Question

Why do companies that implement Lean Production tend to have minimal inventories?

Distinguish between a) a variable cost, b) a fixed cost, and c) a mixed cost.

Answer 1

LEAN PRODUCTION

  

• The main objective of LEAN PRODUCTION is to eliminate waste without sacrificing production . Typical manufacturing companies faces large amount of waste from its production activities . But practicing lean production would assist in identification and steady elimination of waste .
• One of the major concepts of lean production would be managing the inventories ( raw materials , work in progress , finished goods ) . The more the inventory is managed , the lower is the HOLDING COSTS .
• Inventory can be managed based on the demand of the customer similar to Just-in-time concept , standardizing the process of production so that the raw materials and finished goods flows continuously without any waste during production .
• To avoid such waste the companies implementing Lean production prefer minimal inventories.

DISTINGUISH BETWEEN VARIABLE COST , FIXED COST AND MIXED COST :

   A)  FIXED COST B)   VARIABLE COST    C) MIXED COST

MEANING Costs that do not change with   Costs that changes in proportion Costs that include both fixed and
increase or decrease in goods to production and output . variable costs .      or services produced or sold .

RATE PER Varies based on the      Remains same In spite of changes   Varies based on fixed and   UNIT production . in production units . variable cost .

TOTAL Remains same in spite Varies based on the production   Varies based on fixed and AMOUNT   of changes in production units units . variable cost.

OTHER Period cost, unit level cost semi-variable cost or NAMES supplementary cost semi fixed cost

EXAMPLE Rent , depreciation . Raw materials , wages . Transportation cost , senior management cost .