p.14
Inventory Control Levels: Minimum, Maximum, Reorder
How is the maximum level calculated?
Maximum Level = Reorder level + Reorder quantity - (Minimum Usage x Minimum Lead Time).
p.13
Inventory Control Levels: Minimum, Maximum, Reorder
What does the minimum inventory level indicate to management?
That inventories are approaching a dangerously low level and stockouts are possible.
p.62
Reasons for Inventory Control
Why is purchasing inventory considered a significant cost for organizations?
Because it is usually one of the largest costs faced by an organization.
p.19
Inventory Control Levels: Minimum, Maximum, Reorder
What is the formula for calculating the Reorder Level (ROL)?
ROL = [max usage x max lead time].
p.5
Ordering and Receiving Materials
What document is used to acknowledge the receipt of goods?
Goods received note (GRN).
p.20
Economic Order Quantity (EOQ) and its Calculations
What is the optimum order size in EOQ?
The Reorder Quantity (ROQ) that minimizes the balance of ordering and holding costs.
p.2
Functions of Inventory Control Systems
What is the first function of an inventory control system?
The ordering of inventory.
p.12
Inventory Control Levels: Minimum, Maximum, Reorder
How is the reorder level calculated?
Reorder level = Maximum Usage x Maximum Lead Time.
p.47
Ordering and Receiving Materials
What is the journal entry to record materials issued from store for production?
Debit: WIP (Direct) $20,000,000; Credit: Material control account $20,000,000.
p.47
Ordering and Receiving Materials
What account is debited when materials are issued for production?
WIP (Work in Progress) account.
p.25
Economic Order Quantity (EOQ) and its Calculations
What is the formula for average inventory in the EOQ model?
Average inventory = (Q/2) + safety stock.
p.49
Ordering and Receiving Materials
What is the journal entry to record materials issued from store when 40% is directly related to production?
Debit WIP (Direct) $8,000,000, Debit Production Overheads (Indirect) $12,000,000, Credit Material control account $20,000,000.
p.60
Advantages and Disadvantages of Inventory Valuation Methods
What is an advantage of the LIFO inventory method?
Inventories are issued at a price close to current market value.
p.22
Economic Order Quantity (EOQ) and its Calculations
What is assumed about the ordering cost in the EOQ model?
The ordering cost is known and constant.
p.57
Inventory Valuation Methods: FIFO, LIFO, AVCO
What happens to closing inventory under FIFO in inflationary conditions?
Higher priced items make up closing inventory.
p.32
Economic Order Quantity (EOQ) and its Calculations
What is the formula to calculate the total cost at EBQ?
Total Cost = (Demand / EBQ) * Setup Cost + (EBQ / 2) * Holding Cost.
p.54
Inventory Valuation Methods: FIFO, LIFO, AVCO
What inventory valuation method is used in the provided solution?
LIFO (Last In, First Out).
p.59
Advantages and Disadvantages of Inventory Valuation Methods
What challenge might managers face with FIFO regarding costs?
They may find it difficult to compare costs and make decisions when charged varying prices for the same materials.
p.53
Inventory Valuation Methods: FIFO, LIFO, AVCO
What inventory valuation method is used in the provided solution?
FIFO (First In, First Out).
p.4
Functions of Inventory Control Systems
What quality aspect is important in an efficient material control system?
The right quality of material.
p.11
Inventory Control Levels: Minimum, Maximum, Reorder
How can management assess inventory control levels?
By evaluating past inventory usage and delivery times.
p.15
Inventory Control Levels: Minimum, Maximum, Reorder
What are the three key inventory control levels?
Minimum, Maximum, and Reorder Level.
p.2
Functions of Inventory Control Systems
What is the third function of an inventory control system?
The receipt of goods into stores.
p.28
Economic Order Quantity (EOQ) and its Calculations
What is the formula for total cost in inventory management?
Total cost = Order cost (Co) + Carrying cost (Ch) + Purchase cost (PC).
p.9
Inventory Count and Discrepancies
What is an example of a classification error in inventory?
Stainless steel classified as mild steel.
p.61
Advantages and Disadvantages of Inventory Valuation Methods
What is a disadvantage of the AVCO method related to issue pricing?
The resulting issue price is rarely an actual price that has been paid and can run to several decimal places.
p.43
Functions of Inventory Control Systems
What is the difference between Mark-Up and Margin?
