COST ACCOUNTING IN TEXTILES

INVENTORY CONTROL
 TIMING FOR INVENTORY SYSTEM
• When operating, we have to decide on the
specific timing for acquiring resources.
• For labor and utilities, we can acquire the
resources on an as-needed basis.
• However, for products such as raw materials,
manufacturing components we can acquire them
either «early» or «as-needed». Most firms will
use both approaches.
• Most firms use several inventory control systems.
 NEED FOR INVENTORIES
• When selecting an inventory system, our aim is to
minimize costs.
• The costs involving inventories are:
• - the costs of placing orders
• - the cost of storing inventory
• - the costs if we fail to have an item in stock when
needed
• - the cost of operating the accounting system (for
inventories).
 MINIMIZING INVENTORY COSTS
• This depends on the nature of the demand for
the product:
• If demand is uncertain and must be met relatively
quickly, the firm will have to maintain an
inventory of the product.
• If demand can be accurately predicted (or if it
needn’t be ready for a time period that exceeds
the time necessary to produce the product) an
inventory of the product will not be required.
 OPERATING WITHOUT INVENTORIES
• This requires:
• - careful planning
• - scheduling
• - monitoring of resource usage

• Sytems doing those procedures are called

MATERIALS REQUIREMENT PLANNING (MRP)
SYSTEMS.
 MRP (MATERIALS REQUIREMENT
PLANNING) SYSTEMS
• Management has to be able to predict/schedule demand
for products.
• Firms that can schedule the production of orders several
weeks in advance are the best candidates for this system.
• Once production is scheduled:
• 1ST step: The MRP system works backward to determine
what materials are needed and when they are needed.
This requires that the firm has a complete bill of
materials (BOM) for each product it manufactures. (BOM
is a complete listing of all parts, ingredients needed to
produce a unit of product. When we multiply quantity of
an order with the BOM list for one unit, then we have a
complete list of needed materials/ingredients to produce
the whole order.)
 Example to Bill of Materials (BOM)
ITEM: ladies shawlcollar bathrobe ITEM: mens shawlcollar bathrobe (BR002)
(BR001) Components:
Components:

Fabric: Fabric:
3 meters (150 cm width) 100% cotton 3,5 meters (150 cm width) 100% cotton
60 g/m2 double side looped terry 360 g/m2 double side looped terry

Accessories (on the bathrobe): Accessories (on the bathrobe):

