Once a product's total life-cycle costs are projected, they can be compared to the target cost todetermine whether adjustments to the product design and manufacturing process are necessa
Trang 1Innovative Inventory and Production Management TechniquesQuestions
1 The important relationships in the value chain that can be
exploited are (1) between the company and its upstream supplierand (2) between the company and its downstream customer It is
at the interfaces of these relationships where real
opportunities for improvements exist By building improved cooperation, communication, and integration, the entities
within the value chain can treat each other as extensions of themselves In so doing, they can enjoy gains in quality, throughput, and cost efficiency Non-value-added activities can be reduced or eliminated and performance of value-added activities can be enhanced Shared expertise and problem
solving can be very beneficial Products and services can be provided faster and with fewer defects, and activities can be performed more effectively and reliably with fewer deficienciesand less redundancy
2 The three costs are costs of ordering, purchasing, and carrying
inventory These costs are presented in Exhibit 16-1 with examples
3 A push system is a production control system in which work
centers produce inventory in excess of current needs because oflead time or economic production/order quantity requirements
A pull system of production control is one in which parts are delivered/produced only as needed by the work center for which they are intended Theoretically, there are no stockroomswhere work centers "push" completed parts in excess of the current needs of recipient work centers
4 Incremental variable costs associated with preparing,
receiving, and paying for an order are called ordering costs
and include the cost of forms and a variety of clerical costs
In manufacturing companies, ordering costs are incurred for rawmaterial purchases However, if the company intends to produce
rather than order a part, direct and indirect setup costs
(instead of ordering costs) are created as equipment is readiedfor each new production run Therefore, setup costs are the conceptual counterpart of ordering costs when parts are to be made rather than purchased
175
Trang 25 Advances in information technology have greatly improved the
efficiency and effectiveness of purchasing Bar coding and electronic data interchange (EDI) are expected to significantly
reduce procurement costs An extension of EDI is
vendor-managed inventory (VMI), a streamlined system of inventory
acquisition and management A supplier is empowered to
frequently monitor EDI inventory levels and provide its
customer company a proposed e-order and subsequent shipment
On electronic acceptance, a funds transfer from the buyer’s bank is made when the goods are received Finally, the process
of conducting business transactions over the Internet, known as
e-commerce, has made possible the use of procurement cards
(p-cards) These are given to selected employees as a means of securing greater control over spending and eliminating the paper-based purchase authorization process
6 A stockout occurs when a firm runs out of an inventory item
Such an item could either be finished goods inventory or a component material
A company can estimate the cost of a stockout by estimating
* lost customer goodwill,
* lost contribution margin, and
* additional ordering and shipping costs on special orders
A manufacturer could also estimate additional setup costs
caused by having to stop the production process and restart it
7 Companies must be aware of where their products are in their
life cycles, because in addition to the sales effects, the life-cycle stage may have a tremendous impact on costs and profits Managing production activities and costs requires an understanding of product life cycles in order to effectively and efficiently engage in production planning, controlling, problem solving, and performance evaluation
8 The five stages are development, introduction, growth, maturity
and decline Each stage is important because it has an
important impact on production costs The types of costs
incurred vary from stage to stage and effective cost managementmust be responsive to how costs are changing as the life cycle progresses
9 Costs, sales, and profits change for several reasons For
example, costs change because of the timing of activities and volume In the early stages, costs are being incurred to
develop the product and production processes In later stages,production costs are the largest cost component Sales change mostly because of changes in customer demand In the early stages, sales volume is nil or low In the middle stages, volume is high and in the later stages volume stabilizes and then drops Secondarily, sales change because of per-unit pricechanges Profit changes with the changes in costs and sales
Trang 310 Target costing is a method of determining what the cost of a
product should be by subtracting desired profit from the
estimated selling price Once a product's total life-cycle costs are projected, they can be compared to the target cost todetermine whether adjustments to the product design and
manufacturing process are necessary before product engineers release the final design and specifications
11 Target costing requires that profitability be viewed on a
long-term basis The consideration of target cost can impact futureopportunities to reduce costs The desired target cost may not
be attainable at the start of production, but because learning curve activities and design for manufacturability have been considered up front, the target cost should be reachable within
a reasonable time
12 The big factor is the amount of cost that is incurred to launch
a new product If the cost to develop and launch a new product
is very large, much research must precede the introduction of aproduct to ensure its success However, if the cost to
introduce a new product is relatively low, a company can rely
on the market to determine which products will be successful Products that are not well received by the market can simply bediscontinued
13 A cost table provides information about the costs of materials,
labor, and production processes A cost table is useful in the design of a product because, given alternative materials and conversion operations, the cost table will facilitate
determining how product cost is affected by alternative productand process designs
14 A major distinction between kaizen costing and target costing
is seen in the life-cycle stages in which each is used Kaizencosting is used to reduce the cost of products in later stages
of the product life cycle Target costing is applied in the product development/design stage
15 A substitute good (service) is a product (service) that could
be used in lieu of using another product (service) For
example, public bus service could be a substitute for private taxi service If the price of travel by taxi rises, riders mayswitch to use of bus services to avoid paying the higher taxi fees
16 Research and development costs are treated as product costs of
life-cycle costing, whereas they are expensed as period costs for financial accounting Treating R&D as product costs gives
a more accurate and complete picture of costs relevant to the product over its life cycle
Trang 417 Primary goals of JIT are
* elimination of any process that does not add value to
the product;
* continuous improvement of production efficiency; and
* reduction of total cost of production rather than merely the cost of purchasing
JIT attempts to achieve these goals by working to
* eliminate the acquisition/production of inventories in
excess of current needs;
* reduce lead/setup times; and
* minimize product defects
18 The following changes are needed to effectively implement JIT
in a production environment:
* Selection of a vendor should consider the following items
in addition to the invoice prices:
consistent quality of materials/parts to minimize product defects;
reliable delivery schedules with short lead times toallow for maintaining little or no inventory and forflexibility and speed in setting up production runs;
maintaining long-term relationships with fewer vendors to improve communications, ensure quality and service, obtainquantity discounts, and reduce operating costs;
obtaining suppliers who are close to the plant to reduce lead times and shipping costs
* Small quantities should be ordered to minimize inventory
carrying costs
* Product components and tools should be standardized to
lower costs and increase production efficiency
* The number of product components should be minimized to
lower costs and increase production efficiency
* Products should be carefully designed to reduce subsequent
change orders
* Setup times should be shortened to allow for quicker, more
flexible production
* Production workers are used to continually ensure quality
control in order to reduce costs and approach zero defects
* The plant layout should be designed in a manner that is
conducive to the flow of goods and organization of workers
in order to minimize cycle time from material input to finished product
* Employee suggestions for improving production should be
sought; these individuals often have a wealth of information that goes untapped
* Utilize multiprocess handling to improve worker
flexibility and interest
JIT is a pull system because products are only produced when demanded
Trang 519 One aspect of JIT (being located near vendors) is more
difficult in the United States because the area is much larger and vendors might be located in a completely different
geographical section of the country Another reason for less effective implementation is the differing attitudes between Japanese and American workers toward their jobs and between Japanese and American employers toward their employees
20 Since JIT represents a philosophy of how to do things rather
than how to produce things, many aspects of JIT can be used by
nonmanufacturers The following elements from solution 18 can
be adopted by nonmanufacturers in relation to their purchasing techniques and employee base:
* Selection of a vendor should consider the following items
in addition to the invoice prices:
reliable delivery schedules with short lead times to allow for maintaining little or no inventory and for flexibility and speed in meeting customer needs;
maintaining long-term relationships with fewer vendors to improve communications, ensure quality and service, obtainquantity discounts, and reduce operating costs;
obtaining suppliers that are close to the company to reduce lead times and shipping costs
* Small quantities should be ordered to minimize inventory
carrying costs
* Workers are trained to continually ensure quality control
to reduce costs and approach zero errors
* The workspace layout should be designed in a manner that
is conducive to the flow of goods and organization of workers
* Employee suggestions for improving operations should be
sought; these individuals often have a wealth of information that goes untapped
* Utilize job enhancement to improve worker flexibility and
interest
21 In a lights-out factory, all production is accomplished by an
integrated system of machines The only involvement of workers
is to monitor and maintain the machines The term "lights-out"
is simply a metaphor for an environment where one can simply close the factory doors, turn out the lights, and let the
tireless machines produce
22 In an FMS, each employee is charged with operating or
overseeing several machines Although the automation requires fewer workers than traditional production systems, FMS requiresits workers to have more training than those in a traditional environment Also, the employees need to be given the
authority and responsibility to make decisions because the environment is too fast paced for people "off the floor" to make certain production decisions
23 The primary areas in which implementation of a JIT system will
Trang 6impact the cost accounting system are as follows:
* Variance analysis should be made sooner in the production
process and variances should be smaller because of
continual monitoring of production
