ADVANCED MANAGEMENT ACCOUNTING

ADVANCED ADVANCED MANAGEMENTMANAGEMENT ACCOUNTINGACCOUNTING

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Inventory Inventory Management: Management:

Economic Order Economic Order Quantity, JIT, and the Quantity, JIT, and the Theory of ContraintsTheory of Contraints

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Learning ObjectivesLearning Objectives

Describe the traditional inventory management Describe the traditional inventory management model.model.

Describe JIT inventory management.Describe JIT inventory management. Explain the basic concepts of constrained Explain the basic concepts of constrained

optimization.optimization. Describe the theory of constraints, and explain Describe the theory of constraints, and explain

how it can be used to manage inventory.how it can be used to manage inventory.

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Managing InventoriesManaging Inventories

0 3 6 9 12

Inventory

Average Inventory

WeeksInve

ntor

y, th

ousa

nds

of b

rick

s

60

30

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The Appropriate Inventory PolicyThe Appropriate Inventory Policy

Two Basic Questions Must be Addressed

How much should be ordered or produced?How much should be ordered or produced? When should the order be placed or the setup When should the order be placed or the setup

be performed?be performed?

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InventoriesInventories

As the firm increases its order size, the number As the firm increases its order size, the number of orders falls and therefore the order costs of orders falls and therefore the order costs decline. However, an increase in order size also decline. However, an increase in order size also increases the average amount in inventory, so increases the average amount in inventory, so that the carrying cost of inventory rises. The that the carrying cost of inventory rises. The trick is to strike a balance between these two trick is to strike a balance between these two costs.costs.

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Ordering or Setup CostsOrdering or Setup Costs Carrying CostsCarrying Costs Stockout CostsStockout Costs

Inventory Costs

Basics of Traditional Inventory Basics of Traditional Inventory ManagementManagement

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Inventory CostsInventory Costs

1.1. Ordering Costs: The costs of placing and Ordering Costs: The costs of placing and receiving an orderreceiving an order

Examples:Examples: clerical costs, documents, insurance clerical costs, documents, insurance for shipment, and unloading.for shipment, and unloading.

2.2. Carrying Costs: The costs of carrying inventoryCarrying Costs: The costs of carrying inventory

Examples:Examples: insurance, inventory taxes, insurance, inventory taxes, obsolescence, opportunity cost of capital tied up obsolescence, opportunity cost of capital tied up in inventory, and storage.in inventory, and storage.

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Inventory Costs (continued)Inventory Costs (continued)3.3. Stock-Out Costs: The costs of not having sufficient Stock-Out Costs: The costs of not having sufficient

inventoryinventory

Examples:Examples: lost sales, costs of expediting (extra setup, lost sales, costs of expediting (extra setup, transportation, etc.) and the costs of transportation, etc.) and the costs of interrupted production.interrupted production.

4.4. Setup Costs: The costs of preparing equipment and Setup Costs: The costs of preparing equipment and facilities so they can be used to produce a particular facilities so they can be used to produce a particular product or componentproduct or component

Examples:Examples: setup labor, lost income (from idled setup labor, lost income (from idled facilities), and test runs. When a firm facilities), and test runs. When a firm produces the goods internally, ordering produces the goods internally, ordering costs are replaced by setup costs.costs are replaced by setup costs.

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Traditional Reasons for Carrying InventoryTraditional Reasons for Carrying Inventory

1.1. To balance ordering or setup costs and carrying To balance ordering or setup costs and carrying costscosts

2.2. To satisfy customer demand (e.g., meet delivery To satisfy customer demand (e.g., meet delivery dates)dates)

3.3. To avoid shutting down manufacturing facilities To avoid shutting down manufacturing facilities because of:because of:

a.a. machine failuremachine failure

b.b. defective partsdefective parts

c.c. unavailable partsunavailable parts

d.d. late delivery of partslate delivery of parts

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Traditional Reasons for Carrying Traditional Reasons for Carrying Inventory (continued)Inventory (continued)

4.4. Unreliable production processesUnreliable production processes

5.5. To take advantage of discountsTo take advantage of discounts

6.6. To hedge against future price increasesTo hedge against future price increases

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Inventories Inventories

Determination of optimal order sizeDetermination of optimal order size

Inve

ntor

y co

sts,

dol

lars

Order size

Total costs

Carrying costs

Total order costs

Optimal order size

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Total Costs = Ordering costs + Carrying cost

TC = PD/Q + CQ/2

where TC = The total ordering (or setup) and carrying cost

P = The cost of placing and receiving an order (or the cost

of setting up a production run)

Q = The number of units ordered each time an order is

placed (or the lot size for production)

D = The known annual demand

C = The cost of carrying one unit of stock for one year

Economic order quantity (EOQ) = 2PD/C

An Inventory ModelAn Inventory Model

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Inventories Inventories

Economic Order QuantityEconomic Order Quantity - Order size that - Order size that minimizes total inventory costs.minimizes total inventory costs.

Economic Order Quantity =2 x annual sales x cost per order

carrying cost

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Economic-Order-Quantity Economic-Order-Quantity Decision ModelDecision Model

The formula for the EOQ model is:The formula for the EOQ model is:

EOQ =EOQ =

D = Demand in units for a specified time periodD = Demand in units for a specified time periodP = Relevant ordering costs per purchase orderP = Relevant ordering costs per purchase orderC = Relevant carrying costs of one unit inC = Relevant carrying costs of one unit in stock for the time period used for Dstock for the time period used for D

2DP

C

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An EOQ IllustrationAn EOQ Illustration

EOQ = 2PD/C

D = 1,000 units

Q = 500 units

P = $200 per order

C = $40 per unit

EOQ = (2 x 200 x 10,000) / 40

EOQ = 10,000

EOQ = 100 units

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What are the relevant total costs?What are the relevant total costs? The formula for The formula for relevant total costsrelevant total costs (RTC)(RTC) is: is: RTC = RTC =

Annual relevant ordering costs + Annual relevant Annual relevant ordering costs + Annual relevant carrying costs carrying costs

RTC = RTC = (( )) × P + × P + (( ) ) × C = + × C = +

Q can be any order quantity, not just EOQQ can be any order quantity, not just EOQ..

DQ

Q 2

DP Q

QC 2

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Rel

evan

t Tot

al C

osts

(D

olla

rs)

2,000

4,000

6,000

8,000

10,000

5,434

600 1,200 1,800 2,400988EOQ

Annual relevant carrying costs

Annual relevant total costs

Annual relevant ordering costs

Order Quantity (Units)

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Considerations in Obtaining Considerations in Obtaining Estimates of Relevant CostsEstimates of Relevant Costs

Obtaining Obtaining accurate estimatesaccurate estimates of the of the cost parameterscost parameters used in the EOQ decision model is a used in the EOQ decision model is a challenging challenging tasktask..

What are the What are the relevant incremental costsrelevant incremental costs of carrying of carrying inventory?inventory?

– Only those costsOnly those costs of the purchasing company that of the purchasing company that change with the quantity of inventory heldchange with the quantity of inventory held

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Considerations in Obtaining Considerations in Obtaining Estimates of Relevant CostsEstimates of Relevant Costs

What is the What is the relevant opportunity costrelevant opportunity cost of capital? of capital?– It is the It is the return forgone by investing capital in return forgone by investing capital in

inventoryinventory rather than elsewhere. rather than elsewhere.– It is calculated as the required rate of return It is calculated as the required rate of return

multiplied by multiplied by thosethose costs per unit thatcosts per unit that vary with the vary with the number of units purchasednumber of units purchased and that are incurred at and that are incurred at the time the units are received.the time the units are received.

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Costs Associated with Costs Associated with Goods for SaleGoods for Sale

Five categories of costs associated with goods for Five categories of costs associated with goods for sale are:sale are:

1 . . Purchasing costsPurchasing costs

2 . . Ordering costsOrdering costs

3 . . Carrying costsCarrying costs

4 . . Stockout costsStockout costs

5 . . Quality costsQuality costs

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Reorder PointReorder Point When Demand is CertainWhen Demand is Certain

Reorder point = Rate of usage x Lead timeReorder point = Rate of usage x Lead time

Example:Example: Assume that the average rate of usage is 4 Assume that the average rate of usage is 4 units per day for a component. Assume also units per day for a component. Assume also that the time required to place and receive an that the time required to place and receive an order is 10 days. What is the reorder point?order is 10 days. What is the reorder point?

Reorder point = 4 x 10 = Reorder point = 4 x 10 = 4040 units units

Thus, an order should be placed when inventory drops to Thus, an order should be placed when inventory drops to 40 units.40 units.

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Reorder PointReorder Point When Demand is UncertainWhen Demand is Uncertain

ReorderReorder point = (Ave. rate of usage x Lead time) + point = (Ave. rate of usage x Lead time) + Safety stockSafety stock

where:where:

Safety stock = (Maximum usage - Average usage) x Safety stock = (Maximum usage - Average usage) x Lead timeLead time

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Reorder Point (continued)Reorder Point (continued)

Example:Example:

Suppose that the maximum usage is 6 Suppose that the maximum usage is 6 units per units per day and the day and the average usage is average usage is 4 units per day. 4 units per day. The lead time is 10 days. The lead time is 10 days.

What is the reorder point?What is the reorder point?

Safety stockSafety stock == (6 - 4) x 10 = (6 - 4) x 10 = 2020 units units

Reorder pointReorder point == (4 x 10) + 20 = (4 x 10) + 20 = 6060 units units

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Reorder PointReorder Point988

494

Weeks 1 2 3 4 5 6 7 8

Reorder Point

Reorder Point

Lead Time

2 weeks

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Reorder Point (no safety stock)Reorder Point (no safety stock)

Reorder point = Rate of usage x Lead time

100

80

60

40

20

0

Time

ROP

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Safety StockSafety Stock

Safety stock Safety stock is is inventory held at all timesinventory held at all times regardless regardless of the quantity of inventory ordered using the EOQ of the quantity of inventory ordered using the EOQ model.model.

Safety stock is used as a Safety stock is used as a buffer against unexpected buffer against unexpected increases in demandincreases in demand or lead time and unavailability or lead time and unavailability of stock from suppliers.of stock from suppliers.

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Evaluating Managers and Evaluating Managers and Goal-Congruence IssuesGoal-Congruence Issues

Goal-congruenceGoal-congruence issues can arise when there is an issues can arise when there is an inconsistency between the EOQ decision model inconsistency between the EOQ decision model and the model used to evaluate the performanceand the model used to evaluate the performance of of the manager implementing the inventory the manager implementing the inventory management decisions.management decisions.

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Traditional versus JIT Inventory Traditional versus JIT Inventory ProceduresProcedures

Inventory Control System

1. Balance setup and carrying costs

2. Satisfy customer demand

3. Avoid manufacturing shutdowns

4. Take advantage of discounts

5. Hedge against future price increases

1. Drive setup and carrying costs to zero

2. Use due-date performance

*3. Total preventive maintenance

*4. Total quality control

*5. The Kanban system

Traditional Systems JIT Systems

*Rather than holding inventories as a hedge against plant-shutdowns,

JIT attacks the plant-shutdown problem by addressing these issues.

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Just-In-Time Production SystemsJust-In-Time Production Systems

Just-in-time (JIT) production systems Just-in-time (JIT) production systems take a take a ““demand pulldemand pull” approach in which goods are ” approach in which goods are only only manufactured to satisfy customer ordersmanufactured to satisfy customer orders..

Demand triggersDemand triggers each step of the each step of the productionproduction process, starting with customer demand for a process, starting with customer demand for a finished product at the end of the process, to the finished product at the end of the process, to the demand for direct materials at the beginning of the demand for direct materials at the beginning of the process.process.

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Materials Requirement Materials Requirement Planning (MRP)Planning (MRP)

Materials requirements planning (MRP) systems Materials requirements planning (MRP) systems take a “take a “push-throughpush-through” approach that manufactures ” approach that manufactures finished goods for inventory on the basis of finished goods for inventory on the basis of demand demand forecastsforecasts..

MRP predetermines the necessary outputs at each MRP predetermines the necessary outputs at each stage of production.stage of production.

Inventory management is a key challenge in an Inventory management is a key challenge in an MRP systemMRP system..

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JIT And Inventory ManagementJIT And Inventory Management Setup and Carrying Costs: The JIT Approach Setup and Carrying Costs: The JIT Approach

JIT reduces the costs of acquiring inventory to JIT reduces the costs of acquiring inventory to insignificant levels by:insignificant levels by:

1. 1. Drastically reducing setup timeDrastically reducing setup time

2. 2. Using long-term contracts for outside Using long-term contracts for outside purchasespurchases

Carrying costs are reduced to insignificant levels by Carrying costs are reduced to insignificant levels by reducing inventories to insignificant levelsreducing inventories to insignificant levels

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JIT And Inventory ManagementJIT And Inventory Management Due-Date Performance: The JIT Solution Due-Date Performance: The JIT Solution

Lead times are reduced so that the company can Lead times are reduced so that the company can meet requested delivery dates and to respond meet requested delivery dates and to respond quickly to customer demand.quickly to customer demand.

