Ch. 21 -- Inventory Mnmt., JIT and Simplified Cost Method (Adv. Mnmt. Acct.)

​"JIT purchasing has many benefits but also some​ risks." Do you​ agree? Explain briefly. A. Just-in-time (JIT) purchasing is the purchase of materials​ (or goods) so that they are delivered just as needed for production​ (or sales). Benefits include lower inventory holdings​ (reduced warehouse space required and less money tied up in​ inventory) and less inventory obsolescence and spoilage. The risk in JIT purchasing is the risk of stockouts—delays in supply of materials​ (or goods) may result in materials​ (goods) not being available when needed for production​ (or sales). B. Just-in-time (JIT)​ purchasing, which is also called lean​ purchasing, is a​ "demand-pull" purchasing system that purchases each component in a production line as soon​ as, and only​ when, needed by the next step in the production line. Benefits include lower inventory holdings and less storage space needed. Risks could include any failure on the part of suppliers which could result in the​ company's assembly plant not meeting its scheduled deliveries. C. Just-in-time (JIT) purchasing is a purchasing system that omits recording some of the journal entries relating to the stages from purchase of direct materials

A. Just-in-time (JIT) purchasing is the purchase of materials​ (or goods) so that they are delivered just as needed for production​ (or sales). Benefits include lower inventory holdings​ (reduced warehouse space required and less money tied up in​ inventory) and less inventory obsolescence and spoilage. The risk in JIT purchasing is the risk of stockouts—delays in supply of materials​ (or goods) may result in materials​ (goods) not being available when needed for production​ (or sales).

Discuss the differences between lean accounting and traditional cost accounting. A. Traditional accounting systems cost individual products and separate product costs from​ selling, general, and administrative costs. Lean accounting costs the entire value stream instead of individual products. Rework​ costs, unused capacity​ costs, and common costs that cannot be reasonably assigned to value streams are excluded from value stream costs. In​ addition, many lean accounting systems expense material costs in the period they are​ purchased, rather than storing them on the balance sheet until the products using the material are sold. B. Both lean accounting and traditional accounting cost individual products and separate product costs from​ selling, general, and administrative costs. The difference is that rework​ costs, unused capacity​ costs, and common costs that cannot be reasonably assigned to value streams are excluded from value stream costs and added to the lean accounting method. In​ addition, many lean accounting systems expense material costs in the period they are​ purchased, rather than storing them on the balance sheet until the products using the material are sold. C. Traditi

A. Traditional accounting systems cost individual products and separate product costs from​ selling, general, and administrative costs. Lean accounting costs the entire value stream instead of individual products. Rework​ costs, unused capacity​ costs, and common costs that cannot be reasonably assigned to value streams are excluded from value stream costs. In​ addition, many lean accounting systems expense material costs in the period they are​ purchased, rather than storing them on the balance sheet until the products using the material are sold.

The order size associated with the​ economic-order-quantity (EOQ) model will necessarily decline​ if: A. Ordering costs rise B. Insurance costs for materials in storage fall C. Storage costs rise D. Stockout costs rise

C. Storage costs rise

__________ __________ are costs that arise while goods are being held in inventory

Carrying costs

Why do better decisions regarding the purchasing and managing of goods for sale frequently cause dramatic percentage increases in net​ income? __________ of __________ __________​ (in retail​ organizations) or __________ __________ __________ ​(in organizations with a manufacturing​ function) as a percentage of sales __________ exceeds net income as a percentage of sales by many orders of magnitude. For​ example, a​ 10% reduction in the ratio of cost of goods sold to sales without any other changes can result in an __________ in net income to sales.

Cost of goods sold​; direct materials costs; frequently; increase

Costs of quality are costs incurred to prevent and appraise, or that rise as a result of, quality issues

Costs of quality

Which of the following cost categories are important in managing goods for sale in a retail​ company? A. 1. purchasing costs 2. ordering costs B. 1. carrying costs 2. stockout costs C. 1. quality costs 2. shrinkage costs D. All of the above are correct.

D. All of the above are correct.

Why might​ goal-congruence issues arise when managers use an EOQ model to guide decisions on how much to​ order? A. Goal congruence issues arise when there is an inconsistency between the EOQ decision model and the model used for calculating the stockout costs. For​ example, when a company runs out of a particular item for which there is customer​ demand, the stockout quantity may be different than the EOQ model is indicates is optimal. B. Goal congruence issues arise when there is an inconsistency between the EOQ decision model and the model used for calculating the costs of quality. For​ example, if a product or service are not in conformance with customer​ specifications, the manager must determine whether to include internal failure​ costs, and external failure​ costs, which may be different than the EOQ model indicates is optimal. C. Goal congruence issues arise when there is an inconsistency between the EOQ decision model and the model used for calculating the shrinkage costs. For​ example, the difference between​ (a) the cost of the inventory recorded on the books in the absence of theft and​ (b) the cost of inventory when physically​ counted, may be larger than the EOQ model i

D. Goal congruence issues arise when there is an inconsistency between the EOQ decision model and the model used for evaluating the performance of the person implementing the model. For​ example, if opportunity costs are ignored in performance​ evaluation, the manager may be induced to purchase in a quantity larger than the EOQ model indicates is optimal.

