management accounting fundamentals - amazon s3s3.amazonaws.com/zanran_storage/ module 9 relevant...

1

Module 9

Relevant costs for decision

making and inventory

management

Lectures and handouts by:

Shirley Mauger, MBA, HB Comm, CGA

Management Accounting

Fundamentals

2

Module 9 - Table of Contents

9.1 Cost concepts for decision making

9.2 Adding and dropping product lines

9.3 The make or buy decision

9.4 Computer illustration 9.4-1: Relevant costs

9.5 Special orders

9.6 Utilization of a constrained resource

9.7 Joint product costs and the contribution approach

9.8 Economic order quantity (EOQ) and the reorder point

Review question: Relevant cost analysis

Review question: Retain or drop a department, make or buy

decision

Review question: Economic order quantity and safety stock

Review question: Multiple choice questions

1

2

3

N/A

3

4

5

6

7

8

9

10

Part Content

3

Part 1

Cost concepts for decision making

Topic 9.1

MA1 – MODULE 9

2

Part 1 – Cost concepts for decision making (Topic 9.1)

Identify sunk costs and explain why they are not relevant in decision making based on a general rule for distinguishing between relevant and irrelevant costs. (Level 1)

4

Decision

Making

Formulating long-

and short-term plans

(Planning)

Measuring

performance

(Controlling)

Implementing

plans (Directing

and Motivating)

Comparing actual

to planned

performance

(Controlling)

Garrison, Noreen, Chesley, Carroll, Managerial Accounting, 6th Canadian edition, 2004 p. 6


Short term decisions

• Adding and dropping product lines or segments

• Make or buy

• Special orders

• Utilization of a constrained resource

• Sell or process further

5P 563


Short term decisions

Relevant costs Irrelevant costs

A cost that differs between

alternatives.

A cost that can be ignored

in the analysis.

• Adding and dropping product lines or segments

• Make or buy

• Special orders

• Utilization of a constrained resource

• Sell or process further

6p 563-568

3


Sunk cost

Opportunity cost

Future costs that don’t differ between alternatives

Relevant Irrelevant

Different costs for different purposes

Whether a cost is relevant or irrelevant depends on

the circumstances.

Avoidable/differential cost

7p 563-568


Can be eliminated in whole or in part by

choosing one alternative over another.

• Department manager’s salary if the department is eliminated.

• Savings in direct materials cost because of the purchase of a

new machine.

Relevant IrrelevantAvoidable/differential cost

Sunk cost

Opportunity cost


8p 563-568


Any cost in the future that will occur no

matter which alternative is chosen

• Lease cost on the building which will continue to be

used whether or not the new equipment is installed.

• Maintenance cost of existing equipment that will be

kept whether or not the new product line is

manufactured.

Relevant Irrelevant

Sunk cost

Opportunity cost



9p 563-568

4


Any cost that has already been incurred and

cannot be changed

• Money that a corporation spent last year to

investigate the site for a new office, expensed those

funds and now is deciding whether or not to go

forward with the project.

• Book value of old equipment that cannot be resold.

Relevant Irrelevant

Sunk cost

Opportunity cost



10p 563-568


The potential benefit foregone when one

alternative is chosen over another

• Revenue lost because the retail outlet closes early on

the weekends.

• Potential loss of investment income due to stockpiling

inventory.

• Seldom recognized on financial reports.

Relevant Irrelevant

Sunk cost

Opportunity cost



11p 563-568

12

Part 2

Adding and dropping product lines

Topic 9.2

MA1 – MODULE 9

5

Part 2 – Adding and dropping product lines (Topic 9.2)

Prepare an analysis showing whether a product line or other organizational segment should be dropped or retained. (Level 1)

Adding and dropping product lines

Two approaches to the cost analysis:

1. Compare all costs

2. Compare only differential costs

(those that differ between alternatives)

13p 569-572


First classify the costs: Relevant/

Irrelevant

Variable costs R

Depreciation on van I

Liability insurance R

Program administrators’ salary R

General administrative overhead I

14

Cumberland County Senior Services

Exercise 12-2, page 597

Stop the audio, turn to exercise 12-2, page 597

and the handout, page 1 then come back to listen

to the solution. p 569-572




to the solution.


