Cost Accounting
Foundations and Evolutions
Kinney, Prather, Raiborn
Chapter 17
Inventory and
Production Management
Learning Objectives (1 of 3)
• List the most important relationships in
the value chain
• Explain why inventory cost management
is important
• Contrast the push and pull systems of
production
• Explain why product life cycles affect
product costing and profitability
Learning Objectives (2 of 3)
• Define target costing and explain how it
influences production cost management
• Describe the just-in-time philosophy and
explain how it affects accounting systems
• Describe flexible manufacturing systems
Learning Objectives (3 of 3)
• Explain how the theory of constraints helps
in determining production flow
• (Appendix) Illustrate how the economic
order quantity, reorder point, and safety
stock are determined and used
Managing Inventory
The goal is to minimize the
company’s monetary commitment
to inventory without negatively
impacting product availability
Inventory
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Types
Raw material
Work in process
Finished goods
Indirect materials
(supplies)
Merchandise
inventory
Costs
• Purchasing/production
• Ordering/setup
• Carrying/not carrying
Production Systems
• Push Systems
– Produce in anticipation of customer orders
– Store raw material, work in process, and
finished goods inventory
• Pull
– Produce as needed
– Minimal storage
Product Life Cycles
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Development Stage
• Decisions made during the development
stage represent 80 to 90 percent of product’s
total life-cycle costs
• Development (R&D) costs expensed as
incurred in financial accounting
Introduction Stage
• Substantial costs including
engineering changes, market
research, advertising, and promotion
• Sales low
Introduction
Stage
• Sales price matches similar or
substitute goods
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Growth Stage
• Increased sales
• Quality may improve
• Prices stable
Growth
Stage
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Maturity Stage
• Sales stabilize or decline slowly
• Firms compete on selling price
• Costs at lowest level
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Maturity
Stage
Decline Stage
• Waning sales
• Dramatic price cuts
• Cost per unit increases as
fixed costs are spread over
fewer units
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Decline
Stage
Just-in-Time
• Eliminate any process or operation that
does not add value
• Continuous improvement in
production/performance efficiency
• Reduction in total cost of
production/performance while
increasing quality
Traditional Manufacturing
• Smooth operating activity
– steady use of workforce
– continuous machine utilization
• Spread overhead over a maximum number
of products
• Inventory levels high enough to cover up
inefficiencies in acquisition and/or
production
JIT Plants
• Minimize material handling time, lead time,
movement of goods
• Use manufacturing cells which allow for visual
controls, greater teamwork, quick exchange of vital
information
• Reduce storage
• Increase throughput
• Develop multiskilled workers
• Use autonomation – programmed factory
equipment
Manufacturing Methods
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Flexible Manufacturing
System (FMS)
network of robots and
material conveyance
devices monitored and
controlled by computers
modular factories
customization
quick, inexpensive
production changes
Computer-Integrated
Manufacturing (CIM)
• two or more FMSs
connected via host
computer and
information system
Theory of Constraints (TOC)
Flow of goods through a production process
cannot be at a faster rate than the slowest
bottleneck in the process
Eliyahu Goldratt
Theory of Constraints
• Constraint - anything that confines or limits
a person or machine’s ability to perform a
project or function
– Human constraints
– Material constraints
– Machine constraints
• place quality control points before
bottlenecks
Questions
• What is the difference between push and
pull systems of production?
• What is target costing?
• What is the just-in-time philosophy? How
does JIT affect production?