2021 2022 Lecture 9 Mba Inventory & Break Even Analysis

Material and Inventory
Management
 The type of inventory management system
depends on the nature of the demand for the
goods and services
MBA 2018: PROJECTS & DR. FREEMAN OSEI-TETE 1

OPERATIONS MGT
7 Procedures for Puchassing
Materials
1. Determine the Purchases budget
2. Receipts of Purchase Requisition
3. Determine sources of supply
4. Placing order
5. Follow up ofpurchase order
6. Receu[ts and nspection of materials
7. Checking invoices and Payments
DR. FREEMAN OSEI-TETE 2

Inventory Management
 A ‘material’ is the physical substance used by
a manufacturing concern to process or
manufacture its products or goods for sale

OPERATIONS MGT
Material may be direct or
indirect
 Industry
 Transport (Vehicle)
 Steel Industry
 Textile Industry
 Housing (Building)

OPERATIONS MGT
Materials can be CLASSIFIED
into:
 Basic raw materials
 Parts & Components
 Consumable supplies
 Work-in-Progress
 Finished goods
 Stationary and other office supplies


OPERATIONS MGT
Demand can be classified into:
 Dependent demand – predictable because
depends on other factors
 Independent demand – unpredictable

because may not be sure of customer orders

OPERATIONS MGT
Types of Inventory
 Buffer/Safety stock – uncertainties in timing

 Cycle – product period
 Anticipation – due to seasonal factors
 Pipeline movement – lead time

OPERATIONS MGT
Inventory Decisions
 Cost of not having the stock against the cost
of holding or ordering the inventory

OPERATIONS MGT
CLASSIFICATION OF COST
 Cost classification is the arrangement of cost
items into logical groups or according to their
common characteristics to enhance their
informational value.

OPERATIONS MGT
Generally, costs can be
classified:
 By Function
 By Behaviour, and
 By Element

OPERATIONS MGT
Measures of ensuring proper
control
1. The provision of a store/warehouse.
2. Proper documentation of stock and store
items
3. Authorization, requisitioning and approval of
purchases should be strictly adhered to
4. Stock identification system
5. Keeping of stock levels

OPERATIONS MGT
6. Keeping of Bin cards and stores ledgers
7. Periodic stocktaking (perpetual or
continuous)
8. Comparison of physical stock with balances
on bin cards and stores ledgers
9. Moral check on workers

OPERATIONS MGT
ACCOUNTING FOR
MATERIALS
 Calculating for stock levels
 Pricing of Issues (Stock Valuation)

OPERATIONS MGT
CALCULATING FOR STOCK
LEVELS
The most commonly used stock levels are:
Re-orderStock level
Maximum Stock level
Minimum Stock level
Economic Order Quantity

OPERATIONS MGT
1. ROL = Max U x Max LT
2. MaSL = ROL + EOQ – (Min. usage x Min.
lead time).
3. MiSL = ROL – (ave usage x ave lead
time).
4. EOQ =

OPERATIONS MGT
EOQ
 It is calculated after considering:
1. Frequency of Usage
2. Bulk discounts
3. Carrying costs, ordering costs etc.
4. Stockholding costs etc.
5. Availability of funds for purchasing
6. Delivery terms and conditions
7. Risk of fire outbreak
OPERATIONS MGT
 Ray Ltd. had a forecast demand per month
will be 6,000 units, ordering cost will be GH
¢2,500 per order, material cost will be GH
¢1,000 per unit, expressed on a carrying cost
percentage of 10%. The buffer stock however
was forecast to be 15 units.
 Calculate the economic order quantity and
the average stock

OPERATIONS MGT
 Find the EOQ where the forecasted demand
is 1,000 units per week; ordering cost is GH
¢350 per order; the unit cost is GH¢8 each;
and it is estimated that carrying costs are
15% p.a.
 Calculate the EOQ and the average stock
assuming a buffer stock of 20 units.

OPERATIONS MGT
Stock Valuation and
Assignments
 Cases
 Presentations
 Calculations

OPERATIONS MGT
Cost-Volume-Profit
(Break Even Analysis)
 BEA – the relationship between and among
cost, volume and profit (CVP)
 BEP – the point at which total revenue is

equal to total cost
 TR and TC

OPERATIONS MGT
Break Even Point (BEP)
 The volume of output at which total cost
and total revenue are equal
 Profit (P) = TR – TC = R x Q – (FC +v x
Q)
= Q(R – v) – FC
FC
QBEP 
Rv

Cost-volume analysis
Focuses on the relationship between cost,
revenue, and volume of output
 Fixed Costs (FC)
-tend to remain constant regardless of

output volume
 Variable Costs (VC)
-vary directly with volume of output

-VC = Quantity(Q) x variable cost per unit
(v)
OPERATIONS MGT
Cost and Revenue
 Total Cost
-TC = Q x v
 Total Revenue (TR)
-TR = revenue per unit (R) x Q

OPERATIONS MGT
OPERATIONS MGT
OPERATIONS MGT
FINANCIAL ANALYSIS
 Cash flow
 The difference between cash received from
sales and other sources, and cash outflow for
labour, material, overhead, and taxes
 Present value
 The sum, in current value, of all future cash flow
of an investment proposal

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Material and Inventory

MBA 2018: PROJECTS & DR. FREEMAN OSEI-TETE 1

DR. FREEMAN OSEI-TETE 2

MBA 2018: PROJECTS & DR. FREEMAN OSEI-TETE 3

MBA 2018: PROJECTS & DR. FREEMAN OSEI-TETE 4

MBA 2018: PROJECTS & DR. FREEMAN OSEI-TETE 5

 Independent demand – unpredictable

MBA 2018: PROJECTS & DR. FREEMAN OSEI-TETE 6

 Buffer/Safety stock – uncertainties in timing

MBA 2018: PROJECTS & DR. FREEMAN OSEI-TETE 7

MBA 2018: PROJECTS & DR. FREEMAN OSEI-TETE 8

MBA 2018: PROJECTS & DR. FREEMAN OSEI-TETE 9

MBA 2018: PROJECTS & DR. FREEMAN OSEI-TETE 10

MBA 2018: PROJECTS & DR. FREEMAN OSEI-TETE 11

MBA 2018: PROJECTS & DR. FREEMAN OSEI-TETE 12

 Pricing of Issues (Stock Valuation)

MBA 2018: PROJECTS & DR. FREEMAN OSEI-TETE 13

Minimum Stock level

Economic Order Quantity

MBA 2018: PROJECTS & DR. FREEMAN OSEI-TETE 14

MBA 2018: PROJECTS & DR. FREEMAN OSEI-TETE 15

MBA 2018: PROJECTS & DR. FREEMAN OSEI-TETE 17

MBA 2018: PROJECTS & DR. FREEMAN OSEI-TETE 18

MBA 2018: PROJECTS & DR. FREEMAN OSEI-TETE 19

 BEP – the point at which total revenue is

MBA 2018: PROJECTS & DR. FREEMAN OSEI-TETE 20

DR. FREEMAN OSEI-TETE 21

-tend to remain constant regardless of

-vary directly with volume of output

-TR = revenue per unit (R) x Q

DR. FREEMAN OSEI-TETE 24

DR. FREEMAN OSEI-TETE 28

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