Chapter 18 Inventory and Production Management Cost Accounting Foundations and Evolutions Kinney and Raiborn Seventh Edition COPYRIGHT © 2009 South-Western, a part of Cengage Learning. South-Western is a trademark used herein under license.

Learning Objectives (1 of 3) Identify costs associated with inventory and 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

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

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

Inventory Items Inventory is often a firm’s largest investment Merchandise for resale Manufacturing raw materials, work-in- process and finished goods Firms today should minimize inventory while meeting customer demands

Managing Inventory The goal is to minimize the company’s monetary commitment to inventory without negatively impacting product availability

Value Chain Customers and Suppliers may be internal or external Suppliers Production plants Finished goods Distribution centers Customers

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

T I M E SALESSALES Product Life Cycles Development Stage

Introduction Stage T I M E SALESSALES Substantial costs including engineering changes, market research, advertising, and promotion Sales price matches similar or substitute goods Sales low Introduction Stage

Growth Stage Increased sales Quality may improve Prices stable T I M E SALESSALES Growth Stage

Maturity Stage Sales stabilize or decline slowly Firms compete on selling price Costs at lowest level T I M E SALESSALES Maturity Stage

Decline Stage Waning sales Dramatic price cuts Cost per unit increases as fixed costs are spread over fewer units T I M E SALESSALES Decline Stage

Development Stage Development (R&D) costs expensed as incurred in financial accounting Decisions made during the development stage represent 80 to 90 percent of product’s total life-cycle costs

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

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

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

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

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

Theory of Constraints Constraint - anything that confines or limits a person or machine’s ability to perform a project or function –Human constraints –Material constraints –Machine constraints place quality control points before bottlenecks

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?

Potential Ethical Issues Producing inventory not needed driven by achieving operating profits Avoiding innovative production and inventory driven by avoiding short-run costs Blaming suppliers for inventory mistakes caused by management

Potential Ethical Issues Failure to write-down obsolete or spoiled inventory in a timely manner Using coercion to force supplies to give price concessions Using the adoption of emerging production and inventory methods to fire workers