Inventory and

1
Cost Accounting Foundations and
Evolutions Kinney, Prather, Raiborn
Chapter 17 Inventory and Production Management
2
Learning Objectives (1 of 3)

• List the most important relationships in the
  value chain
• Explain why inventory cost management is
  important
• Contrast the push and pull systems of production
• Explain why product life cycles affect product
  costing and profitability

3
Learning Objectives (2 of 3)

• Define target costing and explain how it
  influences production cost management
• Describe the just-in-time philosophy and explain
  how it affects accounting systems
• Describe flexible manufacturing systems

4
Learning Objectives (3 of 3)

• Explain how the theory of constraints helps in
  determining production flow
• (Appendix) Illustrate how the economic order
  quantity, reorder point, and safety stock are
  determined and used

5
Managing Inventory
The goal is to minimize the companys monetary
commitment to inventory without negatively
impacting product availability
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Inventory

• Types
• Raw material
• Work in process
• Finished goods
• Indirect materials (supplies)
• Merchandise inventory

• Costs
• Purchasing/production
• Ordering/setup
• Carrying/not carrying

7
Production Systems

• Push Systems
• Produce in anticipation of customer orders
• Store raw material, work in process, and finished
  goods inventory
• Pull
• Produce as needed
• Minimal storage

8
Product Life Cycles
S A L E S
T I M E
9
Development Stage

• Decisions made during the development stage
  represent 80 to 90 percent of products total
  life-cycle costs
• Development (RD) costs expensed as incurred in
  financial accounting

10
Introduction Stage

• Substantial costs including engineering changes,
  market research, advertising, and promotion
• Sales low
• Sales price matches similar or substitute goods

Introduction Stage
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Growth Stage

• Increased sales
• Quality may improve
• Prices stable

Growth Stage
12
Maturity Stage

• Sales stabilize or decline slowly
• Firms compete on selling price
• Costs at lowest level

Maturity Stage
13
Decline Stage

• Waning sales
• Dramatic price cuts
• Cost per unit increases as fixed costs are spread
  over fewer units

Decline Stage
14
Just-in-Time

• Eliminate any process or operation that does not
  add value
• Continuous improvement in production/performance
  efficiency
• Reduction in total cost of production/performance
  while increasing quality

15
Traditional Manufacturing

• Smooth operating activity
• steady use of workforce
• continuous machine utilization
• Spread overhead over a maximum number of products
• Inventory levels high enough to cover up
  inefficiencies in acquisition and/or production

16
JIT Plants

• Minimize material handling time, lead time,
  movement of goods
• Use manufacturing cells which allow for visual
  controls, greater teamwork, quick exchange of
  vital information
• Reduce storage
• Increase throughput
• Develop multiskilled workers
• Use autonomation programmed factory equipment

17
Manufacturing Methods

• Flexible Manufacturing System (FMS)
• network of robots and material conveyance devices
  monitored and controlled by computers
• modular factories
• customization
• quick, inexpensive production changes

• Computer-Integrated Manufacturing (CIM)
• two or more FMSs connected via host computer and
  information system

18
Theory of Constraints (TOC)

• Flow of goods through a production process cannot
  be at a faster rate than the slowest bottleneck
  in the process
• Eliyahu Goldratt

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Theory of Constraints

• Constraint - anything that confines or limits a
  person or machines ability to perform a project
  or function
• Human constraints
• Material constraints
• Machine constraints
• place quality control points before bottlenecks

20
Questions

• What is the difference between push and pull
  systems of production?
• What is target costing?
• What is the just-in-time philosophy? How does
  JIT affect production?