MANAGEMENT AND COST ACCOUNTING SIXTH EDITION COLIN DRURY

MANAGEMENT AND COST ACCOUNTING SIXTH EDITION COLIN DRURY Management and Cost Accounting, 6 th edition, ISBN 1 -84480 -028 -8 © 2004 Colin Drury

Part Six: The application of quantitative methods to management accounting Chapter Twenty-five: Quantitative models for the planning and control of stocks Management and Cost Accounting, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

25. 1 PLANNING AND CONTROL OF STOCKS 1. Reasons for holding stocks • Transaction motive • Precautionary motive • Speculative motive 2. Relevant costs required for determining EOQ • Holding costs • Ordering costs 3. Holding costs • Opportunity cost of investment in stocks • I ncremental insurance costs • Incremental warehouse and storage costs • Incremental material handling costs • Costs of deterioration and obsolete stocks 4. Ordering costs • Incremental clerical costs of preparing a purchase order, receiving deliveries and paying invoices. Management and Cost Accounting, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

25. 2 Determining the EOQ Management and Cost Accounting, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

25. 3 Economic order quantity graph Management and Cost Accounting, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

25. 4 a EOQ formula Management and Cost Accounting, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

25. 4 b Determining the length of a production run Management and Cost Accounting, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

25. 5 Quantity discounts Management and Cost Accounting, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

25. 6 a Determining when to place the order 1. Assume: EOQ = 600 units; Lead time = 2 wks; Usage per wk = 120 units 2. Re-order point = 2 weeks × 120 units = 240 units. With an EOQ of 600 units orders will be placed at five-weekly intervals. Management and Cost Accounting, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

25. 6 b Uncertain demand 1. If weekly demand exceeds 120 units there will be a stockout. 2. Therefore safety stocks are maintained and re-order point is: (Average usage during average lead time) + (Safety stocks) Management and Cost Accounting, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

25. 6 c Uncertain demand contd. Management and Cost Accounting, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury