Chapter 20 Inventory Management, Just in Time & Back Flush Costing

Problem 1
Stranded Incorporation has experienced a loss
due to poor inventory management. The loss
usually caused by expired and damaged
inventory. Other source of loss is excess or lack of
inventory in one production cycle due to the
management miscalculate the order amount of
inventory.
Early 2009, Stranded Incorporation decides to use
EOQ analysis in their inventory management.
The information available is as follows:
Sales per week (normal)
: 2,000 units
Sales per week (maximum) : 3,500 units
Purchasing price
: Rp 2,000
Assumption
: 1 year = 50 weeks
Lead time
: 2 weeks
Ordering cost per order
: Rp 31,250
Carrying cost consist of:
RRR on investment
: 20%
Insurance and rent cost
: Rp 600/ unit
Required:
1. Calculate EOQ
2. Calculate number of deliveries per year
3. Determine reorder point
4. Determine safety stock

Problem 2
PT Terang Selalu mendistribusikan berbagai jenis
genset berbahan bakar biodiesel. Untuk jenis

portable generator, perusahaan memperkirakan

permintaan dalam setahun mencapai 2.000 unit
genset. Perusahaan membeli portable genset
seharga Rp 5.000.000; biaya yang dikeluarkan
tiap order Rp 4.000.000; Rata-rata carrying cost
per unit Rp 400.000.
Required:
1. Hitung EOQ, biaya order per tahun, dan
carrying cost tahunan, serta total relevant cost
tahunan
2. Misalnya perusahaan salah memprediksi, dan
sebenarnya biaya per order adalah Rp
3.000.000, berapa cost of prediction error?

Problem 3
Healthy Life and Co. has gain significant market
share in the pharmacy industry for years. The
company manufactures a series of anti-cancer
supplement. For November, there were no
beginning inventories of direct materials and no
beginning or ending WIP. Healthy Life and Co. uses
a JIT production system and back flush costing
with three trigger points for making entries in the
accounting system:
Purchase of Direct Material Debited to
inventory: Materials and In-Process Control
Completion of Finished Goods Debited to
Finished Goods Control
Sale of Finished Goods assume the company
use perpetual method for recording sales

Chapter 20 Inventory Management, Just in Time & Back Flush Costing

Healthy Life standard cost per unit are:
Direct Material
$ 35
Conversion Cost
$ 23
The following data apply to Novembers
manufacturing:
Direct material purchased
$ 680,000
Conversion cost incurred
$
520,000
Number of units manufactured
22.500
units
Number of units sold
21.500 units
Mark-up percentage of sales are 45% of
unadjusted COGS amount (before adjustment
of over-or under- allocated conversion cost
write-off)
Under or over- allocated conversion cost is
write-off monthly to COGS account.
Prepare summary journal entries for November to
record:
Purchase of direct material
Incurred conversion cost
Completion of Finished goods
Sale of finished goods
Under-or over- allocated conversion costs
Assume that the company uses:
1. Three trigger points Purchase of direct
material, completion of finished goods, and
sale of finished goods

2. Two trigger points purchase of direct material,

and sale of finished goods
3. Two trigger points completion of finished
goods and sale of finished goods

Problem 4
The champion Hardware Company manufactures
specialty brass door handles at its Lynchburg
plant. Champion is considering implementing a JIT
production system. The following are the
estimated costs and benefits of JIT Production.
Annual additional tooling costs would be $
100.000
Average inventory would decline by 80% from
the current level of $ 1.000.000
Insurance, space, material-handling, and setup
costs, which currently total $ 300.000 annually,
would decline by 25%
The emphasis on quality inherent in JIT
production would reduce rework costs by 30%.
Champion currently incurs $200.000 in annual
rework cost.
Improve product quality under JIT production
would enable Champion to raise the price of its
product by $4 per unit. Champion sells 40.000
units each year.
Champions required rate of return on inventory
investment is 15% per year
Required:
Calculate the net benefit or cost to Champion if it
adopts JIT production at the Lynchburg plant

Chapter 20 Inventory Management, Just in Time & Back Flush Costing