Cost Accounting, 15e Global Edition (Horngren/Datar/Rajan)
Chapter 20 Inventory Management, Just-in-Time, and Simplified Costing Methods
Objective 20.1
1) Among different types of costs associated with inventory, the costs of obtaining purchase approvals
are ________.
A) purchasing costs
B) ordering costs
C) stockout costs
D) carrying costs
2) Among different types of costs associated with inventory, the incoming freight charges of inventories
are ________.
A) purchasing costs
B) ordering costs
C) stockout costs
D) carrying costs
3) Among different types of costs associated with inventory, the opportunity cost of the investment tied
up in inventory is a(n) ________.
A) purchasing cost
B) ordering cost
C) stockout cost
D) carrying cost
4) The costs that result from theft of inventory are ________.
A) shrinkage costs
B) external failure costs
C) stockout costs
D) costs of quality
5) The costs that result when a company runs out of a particular item for which there is a customer
demand are ________.
A) shrinkage costs
B) shortage costs
C) stockout costs
D) EOQ estimation costs
6) Among different types of costs associated with inventory, the costs that result when features and
characteristics of a product or service are not in conformance with the customer specifications are
________.
A) EOQ estimation costs
B) costs of quality
C) purchasing costs
D) shrinkage costs
7) Which of the following statements is true of costs associated with goods for sale?
A) Appraisal costs is a subcategory of shrinkage costs.
B) Special processing costs are always part of purchasing costs.
C) All inventory costs are not available in financial accounting systems.
D) Stockout costs are costs that arise when a company runs out of a particular item for which there is no
customer demand.
8) Among different types of costs associated with inventory, four categories of quality costs are ________.
A) control costs, inspection costs, internal failure costs, and external failure costs
B) prevention costs, inspection costs, internal failure costs, and external failure costs
C) prevention costs, appraisal costs, internal failure costs, and external failure costs
D) prevention costs, control costs, internal failure costs, and external failure costs
9) Which of the following statements is true of costs associated with goods for sale?
A) Information-gathering technology increases the reliability and timeliness of inventory information and
increases the costs related to inventory.
B) Opportunity costs are not recorded in financial accounting systems because they are not a significant
component in several cost categories.
C) The costs of receiving and inspecting the items are included in the purchase orders are ordering costs.
D) Opportunity costs are recorded in financial accounting systems but are a not significant component in
several cost categories.
10) Most firms try not to hold more inventory than necessary because shrinkage costs generally decrease
when a firm’s inventory increases.
11) Inventory management is the planning, organizing, and controlling activities that focus on the flow of
materials into, through, and out of the organization.
12) Purchasing costs arise in preparing and issuing purchase orders, receiving and inspecting the items
included in the orders, and matching invoices received, purchase orders, and delivery records to make
payments.
13) The opportunity cost of the stockout includes lost contribution margin on the sale not made plus any
contribution margin lost on future sales due to customer ill will.
14) Stockout costs arise when an organization experiences an ability to deliver its goods to its customers.
15) Shrinkage is measured by adding (a) the cost of the inventory recorded on the books in the absence of
theft and other incidents just mentioned, and (b) the cost of inventory when physically counted.
16) Freight in charges forms part of purchasing costs of inventory.
17) All inventory costs are available in financial accounting systems.
18) Managing inventories to increase net income requires companies to effectively manage costs
associated with goods for sale.
Required:
Classify the below listed items as either Purchasing Costs, Ordering Costs, Carrying Costs, Stockout
Costs, Costs of Quality, or Shrinkage Costs.
________ a. costs of obtaining purchase approvals
________ b. costs resulting from embezzlement by employees
________ c. internal failure costs
________ d. opportunity cost of the investment tied up in inventory
________ e. costs associated with storage
________ f. costs of lost sales as a result of not having an item requested by a customer
________ g. freight-in charges
________ h. special processing costs
________ i. costs of wages for work-in-process inspections
________ j. costs that result from misclassifications and clerical errors
Objective 20.2
1) Which of the following statements is true of the the economic order quantity decision model?
A) The economic order quantity increases with higher demand and higher carrying costs and decreases
with higher ordering costs.
B) The simplest version of the economic order quantity model assumes there are only ordering costs,
carrying costs, stockout costs, and purchasing costs.
C) It assumes the purchase order lead time is not known with certainty.
D) The larger the order quantity, the lower the annual relevant ordering costs and the higher the annual
relevant carrying costs.
2) Which of the following is the correct mathematical expression to calculate annual relevant ordering
costs?
A) Demand in units for a specified period / (Relevant ordering cost per purchase order × Size of each
order)
B) Size of each order × Relevant ordering cost per purchase order / Demand in units for a specified period
C) (Demand in units for a specified period / Size of each order) × Relevant ordering cost per purchase
order
D) (Demand in units for a specified period – Size of each order) × Relevant ordering cost per purchase
order
3) Under economic-order-quantity decision model, it is assumed that ________.
A) the quantity ordered can vary at each reorder point
B) demand, ordering costs, and carrying costs are uncertain
C) the purchasing cost per unit is affected by the order quantity
D) no inventory stockouts occur
4) The following information applies to Krynton Company, which supplies microscopes to laboratories
throughout the country. Krynton purchases the microscopes from a manufacturer which has a reputation
for very high quality in its manufacturing operation.
Annual demand (weekly demand = 1/52 of annual demand) 52,000 units
Orders per year 20
Lead time in days 15 days
Cost of placing an order $100
What is the reorder point?
A) 1,040 units
B) 2,143 units
C) 1,580 units
D) 3,080 units
5) The economic order quantity model completely ignores ________.
A) carrying costs
B) ordering costs
C) stockout costs
D) the size of a purchase order
Answer the following questions using the information below:
Globe Inc. is a distributor of DVDs. DVD Mart is a local retail outlet which sells blank and recorded
DVDs. DVD Mart purchases tapes from Globe at $25.00 per DVD; DVDs are shipped in packages of 60.
Globe pays all incoming freight, and DVD Mart does not inspect the DVDs due to Globe’s reputation for
high quality. Annual demand is 312,000 DVDs at a rate of 6,000 DVDs per week. DVD Mart earns 15% on
its cash investments. The purchase-order lead time is one week. The following cost data are available:
Relevant ordering costs per purchase order $114.50
Carrying costs per package per year:
Relevant insurance, materials handling,
breakage, etc., per year $ 4.50
6) What is the economic order quantity?
A) 64.08 packages
B) 21.04 packages
C) 37.50 packages
D) 72.03 packages
7) What are the annual relevant ordering costs?
A) $9,057
B) $7,157
C) $8,266
D) $7,121
8) What are the annual relevant carrying costs?
A) $7,122
B) $8,265
C) $9,057
D) $7,157
9) What are the relevant total costs?
A) $14,279
B) $18,114
C) $16,531
D) $14,278
10) How many deliveries will be made during each time period?
A) 72.19 deliveries
B) 60.11 deliveries
C) 89.23 deliveries
D) 52.18 deliveries
Answer the following questions using the information below:
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 at a rate of 2,991 balls per week. Martin’s Golf Supplies earns 12% on its cash
investments. The purchase-order lead time is one week. The following cost data are available:
Relevant ordering costs per purchase order $125.00
Carrying costs per carton per year:
Relevant insurance, materials handling,
breakage, etc., per year $ 0.77
11) If Martin’s makes an order (1/12 of annual demand) once per month, what are the relevant total costs?
A) $1,500.00
B) $652.50
C) $2,152.50
D) $3,000.00
12) What is the economic order quantity?
A) 180 cartons
B) 273 cartons
C) 270 cartons
D) 360 cartons
13) Purchasing at the EOQ recommended level, how many deliveries will be made during each time
period?
A) 2 deliveries
B) 6.0 deliveries
C) 7.91 deliveries
D) 12 deliveries
14) Purchasing at the EOQ recommended level, what are the relevant total costs?
A) $1,500.00
B) $1,978.60
C) $989.37
D) $3,000.00
15) The purchase-order lead time is the ________.
A) time between placing an order and its delivery
B) time between receiving a customer order and producing the products
C) time between receiving a customer order and delivering the items
D) time required to correct errors in the defective products
16) Which of the following statements is true of the economic-order-quantity decision model?
A) It assumes purchasing costs are relevant because the cost per unit changes due to the quantity
ordered.
B) It assumes that quality costs are considered only to the extent that these costs affect ordering or
carrying costs.
C) It assumes that stockout costs are relevant even if no stockouts occur.
D) It assumes that ordering costs and carrying costs are irrelevant.
17) What is the economic order quantity for Vision?
A) 457 lenses
B) 328 lenses
C) 266 lenses
D) 161 lenses
18) What is the reorder point?
A) 500 lenses
B) 562.5 lenses
C) 1050 lenses
D) 1062.5 lenses
19) Beryl Company sells 500 flash drives per week. Purchase-order lead time is 1 1/2 weeks and the
economic-order quantity is 1,125 units. What is the reorder point?
A) 1,687.5 units
B) 937.5 units
C) 750 units
D) 1,125 units
20) Delinz Company can predict with virtual certainty the demand for its products. Delinz’s sells 75 hams
per week. Purchase-order lead time is 3 weeks and the economic-order quantity is 150 hams. What is the
reorder point?
A) 675 hams
B) 225 hams
C) 450 hams
D) 150 hams
21) Miniature Company sells stuffed tigers. Birtal Inc. manufactures many different stuffed animals.
Miniature orders 20,800 tigers per year, 400 per week, at $15 per tiger. The manufacturer covers all
shipping costs. Miniature earns 15% on its cash investments. The purchase-order lead time is 3 weeks.
Miniature sells 310 tigers per week. The following data are available (based on management’s estimates):
Estimated ordering costs per purchase order $22
Estimated insurance, materials handling, breakage,
and so on, per year $7
Actual ordering costs per order $25
What is the economic order quantity using the estimated amounts?
A) 637.7 stuffed tigers
B) 314.5 stuffed tigers
C) 191 stuffed tigers
D) 325 stuffed tigers
22) Relevant total costs in the economic order quantity decision model equal relevant ordering costs plus
relevant ________.
A) carrying costs
B) stockout costs
C) quality costs
D) purchasing costs
Answer the following questions using the information below:
The Allianz Company produces a specialty wood furniture product, and has the following information
available concerning its inventory items:
Relevant ordering costs per purchase order $450
Relevant carrying costs per year for each package:
Required annual return on investment 15%
Required other costs per year $4
Annual demand is 30,000 packages per year. The purchase price per package is $48.
23) What is the economic order quantity?
A) 1,936.50 units
B) 1,414.21 units
C) 1,552.65 units
D) 2,598.07 units
24) What is the annual relevant ordering costs?
A) $5,196
B) $8,695
C) $6,971
D) $9,547
25) What is the annual relevant carrying costs?
A) $5,196
B) $6,971
C) $8,695
D) $3105.30
26) What are the relevant total costs at the economic order quantity?
A) $17,390
B) $10,392
C) $13,942
D) $11,800
27) Which of the following statements is true of Allianz’s EOQ system costs?
A) At EOQ, the annual relevant ordering costs is exactly the half of annual relevant carrying costs.
B) At EOQ, the annual relevant carrying costs is higher than the annual relevant ordering costs.
C) At EOQ, the annual relevant carrying costs is exactly the half of the annual relevant total costs.
D) At EOQ, the annual relevant carrying costs is equal to the annual relevant total costs.
28) What are the total relevant costs, assuming the quantity ordered equals 1,000 units?
A) $17,100
B) $16,500
C) $15,500
D) $19,100
29) How many deliveries will be required at the economic order quantity?
A) 15.50 deliveries
B) 15 deliveries
C) 19.32 deliveries
D) 21.21 deliveries
30) The annual relevant total costs are at a minimum when relevant ________.
A) ordering costs are greater than the relevant carrying costs
B) carrying costs are greater than the relevant ordering costs
C) carrying costs are equal to relevant ordering costs
D) carrying costs are equal to relevant purchasing costs
Answer the following questions using the information below:
The following information applies to Krynton Corp. which supplies microscopes to laboratories
throughout the country. Krynton purchases the microscopes from a manufacturer which has a reputation
for very high quality in its manufacturing operation.
Annual demand (weekly demand= 1/52 of annual demand) 13,000 units
Orders per year as per EOQ model 13
Lead time in days 15 days
Annual relevant carrying costs $2,600
31) What are the annual relevant ordering costs, assuming that relevant total costs are minimal?
A) $1,000
B) $2,253.33
C) $2,600
D) $6,000
32) Assuming each order was made at the economic order quantity amount, what is the cost of placing an
order?
A) $322 per order
B) $200 per order
C) $231 per order
D) $417 per order
33) What is the economic order quantity assuming each order was made at the economic-order-quantity
amount?
A) 1,485 units
B) 1,000 units
C) 780 units
D) 3,000 units
34) If Premium Company has a safety stock of 480 units and the average daily demand is 60 units, how
many days can be covered if the shipment from the supplier is delayed by 4 days?
A) 8 days
B) 4 days
C) 12 days
D) 7 days
35) If Kenton Inc. has a safety stock of 175 units and the average weekly demand is 25 units, how many
days can be covered if the shipment from the supplier is delayed by 12 days?
A) 12 days
B) 49 days
C) 61 days
D) 37 days
36) The optimal safety stock level is the quantity of safety stock that minimizes the sum of the annual
relevant ________.
A) stockout costs and carrying costs
B) ordering costs and carrying costs
C) ordering costs and stockout costs
D) ordering costs and purchasing costs
37) Companies use safety stock as a buffer against unexpected decreases in demand.
38) To determine the Economic Order Quantity, the relevant ordering costs are maximized and the
relevant carrying costs are minimized.
39) The optimal safety-stock level is the quantity of safety stock that minimizes the sum of annual
relevant stockout and ordering costs.
40) The EOQ model is solved using calculus but the key intuition is that relevant total costs are
minimized when relevant ordering costs equal relevant carrying costs.
41) The reorder point is the quantity level of inventory at which a new purchase order is made.
42) Due to unprecedented growth during the year, Flowers by Kelly decided to use some of its surplus
cash to increase the size of several inventory order quantities that had been previously determined using
an EOQ model.
Required:
Identify whether increasing the size of inventory orders will increase, decrease, or have no effect on each
of the following items.
________ a. Average inventory
________ b. Cost of goods sold
________ c. Number of orders per year
________ d. Total annual carrying costs
________ e. Total annual carrying and ordering costs
________ f. Total annual ordering costs
43) The only product of a company has an annual demand of 14,000 units. The cost of placing an order is
$70 and the cost of carrying one unit in inventory for one year is $20.
Required:
Determine the economic order quantity.