Lead times are reduced by:Lead times are reduced by:– reducing setup times reducing setup times – improving qualityimproving quality– using cellular manufacturingusing cellular manufacturing

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JIT And Inventory ManagementJIT And Inventory Management Avoidance of Shutdown: Avoidance of Shutdown:

The JIT ApproachThe JIT Approach Total preventive maintenance to reduce machine Total preventive maintenance to reduce machine

failuresfailures Total quality control to reduce defective partsTotal quality control to reduce defective parts Cultivation of supplier relationships to ensure Cultivation of supplier relationships to ensure

availability of quality raw materials and availability of quality raw materials and subassemblies subassemblies

The use of the Kanban system is also essentialThe use of the Kanban system is also essential

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JIT And Inventory ManagementJIT And Inventory ManagementDiscounts and Price Increases: Discounts and Price Increases:

JIT Purchasing Versus Holding InventoriesJIT Purchasing Versus Holding Inventories

Careful vendor selectionCareful vendor selection Long-term contracts with vendorsLong-term contracts with vendors

– Prices are stipulated (usually producing a Prices are stipulated (usually producing a significant savings)significant savings)

– Quality is stipulatedQuality is stipulated– The number of orders placed are reducedThe number of orders placed are reduced

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Major Features of a JIT SystemMajor Features of a JIT System

The five major features of a JIT system are:The five major features of a JIT system are: Organizing production in Organizing production in manufacturing cellsmanufacturing cells

Hiring and retaining Hiring and retaining multi-skilled workersmulti-skilled workers Emphasizing Emphasizing total quality managementtotal quality management

Reducing manufacturing lead time and setupReducing manufacturing lead time and setup TimeTime

Building Building strong supplier relationshipsstrong supplier relationships

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Benefits of JIT SystemsBenefits of JIT Systems

Benefits of JIT production:Benefits of JIT production:– Lower carrying costsLower carrying costs of inventory of inventory– EliminatingEliminating the root causesthe root causes of rework, scrap, of rework, scrap,

waste, and manufacturing lead time.waste, and manufacturing lead time.

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Performance Measures and Performance Measures and Control in JIT ProductionControl in JIT Production

To manage and reduce inventories, the management To manage and reduce inventories, the management accountant must design performance measures to accountant must design performance measures to controlcontrol and and evaluate JIT productionevaluate JIT production..

What information may management accountants What information may management accountants use?use?– Personal observationPersonal observation by production line workers and by production line workers and

managersmanagers– Financial performance measuresFinancial performance measures, such as inventory , such as inventory

turnover ratiosturnover ratios

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Performance Measures and Performance Measures and Control in JIT ProductionControl in JIT Production

What are What are nonfinancial performance measures of nonfinancial performance measures of time, inventory, and qualitytime, inventory, and quality??– Manufacturing lead timeManufacturing lead time– Units produced per hourUnits produced per hour– Days’ inventory on handDays’ inventory on hand– Total setup time for machines/Total Total setup time for machines/Total

manufacturing timemanufacturing time– Number of units requiring rework or scrap/Total Number of units requiring rework or scrap/Total

number of units started and completednumber of units started and completed

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Backflush CostingBackflush Costing

A A unique production systemunique production system such as JIT often leads such as JIT often leads to its own to its own unique costing systemunique costing system..

Organizing manufacturing in cells, reducing defects Organizing manufacturing in cells, reducing defects and manufacturing lead time, and ensuring timely and manufacturing lead time, and ensuring timely delivery of materials enables delivery of materials enables purchasing, purchasing, production, and sales to occur in quick succession production, and sales to occur in quick succession with minimal inventorieswith minimal inventories..

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Backflush CostingBackflush Costing

Where Where journal entriesjournal entries for one or more stages in the for one or more stages in the cycle are cycle are omittedomitted, the journal entries for a , the journal entries for a subsequent stage subsequent stage use normal or standard costs to use normal or standard costs to work backward to flush outwork backward to flush out the costs in the cycle the costs in the cycle for which journal entries were not made.for which journal entries were not made.

