《ACCA考试之财务管理 FINANCIAL MANAGEMENT》课件PPT 5 Managing working capital

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1.1 The basic EOQ formula
Key term
The economic order quantity (EOQ) is the optimal ordering quantity for an item of inventory which will minimize costs (order set-up + holding costs). Let D = usage in unit for one period (the demand)
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1 Managing inventory
Fast forward
An economic order quantity can be calculated as a guide to minimizing costs in managing inventory level. Bulks discounts can however mean that a different order quantity minimizing inventory costs.
I * Q* U 2
2Co D U CH
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1.3 Uncertainties in demand and lead times: a re-order level system
Fast forward
Uncertainties in demand and lead times taken to fulfill orders mean that inventory will be ordered once it reaches a re-order level Re-order level = maximum usage × maximum lead time
inventory).
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Economic order quantity (EOQ) model
Pattern of stock levels
stock
Order quantity
Buffer stock
0
time
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Inventory costs
Holding costs
Procuring costs Shortage costs
C0 = cost of placing one order CH = holding cost per unit of inventory for one period Q = re-order quantity
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Economic order quantity (EOQ) model
Pattern of stock levels
order point (OP) Lead time Daily usage Re order level max imum usaage max imum lead time
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1.3 Uncertainties in demand and lead times: a re-order level system
The ordering costs per order are assumed to be constant regardless of the sizes of order. The total ordering cost for a period is simply the cost per order times the number of orders for that period.
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1 Managing inventory
The scientific control of inventories may be analysed into three parts:
The economic order quantity (EOQ) model can be used to decide the optimum order size for inventories which will minimising the costs of ordering inventories plus inventory holding costs . If discounts for bulk purchases are available, it may be cheaper to buy inventories in large order sizes so as to obtain the discounts Uncertainty in demand for inventories and/or the supply lead time may lead a company to decide to hold buffer inventories in order to reduce or eliminate the risk of ‘stock-out’ (running out of
stock
Order quantity
0
time
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1.1 The basic EOQ formula
Assume that demand is constant, the lead time is constant or zero and purchase costs per unit are constant (i.e. no bulk discount)
The re-order level is the measure of inventory at which a replenishment order should be made.
If an order is replaced too late, the organization may run out of inventory, a stock-out, resulting in a loss of sales and/or a loss or production. If an order is placed too soon, the organization will hold too much inventory, and inventory holding costs will be excessive. Use of a re-order level builds in a measure of safety inventory and minimizes the risk of the organization running out of inventory. This is particularly important when the volume of demand or the supply lead time are uncertain.
Holding
cos t
CH
Q 2
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1.1 The basic EOQ formula
பைடு நூலகம்
The total costs of inventory
total
inventory
cos t
C0
D Q
CH
Q 2
Optimal order quantity – the optimal quantity of an inventory item to order at any one time is that quantity,
Q* that minimizes total inventory costs over our planning period.
Q*
2 D C0 CH
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1.1 The basic EOQ formula
The optimal numbers of oders for a period
N* D Q*
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Exam guide
Questions in this area are likely to be a mixture of calculations and discussion as in Pilot Paper question 3 which involves a typical evaluation of a change in credit policy and an explanation of the key area of accounts receivable management.
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1.3 Uncertainties in demand and lead times: a re-order level system
Key terms
Lead-time is the time between placing an order and delivery of the goods Order point – the quantity to which inventory must fall in order to signal that an order must be placed to replenish an item.
Paper F9 Financial Management
Accounting School
1
Chapter 5
Managing working capital
2
Topic list
Managing inventories Managing accounts receivable Managing accounts payable
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1.1 The basic EOQ formula
Assume that demand is constant, the lead time is constant or zero and purchase costs per unit are constant (i.e. no bulk discount and buffer inventory)
If usage of an inventory item is at a steady rate over a period of time and there is no safety stock, and inventory (in units) can be expressed as
Q Average inventory
holding cost per unit of inventory CH, are also assumed to be constant per unit of the inventory, per period of time. Thus the total holding cost for period is the holding cost per unit times the average number of units of inventory for the period.
D
2 D Co
CH
DCH 2Co
The total costs of inventory in relation to EOQ
TC(Q*) 2DC0CH
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1.1 The basic EOQ formula
The inventory cycle
t* 12 N*
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DCH 2Co
The funds tied up in EOQ
D ordering cos ts C0 Q
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1.1 The basic EOQ formula
Assume that demand is constant, the lead time is constant or zero and purchase costs per unit are constant (i.e. no bulk discount and buffer inventory)
Cost of inventory
The cost of capital Ware housing and handling costs Deterioration Obsolescence Insurance Pilferage Ordering costs Delivery costs Contribution from lost sales Extra cost of emergency inventory Cost of lost production and sales in a inventory Relevant particularly when calculating discounts