group presentation ch 20

8/6/2019 Group Presentation Ch 20

1/40

Accounts Receivable and

Inventory Management

Billy Leon P.|Hesty Oktariza | Neww


2/40

Accounts Receivable Management

Size of Investment in Accounts Receivable

Percent of Credit Sales to Total Sales

Level of SalesCredit and collection policies

Terms of Sale

Quality of CustomerCollection Efforts


3/40

Terms of Sale

Quoted as a/b net c , which means deducta% if paid within b days, otherwise pay

within c days.

Example: 3/30 net 60 means deduct 3% ifpaid within 30 days, otherwise pay the entire

amount within 60 days.

Chapter 20 : Accounts Receivable andInventory Management


4/40

Terms of Sale

Annualized opportunity cost of foregoing adiscount:

Opportunity cost of foregoing 3/30 net

60:= 37.11%



5/40

Type of customer

The costs associated with extending credit to

lower-quality customers include:

a. Increased costs of credit investigation

b. Increased probability of customer default

c. Increased collection costs



6/40

Credit scoring

The numerical credit evaluation of eachcandidate



7/40

Collection efforts

The key to maintaining control over the

collection of accounts receivable is the fact

that the probability of default increase with

the age of the account



8/40

One common way of evaluating th

e currentsituation is ratio analysis.

examining the average collection period

ratio of receivables to assets ratio of credit sales to receivables (accounts

receivable turnover ratio)

amount of bad debts relative to sales overtime

aging of accounts receivable schedule



9/40

Once delinquent accounts have beenidentified, the third and final variable is

determined by the firms collection policies. A

direct trade-off does exist between collection

expenses and lost goodwill on one hand and

non-collection of accounts on the other, and

this trade-off is always part of making thedecision.



10/40

Credit should be extended to the point thatmarginal profitability on additional sales

equals the required rate of return on the

additional costs we have to consider

investment in inventories + receivables +

change in cost of cash discount to generate

those sales.



11/40

INVENT

ORY MANAGEMENT


12/40


The purpose of

carrying inventoriesis to uncouple the

operations of the

firm.


Types ofInventory

RawMaterialsInventory

Work-In-Process

Inventory

FinishedGoods

Inventory

Stock ofCash


13/40

Trade-Off in Investment on Inventory

Too much inventory isexpensive and

wasteful.

Not enough inventorycan result in lost sales



14/40

Inventory Management Techniques

In order to effectively manage the investment in

inventory, there are two problems must be dealtwith:

a) Order Quantity Problem(how much to order)

b)Order Point Problem (how often to order)



15/40

a. Order Quantity Problem

The economiceconomic orderorder quantityquantity (EOQ)(EOQ) modelmodelattempts to determine the order size that will

minimize total inventory costs.



16/40

EEconomicconomic OOrderrder QuQuantityantity (EOQ)(EOQ) MModelodel

Determining Optimal Inventory (where totalcosts are minimized)


TotalOrderingCost

TotalCarryingCost

TotalInventoryCost


17/40

Inventory Cost

Carrying Costs Warehouse rent Insurance

Security costs

Utility costs

Maintenance costs

Property taxes

Move and re-arrange,obsolescence, and

Opportunity cost, i.e.,using cash for profitable

projects rather than

being tied up in inventory


Average

Inventory

Carrying Cost

per Unit

Q

2

Q

2C

Where :

Q = the inventory size (in unit)

C = Carrying cost per unit


18/40

TimeTime

OrderQuantity

Q

InventoryInventory

LevelLevel

(units)(units)

The EOQ Model assumes

the firm orders a fixed

amount (Q) at equal

intervals.



19/40

TimeTime

OrderQuantity

Q

InventoryInventory

LevelLevel

(units)(units)

The EOQ Model

Average inventory = Order Quantity2



20/40

Carrying CostsCarrying Costs

Order Size (units)Order Size (units)

CostCost($)($)

Carrying costs increase

as the size of the

inventory increases.

The EOQ Model



21/40

Inventory Cost

Ordering Costs Clerical expense

Telephone

Material Resource

Planning (MRP) system

Managementtime

Receiving cost


Number of

Orders

Ordering Cost

per order

S

Q

S

QO

Where :

Q = the inventory size (in unit)

S = total demand in units over

planning period


22/40


CostCost($)($) Ordering Costs,Ordering Costs,per unitper unit

Ordering costs per unitgo down as order size

increases. Assumes ordering

costs are relatively fixed.

The EOQ Model



23/40

TotalTotal Cost =Cost = QQ x Cx C ++ SS xx OO22 QQ


CostCost($)($)

Carrying Costs = ( )CQ2

= ( ) OSQ

Ordering CostsX

Y

The economic order quantity is the

intersection of the X and Y points where

total inventory cost is minimized

The EOQ Model



24/40

=Total InventoryCosts

( ) C + ( ) OQ2

SQ

Where:Where:Q = Order Size (order quantity)S = Annual Sales VolumeC = Carrying Cost per UnitO = Ordering Cost per Order

TotalOrdering

Cost

TotalCarrying

Cost

TotalInventory

Cost

Chapter 20 : Accounts Receivable and



25/40

The ordering quantity that minimizes thetotal costs of inventory.

Determining Optimal Inventory

Q* =2 SO

C

a. Order Quantity Problem (contd)




26/40


27/40

Basic Assumptions in EOQ

1. Constant or uniform demand.

2. Constant unit price regardless of amount ordered.

3. Constant carrying costs per unit.

4. Constant ordering costs per order regardless of the size

of the order.

5. Instantaneous delivery.

6. Independent orders.




28/40

b. Order Point Problem

Order PointOrder Point

The quantity to which inventory must fall in order to

signal that an order must be placed to replenish an

item.

How low inventory should be depleted before it is

reordered? When to order?



29/40

Safety Stock

Inventory held to accommodate any unsually

large and unexpected usage during deliverytime.

D

elivery Time StockThe inventory needed between the order date

and the receipt of the inventory needed.


b. Order Point Problem (contd)


30/40



Order new

inventory wh

en th

elevel of inventory

falls to this level

Safety stockDelivery-timestock

*Delivery-time stock = Delivery TimeDelivery Time X Daily usage


31/40

Average EOQ inventory 2= + safety stock




32/40

Inventory Management with Safety Stock- Order

EOQ

Depleted Stock

During Delivery

Inventory Order PointInventory Order Point

Actual Delivery Time

SafetyStock

TimeTime

InventoryInventory

LevelLevel

(units)(units)

20

50

70



33/40

Amount of uncertainty in inventory demand

Amount of uncertainty in the delivery time

Cost of running out of inventory

Cost of carrying inventory

DependsDepends on the:on the:

What is the proper amount of safety stock?What is the proper amount of safety stock?



34/40

Inflation and Relationship Between

EOQ Model

Anticipatory Buying

buying in anticipation of a price increase to

secure the goods at a lower cost

The Inflation Effect

inflation affects the EOQ model is through

increased carrying costs



35/40

Objectives

Determining Optimal Inventory to determine the order size that will minimize total

inventory costs.

where Q*= the optimal order quantity in unitsO = ordering cost per orderS = total demand in units over the planning

period

C = cost of carrying 1 unit in inventory

2SO

C

Q* =

Ch

apter 20 : Accounts Receivable andInventory Management


36/40

Example:

Lumber Autos expects to sell 1,560 new automobiles in the

next year. It currently costs $40 per order placed with the

manufacturer. Carrying costs amount to $50 per auto. How

many autos should they order each time they place an order?

=

= 49.96} 50 cars

2(1560)40502SO

CQ* =




37/40

Just-In-Time Inventory Control

JIT System is one link in Supply Chain Management(SCM)

JIT is an approach to inventory management and

control in which inventories are acquired andinserted in production at the exact times they are

needed

The objective of JIT System is to cut down theinventory at the minimum level, and the time and

physical distance between the various production

operations also minimized

How aboutJus

t-In-CaseSystem?




38/40

Total Quality Management (TQM)

What is TQM?

Why TQM are needed?

The Financial Consequences of Quality-TheTraditional View

The Financial Consequences of Quality- The

TQM View




39/40

The Financial Consequences of Quality-

The Traditional View

Preventive Cost

Cost resulting from design and production efforts on the part

of the firm to reduce or eliminate defects

Appraisal Cost

Cost of testing , measuring, and analyzing to safeguard against

possible defects going unnoticed

Internal Failure Cost

Cost associated with discovering poor-quality products prior to

delivery (reworking the product, downtime cost, discounts) External Failure Cost

Cost resulting from a poor-quality product reaching the

customers hand (warranty product, recall product, lost sales

cost)Chapter 20 : Accounts Receivable and



40/40

The Financial Consequences of Quality-

The TQM View

The TQM view argues that higher qualitywill result in increased sales and market share

In fact, by use TQM model it can dropmanufacturing cost significantly



group presentation ch 20

Documents