MANAGEMENT
AND COST
ACCOUNTING
SIXTH EDITION
COLIN DRURY
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2004 Colin Drury
Part Six:
The application of quantitative methods to management
accounting
Chapter Twenty-five:
Quantitative models for the planning and control of stocks
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
25.1
PLANNING AND CONTROL OF STOCKS
1. Reasons for holding stocks
•
Transaction motive
•
Precautionary motive
•
Speculative motive
2. Relevant costs required for determining EOQ
•
Holding costs
•
Ordering costs
3. Holding costs
•
Opportunity cost of investment in stocks
•I
ncremental insurance costs
•
Incremental warehouse and storage costs
•
Incremental material handling costs
•
Costs of deterioration and obsolete stocks
4. Ordering costs
•
Incremental clerical costs of preparing a purchase order,
receiving deliveries and paying invoices.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
25.2
Determining the EOQ
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
25.3
Economic order quantity graph
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
25.4a
EOQ formula
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
25.4b
Determining the length of a production run
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
25.5
Quantity
discounts
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
25.6a
Determining when to place the order
1. Assume: EOQ = 600 units; Lead time = 2 wks; Usage per wk = 120
units
2. Re-order point = 2 weeks × 120 units = 240 units.
With an EOQ of 600 units orders will be placed at five-weekly intervals.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
25.6b
Uncertain demand
1. If weekly demand exceeds 120 units there will be a stockout.
2. Therefore safety stocks are maintained and re-order point is:
(Average usage during average lead time) + (Safety stocks)
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
25.6c
Uncertain demand contd.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury