Deck 20: Inventory Management and Variable and Absorption Costing

Question 1

Exhibit 20-1 The following information is for Saratoga Company:
Refer to Exhibit 20-1. Determine the number of days in ending raw materials inventory. Assume Saratoga uses a 365-day year.

A) 27.3
B) 28.3
C) 31.2
D) 58.4

Answer 1

B

Question 2

What type of firm would have a large inventory of goods completed and ready to sell?

A) Service
B) Manufacturing
C) Merchandising
D) Both manufacturing and merchandising

Answer 2

C

Question 3

When comparing balance sheets, which type of company has an inventory of work-in-process services?

A) Manufacturing firm
B) Service firm
C) Merchandising firm
D) All of these have an inventory of work-in-process services

Answer 3

B

Question 4

Exhibit 20-1 The following information is for Saratoga Company:
Refer to Exhibit 20-1. Determine the work-in-process days in inventory. Assume a 365-day year.

A) 25.9
B) 38.5
C) 19.3
D) 93.6

Question 5

Maintaining smaller inventories should lead to:

A) Less purchasing costs
B) More storage costs
C) Less shrinkage costs
D) All of these are correct

Question 6

Exhibit 20-1 The following information is for Saratoga Company:
Refer to Exhibit 20-1. Determine the inventory turnover for work-in-process inventory.

A) 3.9
B) 7.4
C) 7.6
D) 14.1

Question 7

Exhibit 20-1 The following information is for Saratoga Company:
Refer to Exhibit 20-1. Determine the number of days in finished goods inventory. Assume a 365-day year.

A) 44.5
B) 47.4
C) 50.7
D) 96

Question 8

Exhibit 20-1 The following information is for Saratoga Company:
Refer to Exhibit 20-1. Determine the raw materials inventory turnover (rounded).

A) 7.6
B) 11.7
C) 12.9
D) 13.4

Question 9

When calculating ROI on inventory, inventory turnover is calculated by:

A) Gross margin divided by Inventory
B) Gross margin divided by Average inventory
C) Sales revenue divided by Inventory
D) Sales revenue divided by Average inventory

Question 10

Exhibit 20-1 The following information is for Saratoga Company:
Refer to Exhibit 20-1. Determine the inventory turnover for the finished goods inventory.

A) 3.8
B) 7.2
C) 7.7
D) 8.2

Question 11

The formula for a typical income statement is:

A) Sales - Cost of goods sold - Selling & administrative expenses = Operating income
B) Operating income = Gross margin - (Selling & administrative expenses + Cost of goods sold)
C) Sales - Selling & administrative expenses - Cost of goods sold = Gross margin
D) Gross margin - Cost of goods sold = Operating income

Question 12

The formula for inventory turnover is:

A) Cost of goods sold ¸ average inventory
B) Cost of goods manufactured ¸ average inventory
C) Cost of goods sold ¸ cost of goods manufactured
D) Average inventory × cost per unit

Question 13

What type of firm could have work-in-process inventory?

A) Service
B) Manufacturing
C) Merchandising
D) Both service and manufacturing

Question 14

When comparing balance sheets, which type of company could not have a supplies inventory?

A) Manufacturing firm
B) Service firm
C) Merchandising firm
D) All of these could have a supplies inventory

Question 15

When comparing income statements, which type of company does not have a section for cost of goods or services sold?

A) Manufacturing firm
B) Service firm
C) Merchandising firm
D) All of these have a cost of goods or services sold section

Question 16

Which of the following values would be the most desirable for inventory turnover?

A) 9
B) 6
C) 3
D) Not enough information to tell

Question 17

When comparing balance sheets, which type of company has a significant materials inventory?

A) Manufacturing firm
B) Service firm
C) Merchandising firm
D) All of these have a significant materials inventory

Question 18

Maintaining too little inventory causes all but which of the following problems?

A) The opportunity lost to invest in alternative business investments
B) Increased risk of lost sales
C) Increased ordering costs
D) Increased exposure to nondelivery

Question 19

Which of the following is not true of inventory turnover?

