Describe the benefits of holding the following: a. Raw materials inventories b.

Question

Describe the benefits of holding the following:

                a. Raw materials inventories

                b. Work-in process inventories

                c. Finished goods inventories

14. Describe the components of carrying costs.

16. Describe the nature of stockout costs associated with a stockout in the following:

                a. Raw materials inventories

                b. work-in-process inventories

                c. Finished goods inventories

21. Define the following terms:

                a. Stockout

                b. Deterministic inventory control models

                c. Probabilistic inventory control models

                d. Safety Stock

                e. Lead time

Explanation / Answer

1)

a)Raw materials inventory is the total cost of all component parts currently in stock that have not yet been used in work-in-process or finished goods production.

Raw materials may sometimes be declared obsolete, possibly because they are no longer used in company products, or because they have degraded while in storage, and so can no longer be used. If so, they are typically charged directly to the cost of goods sold, with an offsetting credit to the raw materials inventory account.

b)

Companies must determine what commonly accepting inventory valuation method to use when accounting for inventory at various stages. The two most common methods are FIFO and LIFO. FIFO is first-in, first-out and LIFO is last-in, first-out. The names signify the order in which inventory used or sold is accounted for. In the case of work-in-process, FIFO use means that materials used in production are valuated using the materials received first. LIFO use means materials received most recently are counted as first used. Both have advantages, although LIFO is increasingly popular because it reduces the immediate tax burden during normal periods of inflation.

One of the more challenging elements of the inventory valuation process is accounting for the changes that take place from the work-in-process stage to the finished goods stage. Although companies use a few different approaches, the general intent is to add additional materials and labor costs to the already accounted for work-in-process valuation to equal the final value of the finished goods.

c)

Inventory control is a strategy companies use to keep an appropriate level of materials, supplies and finished products on hand. Excessive amounts of inventory have advantages and disadvantages for a business, which makes inventory control a delicate balancing act. Weighing the pros and cons can help small business owners determine the appropriate levels of inventory to stock.

When a company holds a high level of inventory, it ties up business funds that the company could use in other areas such as research and development or marketing. New product development and marketing can bring additional business to the company, but holding high inventory levels does not. The cost of the inventory is not recouped by the organization until the company sells the inventory or uses it to build customer orders.

14)

The cost of carrying inventory is used to help companies determine how much profit can be made on current inventory. The cost is what a business will incur over a certain period of time, to hold and store its inventory. The carrying cost of inventory is often described as a percentage of the inventory value. This percentage can include taxes, employee costs, depreciation, insurance, and the cost of insuring and replacing items. There are four main components to the carrying cost of inventory; capital cost, storage space cost, inventory service cost, and inventory risk cost.

21)

A stockout, or out-of-stock (OOS) event is an event that causes inventory to be exhausted. While out-of-stocks can occur along the entire supply chain, the most visible kind are retail out-of-stocks in the fast moving consumer goods industry (e.g., sweets, diapers, fruits).

Method based on the assumption that all parameters and variable associated with an inventory are known or can be computed with certainty, and that the replenishment lead time is constant and independent of the demand.

Method based on the assumption that the average demand for inventory items is reasonably constant over time. And, therefore, it is possible to describe the probability distribution of the demand, specially during replenishment lead time. Also called stochastic inventory control.

Safety stock (also called buffer stock) is a term used by logisticians to describe a level of extra stock that is maintained to mitigate risk of stockouts (shortfall in raw material or packaging) due to uncertainties in supply and demand.

A lead time is the latency (delay) between the initiation and execution of a process. For example, the lead time between the placement of an order and delivery of a new car from a manufacturer may be anywhere from 2 weeks to 6 months. In industry, lead time reduction is an important part of lean manufacturing.

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