Deck 19: Inventory Cost Management Strategies

Question 1

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:


-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

Answer 1

$3,913.65

Question 2

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:


-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

Answer 2

$4,165.00

Question 3

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 at all times.
E) The safety stock is the minimum level of inventory that must remain at the customers.

Answer 3

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.

Question 4

Answer the following question(s) using the information below:
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, FOB destination. 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:


-If Garry's Golf Supplies 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

Question 5

Answer the following question(s) using the information below:
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, FOB destination. 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:


-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

Question 6

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:
Annual demand is 10,000 packages per year. The purchase price per package is $16.

-What is the economic order quantity for Wood Furniture Company?

A) 150,000 units
B) 1,000 units
C) 75,000 units
D) 5,000 units
E) 1,464 units

Question 7

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.

Question 8

The IBP Grocery orders most of its items in lot sizes of 10 units. Average annual demand per side of beef is 720 units per year. Ordering costs are $25 per order with an average purchasing price of $100. Annual inventory carrying costs are estimated to be 40 percent of the unit cost.
Required:
a. Determine the economic order quantity.
b. Determine the annual cost savings if the shop changes from an order size of 10 units to the economic order quantity.
c. Since the shelf life is limited the IBP Grocery must keep the inventory moving. Assuming a 360-day year, determine the optimal lot size under each of the following: (1) a 20-day shelf life and (2) a 10-day shelf life.

Question 9

For supply item ABC, Andrews Company has been ordering 125 units based on the recommendation of the salesperson who calls on the company monthly. A new purchasing agent has been hired by the company who wants to start using the economic order quantity method and its supporting decision elements. She has gathered the following information:

Required:
Determine the EOQ, average inventory, orders per year, average daily demand, reorder point, annual ordering costs, and annual carrying costs.

Question 10

A jeweller orders gems in lot sizes of 1,250 gems. The annual demand for emeralds is 6,250 gems. Ordering costs are $200 per order and carrying costs are $10 per unit annually.
Required:
a. Determine the economic order quantity.
b. Determine the amount of annual cost savings if the company changes from an order size of 1,250 units to the economic order size.
c. One supplier offers a discount of $2 per unit off the purchase price of orders in lots of 625 units or more. What impact would this have on the EOQ and should the order size be changed?

Question 11

The annual demand for a company's product is 3,750 units, and monthly demand varies from 200 to 400 units with the following probability of demand:
200 units have a 25 percent probability
300 units have a 50 percent probability
400 units have a 25 percent probability
The EOQ model provides an optimal order quantity of 250 units. The opportunity costs of being out of stock are $2 per unit, with a carrying cost of $13 per unit, and the reorder point is 250 units.
Required:
a. Prepare a table showing stockouts, expected stockout costs, related carrying costs, and total costs, at each level of demand if the selected safety stocks are: 0, 50, 100 and 150.
b. What is the best level of safety stock to carry?

Question 12

Morrissette Ltd. sells 240,000 units a year. Its carrying costs are $0.10 per unit and its ordering costs are $187.50 per order.
Required:
a. Calculate the economic order quantity.
b. The supplier has offered a $0.02 discount per unit (on all units) if the order size is 80,000 units. Should Morrissette increase its order size?

Question 13

Acme Industries is currently experiencing problems with its inventory of anvils. Its manager, Willy Coy currently orders the anvils in batches of 10,000. Four orders are placed during the year to meet the estimated sales demand of 40,000 units. Each order costs $20 and each unit costs $2 to carry. Mr. Coy maintains a safety stock of 500 anvils.
Required:
a. What are Acme's total annual costs (TC) of inventory under its current ordering policy?
b. What is the Economic Order Quantity for Acme Industries?
c. What is the average inventory if Acme uses the EOQ calculated in part

Question 14

Beta Industries is currently experiencing problems with its inventory of hammer heads. Its manager, Laura Engles currently orders the hammer heads in batches of 6,000. Six orders are placed during the year to meet the estimated sales demand of 36,000 units. Each order costs $75 and each unit costs $0.50 to carry. Ms. Engles maintains a safety stock of 1,000 hammer heads.
Required:
a. What are Beta's total annual costs (TC) of inventory under its current ordering policy?
b. What is the Economic Order Quantity for Beta Industries?
c. What is the average inventory if Beta uses the EOQ calculated in part

Question 15

The executive vice president of Robotics, Inc., is concerned because the cost of materials has not been in line with the budget for several periods, even after implementing an EOQ model. The company has the normal direct material variance computations of price and efficiency at the end of each month. The price variance of the direct materials used is usually near expectations. The vice president does not understand how the budget differences are always larger than the material price variances.
Required:
What explanation can you give for the evaluation problems presented?

Question 16

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 increase in order size caused an increase, a decrease, or no change.

-average inventory

A) no change
B) increase
C) decrease

Question 17

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 increase in order size caused an increase, a decrease, or no change.

-cost of goods sold

A) no change
B) increase
C) decrease

Question 18

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 increase in order size caused an increase, a decrease, or no change.

-number of orders per year

A) no change
B) increase
C) decrease

Question 19

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 increase in order size caused an increase, a decrease, or no change.

-total annual carrying costs

A) no change
B) increase
C) decrease

Question 20

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 increase in order size caused an increase, a decrease, or no change.

-total annual ordering costs

A) no change
B) increase
C) decrease

Question 21

The management accountant must design performance measures to evaluate and control JIT production. One of the dominant sources of information that the management accountant might use for this would be the personal observations of production line workers and team leaders. Another dominant source of information would be

A) inventory turnover ratio.
B) nonfinancial measures of time, inventory and quality.
C) material cost variances.
D) number of units sent to scrap/total scrap costs.
E) total setup time for machines/total number of units started and completed.

Question 22

The Jarvis Corporation produces bucket loader assemblies for the tractor industry. The product has a long term life expectancy. Jarvis has a traditional manufacturing and inventory system. Jarvis is considering the installation of a just-in-time inventory system to improve its cost structure. In doing a full study using its manufacturing engineering team as well as consulting with industry JIT experts and the main vendors and suppliers of the components Jarvis uses to manufacture the bucket loader assemblies, the following incremental cost-benefit relevant information is available for analysis:
The Jarvis cost of investment capital hurdle rate is 15%.
One time cost to rearrange the shop floor to create the manufacturing cell workstations is $275,000.
One time cost to retrain the existing workforce for the JIT required skills is $60,000.
Anticipated defect reduction is 40%. Currently there is a cost of quality defect assessment listed as $150,000 per year.
The setup time for each of the existing functions will be reduced by 67%. Currently the forecast for setup costs are $225,000 per year.
Jarvis will expect to save $200,000 per year in carrying costs as a result of having a lower inventory.
The suppliers will require a 15% premium over the current level of prices in order to position themselves to supply the material on a smaller and more frequent schedule. Currently the materials purchases are $1,500,000 per year.
Required:
Determine whether it is in the best interest of Jarvis Corporation to install a JIT system.

Question 23

The manufacturing manager of New Technology Company is concerned about the company's newest plant. When the plant began operations three years ago it had the best of everything. It had modern equipment, well-trained employees, engineered work and assembly stations and a controlled environment. During the first two years the evaluation results were very good with almost all cost variances being favourable. However, recently things have turned negative.
In recent months everything seems to be operating in a crisis management mode. Although most cost variances remain favourable, the plant's segment contribution is declining and customers are complaining about poor quality and slow delivery. Several customers have suggested that they may take their business elsewhere if things do not improve.
The shop floor is in continual turmoil. In-process inventory is everywhere, production employees have difficulty finding jobs that need to be worked on, and scheduling has requested a larger computer to keep track of work-in-process.
The vice president of sales does not know where to begin with solving the customers' problems. It seems that everyone is working very hard and the plant has the best facilities and trained employees in the industry.
Required:
What is the nature of the plant's problems? What recommendation would you make to help improve the situation?

Question 24

Sudbury Ore Company mines nickel ore for production into various metal products. During recent years the company has had large fluctuations in its inventories of metal ingots. Much of the volatility of the inventory levels is due to the variability of demand by the company's largest customers, automobile manufacturers. For large orders the company has the technology to quickly shift production from one product to another.
Required:
Explain how the company can improve its inventory control system and give the advantages of whatever you recommend.