1 care label 1 care label
1 brand label 1 brand label
1 metal zipper (CODE: ZPxxx) 1 metal zipper (CODE: ZPyyy)
Accessories (outside the bathrobe): Accessories (outside the bathrobe):
1/8 of a 30*40*50 cm cartoon box 1/6 of a 30*40*50 cm cartoon box
1 polyethylene plastic bag at 50*60 cm 1 polypropylene plastic bag at 50*70 cm
1 ticket for package 1 ticket for package
1/200 Euro pallet 1/180 Euro pallet
 (MRP cont.)
• 2ND STEP: To determine when to order the materials.
• We have to know the lead time for each material.
(Lead time is the time required between sending an
order to a supplier and receiving the materials).
Knowing the lead time, we can find the date on which
materials will be sent.
• Sophisticated MRP systems will monitor orders and
production. The MRP system checks to see wether the
supplier has agreed to the required shipment date.
• 3RD STEP: If problems develop, the system informs
production scheduling that some orders may need to
be rescheduled.
JUST IN TIME (A SPECIAL MRP SYSTEM)
• The «just in time» system (JIT) is an ideal system.
• It has relaible suppliers, and no inventories would
be required.
• A just in time system:
• - requires excellent planning
• - requires close cooperation with suppliers
• - avoids all inventory holding costs
• Ex: In a firm having JIT system, no warehouse
space needs to be rented or constructed for
inventories.
WHAT FACTORS LEAD TO INVENTORIES
IN MRP SYSTEMS?
• 1) Safety stocks lead to inventories:
• Not all MRP systems are designed to have a zero-stock
situation, but an effective MRP system should result in
minimal inventories, inventories held will be a safety
stock and an inventory resulting from lot size
considerations. (A safety stock is a small inventory of
materials to cover unexpected events.)
• Ex: If we need 100 sewing machine needles for a one-
month production, we may keep 5-10 needles as safety
stock to replace any broken or ruined needles.
WHAT FACTORS LEAD TO INVENTORIES
IN MRP SYSTEMS? (cont.)
• 2) Lot size considerations
• At the retail level, it is considerably cheaper per
unit to buy large quantities compared to small
quantities.
• Ex: The unit price of one-meter fabric will be
cheaper when we order a 100 000 meter lot,
compared to a 100 meter lot.
• So, if a firm is continually using a part/material in
its orders, a firm may order a larger lot (than the
amount they need) in order to have a cheaper
cost per unit.
EXAMPLE TO AN INVENTORY STATUS
RECORD
ITEM 30*40*50 CM STATUS AS OF
cartoon box MARCH 2014:
PRIMARY SUPPLIER Miller Corp. UNITS ON HAND:
PRICE 0,50 TL 150
SAFETY STOCK:
LEAD TIME 3 months 10
LOT SIZE 500 ALLOCATED:
ALTERNATE Bros Corp 130
SUPPLIER AVAILABLE:
10
PRICE 0,55 TL
LEAD TIME 2 months
LOT SIZE 200
PREPARED BY: RK on 24/03/14
 HOW SHOULD AN MRP SYSTEM
WORK?
• 1) An inventory status record should be kept
for each material the firm uses.
• 2) A bill of materials should be kept for each
product manufactured.
• 3) For each material: A materials requirement
planning matrix should be prepared. This
matrix summarizes the planned status of
inventories for each material for several
periods (periods of product) into the future.
 A materials requirement planning
matrix example
• Ex: Assume Cotton firm:
• - has an order of 425 units for month 6.
• - had already another order of 260 units for
month 2.
• And Cotton Firm is currently on 1st month of
production of this year.
• Then, the materials requirement planning
matrix for bathrobes would be as:
 A materials requirement planning
matrix example (cont.)
Quantity as: PERIOD
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6
Total 260 425
requirement
Scheduled 200
receipts (will
be produced
by our
suppliers)
Scheduled on 70 10 10 10 10 10
hand
(available in
stock)
Amount 415
needed
Planned 500
orders
 A materials requirement planning
matrix (MRPM) example (cont.)
• At month 2, we have 70+200= 270 bathrobes. We will ship
260 of them and will have 10 left in stock at the end of
month 2.
• At mont 6, we have an order of 425 and only have 10 in
stock. So, wewill need 415 bathrobes at month 6.
• The 500 bathrobes as assigned as planned order since it has
not been ordered or scheduled on production. We have to
decide to order/produce them and rearrange the MRPM.
When it is decided, the 500 bathrobe will be removed from
the «planned order» line to the «scheduled receipts» line.
• IN AN MRPM SYSTEM, all data must be frequently updated,
the necessary calculations must be made all data must be
kept for future uses.
• Consequently, an MRPM system must be computerized.
 ECONOMIC ORDER QUANTITY (EOQ)
• In inventory management and purchasing
policy, the objective is to try to minimize the
cost of purchasing and inventory keeping. We
have to find the optimal number of units we
have to buy each time we place an order. This
optimal size is known as «economic order
quantity».
 ECONOMIC ORDER QUANTITY (EOQ)
• The economic order quantity (EOQ) is the square root
of twice the annual demand orders cost divided by the
cost to carry a unit of inventory for a year.
2 𝑥 𝑎𝑛𝑛𝑢𝑎𝑙 𝑜𝑟𝑑𝑒𝑟 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑥 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
• 𝐸𝑂𝑄 =
𝑐𝑜𝑠𝑡 𝑡𝑜 𝑐𝑎𝑟𝑟𝑦 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑜𝑓 𝑜𝑛𝑒 𝑢𝑛𝑖𝑡 𝑓𝑜𝑟 𝑎 𝑦𝑒𝑎𝑟

• Question: If a firm has 70 000 orders of ladies basic

bathrobes in a year and the price of one bathrobe is 10
USD. Find the economic order quantity for this model
assuming the inventory cost one bathrobe is 3,5 USD
for 1 year.
 OTHER INVENTORY SYSTEMS
• Both MRP and EOQ require considerable data and they
cost an expense for gathering and keeping such data.
• For many minor items (screws, needles, buttons,…) the
expense of keeping data is not worth for the economy
it brings. For such items different systems such as tag
system, or two-bin system. In tag system, you have a
kind of order booklet with pages, each page is equal to
a specific amount of order. Ex: You can order 50
needles with each page, and when the booklet is
finished you receive another booklet.
• In two-bin system, we keep each inventory item in two
containers. When the first container becomes empty,
we order for more of the item.
 ABC INVENTORY CONTROL
• Most firms use several inventory control systems for
different items.
• The ABC system classifies all inventory items as A, B or
C items.
• Category A includes the very costly items used
frequently.
• Category B is for intermediately used items and
Category C is for relatively inexpensive and oftenly
used items.
• Ex: What inventory category would you assign for
fabric, button and sewing thread when producing
bathrobes?
• thanks