Managing Cash Flow

170 Cost Reduction Analysis Procedures
1. Inventory Carrying Cost (ICC) of items on hand
waiting for delivery of stockout inventory $ .02
ICC Inventory Value # of Days
.02 $ 8,200 6 days $ 984
2. Expediting costs
Personnel: $15/hour 22 hours 330
Computer: $20/hour 2 hours 40
3. Shipping charges (priority) 124
4. Production time lost: 4 hours $350 ______ 1,400
Total cost of a stockout $ ______ 2,878
Number of stockouts: 26
Total cost of stockouts for the period: 26 $2,878 $74,828 ______
Exhibit 5.19
Cost of an Inventory Stockout—Representative Example
Labor hour cost: $12 per hour
Activity Time Cost
1. Receive PO copy from Purchasing 10 min $ 2.00
and file in open PO file
2. Receive delivery and verify that delivery is ours: 20 min 4.00
check bill of lading, packing slip, and sign
3. Compare delivery to open PO and 15 min 3.00
record receipt on PO
4. Count parts—record on open PO 15 min 3.00
reconcile to PO amount ordered
5. Produce receiving report using open PO copy 30 min 6.00
– Partial: PO back to open file
– Final: PO to accounts payable
– Receiving report to accounts payable
6. Wait for quality control inspection 4 hrs -0-
7. Move: storeroom, shop floor, or internal department 30 min _______ 6.00
Total Cost of Receiving _______ $24.00
Exhibit 5.20
Receiving Costs