__________ triggers each step of the production process as manufacturing activity is prompted by a need for that station's output at the next step in the production process

Demand

Frequently, there will be conflict between the __________ __________ and the models used for performance evaluation. The primary issue is that there are no __________ __________ recorded in the financial accounting systems, and therefore this is not usually a part of the performance evaluation model. This can be overcome by charging managers responsible for managing inventory with __________ __________ that include a required __________ __________ __________.

EOQ model; opportunity costs; carrying costs; return on investment

An __________ __________ is an integrated set of software modules covering accounting, distribution, manufacturing, purchasing, HR and other functions. These systems give __________-__________ __________, __________, __________ and __________ access to detailed timely operating information

ERP system; lower-level managers, workers, customers and suppliers

Companies that implement JIT purchasing will emphasize developing short−term supplier relationships with many suppliers to attain flexibility. (T/F)

False

In a just−in−time system, suppliers are selected primarily on the basis of their ability to provide materials and products at the lowest possible price. (T/F)

False

Lean accounting takes in to consideration all costs associated with inventories. (T/F)

False

Purchasing costs arise in preparing and issuing purchase​ orders, receiving and inspecting the items included in the​ orders, and matching invoices​ received, purchase​ orders, and delivery records to make payments. (T/F)

False

The EOQ model factors in the probability of stockouts. (T/F)

False

__________ __________ management includes planning, coordinating, and controlling activities related to the flow of inventory into, through and out of an organization

Inventory management

__________ __________, also known as lean production, is a "pull demand" manufacturing system that manufactures each component in a production line as soon as, and only when, needed by the next step in the production line

JIT production

A company should utilize __________ __________ only if activities throughout the supply chain are properly planned, coordinated and controlled

JIT purchasing

The EOQ model is compatible with __________, as carrying costs are __________. At the same time, the cost of placing an order is decreasing due to: - Establishing __________ __________ __________ - Placing purchase orders __________ - Using purchase order cards w/ __________-__________ __________ __________

JIT; reduced - L/T purchasing agreements - electronically - pre-set dollar limits

__________ __________ __________ __________ is the purchase of materials or goods so that they are delivered just as needed for production or sales

Just in time purchasing

__________ __________ is a costing method that creates value for customers by costing value streams, rather than individual products or departments

Lean accounting

__________ __________ __________ is a "push through" system that manufactures finished goods for inventory based on demand forecasts

Materials requirement planning

__________ __________ are the costs preparing and issuing purchasing orders, receiving and inspecting the items included in the orders, and matching invoices received, purchasing orders, and delivery records to make payments

Ordering costs

__________ __________ are costs of goods acquired from suppliers including incoming freight costs

Purchasing costs

__________ __________ __________ include the relevant incremental costs plus the relevant opportunity costs of capital

Relevant inventory costs

__________ __________ is inventory held at all times regardless of the quantity of inventory ordered using the EOQ model

Safety stock

__________ is the difference in the cost of inventory when physically counted and the amount shown on the books. It is the result of breakage, misclassification, theft, embezzlement and clerical errors

Shrinkage

__________ __________ are costs that arise when a company runs out of a particular item for which there is customer demand

Stockout costs

In a backflush−costing ​system, no record of work in process appears in the accounting records. (T/F)

True

The cost of breakage and obsolescence are relevant incremental costs of carrying inventory. (T/F)

True

The demand−pull feature of JIT production systems results in close coordination among workstations and smooths the flow of goods. (T/F)

True

__________ __________ are the value-added activities needed to design, manufacture and deliver a given product to customers

Value streams

An alternative approach to sequential tracking is __________ __________, a system that omits some of the journal entries relating to the 4 stages shown in a sequential tracking system

backflush costing

In a just in time system where inventories are minimal, __________ __________ simplifies the costing system without a __________ __________ of __________

backflush costing; a significant loss of information

In adopting just in time production techniques, the absence of inventories makes choices about __________ __________ __________ or __________ __________ __________ unimportant

cost flow assumptions; inventory costing methods

Levels of inventory held by retailers are influenced by the __________ __________ of their customers and __________ __________ with distributors and manufacturers

demand patterns; supply relationships

In contrast to MRP's "push through" approach, JIT is described as a "__________ __________" approach, meaning that demand, rather than forecasts, drive production

demand pull

The __________ __________ __________ __________ is determined by physically comparing remaining direct materials with what should remain based on output of finished goods during the period

direct materials efficiency variance

Backflush costing, by one view...

