 = 15,000 $45,000 | $9,000 U | ENC Variance (Material X, $6,000 F; Material Y, $15,000 U) c The engineering change could have been to increase the quality or nutritional content of the cat food This may have been done in response to competitors' actions or to enter a new segment of the cat food market 452 Chapter 16 Innovative Inventory and Production Management Techniques 40 a Raw and In Process Inventory 320,000 Accounts payable 320,000 Conversion costs Various 708,000 Raw and In Process Inventory Conversion costs 704,000 708,000 704,000 Finished Goods Inventory Raw and In Process Inventory 1,024,000 1,024,000 Cost of Goods Sold Finished Goods Inventory 1,011,200 1,011,200 Cost of Goods Sold Conversion costs 4,000 4,000 Accounts receivable Sales 1,580,000 1,580,000 Alternatively, the following journal entries could be used: Finished Goods Inventory Cost of Goods Sold Accounts payable 12,800 1,011,200 320,000 Conversion costs 704,000 Cost of Goods Sold Conversion costs 4,000 4,000 Accounts receivable Sales 1,580,000 b Raw and In Process 320,000 |4 1,024,000 1,011,200 704,000 | Bal | 1,580,000 Finished Goods 1,024,000 |5 Bal 12,800 | | Chapter 16 Innovative Inventory and Production Management Techniques 451 | | Cost of Goods Costs 1,011,200 704,000 4,000 4,000 Bal 1,015,200 Sold Conversion | 708,000 | | | | Bal Accounts payable accounts | 320,000 708,000 | Various | Sales receivable Accounts | 1,580,000 1,580,000 | c The remaining balance in finished goods = ($1,024,000 ÷ 16,000) × 200 = $12,800 41 5:00 No, Office Provisions did not complete the 180 units by PM Dept Dept Dept Backlog Cumulative Dept Backlog Time of Afternoon 1-2 2-3 3-4 4-5 44 40 49 47 44 40 45 45 0 0 Output Total 180 174 6* * The robot can be counted on to finish 45 units per hour Although Dept averaged 45 units per hour it was late getting units to Dept in the last two hours Since the robot was constrained to 45 units per hour, it could not handle the extra units given it between 3:00 and 4:00 and the extra units given it between 4:00 and 5:00 42 $14,700; at the EOQ, the total annual carrying costs will equal the total annual ordering costs 43 EOQ (Wonder Cream) EOQ (Skin-so-Bright) = = SQRT = SQRT = 94.9 SQRT (2QO ÷ C) [(2 ì 2,000 ì 4.50) ữ 2.00] (9,000) or 95 = SQRT [2 ì 1,000 ì 6.25) ữ 1.45] = SQRT (8,621) 452 Chapter 16 Innovative Inventory and Production Management Techniques = 92.85 or 93 EOQ (Fresh & Sweet) = SQRT [(2 ì 900 ì 3.70) ữ 1.25] = SQRT (5,328) = 72.99 or 73 44 EOQ = SQRT(2QO ÷ C) (EOQ)2 = 2QO ÷ C (C × EOQ2) ÷ (2 × O) = Q Q = (0.65 × (78)2) ữ (2 ì 6.08) = 3954.6 ữ 12.16 = 325.21, or 325 units Chapter 16 Innovative Inventory and Production Management Techniques 451 45 a EPR = SQRT(2QS ÷ C) = SQRT[(2 ì 2,500 ì 200) ữ 5] = SQRT(200,000) = 447.21, or 447 units Number of runs = 2,500 ÷ 447 = 5.59 runs 5.59 runs × $200 per run = $1,118 total setup cost $5 ì (447 ữ 2) = $1,118 total carrying cost Total cost = $1,118 + $1,118 = $2,236 b EPR = SQRT[(2 × 2,500 × 40) ÷ 20] = SQRT(10,000) = 100 units Number of runs = 2,500 ữ 100 25 runs ì $40 = $1,000 setup Carrying cost = $20 ì (100 ữ Total cost = $1,000 + $1,000 46 47 b 48 units = 25 runs cost 2) = $1,000 = $2,000 EPR = SQRT(2QS ữ C) = SQRT[(2 ì 1,600 ì $400) ÷ $2.00] = SQRT(640,000) = 800 units a EPR = SQRT(2QS ữ C) = SQRT[(2 ì 10,000 ì $25) ÷ $2] = SQRT(250,000) = 500 units Annual setup costs (10,000 ữ 500) ì $25 = $ 500 Annual carrying costs (500 ữ 2) ì $2 = 500 Total annual costs $1,000 a EOQ = SQRT(2QS ÷ C) = SQRT[(2 × 9,000 × $15) ÷ $.25] = SQRT(1,080,000) = 1039.23, or 1,039 units b 9,000 ÷ 1,039 = 8.66, or orders per year c 12 months ÷ orders = order every 1.33 months 49 a The controller would want to isolate just the variable costs - those costs that vary with the number of orders processed In this case, the relevant costs would include the $0.30 of department supplies, and $3.02 for phone expense b Similar to the ordering costs, the controller would only want to include those costs that vary with the number of units stored The variable costs include the $0.05 for inventory insurance and $0.07 for Chapter 16 Innovative Inventory and Production Management Techniques obsolescence 50 a YEAR Revenue $250,000 $600,000 $805,000 $1,050,000 Less costs: DM and DL 105,000 262,500 367,500 525,000 VOH 25,000 62,500 87,500 125,000 FOH* 175,000 175,000 175,000 175,000 Gross M $(55,000) $100,000 $175,000 $ 225,000 GM % (22%) 16.67% 21.74% 21.43% Cost per unit $3.05 $2.00 $1.80 $1.65 452 YEAR $1,200,000 Revenue Less costs: DM and DL VOH FOH Gross M $ GM% Cost per unit 693,000 150,000 175,000 182,000 15.17% $1.70 $900,000 $380,000 519,750 112,500 175,000 $ 92,750 10.31% $1.79 231,000 50,000 175,000 $(76,000) (20%) $2.28 $247,000 150,150 32,500 175,000 ($110,650) (44.80%) $2.75 *FOH includes the $600,000 spent on R&D, allocated at $75,000 for each year of product life b Total Revenues Less costs: DM and DL VOH FOH Research and development Lifetime gross margin $5,432,000 2,853,900 645,000 800,000 600,000 $ 533,100, or 9.81% c The analysis in part (a) measures income solely on an annual basis and considers R&D as a product cost allocated at a rate of $75,000 per year The analysis in part (b) regards the R&D costs as a product cost but does not allocate the cost of overtime Part (a) analysis makes a product appear upon introduction, if significant costs were incurred that year for its development, to be an unprofitable item - an analysis that hardly makes the introduction of new products appear worthwhile Chapter 16 Innovative Inventory and Production Management Techniques 451 51 a D b U c T d D,T e T f T g D h T i T j D, T 52 a (1) Raw and In Process Material Price variance 480 Accounts Payable (2) (3) Conversion costs Accum depreciation Cash Accounts Payable 3,000,000 Raw and In Process Conversion cost (20,800 × $140) 2,912,000 24,904,480 600,000 2,200,000 200,000 2,912,000 (4) No entry (5) Conversion costs Acc dep Cash Acc pay 14,442,000 Raw and In Process Conversion costs (103,200 × $140) 14,448,000 (6) 24,904,000 4,000,000 9,325,000 1,117,000 14,448,000 b (103,200 rolls × 0.4) = 41,280 yd.; 41,280 × $2 = $82,560 increase c Material Quantity Engineering Change Variance Raw and In Process 82,560 d 103,200 × 5/240 × $140 = $301,000 saved e Conversion costs 301,000 Machine Hrs Eng Change Variance 82,560 301,000 452 Chapter 16 Innovative Inventory and Production Management Techniques f Actual conversion costs ($3,000,000 + $14,442,000) $17,442,000 Machine hrs engineering change 301,000 Revised conversion costs $17,743,000 Applied conversion costs ($2,912,000 + $14,448,000) 17,360,000 Underapplied $ 383,000 g Increase in material cost per roll (0.4 × $2.00) $ 0.80 Decrease in conv cost per roll (5/60 × $35) (2.92) Net decrease in cost per roll $(2.12) Yes, the changes are cost beneficial 53 a EOQ = SQRT[(2 × 14,000 × 16.00) ÷ 0.50] = SQRT(896,000) = 946.57, or 947 pounds b 54 average daily usage = 14,000 ÷ 365 = 38.36 lbs order point = [38.36 × (12 + 7)] = 728.84 lbs a EPR = SQRT(2QS ÷ C) = SQRT[(2 ì 30,000 ì $50) ữ $0.25] = SQRT(12,000,000) = 3,464.10, or 3,464 pounds b Number of runs = 30,000 ÷ 3,464 = 8.66, or runs c EOQ (seed) = = = = SQRT(2QO ữ C) SQRT[(2 ì 30,000 × × × $4.25) ÷ $0.01] SQRT(102,000,000) 10,099.51, or 10,100 seeds EOQ (fertilizer) = SQRT[(2 × 30,000 × 0.25 ì $8.80) ữ $0.05] = SQRT(2,640,000) = 1,624.81, or 1,625 pounds of fertilizer d Seed orders = (30,000 × ì 2) ữ 10,100 = 11.88, or 12 orders Fertilizer orders = (30,000 ì 0.25) ữ 1,625 = 4.62, or orders Chapter 16 Innovative Inventory and Production Management Techniques 451 e Total cost: Average inventory (onions): 3,464 ÷ = 1,732 lbs (seeds) : 10,100 ÷ = 5,050 seeds (fertilizer) : 1,625 ÷ = 812.5 lbs Carrying costs: Onions: 1,732 × $0.25 = $433.00 Seeds: 5,050 × $0.01 = 50.50 Fertilizer: 812.50 × $0.05 = 40.63 $ 524.13 Total Ordering costs: Seeds: 12 × $4.25 = $ 51.00 Fertilizer: × $8.80 = 44.00 95.00 Setup costs: Onions: × $50.00 = 450.00 Total cost $1,069.13 f The growing of onions is very similar in most respects to a factory production setting However, the length of time from the beginning of the process to the end of the process is likely to be much longer and therefore require more careful planning An incorrect estimate of demand cannot be remedied in any time shorter than the growing cycle of the onion plant Also, weather and local growing conditions may be additional constraints on the production decision Further, the yield is likely to vary much more for onions than other production processes because some of the critical inputs are beyond the control of managers (sunshine and rain, for example) g Yes, there are some inconsistencies Because the growing of onions is a cyclical event, as opposed to a continuous event, there should be a very close relationship between the required quantities of onions, fertilizer, and seeds Inventories should be minimal and be ordered in quantities that match input requirements for each growing cycle The EOQ quantities differ from the cycle quantities Chapter 16 Innovative Inventory and Production Management Techniques Cases 452 55 a The two costs Stanly of Chemcon Corporation is attempting to balance in this situation are: the transaction [or ordering costs incurred in the buying and selling of securities ($125 per transaction)] A larger average cash balance will result in lower (less frequent) transaction costs the return that could have been earned on securities or other investments held in lieu of cash The larger the average cash balance, the higher the holding costs and the lower the return because cash provides no return Monthly cash outflows $2,650,000 Monthly cash inflows 2,500,000 Monthly cash drain $ 150,000 Months in year × 12 Annual cash drain $1,800,000 EOQ = SQRT(2QO ÷ C) = SQRT[(2 × 1,800,000 × 125) ÷ 0.08] = $75,000 b Ave balance = (beginning balance + ending balance) ÷ = ($60,000 + $0) ÷ = $30,000 Number of times = annual demand ữ EOQ = (12 ì $150,000) ÷ $60,000 = 30 times c Chemcon Corporation can apply the EOQ model in cash management because its cash inflows, cash outflows, and net cash flow are evenly distributed throughout the period However, any economic change that would cause the net cash flows not to be evenly distributed would render the EOQ model inappropriate for cash management Economic circumstances that would disrupt Chemcon's net cash flows include the following: * The large proportion of Chemcon's customers with governmental and not-for-profit institutions which tend to be stable economic units The payment patterns of these customers are regular If Chemcon's customer base should shift to more seasonal customers, this would upset the timing of cash inflows * If the expected annual interest rate (8%) on marketable securities should begin to fluctuate, the EOQ model may not be as appropriate Chapter 16 Innovative Inventory and Production Management Techniques 451 (CMA adapted) Reality Check 56 a A key consideration would be to minimize the probability of having obsolete products and product components on hand With the rapid rate of product obsolescence, the firm would only want to produce to satisfy immediate demand; no stockpiling would occur Also, the firm would want to have a production system that could be quickly adapted from the production of one product to another b The firm would want to use a pull-based inventory control system Such a system would avoid the accumulation of materials and components that might be rendered obsolete or unusable due to technical innovations within the firm and by competitors c It would have the effect of reducing the EPR The EPR would be reduced because of the high carrying cost of inventory Inventory carrying costs would be high because included in the inventory carrying costs would be a component to account for the cost of product obsolescence (CMA adapted) 57 The president should ask for a formal analysis of the situation This analysis should address the costs and benefits of each alternative Costs should include purchase prices, warehousing costs (including insurance), personnel to operate the warehouse and take any necessary inventories during the year's period, the cost of capital on the funds tied up in the parts, and penalties for canceling The supply director should comply with the president's request by preparing and presenting an objective report Often, when confronted by situations such as this one, the only costs that are considered are the direct costs (purchase price and penalties) Decision making of this nature should be careful to reflect not only the directly visible costs but also the "hidden costs" of purchase arrangements 58 a As technology changes the relative costs of ordering and carrying inventory change The changes mentioned in this scenario would appear to lower the costs of ordering inventory Consequently, assuming the costs of carrying inventory remain at their original level, the reduction in ordering costs would drive the EOQ quantity down b For the reasons cited in part (a), the EOQ quantity would be reduced 452 Chapter 16 Innovative Inventory and Production Management Techniques Chapter 16 Innovative Inventory and Production Management Techniques 451 59 JIT requires close relations and communications with suppliers Preferably, there should be a few, well-cultivated suppliers who are "trained" to know precisely your inventory needs and who understand the critical requirement of meeting your just-in-time operation schedule Further, they should be made aware that they will be dismissed for defective or inappropriate products or service or for failure to meet delivery schedules All of the above requires continual close communications between the vendor and the JIT producer In this case, William Manufacturing needs to consider whether some or all of the responsibility rests with the company itself Have the vendors been properly "trained" and made precisely aware of product and timing needs? Have the vendors been chosen with the expertise, facilities and delivery capability to service Johnson's requirements? Do William's personnel know exactly what the needs are, and are those needs fairly stable? If, for example, William has frequent engineering changes because of inadequate product development, supplier compliance is hampered Finally, JIT systems cannot be fully and effectively implemented in a few months It usually takes considerably longer to make the system work well Expectations that JIT can have immediate perfect results are likely to lead to disappointment 60 Each student will have a different answer solution provided No 452 Chapter 16 Innovative Inventory and Production Management Techniques 61 JIT