Mark-Up is a percentage of Cost Price, while Margin is a percentage of Selling Price.
p.60
Advantages and Disadvantages of Inventory Valuation Methods
What is a challenge in explaining LIFO to managers?
It is often the opposite of what is physically happening, making it difficult to explain.
p.26
Economic Order Quantity (EOQ) and its Calculations
What is the total cost at the current policy?
To be calculated based on current ordering and holding costs.
p.1
Definition and Classification of Inventory
What is inventory often defined as?
A complete listing of merchandise or stock on hand, bought or made each year by a business.
p.5
Ordering and Receiving Materials
What document is used for requesting materials, transferring, or returning them?
Materials requisition, transfer or returned note.
p.4
Functions of Inventory Control Systems
What is a key characteristic of an efficient system of material control?
Ensures availability of the right quantity of material.
p.8
Inventory Count and Discrepancies
When is periodic stocktaking typically conducted?
At the end of an accounting period.
p.24
Economic Order Quantity (EOQ) and its Calculations
What does C_H represent in the EOQ formula?
Cost of holding one unit of inventory.
p.15
Inventory Control Levels: Minimum, Maximum, Reorder
What does the average inventory formula assume?
That inventory levels fluctuate evenly between the minimum and maximum inventory levels.
p.62
Reasons for Inventory Control
What are the four types of inventory costs?
Purchase costs, holding costs, ordering costs, and costs of running out of inventory.
p.15
Inventory Control Levels: Minimum, Maximum, Reorder
What is buffer stock in inventory control?
Buffer stock is equivalent to the minimum inventory level.
p.15
Inventory Control Levels: Minimum, Maximum, Reorder
How is average inventory calculated?
Average Inventory = Safety Inventory (Buffer Stock) + ½ Reorder Quantity.
p.44
Functions of Inventory Control Systems
How do you calculate the cost price from the selling price with a mark-up?
Cost Price = Selling Price / (1 + Mark-up Percentage).
p.28
Economic Order Quantity (EOQ) and its Calculations
What are the savings if EOQ is adopted?
Savings = $820,128 - $803,200 = $16,928.
p.38
Economic Order Quantity (EOQ) and its Calculations
What is the next step after calculating EOQ prior to discounts?
Determine the optimal order quantity considering quantity discounts.
p.53
Inventory Valuation Methods: FIFO, LIFO, AVCO
What was the stock after the transaction on May 7?
400 units at $20 and 600 units at $24.
p.24
Economic Order Quantity (EOQ) and its Calculations
What does the EOQ formula represent?
The Economic Order Quantity model for inventory management.
p.11
Inventory Control Levels: Minimum, Maximum, Reorder
What do inventory control levels determine?
'When to order' and 'how many to order'.
p.45
Functions of Inventory Control Systems
How do you calculate CP when given SP and a markup percentage?
CP = SP / (1 + markup percentage).
p.58
Inventory Valuation Methods: FIFO, LIFO, AVCO
Where does the average cost fall in relation to FIFO and LIFO?
It falls in between FIFO and LIFO.
p.38
Economic Order Quantity (EOQ) and its Calculations
What values are used in the EOQ calculation?
Co = 100, D = 52,000, Ch = 0.65.
p.10
Perpetual Inventory System
When is the closing inventory calculated in relation to the perpetual inventory system?
In monthly and annual accounts.
p.19
Inventory Control Levels: Minimum, Maximum, Reorder
How is safety stock calculated?
Buffer stock = ROL - [average usage x average lead].
p.57
Inventory Valuation Methods: FIFO, LIFO, AVCO
How does LIFO differ from FIFO in terms of CGS during inflation?
Under LIFO, CGS is higher because higher priced items are sold first.
p.59
Advantages and Disadvantages of Inventory Valuation Methods
Why is FIFO considered easy to understand?
Because it is straightforward to explain to managers.
p.30
Economic Order Quantity (EOQ) and its Calculations
What is the total cost at the EBQ ignoring purchase cost?
Total Cost = (Setup Cost * (Demand / EBQ)) + (Holding Cost * (EBQ / 2)).
p.50
Inventory Valuation Methods: FIFO, LIFO, AVCO
How is the cost of goods issued calculated under AVCO?
Using a weighted average price for all units in inventory.
p.13
Inventory Control Levels: Minimum, Maximum, Reorder
What is the minimum inventory level?
The lowest inventory balance that should be maintained to avoid a stockout.
p.14
Inventory Control Levels: Minimum, Maximum, Reorder
What is the maximum level in inventory control?