Question 25

Kretzinger Company makes extensive use of financial performance reports for each of its departments. Although most departments have been reporting favourable cost variances with the company's current inventory system, management is concerned about the overall performance of the purchasing and production departments. For example, the following information is for the purchasing of materials for a product the company has been manufacturing for several years:
Purchase
?
Required:
a. Compute the inventory turnover for each year. Can any conclusions be drawn for a yearly comparison of the purchase price variance and the inventory turnover?
b. Identify problems likely to be caused by evaluating purchasing only on the basis of the purchase price variance.
c. Management has been relying almost exclusively on variances for performance measurement. What recommendations can you suggest to improve the evaluation process?

Question 26

Use the information below to answer the following question(s).
Fun 'N' Games manufactures various board games. For January there were no beginning inventories of direct materials, and no beginning or ending work-in-process. Only one indirect manufacturing cost category is currently in use, "Conversion Costs."
Journal entries are recorded when materials are purchased and when conversion costs are allocated under backflush costing.


-Which of the following journal entries properly records the purchase of direct materials at Fun 'N' Games?

A)

B)

C)

D)

E)

Question 27

Use the information below to answer the following question(s).
Fun 'N' Games manufactures various board games. For January there were no beginning inventories of direct materials, and no beginning or ending work-in-process. Only one indirect manufacturing cost category is currently in use, "Conversion Costs."
Journal entries are recorded when materials are purchased and when conversion costs are allocated under backflush costing.


-Which of the journal entries properly records the incurrence of conversion costs?

A)

B)

C)

D)

E)

Question 28

Use the information below to answer the following question(s).
Fun 'N' Games manufactures various board games. For January there were no beginning inventories of direct materials, and no beginning or ending work-in-process. Only one indirect manufacturing cost category is currently in use, "Conversion Costs."
Journal entries are recorded when materials are purchased and when conversion costs are allocated under backflush costing.


-Which of the following entries properly records the cost of goods sold for the month?

A)

B)

C)

D)

E)

Question 29

Answer the following questions using the information below:
Acme Inc. manufactures air compressors. For July there were no beginning inventories of direct materials, and no beginning or ending work-in-process. Only one indirect manufacturing cost category is currently in use, "Conversion Costs."
Journal entries are recorded when materials are purchased and when units are transferred to finished goods inventory. Acme Inc. uses backflush costing. Variances are written off against Cost of Goods Sold when units are transferred to finished goods inventory. The following data pertains to July:


-Which of the following journal entries properly reflects Acme's conversion costs allocated including the disposition of the variance?

A)

B)

C)

D)

E)

Question 30

Answer the following questions using the information below:
Acme Inc. manufactures air compressors. For July there were no beginning inventories of direct materials, and no beginning or ending work-in-process. Only one indirect manufacturing cost category is currently in use, "Conversion Costs."
Journal entries are recorded when materials are purchased and when units are transferred to finished goods inventory. Acme Inc. uses backflush costing. Variances are written off against Cost of Goods Sold when units are transferred to finished goods inventory. The following data pertains to July:


-Which of the following journal entries properly records Acme's direct material costs placed into production for the month of July?

A)

B)

C)

D)

E)

Question 31

Answer the following question(s) using the information below:
Complete Microfilm Products manufactures microfilm cameras. For October there were no beginning inventories of direct materials, and no beginning or ending work-in-process. Only one indirect manufacturing cost category is currently in use, "Conversion Costs."
Journal entries are recorded when materials are purchased and when units are sold using backflush costing.


-Which of the following journal entries would be recorded for the units that are sold by Complete Microfilm Products in October?

A)

B)

C)

D)

E)

Question 32

Answer the following question(s) using the information below:
Complete Microfilm Products manufactures microfilm cameras. For October there were no beginning inventories of direct materials, and no beginning or ending work-in-process. Only one indirect manufacturing cost category is currently in use, "Conversion Costs."
Journal entries are recorded when materials are purchased and when units are sold using backflush costing.


-Which of the following entries would occur at Complete Microfilm Products if the only trigger point is the production of finished units?

A)

B)

C)

D)

E)

Question 33

A trigger point is defined as

A) a stage in the cycle going from the purchase of direct materials to the sale of finished goods at which point journal entries are made in the accounting system.
B) a stage in the cycle going from the purchase of accounting software to the sale of finished goods at which point journal entries are made in the new accounting system.
C) a stage in the cycle going from the sale of finished goods at which point journal entries are made in the accounting system.
D) a stage in the cycle going from the purchase of direct materials at which journal entries are made in the accounting system.
E) a stage in the cycle going from the purchase of direct materials to the sale of finished goods at which no journal entries are made in the accounting system.

Question 34

Answer the following question(s) using the information below.
Walton Industries uses backflush costing. For March, there were no beginning inventories of direct materials and no beginning or ending work-in-process. Conversion costs is the only indirect manufacturing cost category currently used. Journal entries are recorded when actual costs are incurred, at completion of finished goods, and at sale of finished goods, under backflush costing.


-Which of the following journal entries properly records the purchase of direct materials at Walton Industries?

A)

B)

C)

D)

E)

Question 35

Answer the following question(s) using the information below.
Walton Industries uses backflush costing. For March, there were no beginning inventories of direct materials and no beginning or ending work-in-process. Conversion costs is the only indirect manufacturing cost category currently used. Journal entries are recorded when actual costs are incurred, at completion of finished goods, and at sale of finished goods, under backflush costing.


-Which of the journal entries properly records conversion costs at Walton Industries?

A)

B)

C)

D)

E)

Question 36

Answer the following question(s) using the information below.
Walton Industries uses backflush costing. For March, there were no beginning inventories of direct materials and no beginning or ending work-in-process. Conversion costs is the only indirect manufacturing cost category currently used. Journal entries are recorded when actual costs are incurred, at completion of finished goods, and at sale of finished goods, under backflush costing.


-Which of the journal entries properly records the finished goods trigger point at Walton Industries?

A)

B)

C)

D)

E)

Question 37

Tornado Electronics manufactures CD players. All processing is initiated when an order is received. For April there were no beginning inventories. Conversion costs and direct materials are the only manufacturing cost accounts. Direct materials are purchased under a just-in-time system. Journal entries are recorded at three trigger points using backflush costing: purchase of direct materials, completion of finished goods, and sale of product. Variances are offset to cost of goods sold. Additional information is as follows:
Required:
Record all journal entries for the monthly activities related to the above transactions based on backflush costing.

Question 38

Corry Corporation manufactures filters for cars, vans, and trucks. A backflush costing system is used and standard costs for a filter are as follows:
Filters are scheduled for production only after orders are received, and are shipped immediately upon completion. This results in product costs being charged directly to cost of goods sold. In December, 3,000 filters were produced and shipped. Materials were purchased at a cost of $8,450 and actual conversion costs of $13,650 were recorded. Variances are written off to Cost of Goods Sold.
Required:
Prepare journal entries to record December's cost transactions for the production and sale of the filters.

Question 39

Dutch Oven is a bakery company. All processing is in batches of 6 dozen. For March, there were no beginning inventories. Conversion costs and direct materials are the only baking cost accounts. Direct materials are purchased under a just-in-time system. The company uses backflush costing with three trigger points: at purchase of raw materials, completion of finished goods, and sale of finished goods. Additional information for the month is as follows:
Required:
Record all journal entries for the monthly activities related to the above transactions assuming that backflush costing is used. The company uses a standard costing system for recording the purchase and use of direct materials; and, the recording of conversion costs. Material price variances are recorded at the time of purchase then closed to cost of goods sold; all other variances are recorded at the completion of finished goods trigger point as a direct charge, or credit to Cost of Goods Sold.

Question 40

Key Smith Company manufactures all types of locks for exterior doors. All processing is in batches of 100 and is initiated when an order is received. For August there were no beginning inventories. Each type of knob uses the same direct materials although the processing steps are slightly different. Conversion costs and direct materials are the only manufacturing cost accounts. Direct materials are purchased under a just-in-time system. Standard costs and actual costs were the same for the month. Backflush costing is used with purchase and sale trigger points. Additional information for the month is as follows:
Required:
Record all journal entries for the monthly activities related to the above transactions based on backflush costing.

Question 41

Cyclone Electronics manufactures automobile radios. All processing is initiated when an order is received. For March there were no beginning inventories. Conversion costs and direct materials are the only manufacturing cost accounts. Direct materials are purchased under a just-in-time system and there was no variance. Backflush costing is used with trigger points at completion of finished goods and sale of product. Additional information for the month is as follows:
Actual conversion costs $116,000
Standard materials cost per unit $30
Standard conversion cost per unit $70
Units produced 1,600
Units sold 1,400
Required:
Record all journal entries for the monthly activities related to the above transactions based on backflush costing.

