Chapter 20

Inventory Management, Just-in-

Time, and Backflush Costing

Copyright © 2003 Pearson Education Canada Inc. Slide 20-1

 Inventory Management
• In retail organizations, look at purchasing costs,
ordering costs, carrying costs, stockout costs and
quality costs
• Economic order quantity (EOQ) model calculates the
optimal quantity to order

EOQ = 2DP
C
where D = demand
P = cost of an order
C = carrying costs of one unit for the time
period under consideration

Copyright © 2003 Pearson Education Canada Inc. Pages 738 - 743 Slide 20-2
 Inventory Model

Reorder Reorder
1,000 Point Point

Inventory
500
In Units

Weeks 1 2 3 4 5 6 7 8

Lead Lead
Demand = 250 / week Time Time
Order lead time 2 weeks 2 Weeks 2 Weeks

Copyright © 2003 Pearson Education Canada Inc. Pages 741 - 742 Slide 20-3
 Just-In-Time Purchasing

• Just-In-Time (JIT) purchasing refers to the

purchase of goods or materials just prior to
demand or use
• Requires a more open relationship with suppliers
and smaller, more frequent orders
• Timely delivery of quality products is crucial in JIT
purchasing environments
• Companies employing JIT choose suppliers
carefully
• Consider the entire supply chain from cradle to
grave (womb to tomb) and share information with
all parties involved in the system

Copyright © 2003 Pearson Education Canada Inc. Pages 744 - 749 Slide 20-4
 Materials Requirements Planning
• Materials requirements planning (MRP) is a push-
through system that manufactures finished goods for
inventory on the basis of demand forecasts
• MRP uses
• demand forecasts for the final products
• a bill of materials for each product
• the quantities of materials, components and
finished products to predetermine the necessary
outputs at each stage of production
• Enterprise Resource Planning (ERP) systems collects
and manages information into a single database to
support the achievement of the organization’s goals

Copyright © 2003 Pearson Education Canada Inc. Pages 750 - 755 Slide 20-5
 Backflush Costing & Trigger Points

• Sequential (or synchronous) tracking is a product

costing method in which the accounting system
entries occur in the same order as actual
purchases and production
• Trigger point is a stage in the production cycle at
which an accounting entry is made

Traditional Trigger Points

Purchase Production Completion Sale of a

of Direct of work in of a good finished
Materials process finished unit unit

Copyright © 2003 Pearson Education Canada Inc. Pages 755 - 763 Slide 20-6
 Backflush Costing

• Backflush costing is an approach to costing which

delays recording changes in the status of the
product until the finished goods appear
• Backflush costing uses standard costs to work
backward and flush out costs for the units
produced
Finished Cost of
Goods Control Goods Sold
Direct Direct
Materials Sale
Allocated
Conversion
Cost Control
Unallocated Conversion Costs

Copyright © 2003 Pearson Education Canada Inc. Pages 755 - 763 Slide 20-7