Which of the following categories of costs are important when managing inventories

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ACCT3203 Contemporary Management Accounting

Tutorial Questions with Suggested Answers

Inventory Management, Just-in-Time, and Simplified Costing Methods

PART (A): Multiple Choice

Instruction

: Select the

best

answer for the following questions.

1.

Which of the following categories of costs are important when managing inventories of goods for

sale according to the authors of the text?

a.

purchasing, ordering, supply, spoilage, and opportunity

b.

purchasing, stockout, carrying, ordering, costs of quality, and shrikage costs

c.

buying, holding, invoicing, opportunity, and investment

d.

supply, obsolescence, holding, stockout, and transportation-in

2.

The economic order quantity ignores:

a.

purchasing costs

b.

relevant costs

c.

stock-out costs

d.

both (a) and (c) are correct

1

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 3 TO 5:

Raphael Company sells optical equipment. Lens Company manufactures special glass lenses. Raphael

Company orders 5,200 lenses per year, 100 per week, at $20 per lens. Lens Company covers all shipping

costs. Raphael Company earns 30% on its cash investments. The purchase-order lead time is 2 weeks.

Raphael Company sells 125 lenses per week. The following data are available:

Relevant ordering costs per purchase order

$21.25

Relevant insurance, materials handling, breakage, and so on, per year

$ 2.50

3.

What is the economic order quantity for Raphael Company?

a.

325 lenses

b.

297 lenses

c.

210 lenses

d.

161 lenses

EOQ

=√(2DP/C) = √(2x5,200x$21.25)/[($20x30%)*+$2.50]

=161.25

Ξ

161

Carrying costs*

= Relevant insurance, materials handling, breakeage .. + Opportunity Costs

= $2.50 + ($20 x30%) =2.50 +6.00

4.

What is the reorder point?

a.

220 lenses

b.

250 lenses

c.

375 lenses

d.

450 lenses

Reorder point

=Number of units sold x Purchase order lead time

=

125 lenses x 2 weeks

=

250 lenses

5.

Determine the safety stock required to prevent stock-outs assuming the

maximum lead time

is

3

weeks

and the

maximum weekly demand

is

150 lenses

a.

200 lenses

b.

250 lenses

c.

375 lenses

d.

450 lenses

e.

none of the above.

Safety stock = [Maximum lead time demand] – Re-order point

Maximum demand per week

150 lenses

2

Maximum lead time

x 3 weeks

Maximum lead time demand

450 lenses

Reorder point without safety stock

250 lenses

Safety stock

200 lenses

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 6 TO 9:

Short Grass Incorporated is a distributor of golf balls. Martin’s Golf Supplies is a local retail outlet which

sells golf balls. Martin’s purchases the golf balls from Short Grass Incorporated at $0.75 per ball; the golf

balls are shipped in cartons of 72. Short Grass Incorporated pays all incoming freight, and Martin’s Golf

Supplies does not inspect the balls due to Short Grass’ reputation for high quality. Annual demand is

155,520 golf balls. Martin’s Golf Supplies earns 12% on its cash investments. The purchase-order lead

time is one month. The following costs data are available:

Relevant ordering costs per purchase order

$125.00

Carrying costs per carton per year:

Relevant insurance, material handling, breakage, etc., per year

$ 0.77

6.

If Martin’s makes an order (1/12 of annual demand) once per month, what are the

relevant total

costs

?

a.

$1,500

b.

$652.50

c.

$2,152.50

d.

$3,000

Order Quantity = Annual Demand/12

= 155,520÷12

= 12,960 golf balls per month

= 12,960 ÷72

=

180 carton

per month

RTC = Ordering Costs + Carrying Costs

Carrying Costs per carton = [$0.77 + ($0.75 x 72 x 12%)] = $0.77 + 6.480=

$7.25

Relevant Total Costs

= [Number of Orders x Ordering Costs] + [Average Inventory x CC per carton

= (12 x $125) + [(180/2) x $7.25]

= $ 1,500 + $652.50

=

$2,152.50

3