The upper limit of stock that should not be exceeded.
p.13
Inventory Control Levels: Minimum, Maximum, Reorder
How is the minimum inventory level calculated?
Minimum Level = Reorder level – (Average usage x Average lead time).
p.1
Definition and Classification of Inventory
What are the classifications of inventory?
Raw materials, work in progress, finished goods on hand, spare parts, or consumables.
p.14
Inventory Control Levels: Minimum, Maximum, Reorder
What does the maximum level act as for management?
A warning level that inventories are approaching a potentially wasteful level.
p.1
Definition and Classification of Inventory
What will the focus be on for the purposes of this unit?
The inventory of materials.
p.7
Inventory Count and Discrepancies
What does an inventory count (stock take) involve?
Counting the physical inventory on hand and checking it against the inventory records.
p.52
Inventory Valuation Methods: FIFO, LIFO, AVCO
What is the method used to calculate closing inventory and cost of sales in FIFO?
First-In, First-Out method.
p.7
Inventory Count and Discrepancies
What are the two methods of conducting an inventory count?
Continuous or periodic basis.
p.20
Economic Order Quantity (EOQ) and its Calculations
What is the purpose of calculating EOQ?
To minimize inventory costs when there is no discount.
p.52
Inventory Valuation Methods: FIFO, LIFO, AVCO
What is the method used to calculate closing inventory and cost of sales in LIFO?
Last-In, First-Out method.
p.7
Inventory Count and Discrepancies
What is the purpose of comparing physical inventory to inventory records?
To check for discrepancies.
p.5
Ordering and Receiving Materials
Why is documentation important in material movement?
To ensure accurate tracking and accountability.
p.20
Economic Order Quantity (EOQ) and its Calculations
What are the two types of costs balanced in EOQ?
Ordering costs (C o) and holding costs (C h).
p.3
Reasons for Inventory Control
What is one reason for inventory control related to holding costs?
Holding costs may be expensive.
p.3
Reasons for Inventory Control
How can running out of raw materials affect production?
Production will be disrupted.
p.11
Inventory Control Levels: Minimum, Maximum, Reorder
What are the three critical inventory control levels?
Reorder level, minimum level, and maximum level.
p.8
Inventory Count and Discrepancies
What is periodic stocktaking?
A process where all inventory items are physically counted and valued at a set point in time, usually at the end of an accounting period.
p.18
Inventory Control Levels: Minimum, Maximum, Reorder
How is the maximum inventory level calculated?
Max Level = ROL + EOQ - (minimum usage x minimum lead).
p.3
Reasons for Inventory Control
What issue can arise from unused inventory with a short shelf life?
It may incur unnecessary expenses.
p.4
Functions of Inventory Control Systems
What does an efficient material control system help maintain?
An even flow of production.
p.3
Reasons for Inventory Control
Why is it important to ensure quality inputs in inventory control?
To maintain a good reputation with customers.
p.11
Inventory Control Levels: Minimum, Maximum, Reorder
What is the purpose of calculating inventory control levels?
To maintain inventories at the optimum level that minimizes costs.
p.4
Functions of Inventory Control Systems
What does an efficient material control system aim to avoid?
Excessive investment in inventories.
p.35
Economic Order Quantity (EOQ) and its Calculations
What are the values used in the EOQ calculation in this example?
Co = 180, D = 30,000, Ch = 1.20
p.10
Perpetual Inventory System
What is a perpetual inventory system?
An inventory recording system that updates records for each receipt and issue of inventory as it occurs.
p.47
Ordering and Receiving Materials
What account is credited when materials are issued from the store?
Material control account.
p.51
Inventory Valuation Methods: FIFO, LIFO, AVCO
What must be determined after each inventory transaction?
The make-up of your inventory balance.
p.32
Economic Order Quantity (EOQ) and its Calculations
How do you calculate the Economic Batch Quantity (EBQ)?
EBQ = sqrt((2 * Demand * Setup Cost) / Holding Cost).
p.23
Economic Order Quantity (EOQ) and its Calculations
How many orders of 100,000 units incur less ordering costs compared to 50,000 units?
5 orders of 100,000 units.
p.16
Inventory Control Levels: Minimum, Maximum, Reorder
What is the formula to calculate the minimum level?
Minimum Level = (Average Usage x Minimum Lead Time) + Safety Stock.
p.31
Economic Order Quantity (EOQ) and its Calculations
How do you calculate the total carrying costs (Ch) at EBQ?
