LIFO uses which method of inventory valuation?
Lower of Cost or Market
FIFO uses which method of inventory valuation?
Lower of Cost or Net Realizable Value
Weighted Avg Inventory uses which method of inventory valuation?
Lower of Cost or Net Realizable Value
When using lower of cost or market, how is the market value determined?
- Use the middle value of
- (1) replacement cost
- (2) market ceiling (aka NRV) = selling price - cost to complete & dispose
- (3) market floor = market ceiling (aka NRV) - reasonable profit
What is the difference between a (1) periodic or (2) perpetual inventory system? How is COGS determined?
- Periodic: requires physical count of inventory at least annually. COGs = beginning inventory + purchases - ending inventory
- Perpetual: The inventory balance is adjusted with each purchase. COGS is determined and assigned to each sale.
What are the 5 cost flow assumptions used to track inventory?
- (1) specific identification used for unique, large or high-dollar products
- (2) FIFO
- (3) LIFO
- (4) weighted average is only used with a periodic inventory system
- (5) moving average is only used with a perpetual inventory system
What is the effect on COGS, net income, and ending inventory during periods of (1) inflation and then (2) deflation for FIFO and LIFO?
- Inflation/FIFO: the least expensive are sold, the most expensive remain. COGS is less, net income is higher, ending inventory is higher.
- Inflation/LIFO: the most expensive are sold, the least expensive remain. COGS is higher, net income is lower, inventory is lower.
- Deflation/FIFO: the most expensive are sold, the least expensive remain. COGS is higher, net income is lower, inventory is lower.
- Deflation/LIFO: the least expensive are sold, the most expensive remain. COGS is less, net income is higher, ending inventory is higher.
What is the most important factor to influence future inventory levels and planning?
An accurate sales forecast!
What are the 4 primary inventory carrying costs?
- Opportunity Costs (dollars are spent on storage of inventory that could be spent elsewhere)
- Lost inventory due to obsolescence or spoilage
Fill in the blank: the [lower/higher] inventory carrying cost the [more/less] inventory a company is willing to carry.
- Lower = More OR
- Higher = Less
What is safety stock?
A buffer of stock to ensure that manufacturing (raw materials stock) or customer supply requirements (finished goods stock) are met.
What is the formula for the Reorder Point? What does this number imply? What should you be careful about when using this formula?
- Safety Stock + (Lead Time x Sales During Lead Time)
- Be Careful: whatever timeframe is used for the lead time (annual, monthly, weekly) the same timeframe must be used for the sales timeframe.
- Identifies the optimum inventory level at which to reorder so that the safety stock is at minimal risk of being violated
What is the formula to determine the economic order quantity (EOQ)?
- Sqrt(2SO/C) where S=sales (in units), O=Ordering cost/PO, C=carrying cost/unit
- The purpose is to balance inventory costs vs reorder costs.
For EOQ, what types of costs are included in the ordering cost?
- A fixed cost/order
- Shipping & handling cost
- Costs to set-up the equipment to make the product
What are the primary components of the Supply Chain Operations Reference model and a brief explanation of each?
- Plan: developing a way to balance demand and supply and prepare for the necessary infrastructure. It all starts with an accurate sales forecast.
- Source: Procure the resources (labor and materials) required
- Make: Turn raw materials into finished products, tested and ready for shipment
- Deliver: Get the finished products into the hands of the customer. Watch -- pricing and A/Ris in this category rather than the planning stage.
What are the benefits of implementing supply chain management?
- Reduced costs
- Increased profits
- Happy customers
- Happy and well-integrated suppliers
What is the general rule for A/P management? What are some techniques to maximize return for the company?
- Stretch it out -- wait until the last minute to pay, unless a discount is involved.
- Take advantage of discounts.
- Take advantage of electronic funds transfer -- for receipt of funds from a client (no delay in receiving and then depositing a cheque)
- -- for payment of funds to a supplier (can use the absolute last minute)
- Defer payments so long as you don't damage the relationship with the supplier or incur interest or penalties
- Use a line a credit. This keeps cash in the acct to use as a buffer. Use this as temp float without invading the cash balance.
What is the formula to determine the APR of a quick payment discount?
(360 / pay period-discount period) x (discount %/100-discount %)
What is the name of the set of procedures to manage raw materials and WIP inventory?
Materials requirements planning
If the EOQ for Product A is 200 units and the company maintains a 50-unit safety stock, what is the average inventory for Product A?
- 250 total units - 50 units safety stock = 200 units fluctuation.
- 200/2 = 100 units avg flux
- 100 units avg flux + 50 units safety stock = 150 units.
What components determine the cost of carrying A/R?
- The variable cost of creating the A/R x the cost of the capital during the collection period.
- A/R Amt x variable cost ratio x IRR x (days carried/360)
The A/R is decreasing, but the sales are increasing. What affect does this have on the avg collection period?
The avg collection period decreases.
The SCOR (Supply Chain Operations Reference) model of supply chain management consists of which 4 components? Provide a brief explanation of what is contained in each component.
- Plan: (1) forecast sales, (2) determine all things inventory from raw materials needed to assessing if suppliers can handle the demand, (3) consider the entire vertical chain
- Source: procure the labor & materials needed; all things vendor
- Make: from manufacturing to packaging plus quality
- Deliver: pricing, delivering, A/R management