account receivable and inventory management

CHAPTER 07:ACCOUNT RECEIVEABLE AND INVENTORY MANAGEMENT

Siti Hazlina Binti Hussin Mohammad

Faiz Bin Zulkifli

Prepared By:

Mr. MOHAMED ARIFF BIN ABDUL RAHMANFaculty of Plantation and Agrotechnology 1

Faculty of Plantation and Faculty of Plantation and AgrotechnologyAgrotechnology 2

•Inventory consist of the firms stock of raw material, work in progress, and finished goods.

•Proper management of these inventories is important as its effects the firms day-to-day operation and provides the basis for production

and sales.

•Its represent a significant investment for the most firms.


The characteristics of the inventories

Raw material •Basic raw materials purchased from supplier to initiate the

production process.•The purpose to make production function independent from

the purchasing function.

Work in process

•Consist of partially finished goods requiring additional work before they finished goods and be sold to the customers.•The purpose is to these production independent from each other., if a break down in one process will not effect the operation.

Finished goods

•Represent products that completed in production process but not sold.

•Purpose to make production function independent from the sales functions.

•That's mean, any production slow down will not hamper sales due to inability to meet demands.

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The objectives of the firms inventory management

To carry sufficient inventories

•The action to minimize the investment level s in inventories .

•This will release tied up fund in inventories which is less productive , to

be used in other more profitable investment

To maximize inventory turnover

•To satisfy the production and sales demands.

•Create smooth out production process and provides better product

selection and prompt deliveries.


Economic Order Quantity (EOQ)

•EOQ is a tool to determine the optimal order quantity that result in the lowest total inventory cost

Total Order Cost Total Carrying CostTotal Inventory

Cost

•Such as cost of processing ,telephoning ,typing and mailing ,and receiving order.•That is high order quantity will reduce the number of order per period.

•Cost of carrying each unit of inventory in the firms stock per period, normally on a yearly basis.

•Sum of TOC and the TCC.•To determine the optimal inventory order quantity that minimize it.


Reorder Point (ROP)

Function of lead–time in days multiply by daily usage.To ensure that inventories arrived in time before safety stock is affected.


Economic Order Quantity (EOQ) @ Q*

2 x D x O / C

Total Ordering Cost (TOC) O ( D/ Q*)

Total Carrying Cost (TCC)

C (( Q/2) + SS)

=Order cost per order(Number of order per period)

Total Inventory Cost (TIC) TOC +TCC

=Carrying cost per unit (Average inventory)

=Total Ordering Cost +Total Carrying Cost

INFO:D=Annual demandO=Ordering costC=carrying costL=lead time (in days)d= daily demand=D/360Lf=Lead time in days to delivery as a fraction of the year.SS=safety stock unit =1.85 Lf x D


Reorder Point (ROP) L x d + SS

=(Lead time in days)(daily usage rate) +Safety stock

Number of order D/Q

Average Inventory (Q/2)+ SS

INFO:D=Annual demandO=Ordering costC=carrying costL=lead time (in days)d= daily demand=D/360Lf=Lead time in days to delivery as a fraction of the year.SS=safety stock unit =1.85 Lf x D


D=Demand=200,000

Past Year Question Sp= selling price=RM100

Oc =ordering cost=RM400

CC=carrying cost =0.1x RM100=RM10

L=18 daysDemand =200,000Selling price=RM100Ordering cost=RM400Lead time=18daysCarrying cost=RM10Ss=0d= D/360=200000/360=555.55

i) EOQ= 2 x D x O / C

= 2x200,000x400/10 =4000 units.

ii)ROP = L x d + SS =18 x555.55 =10,000 units

iii)TOC = O ( D/ Q*) = 400 ( 200,000/ 4000) =20,000 TCC = C (( Q/2) + SS) = 10 (( 4000/2) + 0) =20,000 TIC =TOC +TCC =20,000+20,000 =40,000


Step 2: Insert the info into Formula

Step 1 find an Info :

Faculty of Plantation and Faculty of Plantation and AgrotechnologyAgrotechnology

Past Year Question

Info :D=7000 x12 month=84,000 unitO=RM50C=RM0.50Q=200

i) EOQ= 2 x D x O / C

= 2 x 84,000 x 50/ 0.50 =4098 unit@ 4000 units

ii) Number of order=D/Q=84,000/200=420 times

iii)TOC = O ( D/ Q*) = 50 ( 84,000/ 4000) =RM1,050 TCC = C (( Q/2) + SS) = 0.50 (( 4000/2) + 0) =RM1,000 TIC =TOC +TCC =1050+1000 =RM2,050

If question ,100 @200 unit per order, the answer covert round to the back. For example 4098 to 4000 unit.So ,Q*=4000The optimal order is the best ideal

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Step 1 find an Info :

Step 2: Insert the info into Formula

Past Year Question

1.Characteristics-the willingness of customer’s to payback debt. Eg:social reputation, past payment record, Time Interest Earn (TIE) how many time the company pay interest in year.2.CapacityAbility of customer’s to pay debt.Eg:ability to manage the business in generating revenue, net income, and profitability ratio3. Capital-the ability of customer’s to generate resource to pay debt when due. Eg:assets liquidated or mortgaged.4.Condition-The condition ad environments of customer’s business should in good operation. Eg:change in business environment, political instability, change in social value5.Collateral-The customer’s should have whether tangible or intangible assets as a guarantee that debt will be paid on time. Eg:asset that have value, liquid and transferable

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1.Reminder-give reminder to customer that the account is overdue without payment. Usually sending postcard, reminder phrases and etc.

2.Follow up-If the reminder notes fail getting the customer to pay, the firm will sending follow up letters such as telephone and personal visit.

3.Drastic Action-The drastic action is the last stage that includes drawing a draft on a customer, collection employing collection agency

Faculty of Plantation and Faculty of Plantation and AgrotechnologyAgrotechnology

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