Question 42

Vision Enterprises manufactures converter boxes for high definition TVs. All processing is initiated when an order is received. For March there were no beginning inventories. Conversion costs and direct materials are the only manufacturing cost accounts. Direct materials are purchased under a just-in-time system and there was no variance. Backflush costing is used with trigger points at completion of finished goods and sale of product. Additional information for the month is as follows:
Required:
Record all journal entries for the monthly activities related to the above transactions based on backflush costing.

Question 43

Dolls "R" Us manufactures children's plastic dolls. For January there were no beginning inventories of direct materials, and no beginning or ending work-in-process. Conversion costs and direct materials are the only manufacturing cost accounts. Journal entries are recorded at three trigger points using backflush costing: purchase of direct materials, completion of finished goods, and sale of product. Since February is the first month of the fiscal year, all actual costs are as budgeted. Additional information for the month is as follows:
Required:
Record all journal entries for the monthly activities related to the above transactions based on backflush costing.

Question 44

Falcon Industries manufactures customized industrial compounds. All processing is initiated when an order is received. For April there were no beginning inventories. Conversion costs and direct materials are the only manufacturing cost accounts. Direct materials are purchased under a just-in-time system. Journal entries are recorded at three trigger points using backflush costing: purchase of direct materials, completion of finished goods, and sale of product. Additional information is as follows:
Required:
Record all journal entries for the monthly activities related to the above transactions assuming that backflush costing is used. The company uses a standard costing system for recording the purchase and use of direct materials; and, the recording of conversion costs. Material price variances are recorded at the time of purchase then closed to cost of goods sold; all other variances are recorded at the completion of finished goods trigger point as a direct charge, or credit to Cost of Goods Sold.

Question 45

Arrow Manufacturing Ltd. distributes golf clubs. Its annual demand for next year is forecasted at 14,000 sets at an average cost of $425 per set. In reviewing its historical ordering costs for the past 3 years it noted that costs were $12,900, $16,400 and $20,100 at order volumes of 20, 50 and 80 respectively. Arrow is forecasting an increase of 10% in its fixed ordering costs and a 15% increase in its variable ordering costs. The fixed ordering costs relate to allocations of supervisory time, computer time, and warehouse space. In addition to the order processing, the company must receive and inspect the units. Receiving and inspecting activities require 5 hours per order at a direct labour rate of $12 per hour. Variable overhead related to receiving and inspecting activities is applied at a rate of 40% of direct labour dollars.
In reviewing its other activities, Arrow came up with the following estimates for next year:

The company is closed for two weeks in the summer and again for 2 weeks over Christmas. This results in 48 work weeks in the year and the company operates 5 days per week.
Required:
a. Determine the Economic Order Quantity (EOQ) for Arrow for next year. What are the total annual inventory costs at the EOQ?
b. Determine the reorder point in units assuming that the lead time is 7 days.
c. Now assume the company has found a new supplier that is willing to supply on a just-in-time basis. Inspection and receiving time would be lowered to 1.5 hours per order and the annual estimated damage would be cut by 75%. Storage and inventory insurance would drop to $4.50 and $0.60 respectively. The variable ordering cost would drop to $65 due to integrated ordering systems. However, the annual cost to purchase the golf sets will increase to $428. Determine the new EOQ. Should the company go with the new supplier or maintain its current arrangements?

Question 46

Garden Equipment Manufacturing Ltd. (GEM) has introduced a just-in-time production process and is considering the adoption of lean accounting principles to support its new production philosophy. The company has two product lines: lawnmowers and weed whackers. Two individual products are made in each line. The company's traditional cost accounting system allocates all plant-level overhead costs to individual products. Product-line overhead costs are traced directly to product lines, and then allocated to the two individual products in each line. Equipment costs are directly traced to products. The latest accounting report using traditional cost accounting methods included the following information (in thousands of dollars).

Required:
a. What are the cost objects in GEM's lean accounting system? Which of GEM's costs would be excluded when computing operating income for these cost objects?
b. Compute the operating income for the cost objects identified in requirement b. using lean accounting principles. Why does operating income differ from the operating income computed using traditional accounting methods?
c. Which competitive strategy is best served by lean accounting principles?