Ch = EBQ/2 x Ch(1 - D/R) = 1,000/2 x [$1.60 x (1 - 0.20)] = $640.
p.31
Economic Order Quantity (EOQ) and its Calculations
What is the total cost at EBQ, ignoring purchase cost?
Total cost = Total ordering cost + Total carrying costs = $640 + $640 = $1,280.
p.16
Inventory Control Levels: Minimum, Maximum, Reorder
What is the formula to calculate the average inventory?
Average Inventory = (Minimum Level + Maximum Level) / 2.
p.26
Economic Order Quantity (EOQ) and its Calculations
What is the savings if the EOQ model is adopted?
To be calculated by comparing total costs at EOQ and current policy.
p.36
Economic Order Quantity (EOQ) and its Calculations
What is the calculation for ordering cost (Co) at 5,000 units?
Co = D/Q x Co = 30,000/5,000 x 180 = $1,080.
p.37
Economic Order Quantity (EOQ) and its Calculations
How do quantity discounts affect the optimal order quantity?
They may lower the effective cost per unit, influencing the order quantity.
p.18
Inventory Control Levels: Minimum, Maximum, Reorder
What formula is used to calculate average inventory?
Average inventory = minimum level + ½ EOQ.
p.8
Inventory Count and Discrepancies
What is the main purpose of stocktaking?
To ensure accurate inventory balance by physically counting and valuing items.
p.9
Inventory Count and Discrepancies
What is a pricing error in inventory management?
A correctly counted and classified item priced at $56 for 1000 instead of $56 per 100.
p.9
Inventory Count and Discrepancies
What is a recording error in inventory?
An omission of the entry of a goods received note.
p.57
Inventory Valuation Methods: FIFO, LIFO, AVCO
How does FIFO impact Cost of Goods Sold (CGS) during inflationary conditions?
CGS is lower because earlier and lower priced items are sold first.
p.6
Ordering and Receiving Materials
Why is adequate record-keeping important for accounting?
It provides necessary records for accounting purposes.
p.31
Economic Order Quantity (EOQ) and its Calculations
How do you calculate the total ordering cost (Co) at EBQ?
Co = D/EBQ x Co = 2,000/1,000 x $320 = $640.
p.50
Inventory Valuation Methods: FIFO, LIFO, AVCO
What is the formula for calculating the weighted average price in AVCO?
Total cost divided by total number of units.
p.8
Inventory Count and Discrepancies
What is continuous stocktaking?
Counting and valuing selected items at different times on a rotating basis.
p.48
Ordering and Receiving Materials
What is the journal entry to record the issue of materials from stores?
Debit Work in Process Inventory $8,000,000; Debit Manufacturing Overhead $12,000,000; Credit Raw Materials Inventory $20,000,000.
p.2
Functions of Inventory Control Systems
What is the sixth function of an inventory control system?
Maintenance of inventory at the most appropriate level.
p.45
Functions of Inventory Control Systems
What is the relationship between markup and margin?
Markup is a percentage of CP, while margin is a percentage of SP.
p.10
Perpetual Inventory System
What does a perpetual inventory system provide?
A continuous record of the balance of each item of inventory.
p.56
Inventory Valuation Methods: FIFO, LIFO, AVCO
What is the formula for calculating cost of sales?
Opening inventory + Purchases - Closing inventory.
p.6
Ordering and Receiving Materials
How does proper record-keeping affect ordering?
It prevents duplication of ordering.
p.31
Economic Order Quantity (EOQ) and its Calculations
What values are used in the EBQ calculation in this example?
Co = $320, D = 2,000, Ch = $1.60, R = 10,000.
p.22
Economic Order Quantity (EOQ) and its Calculations
What does the EOQ model assume about replenishment?
Replenishment is made instantaneously, with the whole batch delivered at once.
p.57
Inventory Valuation Methods: FIFO, LIFO, AVCO
What is the impact of LIFO on profits during inflationary conditions?
Profits are lower due to higher CGS.
p.59
Advantages and Disadvantages of Inventory Valuation Methods
What is a disadvantage of using FIFO?
It can be complex to operate due to the need to identify each batch of material separately.
p.50
Inventory Valuation Methods: FIFO, LIFO, AVCO
How does LIFO determine the cost of goods issued?
