Working Capital Management Flashcards
Define raw materials, WIP and FG
RM- inventory held for use in the production process
WIP- inventory in production but incomplete
FG- production inventory that is complete and ready for sale
What is the formula for net realizable value?
net selling price - costs to complete and dispose
AKA the market ceiling
What is a periodic inventory system?
- when inventory quantities are determined by physical counts performed at least annually
- COGS determined after each count: beginning inventory + purchases - ending inventory
What is a perpetual inventory system?
- the inventory balance is updated for each purchase and each sale and is always current
- COGS determined and recorded with each sale
What is the FIFO cost flow assumption?
- first costs inventoried are the first costs transferred to COGS
- ending inventory includes the most recently incurred costs and approximates replacement cost
- perpetual and periodic inventory systems can be used
What is the LIFO cost flow assumption?
- the last costs inventoried are the first costs transferred to COGS
- COGS higher, NI and WC will be lower
- ending inventory does not aproximate replacement cost because ending inv includes the oldest inventory
- perpetual and periodic inventory systems can be used
What is the weighted average cost flow assumption?
- calculates an average cost per item at the end of the period by: total costs of inventory available/ total number of units of inventory available
- used for both the ending inv balance and COGS
- works with a periodic inv system
What are the burdensome carrying costs resulting from excessive inventory?
- storage costs
- insurance costs
- opportunity costs of inventory investment
- lost inventory due to obsolescence or spoilage
- the lower the carrying costs, the more inventory companies are willing to carry
What are the concepts related to the determination of the optimal level of inventory?
- inventory turnover
- safety stock
- reorder point
- economic order quantity
- materials requirements planning
The determination of safety stock depends on the following factors:
- reliability of sales forecasts
- possibility of customer dissatisfaction resulting from back orders
- stockout costs (the cost of running out of inventory), including loss of income, the cost of restoring goodwill with customers and the cost of expedited shipping to meet customer demand
- lead time (the time that elapses from the placement to the receipt of an order)
seasonal demands on inventory
What is the reorder point and its formula?
- the inventory level at which a co. should order or manufacture additional inventory to meet demand and to avert incurring stockout costs
- safety stock + (lead time * sales during lead time)
What is the Kanban inventory control?
- give visual signals that a component required in production must be replenished
- prevents oversupply or interruption of the manufacturing process as the result of lacking a component
What is the computerized inventory control?
- establishes real-time communication links between the cashier and the stock room
- every purchase is recognized instantaneously by the inv database, as well as every return
- computers are programmed to alert inventory managers as to reorder requirements
- some databases interface directly with supplier software toa llow for instantaneous reorders, removing the human element
What is Integrated Supply Chain Managment (ISCM)?
- exists when a firm and the entire supply chain (suppliers, producers, distributors, retailers, customers, service providers) are able to reasonably predict the expected demand of consumers for a product and then plan accordingly to meet that demand
- a collaborative effort between buyers and sellers
- the goal is to better understand the needs and preference of customers and cultivate the relationship with them
What is the Supply Chain Operations Reference (SCOR) model?
- assists a firm in mapping out its true supply chain and then configuring it to best fit the needs of the firm
