Exam 17: Inventory Management, Just-In-Time and Simplified Costing Methods

Satellite Access Corporation manufactures set-top boxes for high definition TVs.All processing is initiated when an order is received.For March there were no beginning inventories.Conversion Costs and Direct Materials are the only manufacturing cost accounts.Direct Materials are purchased under a just-in-time system.Backflush costing is used with a finished goods trigger point.Additional information is as follows: Actual conversion costs \ 870000 Standard materials costs per unit \ 115 Standard conversion cost per unit \ 85 Units produced 11850 Units sold 11200 Required: Record all journal entries for the monthly activities related to the above transactions if backflush costing is used. _____________________________________________________________________________________________ _____________________________________________________________________________________________

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

A demand-pull system in which each component in a production line is produced immediately as needed by the next step in the production line is referred to as:

While holding inventory for sale,the costs that arise are called carrying costs. Variant question

A positive aspect of backflush costing is the presence of the visible audit trail.

The reorder point is simplest to compute when:

Wheels Company produces wheel assemblies for the Trucking industry.The product has a long-term life expectancy.Earthmovers,who has a traditional manufacturing and inventory system,is considering the installation of a just-in-time inventory system to improve its cost structure.After a full study by its manufacturing engineering team,industry JIT experts and the main vendors and suppliers of the components used to manufacture the wheel assemblies,Wheels Company has developed the following incremental cost-benefit relevant information: - Wheels Company cost of investment capital hurdle rate is 15%. - One-time cost to rearrange the shop floor to create the manufacturing cell workstations is $450 000. - One-time cost to retrain the existing workforce for the JIT required skills is $190 000. - Anticipated defect reduction is 40%.Currently there is a cost of quality defect assessment listed as $200 000 per year. - The setup time for each of the existing functions will be reduced by 67%.Currently the forecast for setup costs are $360 000 per year. - Wheels Company 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 $2 500 000 per year. Required: Determine whether it is in the best interest of Wheels Company to install a JIT system. _____________________________________________________________________________________________ _____________________________________________________________________________________________

Which of the following statements about the economic-order-quantity (EOQ)decision model is FALSE?

The 'flush' in backflush refers to the fact that there are no variances in a backflush costing system using standard costs.

A financial benefit of a just-in-time system is that inventory carrying costs are reduced.

Answer the following questions using the information below: Computer Supplies is a distributor of DVDs.Music 4U is a local retail outlet which sells blank and recorded DVDs.Music 4U purchases DVDs from Computer Supplies at $0.25 per DVD;DVDs are shipped in packages of 100.Computer Supplies pays all incoming freight,and Music 4U does not inspect the DVDs due to Computer Supplies' reputation for high quality.Annual demand is 416 000 DVDs at a rate of 8000 DVDs per week.Music 4U earns 15% on its cash investments.The purchase-order lead time is one week.The following cost data are available: Relevant ordering costs per purchase order $\quad\quad\$ 94.50$ Carrying costs per package per year: Relevant insurance, materials handling, breakage, etc, per year $\quad\$ 3.50$ -What is the economic order quantity (EOQ)?

In managing inventory,shrinkage is measured by comparing the cost of inventory on the books to the cost of inventory physically counted.

Gosford Fruit & Vegetables orders most of its items in lot sizes of 15 units.Average annual demand per kilo of kumara is 900 units per year.Ordering costs are $34.15 per order with an average purchasing price of $150.Annual inventory carrying costs are estimated to be 40% of the unit cost. Required: a.Determine the economic order quantity (EOQ). b.Determine the annual cost savings if the shop changes from an order size of 15 units to the economic order quantity (EOQ). c.Since the shelf life is limited,the Gosford Fruit & Vegetables must keep the inventory moving.Assuming a 360-day year,determine the optimal lot size under each of the following: (1)a 20-day shelf life and (2)a 10-day shelf life. _____________________________________________________________________________________________ _____________________________________________________________________________________________

Just-in-time systems are similar to materials requirement planning systems in that both systems are demand-pull systems.

Coffs Fabricators Ltd makes extensive use of financial performance reports for each of its departments.Most departments have been reporting favourable cost variances with the company's current inventory system.However,management is concerned about the overall performance of the purchasing department.For example,the following information is for the purchasing of materials for a product the company has been manufacturing for several years: Purchase Year Quantity Used Average Inventory Price Variance 2013 5000 1000 \ 1000 2014 10000 2500 10000 2015 0000 3000 12000 2016 7500 1875 30000 2017 3100 2700 3000 2018 7000 2800 9750 Required: a.Calculate the inventory turnover for each year.Can any conclusions be drawn for a yearly comparison of the purchase price variance and the inventory turnover? b.Identify problems likely to be caused by evaluating purchasing only on the basis of the purchase price variance. c.What recommendations will improve the evaluation process? _____________________________________________________________________________________________ _____________________________________________________________________________________________

Katoomba Horticulture Company has been ordering 150 units of Liquifeed on the recommendation of the salesperson who calls on the company each month.A new purchasing agent has been hired by the company who wants to start using the economic-order-quantity (EOQ)method and its supporting decision elements.She has gathered the following information: Annual demand in units 350 Days used per year 365 Lead time, in days 12 Ordering costs \ 110 Annual unit carrying costs \ 25 Required: Determine the EOQ,average inventory,orders per year,average daily demand,reorder point,annual ordering costs and annual carrying costs. _____________________________________________________________________________________________ _____________________________________________________________________________________________

Rockhampton Company was in the process of completing the quarterly planning for the purchasing department when a major computer malfunction lost most of his data.For direct material QBJ,he was able to recover the following: Average inventory level of QBJ 400 Orders per year 30 Average daily demand 26 Working days per year 250 Annual ordering costs \ 4000 Annual carrying costs \ 6000 Ralph purchases at the EOQ quantity level. Required: Determine the annual demand,the cost of placing an order,the annual carrying cost of one unit,and the economic order quantity (EOQ). _____________________________________________________________________________________________ _____________________________________________________________________________________________

All of the following are potential financial benefits of just-in-time EXCEPT:

Traditional normal and standard costing systems use:

The major relevant costs in maintaining safety stock are: Variant question