management of food in a fast-food restaurant can generate many benefits Such management of inventory can reduce inventory levels, improve the freshness of food served, and increase customer satisfaction The ability to implement JIT depends on the company’s ability to “forecast” demand for all of its products Demand must be forecasted accurately so that the company’s suppliers deliver the right inputs at the right times and so that the company will have on hand the right number of employees to provide conversion operations With an accurate demand forecast, the company can coordinate deliveries with suppliers to meet the forecasted level of sales for each product Also, the company can develop a work schedule that will have the right number of employees working during each part of the work day Because demand will fluctuate during the day with peaks around usual meal times, deliveries of inputs should occur during the slack times of the day Other tasks such as cleaning should also be scheduled to be performed during the slack periods of the day By training employees to both prepare and deliver food as well as to receive inventory shipments from suppliers, employees can be kept busy throughout the day During peak times, all employees will be busy serving customers; during slack periods, some of their time can be dedicated to preparing for the next peak period including restocking inventory items • • • • 62 JIT is not for all businesses Several factors that determine the success of JIT implementations are discussed below Cooperation of suppliers If suppliers are unable or unwilling to deliver on a JIT basis, the implementation of JIT is impossible Reliability of freight and alternative distribution channels Only if a reliable means of delivering inputs exists can JIT work effectively If no means exists of continually assuring delivery of required inputs, then implementation of JIT will result in stockouts and dissatisfied customers Factors such as weather, and geographical location can affect reliability of deliveries dramatically Organizational philosophy A company must be focused on developing the highest quality production systems to implement JIT Production of defective units results in missed delivery dates to customers A firm must be devoted to constant improvement of the product and production process to effectively use JIT Organizational culture JIT production has a much greater opportunity to be successfully implemented in organizations which have a culture that embraces changes, encourages worker empowerment, and has the ability to deliver required training to its employees Chapter 16 Innovative Inventory and Production Management Techniques 451 • • • · · · · · · Factory arrangement JIT implementation is likely to be more successful in factories that are arranged so that workers in sequential production processes can visually communicate with each other The more disjointed the production process, the more difficult the communication will be between workstations Effective communication between workstations is necessary in JIT production Fast setups Companies that produce many products on a given production line must have the ability to switch between the production of one product and another Often, reduced setup times and setup costs require the implementation of higher technology Firms must be willing and able to commit to such investments Communication with customers An accurate short-term forecast of demand is necessary to manage inventories on a JIT basis Such a forecast relies on effective communication with customers Firms must have in place reliable communication channels to develop the required forecasts 63 The following are some of the benefits expected from such an investment: significantly reduced product development costs, greatly enhanced speed in developing new products, increased ability to respond quickly and effectively to swings in customer demand and competitive threats, enhanced standardization because the software turns every aspect of a product into digital and mathematical models, fewer engineering changes, and faster and less costly ramping up to production 64 Each student will have a different answer provided No solution 65 Each student will have a different answer provided No solution ... 452 Chapter 16 Innovative Inventory and Production Management Techniques Chapter 16 Innovative Inventory and Production Management Techniques 451 59 JIT requires close relations and communications... Chapter 16 Innovative Inventory and Production Management Techniques 40 a Raw and In Process Inventory 320,000 Accounts payable 320,000 Conversion costs Various 708,000 Raw and In Process Inventory. .. Chapter 16 Innovative Inventory and Production Management Techniques 451 impact the cost accounting system are as follows: * Variance analysis should be made sooner in the production process and variances