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Trigger PointsTrigger Points

Stage A: Purchase of direct materialsStage A: Purchase of direct materials Stage B: Production resulting in work in processStage B: Production resulting in work in process Stage C: Completion of a good finished unit or Stage C: Completion of a good finished unit or

productproduct Stage D: Sale of finished goodsStage D: Sale of finished goods

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Assume Assume trigger points A, C, and D.trigger points A, C, and D. This company would have two inventory accounts:This company would have two inventory accounts:

Type Account Title Type Account Title 1. Combined materials1. Combined materials Inventory: MaterialInventory: Material and materials in work-in- and materials in work-in- and In-Processand In-Process process inventoryprocess inventory ControlControl

2. Finished goods2. Finished goods Finished GoodsFinished GoodsControlControl

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Assume Assume trigger points A and D.trigger points A and D. This company would have one inventory account:This company would have one inventory account: Type Account Title Type Account Title

Combines direct materials Combines direct materials InventoryInventory inventory and any direct inventory and any direct ControlControl materials in work-in-process materials in work-in-process and finished goods inventories and finished goods inventories

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Special Considerations in Backflush Special Considerations in Backflush CostingCosting

Backflush costing does Backflush costing does not necessarily comply with not necessarily comply with GAAPGAAP– However, However, inventory levelsinventory levels may be may be immaterialimmaterial, ,

negating the necessity for compliancenegating the necessity for compliance Backflush costing does Backflush costing does not leave a good audit trailnot leave a good audit trail

– the ability of the accounting system to pinpoint the – the ability of the accounting system to pinpoint the uses of resources at each step of the production uses of resources at each step of the production processprocess

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What is the Kanban System?What is the Kanban System?

A Card System is used to monitor work-in-process

A withdrawal KanbanA withdrawal Kanban A production KanbanA production Kanban A vendor KanbanA vendor Kanban

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The Withdrawal KanbanThe Withdrawal Kanban

Item No. TVD-114 Preceding Process

Item Name LCD Screen Computer Assembly

Computer Type Compaq 4/25

Box Capacity 12 Subsequent Process

Box Type AD-1942 Final Assembly

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The Production KanbanThe Production Kanban

Item No. TVD-114 Process

Item Name LCD Screen Computer Assembly

Computer Type Compaq 4/25

Box Capacity 12

Box Type ___AD-1942

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The Vendor KanbanThe Vendor KanbanItem No. TVD-114 Name of Receiving Company

Item Name Computer Chassis Type Black Plastic

Box Capacity 12

Box Type Cardboard--Type Receiving Gate North Receiving Gate

Time to Deliver 8:30 A.M., 12:30 P.M., 2:30 P.M.

Name of Vendor Hovey Supply Company

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The Kanban ProcessThe Kanban Process

Withdrawal

Store

LCD Screen

Withdrawal

Lot with P-Kanban

Production

Ordering Post

(6) Signal

LCD Assembly

Remove

(4) P-Kanban

Attach to

Post

(5) Attach

W-Kanban

(1) Remove

W-Kanban

Attach to

Post

Withdrawal Post

(2), (3)

(7)

Final Assembly

(1)

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Multiple Constrained ResourceMultiple Constrained Resource

To the Thurman Company example for a one To the Thurman Company example for a one constrained resource, add the following additional constrained resource, add the following additional constraint: the market limits sales of the economy constraint: the market limits sales of the economy disk player to 3,000 units. disk player to 3,000 units.

Formulate the linear programming problem and Formulate the linear programming problem and solve using the graphical method Let Xsolve using the graphical method Let X11 = deluxe = deluxe

models and Xmodels and X22 = economy models = economy models

Formulation:Formulation: Max CM = 40XMax CM = 40X11 + 25X + 25X22

Subject to:Subject to: 4X + 2X4X + 2X22 << 20,000 20,000

XX22 << 3,000 3,000

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Multiple Constrained Resource Multiple Constrained Resource (continued)(continued)

10,000

3,000

A 5,000

D C

B

X

X

4X +2X < 20,000

X < 3,000

1

1

2

2

2

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Multiple Constrained Resource Multiple Constrained Resource (continued)(continued)

Corner PointCorner Point XX11 XX22CM = 40XCM = 40X11 + 25X + 25X22

AA 0000 00

BB 5,0005,00000 $200,000$200,000

C*C* 3,5003,5003,0003,000$215,000$215,000

DD 003,0003,000 $75,000$75,000

* Point C is optimal* Point C is optimal

The XThe X11 value of point c is found by substituting the second equation into the first one like so: value of point c is found by substituting the second equation into the first one like so:

$X$X11 + 2 (3,000) = 20,000 + 2 (3,000) = 20,000

4X4X11 + 6,000 = 20,000 + 6,000 = 20,000

4X4X11 =14,000 =14,000

XX11 = 3,500 = 3,500

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ThroughputThroughput InventoryInventory Operating expensesOperating expenses

Three Measures of Systems Performance

Theory of ConstraintsTheory of Constraints

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The Theory of Constraints The Theory of Constraints (continued)(continued)

Five steps to improve performance:Five steps to improve performance:

1. Identify an organization’s constraints.1. Identify an organization’s constraints.

2. Exploit the binding constraints.2. Exploit the binding constraints.

3. Subordinate everything else to the decisions 3. Subordinate everything else to the decisions made in Step 2.made in Step 2.

