Chapter 20—Inventory Management and Variable and Absorption
Costing Key
1. The formula for a typical income statement is:
2. What type of firm could have work-in-process inventory?
3. What type of firm would have a large inventory of goods completed and ready to sell?
4. When comparing income statements, which type of company does not have a section for cost of goods or
services sold?
5. When comparing income statements, which type of company does not have a section for selling and general
administrative expenses?
6. When comparing balance sheets, which type of company has a significant materials inventory?
7. When comparing balance sheets, which type of company has an inventory of work-in-process services?
8. When comparing balance sheets, which type of company could not have a supplies inventory?
9. The formula for inventory turnover is:
10. Which of the following is not true of inventory turnover?
11. Which of the following values would be the most desirable for inventory turnover?
12. Exhibit 20-1
The following information is for Saratoga Company:
Raw materials used during the year
$375,000
Beginning raw materials inventory
28,000
Ending raw materials inventory
30,000
Applied manufacturing overhead
700,000
Direct labor costs
250,000
Beginning work-in-process inventory
100,000
Ending work-in-process inventory
90,000
Cost of goods sold
900,000
Beginning finished goods inventory
125,000
Ending finished goods inventory
110,000
Refer to Exhibit 20-1. Determine the raw materials inventory turnover (rounded).
13. Exhibit 20-1
The following information is for Saratoga Company:
Raw materials used during the year
$375,000
Beginning raw materials inventory
28,000
Ending raw materials inventory
30,000
Applied manufacturing overhead
700,000
Direct labor costs
250,000
Beginning work-in-process inventory
100,000
Ending work-in-process inventory
90,000
Cost of goods sold
900,000
Beginning finished goods inventory
125,000
Ending finished goods inventory
110,000
Refer to Exhibit 20-1. Determine the number of days in ending raw materials inventory. Assume Saratoga uses a 365-day year.
14. Exhibit 20-1
The following information is for Saratoga Company:
Raw materials used during the year
$375,000
Beginning raw materials inventory
28,000
Ending raw materials inventory
30,000
Applied manufacturing overhead
700,000
Direct labor costs
250,000
Beginning work-in-process inventory
100,000
Ending work-in-process inventory
90,000
Cost of goods sold
900,000
Beginning finished goods inventory
125,000
Ending finished goods inventory
110,000
Refer to Exhibit 20-1. Determine the inventory turnover for work-in-process inventory.
15. Exhibit 20-1
The following information is for Saratoga Company:
Raw materials used during the year
$375,000
Beginning raw materials inventory
28,000
Ending raw materials inventory
30,000
Applied manufacturing overhead
700,000
Direct labor costs
250,000
Beginning work-in-process inventory
100,000
Ending work-in-process inventory
90,000
Cost of goods sold
900,000
Beginning finished goods inventory
125,000
Ending finished goods inventory
110,000
Refer to Exhibit 20-1. Determine the work-in-process days in inventory. Assume a 365-day year.
16. Exhibit 20-1
The following information is for Saratoga Company:
Raw materials used during the year
$375,000
Beginning raw materials inventory
28,000
Ending raw materials inventory
30,000
Applied manufacturing overhead
700,000
Direct labor costs
250,000
Beginning work-in-process inventory
100,000
Ending work-in-process inventory
90,000
Cost of goods sold
900,000
Beginning finished goods inventory
125,000
Ending finished goods inventory
110,000
Refer to Exhibit 20-1. Determine the inventory turnover for the finished goods inventory.
17. Exhibit 20-1
The following information is for Saratoga Company:
Raw materials used during the year
$375,000
Beginning raw materials inventory
28,000
Ending raw materials inventory
30,000
Applied manufacturing overhead
700,000
Direct labor costs
250,000
Beginning work-in-process inventory
100,000
Ending work-in-process inventory
90,000
Cost of goods sold
900,000
Beginning finished goods inventory
125,000
Ending finished goods inventory
110,000
Refer to Exhibit 20-1. Determine the number of days in finished goods inventory. Assume a 365-day year.
18. Maintaining too little inventory causes all but which of the following problems?
19. When calculating ROI on inventory, inventory turnover is calculated by:
20. Maintaining smaller inventories should lead to:
21. Carrying too much inventory can cause which of the following problems?
22. Inventory shrinkage is caused by:
23. Use of the ROI formula can help a company:
24. The return on inventory investment formula is:
25. Which of the following is a disadvantage of low inventory levels?
26. ABC Co. has a gross margin of $42,750. LMN Co. has a gross margin of $49,100. XYZ Co. has a gross
margin of $38,190. All three companies sell the same product. Which company did a better job of selling its
product?
27. Exhibit 20-2
Calumet Company sells slippers. The following information is available for Calumet’s inventory for 2011:
Units lost due to theft, breakage, etc.
3,000
Monthly units sold at below market price
10,000
Average monthly inventory level
30,000
Overhead cost of managing a purchase order
$150
Original market sales price
$ 15
Actual sales price or items sold below market price
$ 10
Activity-based monthly cost of maintaining a unit of inventory
$ 3
Number of purchase events during the year
15
Refer to Exhibit 20-2. Calculate Calumet’s shrinkage loss for the year.
28. Exhibit 20-2
Calumet Company sells slippers. The following information is available for Calumet’s inventory for 2011:
Units lost due to theft, breakage, etc.
3,000
Monthly units sold at below market price
10,000
Average monthly inventory level
30,000
Overhead cost of managing a purchase order
$150
Original market sales price
$ 15
Actual sales price or items sold below market price
$ 10
Activity-based monthly cost of maintaining a unit of inventory
$ 3
Number of purchase events during the year
15
Refer to Exhibit 20-2. Calculate Calumet’s market loss for the year.
