Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
Chapter 20 Inventory Cost Management Strategies
20.1 Evaluate relevant data and decide on the economic order quantity (EOQ).
1) Ordering costs consist of the costs of goods acquired from suppliers including freight and
transportation costs.
2) Purchasing costs consist of the costs of preparing and issuing a purchase order.
3) Carrying costs arise when a customer demands a unit of product and that unit is not readily available.
4) The economic-order-quantity decision model aids in the calculation of the optimal quantity of
inventory to order.
5) The reorder point is simplest to compute when either demand or lead time is certain.
6) Safety stock is the buffer inventory held as a cushion against unexpected increases in demand or lead
time, and unexpected unavailability of stock from suppliers.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
7) Inventory management is the planning, organizing, and controlling activities that focus on the flow of
materials into, through, and from the organization.
8) Purchasing costs generally include the freight and transportation costs on goods acquired from
suppliers.
9) Expediting costs of a stockout include the additional ordering costs, plus any associated transportation
costs.
10) Shrinkage costs result from water damage to clothing and other soft goods.
11) Shrinkage is measured by comparing the cost of inventory on the books to the cost of inventory
physically counted.
12) All inventory costs are available in financial accounting systems.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
13) To determine the Economic Order Quantity, the relevant ordering costs are minimized and the
relevant carrying costs are maximized.
14) The Economic Order Quantity increases with demand and ordering costs and decreases with carrying
costs.
15) The annual relevant total costs are at a minimum where relevant ordering costs and their relevant
carrying costs are equal.
16) When retailers are uncertain about demand for their products or availability of their products from
the suppliers, they often hold a fixed level of safety stock to make sure they will be able to fulfill the
customers’ needs.
17) The annual relevant carrying costs of inventory consist of incremental costs plus the opportunity cost
of capital.
18) Costs associated with holding inventories and the resulting opportunity cost of the investment tied up
in inventory fall into which of the following categories?
A) carrying costs
B) ordering costs
C) quality costs
D) stockout costs
E) stockin costs
Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
19) Costs incurred when preparing and issuing purchase orders are included in which of the following
categories?
A) carrying costs
B) ordering costs
C) purchasing costs
D) stockout costs
E) stockin costs
20) An important component in several of the cost categories which are not typically recorded in
accounting systems is
A) labour costs.
B) opportunity costs.
C) ordering costs.
D) quality costs.
E) quantity costs.
21) The simplest version of the economic-order-quantity decision model assumes all of the following
EXCEPT
A) the same fixed quantity is ordered at each reorder point.
B) demand ordering costs and carrying costs are certain.
C) purchase order lead time is certain.
D) no stockouts occur.
E) purchasing costs per unit depend on the quantity ordered.
22) The purchase-order lead time is
A) the difference between the time an order is placed and delivered.
B) the difference between the products ordered and the products received.
C) the discrepancies in purchase orders.
D) the time required to correct errors in the products received.
E) the discrepancies in inventory sheets.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
Use the information below to answer the following question(s).
Movie Time is a distributor of DVDs. Video Mart is a local retail outlet which sells blank and recorded
DVDs. Video Mart purchases DVDs from Movie Time at $5.00 each; the units are shipped in packages of
25. Movie Time pays all incoming freight, and Video Mart does not inspect the DVDs due to Movie
Time’s reputation for high quality. Annual demand is 104,000 DVDs at a rate of 2,000 units per week.
Video 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
$94.50
Carrying costs per package per year:
Relevant insurance, materials handling,
breakage, etc., per year
$3.50
23) What is the economic-order quantity?
A) 874 packages
B) 652 packages
C) 200 packages
D) 198 packages
E) 188 packages
24) What are the total relevant inventory costs?
A) $6,150.50
B) $4,182.56
C) $2.560.20
D) $1,951.70
E) $2,462.41
Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
25) How many deliveries will be made during each time period?
A) 22.1 deliveries
B) 26.0 deliveries
C) 29.4 deliveries
D) 32.0 deliveries
E) 29.6 deliveries
Use the information below to answer the following question(s).
Office Supply House purchases 4,160 reams of paper per year, ordered in lots of 80 reams per week at
$150 per ream. The vendor covers all shipping costs. Office Supply House is not required to inspect the
shipment upon entry. Office Supply House earns 20% on its cash investments. The purchase-order lead
time is two weeks. The following cost data are available:
Relevant ordering costs per purchase order
$53.75
Relevant insurance, materials handling,
breakage, and so on, per year
$4.25
26) What is the economic-order quantity?
A) 324 reams
B) 235 reams
C) 114 reams
D) 100 reams
E) 110 reams
Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
27) What are the total relevant inventory costs at the economic–order quantity?
A) $3,913.65
B) $3,948.50
C) $4,975.86
D) $6,238.62
E) $4,862.84
28) What are the total relevant costs assuming the quantity ordered equals 80 reams?
A) $3,913.65
B) $3,948.50
C) $4,075.25
D) $4,165.00
E) $5,326.49
29) How many deliveries will be required at the economic–order quantity level?
A) 17.7 deliveries
B) 36.5 deliveries
C) 41.6 deliveries
D) 52.3 deliveries
E) 18.9 deliveries
Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
30) The level of inventory which should trigger a new order is called
A) the customer demand level.
B) the supply equal demand level.
C) the stockout level.
D) the reorder point.
E) the inventory level.
31) Disc Company sells 400 discs per week. Purchase-order lead time is 3 weeks and the economic-order
quantity is 900 units. What is the reorder point?
A) 950 units
B) 1,200 units
C) 3,500 units
D) 4,500 units
E) 5,600 units
32) Owen-King Company sells optical equipment. Lens Company manufactures special glass lens. Owen–
King Company orders 5,200 lens per year, 100 per week at $20 per lens. Lens Company covers all
shipping costs. Owen-King Company earns 30% on its cash investments. The purchase-order lead time is
2.5 weeks. Owen-King Company sells 125 lens per week. The following data is available:
Relevant ordering costs per purchase order
$21.25
Relevant insurance, materials handling,
breakage, and so on, per year
$2.50
What is the economic–order quantity for Owen-King Company?
A) 325 lens
B) 297 lens
C) 210 lens
D) 161 lens
E) 92 lens
Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
33) Owen-King Company sells optical equipment. Lens Company manufactures special glass lens. Owen–
King Company orders 5,200 lens per year, 100 per week at $20 per lens. Lens Company covers all
shipping costs. Owen-King Company earns 30% on its cash investments. The purchase-order lead time is
2.5 weeks. Owen-King Company sells 125 lens per week. The following data is available:
Relevant ordering costs per purchase order
$21.25
Relevant insurance, materials handling,
breakage, and so on, per year
$2.50
What is the reorder point?
A) 220.5 lens
B) 312.5 lens
C) 397.5 lens
D) 415.5 lens
E) 561.9 lens
34) The following information has been gathered for Product A:
Annual demand
760 units
Purchase price per unit
$300
Orders per year
10
Average daily demand
2.5 units
Lead time in days
10
Cost of placing an order
$40
Relevant insurance, handling. etc costs
$8
Required return
10%
What are the annual carrying costs if the company orders at the EOQ amount?
A) $80
B) $400
C) $1,520
D) $12,800
E) $16,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
35) The following information has been gathered for Product A:
Annual demand
760 units
Orders per year
10
Average daily demand
2.5 units
Lead time in days
10
Cost of placing an order
$40
What is the economic order quantity?
A) 9 units
B) 10 units
C) 20 units
D) 40 units
E) 46 units
36) The following information has been gathered for Product A:
Annual demand
760 units
Orders per year
10
Average daily demand
2.5 units
Lead time in days
10
Cost of placing an order
$40
What is the reorder point?
