Question

COST ACCOUNTING

Companies can use the Economic Order Quantity (EOQ) method to maintain the existing inventory conditions within the company, especially to reduce the existing fixed costs that can arise from the purchase of goods using expedition services. For example, buying goods with Full Container Load (FCL) and Less Container Load (LCL), the LCL fixed cost will be greater because the goods purchased are small but the tariff for sending goods from the supplier to the factory requires no small cost, especially with shipping goods from abroad that will add costs until the terminology is formed in the practice of cost accounting is referred to as 'landing cost'. In maintaining the freshness of UHT milk, companies need to use good quality paper and can withstand water and even the freshness of dairy products is maintained even if stored at room temperature. We often see this when we go to retail stores, right?

QUESTIONS:

1. As an accountant from the UHT Dairy Products Company, you have the task of conducting a survey of the raw materials for packaging – paper from Korea that must be sent to Indonesia. Management also questioned which costs could arise and whether the company should continue to import paper when paper was needed or the need for maintaining paper stock at the factory. If companies must import paper when needed, what should be considered and what costs will occur, and vice versa?

2. Analyze and use info graphics of the decisions that must be taken by the company along with the impacts, advantage, and disadvantage, also which methods that can be used? EOQ or Just in Time (JIT)?

Answer 1

Economic Order Quantity (EOQ):

It is the ordering quantity of inventory for the company by maintaining such ordering quantity; the company can derive some financial and non-financial benefits because of a reduction in its costs associated with the inventory handling process. The EOQ method of inventory management minimizes various costs associated with the inventory management process like costs to place a new order, inventory carrying costs, out of stock costs, etc. This technique works best in such scenarios where the demand for inventory, cost to make a new order, and inventory carrying costs are constant over time.

Just-in-time inventory system (JIT):

It is another known technique for the management of inventory. The objective of the JIT technique is to minimizing several activity times in the production system, in various customers and suppliers related processes. The JIT system's objective is to match the pre-defined production schedules of the organization with the raw-material supply schedules of the suppliers. This is a very widely used technique to minimize waste of time and to enhance the productivity. But, if an organization wants to implement the JIT system, it is expected that the supplier could forecast the demand from the organization.

By observing the facts given, The UHT serves the daily dairy needs of its customers. If the UHT wishes to opt for the EOQ technique, the out-of-stock situation of its raw material won’t impact its production process. For UHT, landing costs form a better part of their expenditure because they are importing their packing material. So, its obvious that they want to minimize their costs. To achieve this, they need a proper monitoring mechanism on their inventory level, re-ordering levels.

If the UHT desires to adopt the JIT technique, their process to procure the material should align with their schedule of production. But, it is known for the company that its customer demand is not much constant. It is evident that there is considerable uncertainty associated with their customer orders which may increase the landing costs for the UHT. Such a scenario, at times, may also create no stock situation for their products.

That’s why; the preferred option is the EOQ technique for the company in spite of the JIT technique.

EOQ system Advantages:

· The carrying costs and storage costs for inventory can be minimized.

· The production disruptions won’t result from no raw material stock scenario.

· The company will be benefited by placing orders for the planned quantities of raw material because the cost of landing is high,.

· It will be easy to implement the process of re-stocking and there will be a good saving in costs for placing orders, maintaining stock, and no-stock costs.

EOQ system disadvantages:

· The assumptions on which the EOQ system operates will not stand true on a regular basis.

· There is an assumption for uniform demand from the customers which is not a case in the real-world scenarios.

· There is a constant change is the customer's tastes and preferences. So, accurate forecasting of the demand on a regular basis is very difficult to handle.

· Regular inventory quantity monitoring is a very resource-intensive task for the company which may turn out costly over time.

Even though there are few disadvantages as described above, implementing the EOQ technique will be beneficial for the UHT.