Irrelevant

Variable costs R

Depreciation on van I

Liability insurance R

Program administrators’ salary R

General administrative overhead I



15p 569-572

6


Current

Total

House-keeping

Dropped Difference

Revenues $900,000 $660,000 $(240,000)

Less variable expenses 490,000 330,000 160,000

Contribution margin 410,000 330,000 (80,000)

Variable costs are avoidable


16



p 569-572


Current

Total

House-keeping

Dropped Difference

Revenues $900,000 $660,000 $(240,000)



Less fixed expenses:

Depreciation 68,000 68,000 0

Liability insurance 42,000 27,000 15,000

Depreciation is based on the van which is a sunk cost.Liability insurance is an

avoidable cost.


17



p 569-572


Current

Total

House-keeping

Dropped Difference

Revenues $900,000 $660,000 $(240,000)






Program admin. salaries 115,000 78,000 37,000

General administrative

overhead 180,000 180,000 0

Total fixed expenses 405,000 353,000 52,000

Net operating income/loss $ 5,000 $(23,000) $ (28,000)

Cost of administrator’s salary is avoidable.

General administrative overhead is not avoidable.


18



p 569-572

7




Current

Total

House-keeping

Dropped Difference

Revenues $900,000 $660,000 $(240,000)








overhead 180,000 180,000 0



If the housekeeping service is dropped, net income will be reduced by $28,000.


19p 569-572




Current

Total

House-keeping

Dropped Difference

Revenues $900,000 $660,000 $(240,000)








overhead 180,000 180,000 0




Compare lost contribution margin to costs that can be avoided.

(Relevant costs)

20p 569-572




2. Compare differential costs

Difference

Contribution margin lost if housekeeping is dropped (80,000)

Less fixed costs that can be avoided

Liability insurance 15,000

Program admin. salaries 37,000

Total traceable fixed expenses 52,000

Net annual cost increase $ (28,000)

Ignoring the irrelevant costs, will give the same answer.

21p 569-572

8


22

Segmented statements –

module 8

= Contribution margin

Sales

(Variable costs)

(Traceable fixed costs)

= Segment margin

Corporate wide income

Segment reporting format

= Net income

(Common costs)


Total

Home

Nursing

Meals on

Wheels

House-

keeping

Revenues $900,000 $260,000 $400,000 $240,000

Less variable expenses 490,000 120,000 210,000 160,000

Contribution margin 410,000 140,000 190,000 80,000

Deduct variable expenses.Housekeeping has a 33%

contribution margin. ($80,000/$240,000)

23


Exercise 12-2, page 597, req. 2

p 569-572


Deduct fixed costs that can be traced to the department.

Total

Home

Nursing

Meals on

Wheels

House-

keeping

Revenues $900,000 $260,000 $400,000 $240,000



Less traceable fixed expenses:

Depreciation 68,000 8,000 40,000 20,000

Liability insurance 42,000 20,000 7,000 15,000

Program administrators’

salaries 115,000 40,000 38,000 37,000

Total traceable fixed

expenses 225,000 68,000 85,000 72,000

Program segment margins $185,000 $ 72,000 $105,000 $ 8,000

24



p 569-572

9

25


Total

Home

Nursing

Meals on

Wheels

House-

keeping

Revenues $900,000 $260,000 $400,000 $240,000



Less traceable fixed expenses:

Depreciation 68,000 8,000 40,000 20,000

Liability insurance 42,000 20,000 7,000 15,000

Program administrators’

salaries 115,000 40,000 38,000 37,000

Total traceable fixed

expenses 225,000 68,000 85,000 72,000

Program segment margins 185,000 $ 72,000 $105,000 $ 8,000


overhead 180,000

Net operating income/loss $ 5,000



p 569-572

Deduct common costs from the

corporate wide total.


Qualitative factors to consider:

• Is the line necessary to the sale of other products?

• Does the line serve as a ‘magnet’ to attract customers?

26p 569-572

27

Part 3

The make or buy decision

Special orders

Topics 9.3 & 9.5

MA1 – MODULE 9

10

Part 3 – The make or buy decision (Topic 9.3)

Explain what is meant by a make or buy decision and prepare a make or buy analysis. (Level 1)

• Vertical integration:

• When a company is involved in the production of

more than one or more steps in the production and

distribution of the product. (value chain)

• Make or buy decision:

• Decision as to whether a product should be made

internally or purchased from an outside supplier.