A) 38
B) 25
C) 30
D) 80
E) 100
Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
37) The inventory that is held to offset unexpected increases in demand or lead time and unexpected
unavailability of stock from suppliers is primarily known as
A) inventory stock.
B) over-supply stock.
C) safety stock.
D) surplus stock.
E) obsolete stock.
38) Which of the following statements is true?
A) The reorder point is the point at which the amount of inventory on hand equals the amount needed to
cover sales during the lead time.
B) The reorder point is the minimum level of inventory allowed during a particular period.
C) The safety stock is the amount of stock that must be on hand to cover sales during lead time.
D) The safety stock is the minimum level of inventory that must remain on hand.
E) The safety stock is the minimum level of inventory that must remain at the customers.
39) What are the major relevant costs in maintaining safety stock?
A) carrying costs and purchasing costs
B) ordering costs and purchasing costs
C) ordering costs and stockout costs
D) stockout costs and carrying costs
E) stockout costs and purchasing costs
40) The total annual relevant cost equation, TRC, includes all of the following inputs EXCEPT
A) ordering costs per purchase order.
B) demand in units.
C) reorder point.
D) carrying cost per unit.
E) EOQ.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
41) The economic-order quantity decision model
A) calculates the amount of inventory that may be purchased with the monetary constraint.
B) determines the minimum amount of inventory to purchase.
C) determines the maximum amount of inventory to keep on hand.
D) determines the optimal amount of inventory to order.
E) calculates the numbers of employees needed.
Answer the following question(s) using the information below:
Green Grass Incorporated is a distributor of golf balls. Garry’s Golf Supplies is a local retail outlet which
sells golf balls. Garry‘s purchases the golf balls from Green Grass Incorporated at $0.75 per ball; the golf
balls are shipped in cartons of 72. Green Grass Incorporated pays all incoming freight, and Garry’s Golf
Supplies does not inspect the balls due to Green Grass’ reputation for high quality. Annual demand is
172,800 golf balls at a rate of 3,322 balls per week. Garry’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
42) If Garry’s makes an order (1/12 of annual demand) once per month, what are the relevant total costs?
A) $1,500.00
B) $2,085.67
C) 2,225.00
D) $3,000.00
E) $680.00
Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
43) What is the economic order quantity?
A) 200 cartons
B) 288 cartons
C) 300 cartons
D) 883 cartons
E) 218 cartons
44) Purchasing at the EOQ recommended level, how many deliveries will be made during each time
period?
A) 2.0 deliveries
B) 6.0 deliveries
C) 8.3 deliveries
D) 12 deliveries
E) 2.7 deliveries
Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
45) Purchasing at the EOQ recommended level, what are the relevant total costs?
A) $1,500.00
B) $2,085.67
C) $2,225.00
D) $3,000.00
E) $680.00
Answer the following question(s) using the information below:
The Wood Furniture company produces a specialty wood furniture product, and has the following
information available concerning its inventory items:
Relevant ordering costs per purchase order
$150
Relevant carrying costs per year:
Required annual return on investment
10%
Required other costs per year
$1.40
Annual demand is 10,000 packages per year. The purchase price per package is $16.
46) What is the economic order quantity?
A) 150,000 units
B) 1,000 units
C) 75,000 units
D) 5,000 units
E) 1,464 units
Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
47) What are the relevant total costs at the economic order quantity?
A) $1,000
B) $1,500
C) $3,000
D) $3,500
E) $2,050
48) What are the total relevant costs, assuming the quantity ordered equals 500 units?
A) $3,500
B) $500
C) $4,000
D) $3,750
E) $3,350
49) How many deliveries will be required at the economic order quantity?
A) 1.0 delivery
B) 5.1 deliveries
C) 8.2 deliveries
D) 10.0 deliveries
E) 6.8 deliveries
Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
50) Wilson’s Deli can predict with virtual certainty the demand for its products. Wilson’s sells 20 hams
per week. Purchase-order lead time is 2 weeks and the economic-order quantity is 50 hams. What is the
reorder point?
