End of Chapter: Inventory Management, Just-in-Time, and Simplified Costing Methods

Problems for Self-Study

Problem 1

Lee Company has a Singapore plant that manufactures Blu-Ray players. One component is an XT chip. Expected demand is for 5,200 of these chips in March 2020. Lee estimates the ordering cost per purchase order to be $250. The monthly carrying cost for one unit of XT in stock is $5.

Required

Compute the EOQ for the XT chip.
Compute the number of deliveries of XT in March 2020.

Solution

$\begin{array}{l} \begin{array}{l} E O Q & = & \sqrt{\frac{2 \times 5,200 \times 250}{5}} \\ _{}^{} = & 721 chips (rounded) \end{array} \\ \begin{array}{l} Number of deliveries & = & \frac{5,200}{721} \\ = & 8 (rounded) \end{array} \end{array}$

Problem 2

Littlefield Company uses a backflush costing system with three trigger points:

Purchase of direct materials
Completion of good finished units of product
Sale of finished goods

There are no beginning inventories. Information for April 2020 is as follows:

The table depicts information for Littlefield Company for April 2020. The details of the table are as follows:

1. Direct materials purchased: 880,000 dollars

2. Direct materials used: 850,000 dollars

3. Conversion costs incurred: 422,000 dollars

4. Conversion costs allocated: 400,000 dollars

5. Costs transferred to finished goods: 1,250,000 dollars

6. Cost of goods sold: 1,190,000 dollars

Required

Prepare journal entries for April (without disposing of under- or overallocated conversion costs). Assume there are no direct materials variances.
Under an ideal JIT production system, how would the amounts in your journal entries differ from the journal entries in requirement 1?

Solution

1. Journal entries for April are as follows:

The table depicts journal entries for Littlefield Company for April 2020. The details of the table are as follows:

1. Entry A1

Materials and in-process inventory control: 880,000
Accounts payable control: 880,000
Direct materials purchased

2. Entry A2

Conversion costs control: 422,000
Various accounts such as wages payable control: 422,000
Conversion costs incurred

3. Entry C1

Finished goods control: 1,250,000
Materials and in-process inventory control: 850,000
Conversion costs allocated: 400,000
Standard cost of finished goods completed

4. Entry D1

Cost of goods sold: 1,190,000
Finished goods control: 1,190,000
Standard costs of finished-goods sold

2. Under an ideal JIT production system, if the manufacturing lead time per unit is very short, there would be zero inventories at the end of each day. Entry (C1) would be for $1,190,000 finished-goods production [to match finished-goods sold in entry (D1)], not $1,250,000. If the marketing department could only sell goods costing $1,190,000, the JIT production system would call for direct materials purchases and conversion costs of lower than $880,000 and $422,000, respectively, in entries (A1) and (A2).