4. Elevate the organization’s binding constraints.4. Elevate the organization’s binding constraints.

5. Repeat the process as a new constraint emerges 5. Repeat the process as a new constraint emerges to limit output.to limit output.

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A sequential process of A sequential process of identifying and removing identifying and removing constraints constraints in a system.in a system.

Restrictions or barriers that impedeprogress toward an objective

Restrictions or barriers that impedeprogress toward an objective

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The theory of constraints emphasizes the The theory of constraints emphasizes the management of bottlenecksmanagement of bottlenecks as the keyas the key to improving to improving the performance of the production system as a the performance of the production system as a whole.whole.

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Methods to Relieve BottlenecksMethods to Relieve Bottlenecks

Eliminate idle time at the bottleneckEliminate idle time at the bottleneck operation operation Process onlyProcess only those parts or products those parts or products that increase that increase

throughput contributionthroughput contribution, not parts or products that , not parts or products that will remain in finished goods or spare parts will remain in finished goods or spare parts inventoriesinventories

Shift productsShift products that do not have to be made on the that do not have to be made on the bottleneck operation bottleneck operation to nonbottleneck processesto nonbottleneck processes, , or or to outside processing facilitiesto outside processing facilities

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Methods to Relieve BottlenecksMethods to Relieve Bottlenecks

Reduce setup time and processing time at Reduce setup time and processing time at bottleneckbottleneck operations operations

ImproveImprove the the qualityquality of parts or products of parts or products manufactured at the bottleneck operationmanufactured at the bottleneck operation

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The objective of TOC is to The objective of TOC is to increase throughput increase throughput contributioncontribution while while decreasing investments and decreasing investments and operating costsoperating costs..

TOC considers a TOC considers a short-run time horizonshort-run time horizon and and assumes assumes operating costs to be fixedoperating costs to be fixed costscosts..

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The Drum-Buffer-Rope SystemThe Drum-Buffer-Rope System

Initial Process

Process A

Process B

Drummer Process

Raw Materials

Process C

Final ProcessRope

Time Buffer

Finished Goods

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The Management of CapacityThe Management of Capacity

Managers can reduce capacity-based fixed costs Managers can reduce capacity-based fixed costs by measuring and managing unused capacityby measuring and managing unused capacity

Unused Capacity is the amount of productive Unused Capacity is the amount of productive capacity available over and above the productive capacity available over and above the productive capacitycapacity employed to meet consumer demand in employed to meet consumer demand in the current periodthe current period

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Analysis of Unused CapacityAnalysis of Unused Capacity Two Important Features:Two Important Features:

1.1. Engineered CostsEngineered Costs result from a cause-and-effect result from a cause-and-effect relationship between output and the resources used relationship between output and the resources used to produce that outputto produce that output

2.2. Discretionary CostsDiscretionary Costs have two parts: have two parts:

1.1. They arise from periodic (annual) decisions They arise from periodic (annual) decisions regarding the maximum amount to be incurredregarding the maximum amount to be incurred

2.2. They have no measurable cause-and-effect They have no measurable cause-and-effect relationship between output and resources usedrelationship between output and resources used

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Managing Unused CapacityManaging Unused Capacity

DownsizingDownsizing (Rightsizing) is an integrated (Rightsizing) is an integrated approach of approach of configuring processes, products, configuring processes, products, and peopleand people to match costs to the activities that to match costs to the activities that need to be performed to operate effectively and need to be performed to operate effectively and efficiently in the present and futureefficiently in the present and future

Because identifying unused capacity for Because identifying unused capacity for discretionary costsdiscretionary costs is difficult, is difficult, downsizingdownsizing, or , or otherwise managing this unused capacity, is otherwise managing this unused capacity, is alsoalso difficult difficult..

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ADVANCED MANAGEMENT ACCOUNTING

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