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CHAPTER 18
INVENTORY AND PRODUCTION MANAGEMENT
QUESTIONS
1. The three costs are costs of ordering, purchasing, and carrying inventory. These
2. A push system is a production control system in which work centers produce in-
tion/order quantity requirements.
the current needs of recipient work centers. JIT is a pull system.
3. Companies must be aware of where their products are in their life cycles because,
planning, controlling, problem solving, and performance evaluation.
4. Target costing is a method of determining an allowable cost of making a product
necessary before product engineers release the final design and specifications.
5. It is in the development stage that the production components and production pro-
in later stages of the life cycle.
6. Kaizen costing is an approach to identify ways to incrementally improve produc-
of the product life cycle. Target costing is applied in the product develop-
ment/design stage.
7. The primary goals of the JIT philosophy are
eliminating any process that does not add value to the product;
continuously improving production efficiency; and
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JIT attempts to achieve these goals by working to
eliminate the acquisition/production of inventories in excess of current needs;
8. The following changes are needed to effectively implement JIT in a production
environment:
to the invoice prices:
consistent quality of materials/parts to minimize product defects;
reliable delivery schedules with short lead times to allow for maintaining
runs;
maintenance of long-term relationships with fewer vendors to improve
communications, ensure quality and service, obtain quantity discounts,
and reduce operating costs;
Small quantities should be ordered to minimize inventory carrying costs.
Product components and tools should be standardized to lower costs and increase
production efficiency.
increase production efficiency.
Products should be carefully designed to reduce subsequent change orders.
Setup times should be shortened to allow for quicker, more flexible production.
costs and approach zero defects.
The plant layout should be designed in a manner that is conducive to the flow
of goods and organization of workers to minimize cycle time from material in-
put to finished product.
9. In an FMS, each employee is charged with operating or overseeing several ma-
chines. Although the automation requires fewer workers than traditional produc-
tion systems, FMS requires its workers to have more training than those in a
10. The theory of constraints states that production cannot take place at a rate faster
than the slowest machine or person in the process. TOC can be used in either a
11. Total ordering cost declines as order size increases. Carrying costs increase, in
total, as order size increases. At some point the two costs are equal, and it is at this
rying costs exceed total ordering costs.
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12. Pareto inventory analysis requires that all inventory items be placed into one of
three classes: A, B, or C. The three categories are distinguished from each other
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EXERCISES
13. a. Each student will have a different answer. No solution provided.
14. a. O
b. O
c. O
d. N/A (Purch.)
e. N
f. O
15. a. As technology changes, the relative costs of ordering and carrying inventory
EOQ quantity down.
listed in (a).
16. The president should ask for a formal analysis of the situation. This analysis
should address the costs and benefits of each alternative. Costs should include
an objective report.
“hidden costs” of purchase arrangements.
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17. a. Restaurants that manage their food production on a push basis anticipate the
level of demand and prepare food before customers arrive and order. Restau-
until the customer orders.
b. Customers may prefer to dine at a restaurant that manages food production on a
c. If quality and freshness are important to the customer, food prepared on a pull
basis will be preferred by the customer. Also, if a customer wants food prepared
production be pull based.
18. Each student will have a different answer. However, the reports should address the
following points. There are situations in which JIT will not readily work. For ex-
manufacturing. Other instances in which JIT is not suitable include production en-
vironments in which demand is very seasonal. In such environments, it may be
produce only seasonally.
19. Each student will have a different answer; however, the essence of the rebuttal
would be that profitability of the product recently introduced by 3G would vary
20. Giles is correct. Relative to products with long life cycles, there is less opportunity
the past rather than in the future.
21. Life-cycle revenue:
Year 1
48,000 $19
$ 912,000
Year 2
48,000 $20
960,000
Year 3
90,000 $16
1,440,000
Year 4
40,000 $12
480,000
Total
226,000
$3,792,000
Required profit 226,000 × $3.50
Selling & Administrative expenses
Total target cost
$2,801,000
Target cost per unit: $2,801,000 ÷ 226,000 = $12.39
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22. a. Life-cycle revenues:
Year 1
4,000 $800
$ 3,200,000
Year 2
3,600 $800
2,880,000
Year 3
4,700 $800
3,760,000
Year 4
5,000 $800
4,000,000
Year 5
1,500 $650
975,000
Year 6
1,000 $650
650,000
Totals
19,800
$ 15,465,000
Variable selling costs (19,800 $140)
(2,772,000)
Fixed selling and administrative
(3,700,000)
Required profit ($15,465,000 0.15)
(2,319,750)
Total target manufacturing cost
$ 6,673,250
Divided by number of units
÷ 19,800
Target manufacturing cost per unit
$ 337.03
b. Total target manufacturing cost
$ 6,673,250
Year 1 mfg. cost (4,000 $430)
(1,720,000)
Total target manufacturing cost
$ 4,953,250
Target unit mfg. cost ($4,953,250 ÷ 15,800) $313.50
23. The student’s memo should address the following issues:
b. There are two major courses of action. First, management should ask the prod-
uct engineers to review product design and specifications with the purpose of
ity to achieve the required long-term reductions in cost, the plans for the
product should be abandoned.