Product Customer

R&D Design Manufacturing Marketing Distribution Service

© McGraw-Hill Ryerson Limited., 2009

Common steps in an organization’s value chain.

28p 572-576


• Advantages of integration:

• Less dependence on suppliers.

• Smoother flow of parts and materials.

• More control over quality.

• Disadvantages of integration

• Suppliers may be able to benefit from economies of

scale resulting in higher quality and lower cost.

• Contact with suppliers may be necessary if there is an

emergency and parts cannot be produced in-house.

Product Customer

R&D Design Manufacturing Marketing Distribution Service

© McGraw-Hill Ryerson Limited., 200429

p 572-576



and the handout, page 2, then come back to

listen to the solution.


Irrelevant

Direct materials R

Direct labour R

Variable manufacturing OH R

Fixed manufacturing OH salaries R

Fixed manufacturing OH equipment I

Fixed manufacturing OH common I

Cost of component from outside supplier R

Climate Control Inc.

Exercise 12-3, page 598 – requirement 1

30p 572-576

11


Per unit Total-15,000 units

Make Buy Make Buy

Direct materials $6

Direct labour 8

Variable manufacturing OH 1

Fixed manufacturing salaries 2

Fixed manufacturing OH equipment --

Fixed manufacturing OH common --

TOTAL $17

Exclude irrelevant costs.

31



p 572-576



Make Buy Make Buy

Direct materials $6

Direct labour 8

Variable manufacturing OH 1

Fixed manufacturing salaries 2



Purchase price of components $20

TOTAL $17 $20

It will cost $3 per unit more to purchase the

thermostats.

32



p 572-576



Make Buy Make Buy

Direct materials $6 $ 90,000

Direct labour 8 120,000

Variable manufacturing OH 1 15,000

Fixed manufacturing salaries 2 30,000



Purchase price of components $20 $300,000

TOTAL $17 $20$255,000 $300,000

A total difference of $45,000.

33



p 572-576

12



Irrelevant

Opportunity cost: segment margin

foregone on a new product line R

34



p 572-576


Total-15,000 units

Make Buy

Cost of making the part 255,000

Purchase price of components $300,000

Segment margin foregone 65,000

TOTAL $320,000 $300,000

A difference of $20,000 in favor of buying the new thermostat and

implementing the new product line.

35



p 572-576

Part 3 – Special orders (Topic 9.5)

Prepare an analysis showing whether a special order should be accepted. (Level 1)

Special order

• One-time order that is not considered part of the

company’s normal ongoing business.

• Only incremental costs are considered.

• Should not affect normal sales.

• Idle capacity should be available.

36p 577-578

13

Stop the audio, turn to exercise 12-4, page 598,


to the solution.


Irrelevant

Materials R

Direct labour R

Fixed manufacturing OH I


Additional materials (for filigree) R

Cost of special tool R

Miyamoto Jewellers



37p 577-578


Irrelevant

Materials R

Direct labour R

Fixed manufacturing OH I


Additional materials (for filigree) R

Cost of special tool R

Miyamoto Jewellers



38p 577-578

Per bracelet 10 bracelets

Incremental revenue ($349.95 x 10) $349.95 $3,499.50

Incremental cost

Variable costs:

Total variable cost

Fixed costs:

Total incremental cost

Incremental operating income


39

Miyamoto Jewellers


p 577-578

14



Incremental cost

Variable costs:

Materials 143.00 1,430,00

Direct labour 86.00 860.00

Variable manufacturing OH 7.00 70.00

Additional materials (for filigree) 6.00 60.00

Total variable cost $242.00 $2,420.00

Fixed costs:

Total incremental cost

Incremental operating income


40

Miyamoto Jewellers


p 577-578



Incremental cost

Variable costs:

Materials 143.00 1,430,00

Direct labour 86.00 860.00

Variable manufacturing OH 7.00 70.00

Additional materials (for filigree) 6.00 60.00

Total variable cost $242.00 $2,420.00

Fixed costs:

Fixed manufacturing OH -

Cost of special tool 465.00

Total incremental cost $2,885.00

Incremental operating income $ 614.50

Part 3 – Special orders (Topic 9.5)The special order adds $614,50 to the company’s net operating income and

should be accepted.

