Inventory Management

# Managerial Accounting

## Quiz 20 :Inventory Management

Define and give examples of inventory ordering, holding, and shortage costs.
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Essay

Some examples of following costs :
Ordering costs - It includes following:-
• Transportation cost
• Receiving costs
• Cost of preparing purchase orders
Holding costs - It includes following:-
• Insurance, security
• Cost of storing
• Foregone interest on working capital
Example - Depreciation etcetera.
Shortage costs - It includes the following costs:-
• Loss of quantity discounts on purchase
• Extra machinery setups
• Idle workers etcetera

Explain the differences in the basic philosophies underlying the JIT and EOQ approaches to inventory management.
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Essay

The following are the differences in the basic philosophies underlying the Just-In-Time (JIT) and Economic Order Quantity (EOQ) approaches to inventory Management.
• EOQ approach takes the view the inventory is necessary to fulfill certain orders and in order to balance the cost of ordering against the cost of holding inventory.
Whereas JIT is of the view that inventory should be minimized or if possible eliminated because of inefficiency and waste of storing inventory.
• The philosophy of EOQ is to balance the cost of ordering against the cost of storing inventory where as JIT philosophy is to keep all the inventories as low as possible by frequent deliveries in small quantities.

For each of the following independent cases, use the equation method to compute the economic order quantity.
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Essay

Computation of Economic Order Quantity (EOQ):
The EOQ a mathematical tool (model) is used to reduce the cost of holding inventory and cost of ordering inventory and to determine the order quantity.

Andrew and Fulton, Inc., uses 780 tons of a chemical bonding agent each year. Monthly demand fluctuates between 50 and 80 tons. The lead time for each order is one month, and the economic order quantity is 130 tons. Required: 1. Determine the safety stock appropriate for the chemical bonding agent. 2. At what order point, in terms of tons remaining in inventory, should Andrew and Fulton, Inc., order the bonding agent?
Essay
Fiber Technology, Inc., manufactures glass fibers used in the communications industry. The company's materials and parts manager is currently revising the inventory policy for XL-20, one of the chemicals used in the production process. The chemical is purchased in 10-pound canisters for $95 each. The firm uses 4,800 canisters per year. The controller estimates that it costs$150 to place and receive a typical order of XL-20. The annual cost of storing XL-20 is $4 per canister. Required: 1. Write the formula for the total annual cost of ordering and storing XL-20. 2. Use the EOQ formula to determine the optimal order quantity. 3. What is the total annual cost of ordering and storing XL-20 at the economic order quantity? 4. How many orders will be placed per year? 5. Fiber Technology's controller, Jay Turnbull, recently attended a seminar on JIT purchasing. Afterward he analyzed the cost of storing XL-20, including the costs of wasted space and inefficiency. He was shocked when he concluded that the real annual holding cost was$19.20 per canister. Turnbull then met with Doug Kaplan, Fiber Technology's purchasing manager. Together they contacted Reno Industries, the supplier of XL-20, about a JIT purchasing arrangement. After some discussion and negotiation, Kaplan concluded that the cost of placing an order for XL-20 could be reduced to just \$20. Using these new cost estimates, Turnbull computed the new EOQ for XL-20. a. Use the equation approach to compute the new EOQ. b. How many orders will be placed per year?