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Flashcards in Working Capital - Inventory Management Deck (5):

Inventory Management

Central issue is to determine and maintain an optimum investment in all inventories.; 2 commonn types in US - Traditional Materials Requirement Planning System (MRP)
And Just-in-time inventory system


Traditional Materials Requirement Planning (MRP)

Has been replaced by JIT in many places

1 Supply push - Goods are produced in anticipation of a demand for goods

2 Inventory buffers - Production is in anticipation of sales, inventories are maintained at every level in process as buffers against unexpected increased demand

3 Production haracteritics - MRP is based on long set-up times and production runs; not flexible

4 Supplier/purchases characteristics - Impersonal with purchased made through bids accepted from many suppliers. Purchases made in large amounts

5 Quality management - Set at acceptable level

6 Accounting issues - Traditional cost accounting with emphasis on job order and processing cost approaches; multiple inventory accounts are used



Basis is obtaining and delivering inventory just as or only when it is needed

1) Demand Pull - Goods are produced only when there is an end user demand

2) Inventory reduction - Customer demand pulls inventory through production process in that each stage produces only what is needed by next stage

3) production characteristics - occurs in work centers or cells in which full set of operations to produce a product are carried out. Robots used where feasible

4) Supplier/purchase characteristics - Close working relationships are developed with a limited number of suppliers to help coordinate operating interrelationships and help assure timely delivery of quality inputs. Distance is minimized

5) Quality management - processes must be high quality

6) Accounting issues - simplified cost accounting. Eliminates or combines inventory accounts


Economic order quantity

Trade-off between inventory ordering cost and inventory carrying out. Larger quantity ordered, lower the cost of ordering.

Total inventory cost = total order cost + total carrying cost

Total order cost= total units for period/order size (T/Q) x Per order cost (O)

Total carrying cost= (order size/2) x per unit carrying cost

Total inventory cost = [(T / Q) × O] + [(Q / 2) × C]

EOQ = SQRT (2 x annual demand x cost per order)/carrying cost per unit

The following assumptions are inherent in the economic order quantity model:
1. Demand is constant during the period.
2. Unit cost and carrying cost are constant during the period.
3. Delivery is instantaneous (or a safety stock is maintained).


Reorder point

In a traditional materials requirement planning system, inputs tend to be acquired periodically in large amounts

Quantity at which inventory is reordered must be sufficient to continue production until new order is delivered - delivery time stock.

Reorder point = delivery time stock + safety stock

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