A) 20 hams
B) 30 hams
C) 40 hams
D) 50 hams
E) 100 hams
51) If Ferry Company has a safety stock of 160 units and the average daily demand is 20 units, how many
days can be covered if the shipment from the supplier is delayed by 12 days?
A) 12.0 days
B) 10.0 days
C) 8.0 days
D) 6.7 days
E) 13.33 days
52) If Jackson Collectibles, Inc. has a safety stock of 35 units and the average weekly demand is 14 units,
how many days can be covered if the shipment from the supplier is delayed?
A) 2.5 days
B) 17.5 days
C) 21 days
D) 35 days
E) 7.0 days
Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
53) Sandrington Ltd. operates a retail bicycle shop. Wheel covers are popular with customers.
Sandrington purchases these covers for $48 (per pair) and expects to sell 5,000 pairs per year. Ordering
costs are estimated at $180 per order and relevant insurance handling etc. costs are estimated at $0.30 per
month. The company has established a 14% annual return on investment. The EOQ quantity for
Sandrington is:
A) 418 units
B) 506 units
C) 2,449 units
D) 707 units
E) 24 units
54) Sandrington Ltd. operates a retail bicycle shop. Wheel covers are popular with customers.
Sandrington purchases these covers for $48 (per pair) and expects to sell 5,000 pairs per year. Ordering
costs are estimated at $180 per order and relevant insurance handling etc. costs are estimated at $0.30 per
month. The company has established a 14% annual return on investment. At the EOQ quantity,
Sandrington’s total relevant inventory costs would be:
A) $2,546
B) $3,557
C) $735
D) $4,310
E) $6,467
55) Which of the following factor(s) would not cause a reduction in the EOQ?
A) long-run purchasing arrangements, fixing price and quality
B) electronic commerce
C) increasing use of purchase order cards
D) labour-intensive procurement methods
E) increase in carrying cost [C]
Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
56) The EOQ model is designed to emphasize the tradeoff between which of the following factors?
A) carrying costs and ordering costs
B) purchasing costs and carrying costs
C) stockout costs and carrying costs
D) purchasing costs and ordering costs
E) stockout costs and ordering costs
57) Due to unprecedented growth during the year Denise’s Flowers 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:
For each of the following items tell whether the action caused an increase, a decrease, or no change to the
EOQ.
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
58) Berryton Products‘ only product has an annual demand of 1,000 units. The cost of placing an order is
$20 and the cost of carrying one unit in inventory for one year is $10.
Required:
Determine the economic order quantity.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
20–19
59) Bottle It has one particular product that has an annual demand of 1,000 units. Total manufacturing
costs per unit total $40 and set-up costs per batch are $15. Direct material ordering costs for the product
total $10 per order. Currently the carrying costs per unit are 25 percent of manufacturing costs.
Required:
Determine the economic manufacturing (order) quantity.
60) The only product of a company has an annual demand of 2,000 units. The cost of placing an order is
$40
and the cost of carrying one unit in inventory for one year is $16.
Required:
Determine the economic order quantity.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 20 – Inventory Cost Management Strategies
61) The annual demand for red, medium polo shirts, for Clothes, Inc. is 25,000 units. The cost of placing
an order is $80, and the cost of carrying one unit in inventory for one year is $25.
Required:
a. Use the economic order quantity model to determine the optimal order size.
b. Determine the reorder point assuming a lead time of 10 days, and a work year of 250 days.
c. Assuming the maximum lead time is 20 days and the maximum daily demand is 125 units, determine
the safety stock required to prevent stockouts.
62) An inventory item of XYZ Manufacturing has an average daily demand of 10 units with a maximum
daily demand of 12 units. The economic order quantity is 200 units. The reorder point is 50 units. Safety
stocks are set at 94 units.
Required:
a. Determine the inventory level at the time of reordering.
b. Determine the purchase order lead time.
d. Determine the maximum purchase order lead time that the company can experience before it has a
stockout.