Inventory Management: Planning, Coordination, Controlling

Stockpot costs: the cost Is incurred when the company ran out of certain Items that re requested by customer 5. Quality costs: the cost Is Incurred if the features and characteristics of the product are not in accordance with customer. Economic Order Quantity is a decision model to calculate the optimal quantity of inventory to be ordered with certain assumptions. That assumption is simply no booking fees, storage, same quantity ordered on each reorder point, demand, charge ordering, and storage costs are already known with certainty, the purchase cost per unit is not affected by the quantity ordered, and do not occur out of stock.

Total cost is the sum of ordering cost and carrying cost. The formula of EX. Is: EX.=PDP/C Note: D = demand (unit) for specified period P = ordering cost that relevant per purchase order C = storage cost that relevant per unit ordered for specified period Reorder point is the level of the quantity of inventory on hand that triggers a new purchase order.

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Reorder point most easily calculated If both of demand and free time a purchase order Is already known for sure. Safety stock Is Inventory Is kept at all times regardless of the quantity of inventory ordered using the EX. model.

Safety stock is used as a buffer against unexpected increase in demand, uncertainty about he grace period, and non-availability of inventory from suppliers. Inventory storage costs consist of incremental costs and the opportunity cost of capital. Incremental cost is the cost of company (for example: warehouse rental, warehouse-wage workers) which change with the quantity of stored supplies.

Opportunity cost of capital is the return on Invested capital that is lost due to inventory and not in the other post.

It Is calculated as the required rate of return multiplied by the cost per unit varies with the number of units purchased and issued at the time the unit is received. The opportunity cost is not calculated on the investment if the investment is not affected by changes in inventory levels. The steps to calculate the cost of mistakes "prediction": 1 . Calculate the monetary outcome from the best action that can be taken based on the actual amount of input costs (cost per purchase order) 2.

Calculate the monetary outcome from the best action based on an incorrect amount of the predicted input costs (cost per purchase order) 3. Calculate the deference between the monetary outcome of steps 1 and 2. Just In Time Purchasing is the purchase of materials or odds which are coming just when needed in production or sales. Company that 1 OFF cost of storage is actually much greater than that estimated for the cost of storage, handling, downsizing, and capital can not be fully identified.

At the same time, the cost of doing purchase orders declined as agency, establish a long-term purchase agreements that define the terms and quality for an extended period, company that uses electronic link to perform the purchase order at a particular price will be a small part of the estimated cost of doing orders through phone or mail, company use purchase order card. Purchase CIT is not only guided by the EX. because EX. only designed to emphasize the trade-off between storage cost and ordering relevant.

However, inventory management also includes purchasing costs, ordering costs, and quality costs. Company that use CIT purchasing will choose its appliers carefully and build long-term relationships with them. Some suppliers may have been prepared than others to support the purchase of CIT. Inventory levels are kept by the retailer is affected by the demand patterns of customers and supply relationships with distributors and producers, suppliers to the manufacturer, and so on.

The supply chain describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to customers, regardless of whether those activities occur in the same company or in other companies. Retailers need to buy supplies on the basis of CIT only if the activity along the supply chain are planned, coordinated, and controlled. CIT Production is a manufacturing system "demand-pull" that makes every component in a production line soon after, and only when, needed by the next step in the production line. The benefits of CIT production s lower inventory storage costs.

However, there are other benefits of lower inventory, is to strengthen the emphasis on improving quality by eliminating specific causes of rework, Junk, and waste, as well as manufacturing lead time shorter. Backslash costing is a costing system that ignores the recording of a number of entries relating to the stages ranging from the purchase of direct materials to the sale of finished goods. Backslash costing is used to delay the recording of some of the entries until later in the cycle of production and sales. The steps to charge the units sold and to inventories: .

Noting direct materials purchased during the accounting period 2. Noting the costs of conversion that occurred during the accounting period 3. Specifies the number of units of finished goods made during the accounting period 4. Calculating the cost of a normal or standard per unit of finished goods 5. Noting the cost of finished goods units were completed during the accounting period 6. Noting the standard cost of goods sold during the accounting period 7. Noting allocated conversion costs are too high or low INVENTORY COSTING AND CAPACITY ANALYSIS There are 3 kinds of inventory costing: .

Absorption costing: is a method of inventory costing that all variable costs and fixed costs are included as inventory cost. 2. Variable costing: is a method of inventory costing that all variable costs and fixed costs are included as inventory cost. Fixed costs are excluded from inventory cost and are instead treated as cost of the period in which they are incurred. 3. Throughput costing: is an extreme method of Costing comparison between variable costing and absorption costing: 1 . Variable costing: only variable manufacturing costs are included as inventories costs 2.

Absorption costing: all variable manufacturing costs and all fixed manufacturing costs are included as inventories costs Operating Income will different between absorption costing and variable costing. The amount of the difference represents the amount of fixed product costs capitalized as inventory under absorption costing, and expensed as a period costs under variable costing. In the beginning of fiscal year, manager determine different denominator levels for the different capacity concepts and calculate different budgeted fixed manufacturing cost per unit.

Data from aroma costing or standard costing are often used in pricing or product-mix decisions. The use of theoretical capacity results in an unrealistically small fixed manufacturing cost per unit because it is based on an idealistic and unattainable level of capacity. Theoretical capacity is rarely used to calculate budgeted fixed manufacturing cost per unit because it departs significantly from the real capacity available to a company The downward demand spiral for a company is the continuing reduction in the demand for its products that occurs when competitor prices are not met; as demand drops further.

Consider how the choice among normal capacity utilization, master-budget capacity utilization, and practical capacity affects the evaluation of a marketing manager. Normal capacity utilization is often used as a basis for long-run plans. Normal capacity utilization depends on the time span selected and the forecasts made for each year. However, normal capacity utilization is an average that provides no meaningful feedback to the marketing manager for a particular year. Using normal capacity utilization as a reference for judging current performance of a marketing manager is an example of misusing a Eng-run measure for a short-run purpose.