C H A P T E R

1
6

• C H A P T E R

Traditional Cost Management
2
Learning Objective 1

• Outline the different cost flow patterns in
  manufacturing, merchandising, and service
  organizations and understand how these costs are
  reflected in the income statement and balance
  sheet.

3
What are Cost Flow Patterns of Manufacturing,
Merchandising, and Service Organizations?
Work-in-Process Services
4
Learning Objective 2

• Interpret a cost of goods manufactured schedule
  and analyze the levels of raw materials, work-in-
  process, and finished goods inventories in a
  manufacturing organization.

5
Cost of Goods Manufactured Schedule

• Shows specific costs incurred to manufacture
  goods.
• Provides calculations that support flow of costs.
• Total costs of goods manufactured should include
  only those costs that have gone through
  work-in-process during the period.
• Underapplied MOH is subtracted from actual MOH
  costs. Overapplied MOH is added to actual MOH
  costs.
• Cost of goods available for sale beginning
  finished goods inventory (adjusted for over- or
  underapplied MOH) total cost of goods
  manufactured.

6
Analyzing COGS

• COGS is not useful for internal decision making.
• Management wants to determine cost of goods
  manufactured
• on a product-by-product basis
• on a department-by-department basis
• on a period-by-period basis.
• Other criteria examined besides cost
• product quality.
• speed of production.

7
Learning Objective 3

• Understand how merchants manage cost information
  in their organization.

8
Inventory Management Issues

• Carrying Too Much Inventory
• Increased overhead costs
• Increased financial holding costs
• Increased risk of loss of market value
• Decreased inventory flexibility
• Increased inventory shrinkage

• Carrying Too Little Inventory
• Increased risk of lost sales
• Increased ordering costs
• Increased risk of supplier price increases
• Increased exposure to nondelivery
• Decreased bulk order discounts

9
Return on Investment

• It is just as important to manage the money
  outflow for asset investment as it is to manage
  the money inflow from profits.
• Good management accounting can provide real value
  in the management effort to improve a
  merchandising operation.

10
Define Net Operating Profit
The difference between normal business sales and
normal business expenses.
11
Learning Objective 4

• Measure profitability and personnel utilization
  in a service organization.

12
Describe the Characteristics of Service
Organizations
13
What Two Concepts Are Used to Develop Cost
Management Evaluation Tools for Service
Organizations?

1. Profitability
2. Efficiency

- While management of materials inventories,
equipment, and building space are important in a
service organization, where must the emphasis be
placed?
- Management of the people and their related cost
to obtain the most efficient use of this critical
resource.
14
What is the Formula for Profit Percentage from
Professionals (PPP)?
What is a Personnel Utilization Report (PUR)?
15
Learning Objective 5

• Calculate and interpret holding costs in
  merchandising and service businesses.

16
Match These Terms with Their Correct Formula or
Definition
17
Match These Terms with Their Correct Formula or
Definition
18
Define Segment and Economic Value Added
Segment
Economic Value Added
19
Expanded MaterialLearning Objective 6

• Use classic quantitative tools in inventory
  management (economic order quantity, reorder
  point, and safety stock).

20
Economic Order Quantity

• What must firms balance?

EOQ attempts to answer what questions? How much
inventory should we order? When do we place the
inventory order?
21
Calculating EOQ
How much inventory should we order? What is the
formula for EOQ? What do the terms mean?
Q The market demand in units for the
period P The overhead cost of placing one
order C The total carrying cost for one unit
for the period
22
Reorder Point
When do we place the inventory order? What is the
formula?
Define Lead Time time lag between initiating a
purchase order and when inventory is delivered
and ready for sale.
23
Safety Stock
Why does a business want to hold safety stock?

• Because a surge in customer demand or problems in
  order processing or shipping may cause
  fulfillment problems, a manager may see the need
  for a little cushion in reorder point.

• Safety stock calculation has two parts
• To handle possible problems in the reorder
  process.
• To handle an unexpected spike in sales demand.

24
Define Safety Stock

• The minimal level of inventory required to ensure
  against the organization running out of inventory
  in the case of unforeseen problems in receiving
  its next purchase order.

Reorder point
(Average lead time in days x Average daily
sales) Safety stock
Combining the two calculations is acceptable,
assuming management is not interested in knowing
the specific level for safety stock. However,
management usually wants to know when sales are
eating into the safety stock.
25
EOQ, Reorder Points, and Safety Stock Inventory
Levels
Inventory (Units)
Reorder Point with Safety Stock
EOQ
Reorder Point
Safety Stock
0 units
3 days
6 days
9 days
12 days
Average Lead Time (3 days)