Based on the cost of the last delivery.
p.59
Advantages and Disadvantages of Inventory Valuation Methods
What happens to inventory issue prices in a period of high inflation under FIFO?
They will lag behind current market value.
p.16
Inventory Control Levels: Minimum, Maximum, Reorder
What is the average inventory for the buffer rubber?
Average Inventory = (1,500 units + 7,500 units) / 2 = 4,500 units.
p.27
Economic Order Quantity (EOQ) and its Calculations
How is the order cost (Co) calculated?
Co = D/Q x (Co) = 25,000/500 x (32) = $1,600.
p.33
Economic Order Quantity (EOQ) and its Calculations
What happens when the assumption of a known, constant purchase price is violated in EOQ?
An alternate approach is required.
p.12
Inventory Control Levels: Minimum, Maximum, Reorder
What is the reorder level in inventory control?
The level at which stock should be replenished.
p.12
Inventory Control Levels: Minimum, Maximum, Reorder
What factors determine the reorder level?
The maximum rate of consumption and the maximum lead time.
p.12
Inventory Control Levels: Minimum, Maximum, Reorder
What does maximum rate of consumption refer to?
The highest amount of stock used over a specific period.
p.12
Inventory Control Levels: Minimum, Maximum, Reorder
What does maximum lead time refer to?
The longest time it takes to receive stock after placing an order.
p.10
Perpetual Inventory System
What types of records are used in a perpetual inventory system?
Bin cards and stores ledger accounts.
p.21
Economic Order Quantity (EOQ) and its Calculations
Why is it important to control and check inventory after purchase?
To manage costs and ensure availability.
p.21
Economic Order Quantity (EOQ) and its Calculations
What are holding costs in inventory management?
Costs associated with storing unsold goods.
p.21
Economic Order Quantity (EOQ) and its Calculations
What are ordering costs in inventory management?
Costs incurred when placing orders for inventory.
p.29
Economic Order Quantity (EOQ) and its Calculations
When is EBQ used instead of EOQ?
When producing rather than purchasing and when resupply is gradual.
p.54
Inventory Valuation Methods: FIFO, LIFO, AVCO
What was the stock after the transaction on May 7?
800 units at $20 and 200 units at $24.
p.50
Inventory Valuation Methods: FIFO, LIFO, AVCO
What happens to the unit valuation of inventory under AVCO?
It remains the same until a new delivery is received.
p.37
Economic Order Quantity (EOQ) and its Calculations
What is the EOQ prior to considering quantity discounts?
Calculated using the EOQ formula.
p.33
Economic Order Quantity (EOQ) and its Calculations
What is the formula for Total Cost in EOQ with discounts?
Total Cost = (D/Q x Co) + (Q/2 x Ch) + (D x Unit Price).
p.33
Economic Order Quantity (EOQ) and its Calculations
What should be prepared to analyze total cost at different order quantities?
A table showing total cost at alternate values of Q.
p.9
Inventory Count and Discrepancies
What should be done if discrepancies occur after a stock take?
They should be investigated and corrective actions taken.
p.9
Inventory Count and Discrepancies
What is one reason for discrepancies in inventory?
Quantity errors, such as miscounts during the stock take.
p.58
Inventory Valuation Methods: FIFO, LIFO, AVCO
How do price movements affect FIFO and LIFO?
Conditions are opposite under FIFO compared to LIFO.
p.61
Advantages and Disadvantages of Inventory Valuation Methods
How does AVCO pricing respond to gradual inflation?
Prices tend to lag a little behind current market values when there is gradual inflation.
p.10
Perpetual Inventory System
How is the balance on the stores ledger account used?
It represents the inventory on hand and is used in the calculation of closing inventory.
p.6
Ordering and Receiving Materials
What is one benefit of keeping proper records for ordering and receiving materials?
Ensures enough inventory is held.
p.16
Inventory Control Levels: Minimum, Maximum, Reorder
What is the reorder level for the buffer rubber?
Reorder Level = 250 units/day x 14 days = 3,500 units.
p.26
Economic Order Quantity (EOQ) and its Calculations
What is the formula for calculating EOQ?
EOQ = sqrt((2DS)/H), where D is annual demand, S is ordering cost per order, and H is holding cost per unit per year.
p.16
Inventory Control Levels: Minimum, Maximum, Reorder
What is the maximum level for the buffer rubber?
Maximum Level = 3,500 units + 5,000 units - (250 units/day x 6 days) = 7,500 units.
p.24
Economic Order Quantity (EOQ) and its Calculations
What does C_0 represent in the EOQ formula?
