chapter 2 ma - Accounting for Materials Chapter 2 Planning...

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Accounting for Materials Chapter 2
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Planning Materials Requirements Planning – importance Begins with the design of a product
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Planning Materials Requirements To plan manufacturing requirements, every stock item must be analyzed periodically to: Forecast demand for the next period Determine acquisition lead time Plan usage during the lead time Establish quantity on hand Determine reserve or safety stock requirements Place units on order
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Planning Materials Requirements Accurate future requirements for each stock item or product play a central role in materials control. Materials planning deals with two fundamental factors: The quantity The time to purchase
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Planning Materials Requirements Determination of how much and when to buy involves two conflicting kinds of cost: The cost of carrying inventory The cost of inadequate carrying
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Cost of Carrying inventory Investment cost Property rent/storage cost Insurance Handling cost Deterioration and shrinkage of stocks Obsolescence
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Cost of Inadequate carrying Extra purchasing, handling and transportation cost Higher price due to small order quantity Frequent stockouts resulting in disruptions production schedule Additional clerical costs Inflation-oriented increases in prices Lost sales and loss of GOODWILL
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Economic Order Quantity EOQ – Amount of inventory to be ordered at one time for purposes of minimizing annual inventory cost.
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Economic Order Quantity The quantity to be ordered at a given time must be determined by balancing two factors: The cost of carrying (possessing) materials The cost of ordering (acquiring) materials
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Formula EOQ= √ 2* annual required units*cost per order Cost per unit of material*carrying cost percentage ( carrying cost per unit) OR EOQ= √2*RU*CO CU*CC
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Formula The formula is based on the following relationships: RU/EOQ= No.of orders placed annually RU*CO/EOQ= Annual ordering cost EOQ/2= Avg. no of units in inventory at nay point in time CU*CC*EOQ/2= Annual carrying cost
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Example Estimated requirement for the next year: 10000 units Cost of the item per unit: $8 Ordering cost: $10 Annual Inventory carrying cost: $0.80 or 10%
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Economic Order Quantity Cost of carrying inventory can be calculated and expressed numerically Cost of not carrying inventory is difficult to be calculated; yet they must be considered upon ordering quantities.
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Graph Graph Total annual cost to order and carry Annual carrying cost Annual ordering cost Low point Economic order quantity
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chapter 2 ma - Accounting for Materials Chapter 2 Planning...

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