41

Miyamoto Jewellers


p 577-578

42

Part 4

Utilization of a constrained resource

Topic 9.6

MA1 – MODULE 9

15

Part 4 – Utilization of a constrained resource (Topic 9.6)

Determine the most profitable utilization of scarce resources. (Level 1)

Constraint

• A limitation under which a company must operate that

restricts its ability to satisfy demand.

• i.e. – a machine already operating 24/7 cannot

produce any more units.

• When this constraint is narrowly focused it’s called a

bottleneck.

• How can a company maximize its profits under these

conditions?

• Focus on maximizing total contribution margin.

43p 581-584

Product

A B C

Selling price $60 $90 $80

Less variable costs:

Direct materials 27 14 40

Direct labour 12 32 16

Variable manufacturing OH 3 8 4

Total variable cost 42 54 60

Contribution margin $18 $36 $20




Banner Company

Exercise 12-5 page 598 – requirement 1


Maximize contribution margin when there is a constraint on direct labour: 3,000 hours at $8 per hour

44p 581-584


Product

A B C








Amount of direct labour hours required 1.5 4.0 2.0

Direct labour cost per unit/$8Product A: $12/$8=1.5 hoursProduct B: $32/$8=4.0 hoursProduct C: $16$/8=2.0 hours

45

Banner Company


p 581-584

16


Product

A B C









Contribution margin per direct labour hour $12 $9 $10

Contribution margin per direct labour hourProduct A: $18/1.5= $12/hourProduct B: $36/4.0= $9/hourProduct C: $20/2.0= $10/hour

46

Banner Company


p 581-584


Product

A B C








Contribution margin ratio 30% 40% 25%



Times 3,000 direct labour hours available 3,000 3,000 3,000

Total contribution margin $36,000 $27,000 $30,000

Focus production on product A.

47

Banner Company


p 581-584


How much would you be willing to pay to relax a constraint?

Not more than the additional contribution margin will generate.

Utilizing constraints

• Focus on the constraint by relaxing (or elevating) it.

• Add more hours by paying overtime.

• Add another machine.

• Subcontract bottleneck processing.

• Move shift workers from a non-bottleneck process.

• Perform business process reengineering or total

quality management techniques on the bottleneck

process.

• Reduce defective units.

48p 581-584

17


Product

A B C


Amount of direct labour hours required 1.5 4 2




Up to how much should the company be willing to pay per hour in overtime wages if 3,000 additional hours are made available?

49

Banner Company


p 581-584


Product

A B C






Contribution margin per direct labour hour $12

Current direct labour rate 8

Maximum overtime rate: $20

They would be willing to pay an additional $12 per hour or $20 in total in overtime pay to produce Product A.

50

Banner Company


p 581-584


Product

A B C







Current direct labour rate 8 8 8

Maximum overtime rate: $20 $17 $18

They would be willing to spend up to $17 in overtime pay for product B and up to $18 in overtime for product C.

51

Banner Company


p 581-584

18

52

Part 5

Joint product costs and the contribution

approach

Topic 9.7

MA1 – MODULE 9

Part 5 – Joint product costs and the contribution

approach (Topic 9.7)Prepare an analysis showing whether joint products should be sold at the split-off point or processed further. (Level 1)

Raw

milk Purchasing

and

separating

Joint product

costs

Split-off

pointJoint

products

Skim

Cream

53p 579-581



How are the costs of the raw

milk and the further processing

allocated to cream and liquid

milk?

1. Based on relative sales

value.

2. Based on physical measure.

Raw

milk

Joint product

costs

Split-off

pointJoint

products

Skim

$22,000

30,000

litres

Cream

$28,000

10,000

litresPurchasing

and

separating

$30,000

Sales value

Stop the audio, turn to the

handout, page 5, then come

back to listen to the solution.