Cost of placing one order.
p.62
Inventory Control Levels: Minimum, Maximum, Reorder
What are the three inventory control levels?
Minimum, maximum, and reorder level.
p.61
Advantages and Disadvantages of Inventory Valuation Methods
What is an advantage of the AVCO method regarding price fluctuations?
Fluctuations in prices are smoothed out, making it easier to use the data for decision making.
p.28
Economic Order Quantity (EOQ) and its Calculations
How is the order cost (Co) calculated?
Co = D/Q x (Co) = 25,000/6,250 x (32) = $128.
p.28
Economic Order Quantity (EOQ) and its Calculations
What is the carrying cost (Ch) for the given data?
Ch = Q/2 x (Ch) = 6,250/2 x 6.40 = $20,000.
p.28
Economic Order Quantity (EOQ) and its Calculations
How is the purchase cost (PC) calculated?
PC = D x unit cost = 25,000 x $32 = $800,000.
p.9
Inventory Count and Discrepancies
What is a systems error related to inventory discrepancies?
Inadequate recording of returns to stores.
p.25
Economic Order Quantity (EOQ) and its Calculations
What is the formula for annual holding cost in the EOQ model?
Annual holding cost = Q/2 x Ch (assuming safety stock is zero).
p.51
Inventory Valuation Methods: FIFO, LIFO, AVCO
What is a key principle regarding inventory transactions?
You cannot issue/sell what you do not have.
p.29
Economic Order Quantity (EOQ) and its Calculations
What is the purpose of the EBQ?
To determine the number of items that should be produced in a batch.
p.31
Economic Order Quantity (EOQ) and its Calculations
What is the formula for calculating Economic Batch Quantity (EBQ)?
EBQ = √[2CoD/Ch(1 - D/R)]
p.16
Inventory Control Levels: Minimum, Maximum, Reorder
What is the formula to calculate the reorder level?
Reorder Level = (Average Usage x Maximum Lead Time)
p.60
Advantages and Disadvantages of Inventory Valuation Methods
What complicates decision-making when using LIFO?
Variations in prices can make decision-making difficult.
p.29
Economic Order Quantity (EOQ) and its Calculations
What does C O represent in the EBQ formula?
The set up cost per batch.
p.16
Inventory Control Levels: Minimum, Maximum, Reorder
What is the formula to calculate the maximum level?
Maximum Level = Reorder Level + EOQ - (Average Usage x Minimum Lead Time).
p.2
Functions of Inventory Control Systems
What is the second function of an inventory control system?
The purchase of inventory.
p.17
Inventory Control Levels: Minimum, Maximum, Reorder
What is the formula for calculating the Re-Order Level (ROL)?
ROL = maximum usage x maximum lead.
p.46
Ordering and Receiving Materials
What is the journal entry to record the issue of materials from stores?
Debit: Work in Process Inventory $20,000,000; Credit: Raw Materials Inventory $20,000,000.
p.22
Economic Order Quantity (EOQ) and its Calculations
What is a key assumption regarding stockholding cost in the EOQ model?
The per unit stockholding cost is known and constant.
p.57
Inventory Valuation Methods: FIFO, LIFO, AVCO
What is the effect of FIFO on profits during rising prices?
Profits are higher due to lower CGS.
p.21
Economic Order Quantity (EOQ) and its Calculations
What are the costs of running out of inventory?
Costs associated with lost sales and customer dissatisfaction.
p.59
Advantages and Disadvantages of Inventory Valuation Methods
What is one advantage of the FIFO inventory method?
It is a logical pricing method that likely represents what is physically happening.
p.29
Economic Order Quantity (EOQ) and its Calculations
What does Q represent in the EBQ formula?
The amount produced in each batch.
p.59
Advantages and Disadvantages of Inventory Valuation Methods
How does FIFO inventory valuation relate to replacement cost?
It can be near to a valuation based on replacement cost.
p.36
Economic Order Quantity (EOQ) and its Calculations
What is the conclusion regarding order quantity?
Order in batches of 7,500 as it yields the lowest total cost.
p.33
Economic Order Quantity (EOQ) and its Calculations
How is the optimum reorder quantity (ROQ) determined?
By selecting the value of Q at which total cost is at a minimum.
p.61
Advantages and Disadvantages of Inventory Valuation Methods
How does AVCO simplify administration compared to FIFO?
