Cost Accounting For Dummies
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When cost accounting in a just-in-time (JIT) purchasing system, total purchasing costs often need to be adjusted. The JIT purchasing system requires that you place smaller orders more often. With JIT purchasing, your supplier ends up sending many more orders. You should plan for some errors in inspection. The more orders you place, the greater chance that some items weren’t inspected carefully.

You may be able to require the supplier to cover the customer return costs, if the return is due to their inspection error. This example assumes that you (the seller) cover the cost.

Say your average inventory for the current purchasing system is 2,000 units, and the current system assumes that you place 20 orders per year. That’s one order every two or three weeks. You don’t incur any stockout costs.

Your supplier has time to carefully inspect each item before it ships to you. As a result, all the products you receive work properly. All products you sell under the current purchasing system operate properly, so you don’t incur any costs for customer returns.

In reality, no purchasing system can eliminate the issue of a product breaking after the customer buys it. Hey, stuff just happens. You’ll deal with customer returns using any purchasing system. Now, for a moment, focus only on customer returns due to product defects that were there before the customer received the item.

Take a look at this table, which shows your JIT purchasing costs with stockout costs and customer return costs thrown in.

JIT Purchasing Costs with Stockouts and Returns
Type of Cost Amount
Subtotal — JIT purchasing cost $2,034,600
Stockout costs $250
Customer returns costs $16,000
JIT purchasing cost $2,050,850
Current purchasing costs $2,049,000
Total JIT less current cost $1,850

Now that you’ve added stockout and customer return costs, total JIT purchasing cost is now probably higher than your current system’s cost. At this point, you shouldn’t move to JIT purchasing because “There ain’t no money in it.”

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Kenneth W. Boyd has 30 years of experience in accounting and financial services. He is a four-time Dummies book author, a blogger, and a video host on accounting and finance topics.

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