Managerial Accounting QuizInventory Management Quiz 25/05/2026 1 min read Inventory Management 18 questions in 30 minutes Pass Score 70% 1 / 18 When the economic order quantity (EOQ) model is used for a firm that manufactures its inventory, ordering costs consist primarily of : Insurance and taxes Obsolescence and deterioration Production set-up Storage and handling A manufacturer can use the EOQ model by substituting production set-upcosts for ordering costs. Set-up costs are the manufacturer’s equivalent ofordering costs. The result is sometimes referred to as the economic batchquantity. 2 / 18 Using the economic order quantity (EOQ) model as part of its inventory control program, an increasein which one of the following variables would increase the EOQ? Purchase price per unit Carrying cost rate Safety stock level Ordering costs Fixed cost per order is in the numerator of the EOQ fraction. An increaseresults in an increase in the EOQ. 3 / 18 Which one of the following statements concerning the economic order quantity (EOQ) is correct? Increasing the EOQ is the best way to avoid stockouts The EOQ model assumes that order delivery times are consistent The EOQ results in the minimum ordering cost and minimum carrying cost The EOQ model assumes constantly increasing usage over the year One of the underlying assumptions of the EOQ model is that delivery timesare predictably consistent. Other assumptions are that sales are perfectlypredictable and that usage is constant. 4 / 18 All of the following are carrying costs of inventory except : Shipping costs Insurance Opportunity costs Storage costs The cost of shipping inventory is a cost of acquiring, not carrying, it. 5 / 18 All of the following are inventory carrying costs except : Opportunity cost of inventory investment Storage Inspections Insurance Inventory carrying costs are incurred to hold inventory. Examples includethe costs of storage, insurance, security, inventory taxes, depreciation orrent of warehouse facilities, obsolescence and spoilage, and the opportunitycost of inventory investment. Inspection costs are not related to the lengthof time inventory is held. They are costs of taking delivery and are bestclassified as ordering costs. 6 / 18 The level of safety stock in inventory management depends on all of the following except the : Cost of running out of inventory Level of uncertainty of the sales forecast Cost to reorder stock Level of customer dissatisfaction for back orders Determining the appropriate level of safety stock involves a complexprobabilistic calculation that balances the variability of demand for thegood, the variability in lead time, and the level of risk the firm iswilling to accept of having to incur stockout costs. Thus, the only one ofthe items listed that does not affect the level of safety stock is reorder costs. 7 / 18 A review of inventories reveals the following cost data for entertainment centers. Invoice price $400.00 per unit Freight and insurance on shipment 20.00 per unit Insurance on inventory 15.00 per unit Unloading 140.00 per order Cost of placing orders 10.00 per order Cost of capital 25% What are the total carrying costs of inventory for an entertainment center? $115 $420 $120 $105 The cost of carrying a unit of inventory can be calculated as follows: Invoice price $400 + Freight and insurance on shipment 20 = Per-unit purchase cost $420 Times: cost of capital × 25% = Opportunity cost $105 + Insurance on inventory 15 Per-unit carrying cost = $120 8 / 18 Which one of the following would not be considered a carrying cost associated with inventory? Insurance costs Shipping costs Cost of capital invested in the inventory Cost of obsolescence Carrying costs are incurred to hold inventory. Examples include such costsas warehousing, insurance, the cost of capital invested in inventories,inventory taxes, and the cost of obsolescence and spoilage. Shipping costsand the initial cost of the inventory are the purchase costs. 9 / 18 The economic order quantity for a product is 500 units. However, new orders require 4 working dayslead time during which 80 units will be used. Given this information, the correct economic orderquantity is : 500 units 580 units 509 units 420 units The lead times does not affect the EOQ; it just means the order should beplaced four days earlier. 10 / 18 A company expects to use 48,000 gallons of paint per year costing $12 per gallon. Inventorycarrying cost is equal to 20% of the purchase price. The company uses its inventory at a constantrate. The lead time for placing the order is 3 days, and the company holds 2,400 gallons of paint assafety stock. If the company orders 2,000 gallons of paint per order, what is the cost of carryinginventory? $8,160 $2,400 $5,760 $5,280 The company’s per-gallon carrying cost is $2.40 ($12 purchase price pergallon × 20% carrying cost). The cost of carrying safety stock is $5,760(2,400 gallons × $2.40), and the cost of carrying average inventory is$2,400 (1,000 gallons × $2.40). Thus, total inventory carrying cost is$8,160 ($5,760 + $2,400). 