It is easier to administer than FIFO because there is no need to identify each batch separately.
p.28
Economic Order Quantity (EOQ) and its Calculations
What is the total cost at the current policy?
Total cost = $128 + $20,000 + $800,000 = $820,128.
p.25
Economic Order Quantity (EOQ) and its Calculations
How is the annual order cost calculated in the EOQ model?
Annual order cost = D/Q x Co.
p.44
Functions of Inventory Control Systems
How do you calculate the cost price from the selling price with a margin?
Cost Price = Selling Price * (1 - Margin Percentage).
p.60
Advantages and Disadvantages of Inventory Valuation Methods
How does LIFO benefit managers in decision-making?
Managers are continually aware of recent costs, as the costs charged are current costs.
p.22
Economic Order Quantity (EOQ) and its Calculations
What is assumed about the price per unit in the EOQ model?
The price per unit is known and constant, although quantity discounts may be offered.
p.29
Economic Order Quantity (EOQ) and its Calculations
What does R represent in the EBQ formula?
Annual replenishment rate.
p.50
Inventory Valuation Methods: FIFO, LIFO, AVCO
How does FIFO determine the cost of goods issued?
Based on the cost of the earliest delivery.
p.34
Economic Order Quantity (EOQ) and its Calculations
What is the EOQ formula?
EOQ = sqrt((2 * Demand * Ordering Cost) / Holding Cost).
p.22
Economic Order Quantity (EOQ) and its Calculations
What can violate the average stock assumption in the EOQ model?
If a constant amount is not used per day, or if seasonal and cyclical factors produce uneven usage.
p.34
Economic Order Quantity (EOQ) and its Calculations
Should you divert from the EOQ if discounts are taken into account?
It depends on the total cost analysis including discounts.
p.15
Inventory Control Levels: Minimum, Maximum, Reorder
What is the maximum inventory level?
The amount of inventory on hand immediately after an order is received (safety inventory + reorder quantity).
p.17
Inventory Control Levels: Minimum, Maximum, Reorder
How is the Minimum Level calculated?
Min Level = ROL – (average usage x average lead).
p.62
Functions of Inventory Control Systems
What must be done once inventory is obtained?
It has to be carefully controlled and checked.
p.21
Economic Order Quantity (EOQ) and its Calculations
What are the main components of inventory costs?
Purchase costs, holding costs, ordering costs, and costs of running out of inventory.
p.60
Advantages and Disadvantages of Inventory Valuation Methods
What is a disadvantage of the LIFO inventory method?
The method can be cumbersome to operate due to several batches being only partially used.
p.22
Economic Order Quantity (EOQ) and its Calculations
What is assumed about the rates of demand in the EOQ model?
The rates of demand are known.
p.23
Economic Order Quantity (EOQ) and its Calculations
How many orders of 50,000 units incur more ordering costs compared to 100,000 units?
10 orders of 50,000 units.
p.16
Inventory Control Levels: Minimum, Maximum, Reorder
What is the minimum level for the buffer rubber if safety stock is not considered?
Minimum Level = 250 units/day x 6 days = 1,500 units.
p.30
Economic Order Quantity (EOQ) and its Calculations
How do you calculate the Economic Batch Quantity (EBQ)?
EBQ = sqrt((2 * Demand * Setup Cost) / Holding Cost).
p.27
Economic Order Quantity (EOQ) and its Calculations
What is the purchase cost (PC) in the total cost calculation?
PC = D x unit cost = 25,000 x $32 = $800,000.
p.26
Economic Order Quantity (EOQ) and its Calculations
How do you calculate the total cost at EOQ?
Total Cost = Purchase Cost + Ordering Cost + Holding Cost.
p.37
Economic Order Quantity (EOQ) and its Calculations
What is the formula for calculating EOQ?
EOQ = sqrt((2 * Demand * Ordering Cost) / Holding Cost).
p.53
Inventory Valuation Methods: FIFO, LIFO, AVCO
How many units were issued on May 11 and at what price?
400 units at $20 and 80 units at $24.
p.27
Economic Order Quantity (EOQ) and its Calculations
What is the carrying cost (Ch) for the EOQ?
Ch = Q/2 x (Ch) = 500/2 x 6.40 = $1,600.
p.39
Economic Order Quantity (EOQ) and its Calculations
What is the conclusion regarding order quantity based on total costs?
Order in batches of 8,000 as it yields the lowest total cost.
