Managing Inventory and Service Costs Managing Inventory and Service Costs C H A P T E R 21

Learning Objective 1 Identify the different types of inventory in manufacturing, merchandising, and service organizations and understand how these inventory costs are reflected in the income statement and balance sheet.

What are Cost Flow Patterns of Manufacturing, Merchandising, and Service Organizations? Manufacturing Merchandising Service

Learning Objective 2 Analyze the levels of raw materials, work- in-process, and finished goods inventories in a manufacturing organization.

What is the formula for inventory turnover?

What is the formula for days in inventory?

Learning Objective 3 Understand how merchants manage inventory in their organization.

Inventory Management Issues Carrying Too Much Inventory Increased overhead costs Increased financial holding costs Increased risk of loss of market value Decreased inventory flexibility Increased inventory shrinkage Carrying Too Little Inventory Increased risk of lost sales Increased ordering costs Increased risk of supplier price increases Increased exposure to nondelivery Decreased bulk order discounts

Return on Investment It is just as important to manage the money outflow for asset investment as it is to manage the money inflow from profits. Good management accounting can provide real value in the management effort to improve a merchandising operation. Profit margin X Asset turnoverROI = Profit Revenue Profit margin = Revenue Total assets Asset turnover =

Define Net Operating Profit

Learning Objective 4 Measure profitability and personnel utilization in a service organization.

Describe the Characteristics of Service Organizations Professional Services Service Shops Mass Services

Profitability Report # of Prof. Actual Billable Hours Billing Rate Total Revenue Total Comp. Cost Partners108,200$500$4100,000$4,000,000 Senior Managers 1520, ,000,0001,950,000 Managers2035, ,875,0002,000,000 Seniors50120, ,000,0002,500,000 Staff100250, ,000,0004,000,000 Total$60,975,000$14,450,000

What Two Concepts Are Used to Develop Cost Management Evaluation Tools for Service Organizations?

What is the Formula for Profit Percentage from Professionals (PPP)? What is a Personnel Utilization Report (PUR)?

Learning Objective 5 Describe how the concept of just-in- time (JIT) inventory systems is used to improve cost, quality, and timely performance in organizations.

Discuss JIT inventory systems

How do JIT and Value-Added Activities relate?

Learning Objective 6 Calculate and interpret holding costs in merchandising and service businesses.

Match These Terms with Their Correct Formula or Definition Economic Profit Cost of Capital Financial Holding Cost The Cost of Using Money Average Investment x Annual Rate x Number of Periods Net Operating Profit – Holding Cost of Inventory and Other Asset Investments

Define Segment and Economic Value Added Segment Economic Value Added

Expanded Material Learning Objective 7 Use classic quantitative tools in inventory management (economic order quantity, reorder point, and safety stock).

Economic Order Quantity What must firms balance? EOQ attempts to answer what questions?

Calculating EOQ How much inventory should we order? What is the formula for EOQ? What do the terms mean? How much inventory should we order? What is the formula for EOQ? What do the terms mean?

Reorder Point When do we place the inventory order? What is the formula?

Safety Stock Safety stock — calculation has two parts: 1.To handle possible problems in the reorder process. 2.To handle an unexpected spike in sales demand. Why does a business want to hold safety stock?

Define Safety Stock

EOQ, Reorder Points, and Safety Stock Inventory Levels EOQEOQ Reorder Point Safety Stock Inventory (Units) 0 units 3 days 6 days 9 days 12 days Average Lead Time (3 days) Reorder Point with Safety Stock

Managerial Accounting Chapter 7 Completed