54p 579-581

19



Based on relative sales value Cream Skim Total

Sales value $28,000 $22,000 $50,000

% of total 56% 44% 100%

Allocate $30,000 processing costs $16,800 $13,200 $30,000

Contribution margin $11,200 $8,800 $20,000

55p 579-581



Based on relative sales value Cream Skim Total

Sales value $28,000 $22,000 $50,000

% of total 56% 44% 100%


Contribution margin $11,200 $8,800 $20,000

Based on physical measure

Litres 10,000 30,000 40,000

% of total 25% 75% 100%


Contribution margin $20,500 ($500) $20,000

56p 579-581



Raw

milk Purchasing

and

separating

Manu-

facture

ice

cream

Pasteurize

homo-

genize

and bottle

Packaged

skim milk

Ice

cream

Joint product

costs Separate product costs

Split-off

pointJoint

products

Skim

Cream

57p 579-581

20



Raw

milk Purchasing

and

separating

Manu-

facture

ice

cream

Pasteurize

homo-

genize

and bottle

Packaged

skim milk

Ice

cream

Joint

products

Skim

Cream

Sell or process further decision.

58p 579-581


approach (Topic 9.7)

Input

Stop the audio, turn to exercise 12-6 page 599,



Solex Company


59p 579-581



Input

X

$50,000

Processing

$100,000Y

$90,000

Z

$60,000

Split-off

pointJoint

products

Joint product

costs

60

Solex Company


p 579-581

21



Input

Additional

processing

$35,000

New

product X

$80,000X

$50,000

Additional

processing

$40,000

Processing

$100,000Y

$90,000

Z

$60,000

New

product Y

$150,000

New

product Z

$75,000

Additional

processing

$12,000

Joint product

costs

Split-off

pointJoint

products

Separate

product costs

61

Solex Company


p 579-581



Input

Additional

processing

$35,000

New

product X

$80,000X

$50,000

Additional

processing

$40,000

Processing

$100,000Y

$90,000

Z

$60,000

New

product Y

$150,000

New

product Z

$75,000

Additional

processing

$12,000

Joint product

costs

Split-off

pointJoint

products

Separate

product costs

62

Solex Company


p 579-581

Classify the costs: Relevant/

Irrelevant

Joint processing costs I

Further processing costs R



63

Solex Company


p 579-581

22

Product

X Y Z

Sales value after further processing $80,000 $150,000 $75,000

Sales value at split-off point 50,000 90,000 60,000

Incremental revenue 30,000 60,000 15,000

Cost of further processing

Incremental profit/loss



64

Solex Company


p 579-581

Product

X Y Z

Sales value after further processing $80,000 $150,000 $75,000

Sales value at split-off point 50,000 90,000 60,000

Incremental revenue 30,000 60,000 15,000

Cost of further processing 35,000 40,000 12,000

Incremental profit/loss ($5,000) $20,000 $3,000

Sell product X at split-off and process product Y and Z further.



65

Solex Company


p 579-581



Input

X

ProcessingY

Z

By-products:Joint product with a

relatively low sales value.

(wood chips, molasses)

Joint product

costs

Split-off

point

Joint

products

W

66

23

67

Part 6

Economic order quantity (EOQ) and the reorder

point

Topic 9.8

MA1 – MODULE 9

Part 6 – Economic order quantity (EOQ) and the reorder

point (Topic 9.8)Compute the optimum inventory level and order size. (Level 1)

Inventory Costs

• Ordering cost

• Clerical costs

• Transportation costs

• Carrying cost

• Storage space costs

• Handling costs

• Property taxes

• Insurance

• Obsolescence losses

• Interest on capital invested in inventory

68Reading 9-1



Inventory Costs

• Ordering cost

• Clerical costs

• Transportation costs

• Carrying cost

• Storage space costs

• Handling costs

• Property taxes

• Insurance

• Obsolescence losses

• Interest on capital invested in inventory

• Costs of not carrying sufficient inventory (stock outs)

• Customer ill will

• Quantity discounts forgone

• Erratic production

• Inefficiency of production runs

• Added transportation charges

• Lost sales 69Reading 9-1

24



Inventory Control

• ABC analysis

• Break inventory items into three categories based on

value. Control is focused on ‘A’ items which have the

highest value and are usually the smallest in number.

• Economic order quantity

• Determining an order size that minimizes costs of

ordering and carrying inventory.

70Reading 9-1


point (Topic 9.8)

Economic order quantity

Annual carrying cost: C

Total cost

Annual ordering cost: P

Exhibit 13-9, Reading 9-1, CGA lesson notes, module 971

Reading 9-1


point (Topic 9.8)

Economic order quantity

EOQ – Total cost is minimized

(reading 9-1 page 2)

Exhibit 13-9, Reading 9-1, CGA lesson notes, module 972

Reading 9-1

25


point (Topic 9.8)

Economic order quantity formula

E = order size in units

Q = annual quantity used

in units

P = cost of placing an order

C = annual cost of carrying

one unit in stock

73Reading 9-1


point (Topic 9.8)

Economic order quantity formula

E = ?

Q = 3,000

P = $10

C = $.80

74Reading 9-1


point (Topic 9.8)

Total annual cost

E = order size in units

Q = annual quantity used in

units

P = cost of placing an order


one unit in stock

T = P(Q/E)+C(E/2)

Order cost Carrying cost

75Reading 9-1

26


point (Topic 9.8)

Total annual cost

T = P(Q/E)+C(E/2)

Order cost Carrying cost

T = P(Q/E) + C(E/2)=$10(3,000/274) + $.80*(274/2)= $109 + $110 = $219

76Reading 9-1


point (Topic 9.8)

Economic order quantity formula for production

O = optimal production lot

size

Q = annual production

quantity

P = setup costs for each run


one unit in stock

O

77Reading 9-1


point (Topic 9.8)

Bakerview products sells 24,000 units of the Deluxe-2M each

year. The inventory control manager is concerned about rising

costs and wants to determine the economic order quantity.

After doing some research, the manager has determined the

following costs:

• Cost to place an order $25

• Cost to carry one Deluxe-2M in inventory

for 1 year $2

What is the EOQ for the Deluxe-2M?

Stop the audio, turn to the handout, page 7,

then come back to listen to the solution.78

Reading 9-1

27


point (Topic 9.8)

What is the EOQ for the Deluxe-2M?





following costs:



for 1 year $2

= 775 units

per order

79Reading 9-1Handout, page 7


point (Topic 9.8)

What is the total annual cost for Deluxe-2M?





following costs:



for 1 year $2

T = P ( Q / E) + C( E / 2)

T=25(24,000/775) + 2(775/2)

T = $1,549 per year



point (Topic 9.8)

What will happen to EOQ if ordering costs increase to $35 per order?





following costs:



for 1 year $2

= 917 units

per order


28


point (Topic 9.8)

What will happen to EOQ if carrying costs increase to $2.50 per unit?





following costs:



for 1 year $2.50

= 693 units

per order



point (Topic 9.8)

As order costs increase, EOQ increases. The manager will want to order larger quantities

resulting in fewer orders

As carrying costs increase, EOQ decreases. The manager will want to order smaller quantities, resulting in less storage and

handling.

Summary of requirements

Order

cost

Annual

carrying

cost/unit

EOQ

Original costs $25 $2.00 775

Increased order costs $35 $2.00 917

Increased carrying costs $25 $2.50 693

83Reading 9-1


point (Topic 9.8)

JIT focuses on reducing the order cost

(P).

84Reading 9-1

29


point (Topic 9.8)

Reorder point• Time when an order is placed to replenish stock.

Lead time• Time between order and receipt of stock.

Safety stock• Additional units kept on hand to satisfy maximum demand that can be reasonably expected during the lead time.

= (lead time x average demand) + safety stock

85Reading 9-2


point (Topic 9.8)

Safety

stock

Time (weeks)

Inve

nto

ry(u

nits) Average

usage

EOQ

Adapted from Exhibit 13-10, Reading 9-2, CGA lesson notes, module 9

86Reading 9-2


point (Topic 9.8)

Safety

stock

Time (weeks)

Inve

nto

ry(u

nits) Average

usage

Maximum

expected

usage

EOQ


87Reading 9-2

30


point (Topic 9.8)

Safety

stock

Time (weeks)

Inve

nto

ry(u

nits)

Reorder

point

Average

usage

Maximum

expected

usage

Lead

time

EOQ


88Reading 9-2


point (Topic 9.8)

