ch21tc - COST MANAGEMENT Accounting & Control...

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COST MANAGEMENT 1 Hansen▪Mowen▪Guan Chapter 21 Inventory Management: Economic Order Quantity, JIT, and the Theory of Constraints
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2 Study Objectives 1. Describe the just-in-case inventory management model. 2. Discuss just-in-time (JIT) inventory management. 3. Explain the basic concepts of constrained optimization. 4. Define the theory of constraints, and tell how it can be used to manage inventory.
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3 Just-in-Case Inventory Management Three types of inventory costs can be readily identified with inventory: The cost of acquiring inventory. The cost of holding inventory. The cost of not having inventory on hand when needed.
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4 Just-in-Case Inventory Management Ordering Costs: The costs of placing and receiving an order. Examples: Clerical costs, documents, insurance for shipment, and unloading. Setup Costs: The costs of preparing equipment and facilities so they can be used to produce a particular product or component. Examples: Setup labor, lost income (from idled facilities), and test runs.
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5 Just-in-Case Inventory Management Stock-Out Costs: The costs of not having sufficient inventory. Examples: Lost sales, costs of expediting (extra setup, transportation, etc.) and the costs of interrupted production. Carrying Costs: The costs of carrying inventory. Examples: Insurance, inventory taxes, obsolescence, opportunity cost of capital tied up in inventory, and storage.
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6 Just-in-Case Inventory Management
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7 Economic Order Quantity TC = PD/Q + CQ/2 Just-in-Case Inventory Management Where TC = The total ordering (or setup) and
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ch21tc - COST MANAGEMENT Accounting & Control...

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