* A new inventory account RIP (raw and in process) will
combine the two traditional categories of raw material andwork in process because few or no materials will be
stored
· Because more costs can be traced directly to their related
output, fewer costs must be allocated to products This improves the usefulness of measures for cost control and performance evaluation
Backflush costing is used because it is a less expensive accounting technique than those used in traditional
production environments It is justified on the basis that,
at any point in time, inventory is relatively small compared
to the amount of goods that have been completed and sold Thus, on a cost-benefit basis, small inventory levels do not justify more expensive continuous cost-tracking systems
24 The theory of constraints states that production cannot take place at a rate faster than the slowest machine
or person in the process The theory of constraints can be used in either a manufacturing or service firm to focus
management's attention on the elimination of the bottlenecks
so that the best use of existing capacity can be made
25 Quality control inspections should be placed in front
of bottlenecks so that the limited time of the constraint won't be wasted processing defective units
26 Total ordering cost declines as order size increases.Carrying costs increase, in total, as order size increases
At some point the two costs are equal and it is at this pointthat the EOQ point is located To the right of this point, total carrying costs exceed total ordering costs
27 EOQ is the optimal size of an order that is expected
to minimize the total costs of ordering and carrying
inventory Order point is the level of inventory on hand thattriggers a placement of an order for additional units Thus, once the order point is reached, the economic order quantity should be ordered
28 Safety stock is the basic quantity (or cushion) of inventory kept on hand in the event of fluctuating usage or unusual delays in lead time It is necessary because of the uncertainties associated with the rate of usage and the lead time between placing and receiving an order
29 Pareto inventory analyses requires that all inventoryitems be placed into one of three classes: A, B, or C The three categories are distinguished from one another by their
Trang 7cost-to-volume ratio High-value, low-volume items are
placed in the A category; at the other extreme, low-value, high-volume items are placed in the C category All other items are placed in category B A red-line system or a two-bin system is frequently used to control inventory levels of
C items
30 Inventory is one of many investments made by an
organization and should be expected to earn the same rate of return as other investments The cost of capital is
considered to be an indication of a reasonable rate of returnfor an organization and represents an opportunity cost of holding inventory
31 Inspection of the two formulas (economic production runs and economic order quantity) shows the many
similarities; the main difference is that, in the EPR
formula, the terms are redefined as production costs rather than purchasing costs
Q = annual quantity produced rather than purchased
S = cost of setting up rather than placing an order
C = cost of carrying one unit in stock for one year and
is the same in either formulaUse of the EOQ formula will help Joe minimize his costs of
ordering and carrying if he has a reasonable idea of how many
VCRs to order in total for the year
Trang 8Total target cost $ 802,000
Target cost per unit: $802,000 ÷ 156,000 = $5.14
Trang 936 a.
Life-cycle revenues Year 1 4,000 × $250 $ 1,000,000 Year 2 3,600 × $250 900,000 Year 3 4,700 × $250 1,175,000 Year 4 5,000 × $175 875,000 Year 5 1,500 × $175 262,500 Totals 18,800 $ 4,212,500Variable selling costs (18,800 × $30) (564,000)Fixed selling and administrative (1,750,000)Required profit ($4,212,500 × 0.20) (842,500)Target manufacturing cost $ 1,056,000Target manufacturing cost per unit $ 56.17
b Total target manufacturing cost
$1,056,000
Year 1 mfg cost (4,000 × $65) (260,000)
Total target manufacturing cost $ 796,000
Target unit mfg cost ($796,000 ÷ 14,800)
$53.78
c The company’s engineers could redesign the product to make it less costly to produce by lowering both material and conversion costs or redesign the process to reduce conversion costs Also, they could use kaizen techniques, which could lower costs after production has started
37 The student’s memo should address the following
Trang 1038 a Material usage variance:
Actual cost of materials this month:
| $9,000 U | ENC Variance
(Material X, $6,000 F; Material Y, $15,000 U)
c The engineering change could have been to increase the quality or nutritional content of the cat food This may have been done in response to
competitors' actions or to enter a new segment of the cat food market
Trang 1140 a 1 Raw and In Process Inventory 320,000
Accounts payable 320,000
2 Conversion costs 708,000 Various 708,000
3 Raw and In Process Inventory 704,000 Conversion costs 704,000
4 Finished Goods Inventory 1,024,000 Raw and In Process Inventory 1,024,000
5 Cost of Goods Sold 1,011,200 Finished Goods Inventory 1,011,200
6 Cost of Goods Sold 4,000 Conversion costs 4,000
7 Accounts receivable 1,580,000 Sales 1,580,000
Alternatively, the following journal entries could be used:
Finished Goods Inventory 12,800Cost of Goods Sold 1,011,200 Accounts payable 320,000
Conversion costs 704,000
Cost of Goods Sold 4,000 Conversion costs 4,000
Accounts receivable 1,580,000 Sales 1,580,000
b
Raw and In Process Finished Goods
1 320,000 |4 1,024,000 4 1,024,000 |5 1,011,200
3 704,000 | Bal 12,800 |Bal 0 | |
Trang 12| | Cost of Goods Sold Conversion Costs
5 1,011,200 | 2 708,000 |
3 704,000
6 4,000 | |
6 4,000Bal 1,015,200 | Bal 0 | Accounts payable Various accounts
| 1 320,000 | 2 708,000
Sales Accounts receivable
42 $14,700; at the EOQ, the total annual carrying costs will equal the total annual ordering costs
43 EOQ (Wonder Cream) = SQRT (2QO ÷ C)
= SQRT [(2 × 2,000 × 4.50) ÷ 2.00]
= SQRT (9,000)
= 94.9 or 95EOQ (Skin-so-Bright) = SQRT [2 × 1,000 × 6.25) ÷ 1.45]
= SQRT (8,621)