does not strictly adhere to GAAP

The __________ __________ __________ decision model calculates the optimal quantity of inventory to order This model assumes that there are only __________ and __________ __________ associated with inventory. It also assumes: - The same quantity is ordered at each __________ __________ - Demand, ordering costs and carrying costs are __________ __________ __________ - __________ __________ __________ __________ is unaffected by the quantity order - No __________ occur - When deciding on the size of the purchase order, managers consider costs of quality and shrinkage only to the extent that these costs affect __________ or __________ __________

economic order quantity ordering and carrying costs - reorder point - known with certainty - Purchasing costs per unit - stockouts - ordering or carrying costs

The first decision in managing goods for sale is to determine...

how much of a given product should be ordered

Under an MRP system, __________ __________ can be a challenge as the system may not collect and update inventory records

inventory management

The __________ __________ __________ specifies the quantity and timing of each item to be produced

master production schedule

EOQ ignores __________, __________, __________ and __________ costs

purchasing, stockout, quality and shrinkage

Distinguish​ inventory-costing systems using sequential tracking from those using backflush costing. Traditional normal and standard costing systems use sequential​ tracking, in which journal entries are __________ in the __________ __________ as actual purchases and progress in​ production, typically at __________ different trigger points in the process. Backflush costing __________ recording some of the journal entries relating to the cycle from purchase of direct materials to sale of finished​ goods, i.e., it has __________ trigger points at which journal entries are made. When journal entries for one or more stages in the cycle are omitted​, the journal entries for a subsequent stage use __________ or __________ __________ to work backward to​ "flush out" the costs in the cycle for which journal entries were not made.

recorded in the same order; four omits; fewer; normal or standard costs

JIT purchasing and production methods can be applied in industries other than __________ and __________

retailing and manufacturing

In a JIT system, other benefits of lower inventory, outside of lower carrying costs, include: - emphasis on improving quality by eliminating the causes of __________, __________ and __________ along with __________ __________ __________ __________

rework, scrap and waste; lower manufacturing lead times

Traditional normal and standard costing systems use __________ __________, which is a system of recording journal entries in the same order as purchases and progress in production

sequential tracking

Companies implementing JIT must choose their __________ carefully and develop __________ __________ __________

suppliers; L/T supplier relationships

The __________ __________ describes the flow of goods, services and information from initial sources of materials and services to the delivery of products to the consumers regardless of whether these activities occur within the organization or in other organizations

supply chain

An important point in the __________-__________ __________ is for each company in the supply-chain link to share information and plan and coordinate activities

supply-chain analysis

Such sequential tracking system has 4 __________ __________, or stages, in the cycle from purchase of direct materials to sale of finished goods at which journal entries are made into the accounting system

trigger points

The second decision facing management is... This requires determination of the __________ __________ (the quantity level of inventory on hand that triggers a new purchase order).

when to order a given product reorder point

There are 3 approaches to backflush costing, with different placement of trigger points: - __________ trigger points with entries at purchase of direct materials, completion of finished units of product and sale of finished goods - __________ trigger points with entries at purchase of direct materials and sale of finished goods - __________ trigger points with entries at completion of finished units of product and sale of finished goods

- 3 trigger points - 2 trigger points - 2 trigger points

JIT seeks to: - Meet __________ __________ in a timely way - With __________ __________ products - At the __________ possible cost

- customer demand - high quality - lowest

1. What are the main features of JIT​ production? A. Place emphasis on reducing both setup time and manufacturing lead time and carefully select suppliers who are capable of delivering quality materials in a timely manner. B. Organize production in manufacturing​ cells, hire and retain workers who are​ multi-skilled, and aggressively pursue total quality management​ (TQM) to eliminate defects. C. Sharing of information across companies enables a reduction in inventory levels at all​ stages, fewer stockouts at the retail​ level, and a reduction in expedited manufacturing orders. D. Both A and B E. Both B and C 2. What are its benefits and​ costs? A. The benefits of JIT production include lower quality​ items, but higher margins from better flow of​ information, higher​ quality, and faster​ delivery, as well as simpler accounting systems. The cost of JIT production is ordering cost—the costs of preparing and issuing purchase​ orders, receiving and inspecting the items included in the​ orders, and matching invoices​ received, purchase​ orders, and delivery records to make payments. B. The benefits of JIT production include higher​ quality, higher cost items that produce higher marg

1. D. Both A and B 2. D. The benefits of JIT production include lower costs and higher margins from better flow of​ information, higher​ quality, and faster​ delivery, as well as simpler accounting systems. The cost of JIT production is the risk of stockouts—a production problem in any step of the manufacturing process will result in materials​ (goods) not being produced in time.

Just-in-time inventory assumes all of the​ following, except: 1. Just-in-time inventory presumes​ first-in, first-out costing. 2. Resources will only be introduced as they are needed. 3. Zero defects. 4. Production of components occurs only when requested further downstream in the manufacturing cycle.

1. Just-in-time inventory presumes​ first-in, first-out costing.

What are the 4 categories for costs of quality?

1. Prevention 2. Appraisal 3. Internal Failure 4. External Failure