11 / 18 The amount of inventory that a company would tend to hold in safety stock would increase as the : Variability of sales decreases Cost of running out of stock decreases Sales level falls to a permanently lower level Cost of carrying inventory decreases A firm’s economic order quantity is a function of demand, carrying costs,and ordering costs. A decrease in carrying costs permits a company to carrymore inventory at the same cost and thereby reduce stockout costs. 12 / 18 An inventory management technique designed to minimize inventory investment by having materialsarrive at the time they are needed for use is known as : First in first out (FIFO) Just in time (JIT) Materials requirements planning (MRP) The economic order quantity model (EOQ) A just-in-time (JIT) inventory management system limits the output ofeach manufacturing operation to the demand of the next operation. Shipment of raw materials from vendors are scheduled to arrive “just intime” to be used in the production process. Inventory storage is considereda nonvalue adding activity, and raw materials on hand are thus kept to aminimum. 13 / 18 A corporation’s inventory expressed as a percentage of current assets increased from 25% last July to35% this July. The factor that is least likely to cause this increase is that the corporation : Has inventory that is becoming obsolete Is beginning to experience high growth Is a seasonal company with traditionally higher activity in the summer months Used a material amount of cash from selling its short-term investments to purchase land This statement is least likely to explain an increase in current assets fromlast July to this July. If the corporation was a seasonal company withtraditionally higher activity in the summer months, it would budget similaramounts for each summer in expectation of the high activity. The suddenincrease in current assets for the following summer would not be explainedby the fact that they are a seasonal company. 14 / 18 The new manager of inventory at a major retailer is developing an inventory control system andknows he should consider establishing a safety stock level. The safety stock can protect against all ofthe following risks except for the possibility that : The distribution of daily sales will have a large variance due to holidays, weather, advertising, and weekly shopping habits Customers cannot find the merchandise they want, and they will go to the competition Shipments of merchandise from the manufacturers is delayed by as much as 1 week New competition may open in the company’s market area Safety stock cannot protect against the entry of new competitors. 15 / 18 A company serves as a distributor of products by ordering finished products once a quarter and usingthat inventory to accommodate the demand over the quarter. If it plans to ease its credit policy forcustomers, the amount of products ordered for its inventory every quarter will be : Reduced to offset the increased cost of carrying accounts receivable Unaffected if safety stock is part of the current quarterly order Increased to accommodate higher sales levels Unaffected if the JIT inventory control system is used Relaxing the credit policy for customers will lead to increased salesbecause more people will be eligible for more credit. As sales increase,purchase orders will increase to accommodate the higher sales levels. 16 / 18 The basic Economic Order Quantity (EOQ) model includes which of the following assumptions? I. The same fixed quantity is ordered at each reorder point. II. Purchasing costs are unaffected by the quantity ordered. III. Purchase order lead-time is known with certainty. IV. Adequate inventory is always maintained to avoid stockouts. I and IV only II and III only I, II, and IV only I, II, III, and IV The basic EOQ model assumes that the same fixed quantity is ordered ateach reorder point, purchasing costs are unaffected by the quantity ordered,purchase order lead-time is known with certainty, and adequate inventoryis always maintained to avoid stockouts. 17 / 18 In inventory management, the safety stock will tend to increase if the : Carrying cost increases Cost of running out of stock decreases Variability of the usage rate decreases Variability of the lead time increases A company maintains safety stocks to protect itself against the lossescaused by stockouts. These can take the form of lost sales or lostproduction time. Safety stock is necessary because of the variability in leadtime and usage rates. As the variability in lead time increases, a companywill tend to carry larger safety stocks. 18 / 18 The optimal level of inventory is affected by all of the following except the : Usage rate of inventory per time period Cost per unit of inventory Cost of placing an order for merchandise Current level of inventory The optimal level of inventory is affected by the factors in the economicorder quantity (EOQ) model and delivery or production lead times. Thesefactors are the annual demand for inventory, the carrying cost, whichincludes the interest on funds invested in inventory, the usage rate, and thecost of placing an order or making a production run. The current level ofinventory has nothing to do with the optimal inventory level. Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback 🚀 Join Telegram Group 📢 Telegram Channel 📘 Facebook Group 👍 Facebook Page 📌 Pinterest
