Managing Inventory and Service Costs

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? Manufacturing Merchandising Service

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. 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 Inventory Management Issues

9. ROI = • Profit margin X Asset turnover • Profit • Revenue Profit margin = • Revenue • Total assets 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.

10. Define Net Operating Profit

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

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

13. Profitability Report

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. The Cost of Using Money Average Investment x Annual Rate x Number of Periods Net Operating Profit – Holding Cost of Inventory and Other Asset Investments Match These Terms with Their Correct Formula or Definition Economic Profit Cost of Capital Financial Holding Cost

21. Define Segment and Economic Value Added Segment Economic Value Added

22. Expanded MaterialLearning 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. Calculating EOQ How much inventory should we order? What is the formula for EOQ? What do the terms mean?

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

26. Safety Stock 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