29. Exhibit 20-2
Calumet Company sells slippers. The following information is available for Calumet’s inventory for 2011:
Units lost due to theft, breakage, etc.
3,000
Monthly units sold at below market price
10,000
Average monthly inventory level
30,000
Overhead cost of managing a purchase order
$150
Original market sales price
$ 15
Actual sales price or items sold below market price
$ 10
Activity-based monthly cost of maintaining a unit of inventory
$ 3
Number of purchase events during the year
15
Refer to Exhibit 20-2. Calculate Calumet’s overhead cost for the year.
30. Exhibit 20-2
Calumet Company sells slippers. The following information is available for Calumet’s inventory for 2011:
Units lost due to theft, breakage, etc.
3,000
Monthly units sold at below market price
10,000
Average monthly inventory level
30,000
Overhead cost of managing a purchase order
$150
Original market sales price
$ 15
Actual sales price or items sold below market price
$ 10
Activity-based monthly cost of maintaining a unit of inventory
$ 3
Number of purchase events during the year
15
Refer to Exhibit 20-2. Calculate Calumet’s order costs for the year.
31. Exhibit 20-3
Florence Company sells lawn mowers. The following information is available for Florence’s inventory for 2011:
Units purchased at undiscounted prices before price increase
500
Units purchased after price increase
300
Original actual price
$225
Discounted purchase price
$200
New actual price
$270
Refer to Exhibit 20-3. Calculate Florence’s lost discount for the year.
32. Exhibit 20-3
Florence Company sells lawn mowers. The following information is available for Florence’s inventory for 2011:
Units purchased at undiscounted prices before price increase
500
Units purchased after price increase
300
Original actual price
$225
Discounted purchase price
$200
New actual price
$270
Refer to Exhibit 20-3. Calculate Florence’s costs due to the price increase for the year.
33. For the year ended 2011, Equine Supplies had cost of goods sold of $280,000 and gross margin of $400,000.
Inventory levels were as follows: $40,000 at December 31, 2010 and $44,000 at December 31, 2011. ROI in
inventory is:
34. During 2011, the Lianro Company had sales of $375,000 and cost of goods sold of $281,250. Merchandise
inventory at the beginning of the year was $118,000 and at the end of the year, it was $124,000. The return on
investment in inventory was:
35. Which of the following is an opportunity cost associated with financial holding costs?
36. Economic profit is:
37. Financial holding cost in a merchandising firm is calculated by which formula?
38. Merchandising companies can have holding costs associated with merchandise inventory. In service firms,
the account that would have a comparable holding cost would be:
39. Portage Company made the following inventory purchases during the year:
January 1
$ 80,000
March 31
$150,000
July 15
$172,000
October 1
$ 90,000
If Portage Company’s cost of capital is 14%, what is the amount of its holding costs for the year?
40. The private investigation firm of Watson & Holmes is conducting an investigation for a wealthy movie star.
The investigation is estimated to take 6 months to complete and will use $2,000 in supplies, $120,000 in labor,
and $80,000 in overhead. Watson & Holmes’ cost of capital is 12%. What are the financial holding costs on this
project?
D. $12,120
41. The private investigation firm of Watson & Holmes is conducting an investigation for a wealthy movie star.
The investigation is estimated to take 6 months to complete and will use $2,000 in supplies, $120,000 in labor,
and $80,000 in overhead. Watson & Holmes’ cost of capital is 12%. At the end of the sixth month, Watson &
Holmes finds that the investigation will take an additional 2 months to complete and another $80,000 in labor
and overhead. What are the additional financial holding costs for the 2 extra months on this project?
42. The CPA firm of Peck, Williams, and Shafner is conducting an audit of Monolith Enterprises. The audit is
estimated to take 4 months to complete and will use $4,000 in supplies, $200,000 in labor, and $320,000 in
overhead. Peck’s annual rate is 18%. What are the financial holding costs on this project?
43. The CPA firm of Peck, Williams, and Shafner is conducting an audit of Monolith Enterprises. The audit is
estimated to take 4 months to complete and will use $4,000 in supplies, $200,000 in labor, and $320,000 in
overhead. Peck’s annual rate is 18%. At the end of the fourth month, Peck finds that the audit will take an
additional 2 months to complete and another $200,000 in labor and overhead. What are the additional financial
holding costs for the 2 extra months on this project?
44. The consulting firm of Howe and Biggs is currently conducting a large consulting assignment for Spaeth
Industries. Howe has calculated that the financial holding costs of this 3-month project are $6,000. If the project
will use $600,000 in supplies, labor, and overhead, Howe’s cost of capital must be:
45. EOQ is used to:
46. EOQ is used to determine:
47. Which of the following equations determines the total annual carrying costs of inventory?
48. Which of the following equations determines the total annual ordering costs of inventory?
49. Which of the following is not included in carrying costs?
50. Lead time is the:
51. The formula for the reorder point without safety stock is:
52. A short formula to calculate the reorder point with safety stock is:
53. Hannafin Company decreased the size of inventory order quantities below the quantity determined by EOQ.
What is the impact on total annual ordering costs?
54. Hannafin Company decreased the size of inventory order quantities below the quantity determined by EOQ.
If annual quantity demanded remains the same, the number of orders made during the year will:
55. Garner Industries increased the size of inventory order quantities above the quantity determined by EOQ. If
annual quantity demanded remains the same, the number of orders made during the year will: