Exam 20: Inventory Management, Just-In-Time, and Simplified Costing Methods

The EOQ model is solved using calculus but the key intuition is that relevant total costs are minimized when relevant ordering costs equal relevant carrying costs.

The manufacturing manager of New Technology Company is concerned about the company's newest plant. When the plant began operations three years ago, it had the best of everything. It had modern equipment, well-trained employees, engineered work and assembly stations, and a controlled environment. During the first two years, the evaluation results were very good with almost all cost variances being favorable. However, recently, things have turned negative. In recent months, everything seems to be operating in a crisis management mode. Although most cost variances remain favorable, the plant's segment contribution is declining and customers are complaining about poor quality and slow delivery. Several customers have suggested that they may take their business elsewhere if things do not improve. The shop floor is in continual turmoil. In-process inventory is everywhere, production employees have difficulty finding jobs that need to be worked on, and scheduling has requested a larger computer to keep track of work in process. The vice president of sales does not know where to begin with solving the customers' problems. It seems that everyone is working very hard and the plant has the best facilities and trained employees in the industry. Required: What is the nature of the plant's problems? What recommendation would you make to help improve the situation?

A "push-through" system, often described as a just-in-time system, emphasizes simplicity and close coordination among work centers.

The Jarvis Corporation produces bucket loader assemblies for the tractor industry. The product has a long term life expectancy. Jarvis has a traditional manufacturing and inventory system. Jarvis is considering the installation of a just-in-time inventory system to improve its cost structure. In doing a full study using its manufacturing engineering team as well as consulting with industry JIT experts and the main vendors and suppliers of the components Jarvis uses to manufacture the bucket loader assemblies, the following incremental cost-benefit relevant information is available for analysis: The Jarvis cost of investment capital hurdle rate is 15%. One time cost to rearrange the shop floor to create the manufacturing cell workstations is $275,000. One time cost to retrain the existing workforce for the JIT required skills is $60,000. Anticipated defect reduction is 40%. Currently there is a cost of quality defect assessment listed as $150,000 per year. The setup time for each of the existing functions will be reduced by 67%. Currently the forecast for setup costs are $225,000 per year. Jarvis will expect to save $200,000 per year in carrying costs as a result of having a lower inventory. The suppliers will require a 15% premium over the current level of prices in order to position themselves to supply the material on a smaller and more frequent schedule. Currently the materials purchases are $1,500,000 per year. Required: Determine whether it is in the best interest of Jarvis Corporation to install a JIT system.

Minnesota Ore Company mines iron ore for production into various metal products. During recent years, the company has had large fluctuations in its inventories of metal ingots. Much of the volatility of the inventory levels is due to the variability of demand by the company's largest customers, automobile manufacturers. For large orders, the company has the technology to quickly shift production from one product to another. Required: Explain how the company can improve its inventory control system and give the advantages of whatever you recommend.

The economic order quantity ignores:

Sharing inventory data throughout the supply chain leads to more "rush" orders occurring.

Answer the following questions using the information below: Digital Goods is a distributor of DVDs. DVD Mart is a local retail outlet which sells blank and recorded DVDs. DVD Mart purchases tapes from Digital Goods at $10.00 per DVD; DVDs are shipped in packages of 25. Digital Goods pays all incoming freight, and DVD Mart does not inspect the DVDs due to Digital Goods' reputation for high quality. Annual demand is 208,000 DVDs at a rate of 4,000 DVDs per week. DVD Mart earns 15% on its cash investments. The purchase-order lead time is one week. The following cost data are available: -What is the economic order quantity?

Answer the following questions using the information below: Games R Us manufactures various games. For March, there were no beginning inventories of direct materials and no beginning or ending work in process. Conversion costs is the only indirect manufacturing cost category currently used. Journal entries are recorded when materials are purchased and when conversion costs are allocated under backflush costing. -Which of the journal entries properly records conversion costs?

Answer the following questions using the information below: Short Grass Incorporated is a distributor of golf balls. Martin's Golf Supplies is a local retail outlet which sells golf balls. Martin's purchases the golf balls from Short Grass Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72. Short Grass Incorporated pays all incoming freight, and Martin's Golf Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is 155,520 golf balls at a rate of 2,991 balls per week. Martin's Golf Supplies earns 12% on its cash investments. The purchase-order lead time is one week. The following cost data are available: -Purchasing at the EOQ recommended level, how many deliveries will be made during each time period?

An Enterprise Resource Planning (ERP)System comprises a single database that collects data and feeds it into software applications supporting all of a company's business activities.

What are five features of a just-in-time manufacturing system?

Answer the following questions using the information below: Short Grass Incorporated is a distributor of golf balls. Martin's Golf Supplies is a local retail outlet which sells golf balls. Martin's purchases the golf balls from Short Grass Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72. Short Grass Incorporated pays all incoming freight, and Martin's Golf Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is 155,520 golf balls at a rate of 2,991 balls per week. Martin's Golf Supplies earns 12% on its cash investments. The purchase-order lead time is one week. The following cost data are available: -What is the economic order quantity?

Just-in-time (JIT)production, is a "demand-pull" 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.

Just-in-time purchasing requires:

The Economic Order Quantity increases with demand and carrying costs and decreases with ordering costs.

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.

Backflush costing is usually restricted to companies adopting JIT production methods.

Answer the following questions using the information below: The following information applies to Labs Plus, which supplies microscopes to laboratories throughout the country. Labs Plus purchases the microscopes from a manufacturer which has a reputation for very high quality in its manufacturing operation. -What are the annual relevant carrying costs, assuming each order was made at the economic-order-quantity amount?

What are the principles of lean accounting? Are there any limitations? Discuss.