Aegean distributors, sells building materials throughout western Canada. The following information relates to a line of metal doors carried by the company:

Economic order quantity 650 unitsLead time 4 weeksAverage weekly usage 65 units

What is the reorder point? (assuming no safety stock)

= (lead time x average demand) + safety stock= ( 4 weeks x 65 ) + 0= 260 + 0 = 260 units

Stop the audio, turn to the handout, page 8,

then come back to listen to the solution.89

Reading 9-2


point (Topic 9.8)

Aegean distributors, sells building materials throughout western Canada. The following information relates to a line of metal doors carried by the company (Handout, page 8):

Economic order quantity 650 unitsLead time 4 weeksAverage weekly usage 65 unitsMaximum weekly usage 78 units

What is the reorder point? (with safety stock)

Safety stock is additional stock required to satisfy maximum demand during the lead time.

Maximum weekly usage 78 unitsAverage weekly usage 65 unitsSafety stock 13 unitsLead time x 4 weeksSafety stock 52 units

90Reading 9-2

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point (Topic 9.8)

Aegean distributors, sells building materials throughout western Canada. The following information relates to a line of metal doors carried by the company:

Economic order quantity 650 unitsLead time 4 weeksAverage weekly usage 65 unitsMaximum weekly usage 78 units

What is the reorder point? (with safety stock)

= (lead time x average demand) + safety stock= ( 4 weeks x 65 ) + 52= 260 + 52 = 312 units


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Part 7

Review question:

Relevant cost analysis

(download the additional questions handout:

ma1_mod9_handout1.pdf)

MA1 – MODULE 9

93

Problem 12-24 pages 607-608Handout pages 9 and 10

1. Would the increased fixed expenses be justified?

2. Compute the per unit break-even price on this order.

3. What unit cost figure is relevant for setting a minimum selling price?

4. What would be the impact on profits of closing the plant for the two-month period?

5. Compute the unit cost figure that is relevant for comparison to the quoted price.

Part 7 – Review question: Relevant cost analysis

Stop the audio, read and attempt the

question in the textbook then come back to


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95








96

Part 8

Review questions:

Retain or drop a department

Make or buy decision

Special order/make or buy(download the additional questions handout:


MA1 – MODULE 9

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97

Past CGA exam questionHandout page 11

Prepare an analysis to determine whether the shoe department should be dropped, and make a recommendation.

Part 8 – Review question: Retain or drop a department;

make or buy decision; special order


question in the handout then come back to


98

Past CGA exam questionHandout page 12

State whether Green’s should make or buy the game boards from the competitor.






99

Past CGA exam questionHandout pages 13 - 14

a. Should the government agency contract be accepted?

b. Should the contractor’s offer be accepted?






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100

Part 9

Review question:

EOQ and safety stock



MA1 – MODULE 9

101

Handout questionHandout pages 15 - 16

1. Compute the EOQ.

2. At 18% risk of a stock out what would be the safety stock? The reorder point?

3. At 6% risk of a stock out what would be the safety stock? The reorder point?

Part 9 – Review question: EOQ and safety stock




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Handout questionHandout pages 15 - 16

4. At a 6% stock out risk what would be the total cost of ordering and carrying inventory for one year?

5. a) Using a JIT purchasing policy compute the new EOQ.

b) How frequently would the company be placing an order?

Part 9 – Review question: EOQ and safety stock

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103

Part 10

Review questions:

Multiple Choice Questions



MA1 – MODULE 9

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Multiple choice questionsHandout pages 17 thru 19

Now working on page 17

Q1 What is the affect of the decision on EOQ?

Q2 If the division were discontinued how much would IPM’s income increase?

Q3 What is the EOQ for Popcorn Co?

Q4 Which would not be relevant to the closure decision?

Part 10 – Review questions: Multiple choice




105



Q5 What type of cost is machine amortization?

Q6 Which is not a relevant cost?

Q7 Which is the appropriate decision and related cost?


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Q8 How many units of the standard and deluxe models should be produced?

Q9 What should be considered when deciding whether to accept or reject the order?


management accounting fundamentals - amazon s3s3.amazonaws.com/zanran_storage/ module 9 relevant...

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