24. Each student will have a different answer. No solution provided.
25. a. (1) Direct Material Inventory
32,000
Accounts Payable
32,000
(2) Conversion Cost Control
64,000
Various accounts
64,000
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Raw and In-Process Inventory
2,000
Finished Goods Inventory
6,000
Cost of Goods Sold
902,000
Accounts Payable
302,000
Conversion Cost Control
608,000
Accounts Receivable
1,490,000
Sales
1,490,000
(3) Work in Process Inventory
96,000
Direct Material Inventory
32,000
Conversion Cost Control
64,000
Finished Goods Inventory
96,000
Work in Process Inventory
96,000
(4) Accounts Receivable
158,000
Sales
158,000
Cost of Goods Sold
94,800
Finished Goods Inventory
94,800
b. (1) Cost of Goods Sold
96,000
Various accounts
96,000
(2) No entry
(3) Finished Goods Inventory
1,200
Cost of Goods Sold
1,200
26. a. Raw and In-Process Inventory
302,000
Accounts Payable
302,000
Conversion Cost Control
608,000
Various accounts
608,000
Raw and In-Process Inventory
600,000
Conversion Cost Control
600,000
Finished Goods Inventory
900,000
Raw and In-Process Inventory
900,000
Cost of Goods Sold
894,000
Finished Goods Inventory
894,000
Cost of Goods Sold
8,000
Conversion Cost Control
8,000
Accounts Receivable
1,490,000
Sales
1,490,000
Alternatively, the following journal entries could be used:
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Various accounts
Accounts Receivable
1,490,000
Current material standard:
Material usage variance
$ 4,500 F
Annual material standard:
Current standard
(66,000)
$5,950
b.
Raw and In-Process
Finished Goods
302,000
900,000
900,000
894,000
600,000
Bal.
2,000
Bal. 6,000
Cost of Goods Sold
Conversion Cost Control
894,000
608,000
600,000
8,000
8,000
Bal. 902,000
Bal. 0
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b. Current SP SQ
Annual SP SQ
(X) $0.02 216,000 =
$4,320
(X) $0.02 256,000 =
$5,120
(Y) $0.05 32,000 =
1,600
(Y) $0.05 16,000 =
800
$5,920
$5,920
$0
ECO Variance
(Material X, $800 F; Material Y, $800 U)
slightly exceeded the standard.
d. The company would make a change that was cost neutral if the quality of the
29. JIT requires close relations and communications with suppliers. Preferably, there
should be a few, well-cultivated suppliers who are “trained” to know precisely the
munications between the supplier and the JIT producer.
requirements? Do Duggan’s personnel know exactly what the needs are, and are
those needs fairly stable? If, for example, Duggan has frequent engineering
pered.
Finally, JIT systems cannot be fully and effectively implemented in a few months.
30. Each student will have a different answer. No solution provided.
31. a. Adoption of a FMS should reduce raw material, work in process, and finished
goods inventories. Because an FMS allows the manufacturer to switch produc-
b. The FMS should allow production employment levels to drop. With an FMS,
most production activities are performed by machine and fewer production em-
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a lower number of production employees.
c. In a traditional production system, employees typically perform manual conver-
ly, existing employees would need substantial training to function in an FMS
environment.
32. The first consideration would be to keep the two remaining polishing machines
operating at peak efficiency. To do so would require that all flatware entering the
ing repaired.
33. No, Promotional Products did not complete the 180 units by 5:00 P.M.
TIME OF AFTERNOON
1–2
2–3
3–4
4–5
Total
Dept. 1 output
40
44
50
46
180
Dept. 2 output
40
44
45
45
174
Dept. 2 backlog
0
0
5
1
Cumulative
Dept. 2
backlog
0
0
5
6
6*
Although Dept. 1 averaged 45 units per hour, it was late getting six units to Dept. 2 in
the last two hours. Since the robot was constrained to 45 units per hour, it could not
34. $16,700; at the EOQ, the total annual carrying costs will equal the total annual
costs are equal.
35. Storage
$0.240
Handling
Insurance
Opportunity cost ($6.80 × 0.08)
Carrying cost
0.280
0.440
0.544
$1.504
(Production labor cost is omitted.)