A) It measures how many times inventory has been replaced.
B) It indicates how well inventory has been managed.
C) A higher turnover number indicates a less efficient use of inventory.
D) It is calculated by dividing cost of goods sold by average inventory value.

Question 20

When comparing income statements, which type of company does not have a section for selling and general administrative expenses?

A) Manufacturing firm
B) Service firm
C) Merchandising firm
D) All of these have a section for selling and general administrative expenses

Question 21

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?

A) $0
B) $3,030
C) $6,060
D) $12,120

Question 22

Financial holding cost in a merchandising firm is calculated by which formula?

A) Average inventory investment × Annual rate
B) Ending inventory investment × Annual rate
C) Average inventory investment × Annual rate × Number of periods
D) Ending inventory investment × Annual rate × Number of periods

Question 23

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:

A) 4.8%
B) 75.6%
C) 77.5%
D) 232%

Question 24

Exhibit 20-2 Calumet Company sells slippers. The following information is available for Calumet's inventory for 2011:
Refer to Exhibit 20-2. Calculate Calumet's order costs for the year.

A) $225
B) $2,250
C) $150
D) $45

Question 25

Portage Company made the following inventory purchases during the year: If Portage Company's cost of capital is 14%, what is the amount of its holding costs for the year?

A) $0
B) $8,610
C) $17,220
D) $21,000

Question 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?

A) ABC
B) LMN
C) XYZ
D) There is not enough information available.

Question 27

Exhibit 20-3 Florence Company sells lawn mowers. The following information is available for Florence's inventory for 2011:
Refer to Exhibit 20-3. Calculate Florence's lost discount for the year.

A) $100,000
B) $22,500
C) $7,500
D) $12,500

Question 28

Exhibit 20-2 Calumet Company sells slippers. The following information is available for Calumet's inventory for 2011:
Refer to Exhibit 20-2. Calculate Calumet's overhead cost for the year.

A) $90,000
B) $600,000
C) $1,080,000
D) $1,800,000

Question 29

Inventory shrinkage is caused by:

A) Spoilage
B) Theft
C) Breakage
D) All of these are correct

Question 30

Merchandising companies can have holding costs associated with merchandise inventory. In service firms, the account that would have a comparable holding cost would be:

A) Overhead
B) Cost of Services
C) Accounts Payable
D) Work-in-Process Services

Question 31

Carrying too much inventory can cause which of the following problems?

A) Increase in ordering costs
B) Increase in inventory shrinkage
C) Decreased bulk order discounts
D) Increased risk of price increases

Question 32

Exhibit 20-2 Calumet Company sells slippers. The following information is available for Calumet's inventory for 2011:
Refer to Exhibit 20-2. Calculate Calumet's market loss for the year.

A) $50,000
B) $600,000
C) $1,200,000
D) $360,000

Question 33

Exhibit 20-2 Calumet Company sells slippers. The following information is available for Calumet's inventory for 2011:
Refer to Exhibit 20-2. Calculate Calumet's shrinkage loss for the year.

A) $45,000
B) $30,000
C) $90,000
D) $150,000

Question 34

The return on inventory investment formula is:

A) (Revenue - Gross margin) × (Gross margin - Inventory)
B) (Revenue - Cost of goods sold) × (Revenue ¸ Inventory)
C) (Gross margin ¸ Revenue) × (Revenue ¸ Inventory)
D) None of these are correct

Question 35

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:

A) 58%
B) 161%
C) 667%
D) 952%

Question 36

Which of the following is an opportunity cost associated with financial holding costs?

A) Too much inventory
B) Too little inventory
C) Both too much inventory and too little inventory
D) Neither too much inventory nor too little inventory

Question 37

Use of the ROI formula can help a company:

A) Determine true profit
B) Maximize return on investments
C) Measure revenue
D) Establish asset turnover levels

Question 38

Which of the following is a disadvantage of low inventory levels?

A) Decreased bulk discounts
B) Higher order costs
C) Risk of purchase price inflation
D) All of these are disadvantages of low inventory levels

Question 39

Economic profit is:

A) Gross margin - Financial holding costs
B) Net operating profit - Financial holding costs
C) Gross margin - Opportunity costs
D) Net operating profit - Gross margin

Question 40

Exhibit 20-3 Florence Company sells lawn mowers. The following information is available for Florence's inventory for 2011:
Refer to Exhibit 20-3. Calculate Florence's costs due to the price increase for the year.

A) $13,500
B) $7,500
C) $22,500
D) $21,000

Question 41

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?

A) $0
B) $15,720
C) $31,440
D) $47,160

Question 42

EOQ is used to determine:

A) The day of the month to place inventory orders
B) The optimal order size of inventory
C) The optimal purchase price of inventory
D) All of these are correct

Question 43

Exhibit 20-4 The Hanover Catalog Company has the following information available concerning one of its inventory items:
Refer to Exhibit 20-4. If there is a delay in shipping the item, approximately how many days can be covered by the safety stock?

A) 0.5 days
B) 2 days
C) 133 days
D) 263 days

Question 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:

A) 4%
B) 8%
C) 12%
D) None of these

Question 45

Which of the following equations determines the total annual ordering costs of inventory?

A) Order quantity × Cost to place an order
B) Order quantity ¸ 2 × Unit carrying costs per year
C) Total demand ¸ Order quantity × Cost to place an order
D) Total demand ¸ 2 × Cost to place an order

Question 46

The formula for the reorder point without safety stock is:

A) Maximum daily sales × Average lead time
B) Average daily sales - Maximum daily sales × Average lead time
C) Maximum daily sales - Average daily sales × Average lead time
D) Average daily sales × Average lead time

Question 47

Creasly Company has an economic order quantity of 300 units for item B of inventory. The annual demand for the product is 5,625 units, and the unit carrying cost is $4.00. What is the cost of placing an order?

A) $32
B) $64
C) $75
D) $50

Question 48

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:

A) Increase
B) Not change
C) Decrease
D) Cannot be determined from the information given

Question 49

EOQ is used to:

A) Minimize carrying costs of inventory
B) Minimize ordering costs of inventory
C) Balance carrying costs and ordering costs of inventory
D) Maximize carrying costs of inventory

Question 50

A short formula to calculate the reorder point with safety stock is:

A) Maximum daily sales × Average lead time
B) Average daily sales - Maximum daily sales - Average lead time
C) Maximum daily sales × Maximum lead time
D) Average daily sales × Average lead time

Question 51

Lead time is the:

A) Number of days that it takes to place an order
B) Number of days between placing an order and receiving the order
C) Number of days between running out of inventory and receiving new inventory
D) Number of days an order is in transit

Question 52

Exhibit 20-4 The Hanover Catalog Company has the following information available concerning one of its inventory items:
Refer to Exhibit 20-4. The reorder point with safety stock for this inventory item is:

A) 2,280 units
B) 2,220 units
C) 3,030 units
D) 5,000 units

Question 53

Which of the following equations determines the total annual carrying costs of inventory?

A) Order quantity × Unit carrying cost per year
B) Order quantity ¸ 2 × Unit carrying cost per year
C) Total demand ¸ Order quantity × Unit carrying cost per year
D) Total demand ¸ 2 × Unit carrying cost per year

Question 54

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?

A) $4,840
B) $5,640
C) $8,880
D) $11,700

Question 55

Exhibit 20-4 The Hanover Catalog Company has the following information available concerning one of its inventory items:
Refer to Exhibit 20-4. The EOQ for this inventory item is:

A) 40 units
B) 400 units
C) 500 units
D) 5,000 units

Question 56

Garner Industries increased the size of inventory order quantities above the quantity determined by EOQ. What is the impact on total annual carrying costs?

A) Increase
B) No change
C) Decrease
D) Cannot be determined from the information given

Question 57

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?

A) $0
B) $3,000
C) $18,720
D) $21,720

Question 58

Which of the following is not included in carrying costs?

A) Holding costs
B) Costs due to market loss
C) Cost of capital
D) Costs due to shrinkage

Question 59

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:

A) Increase
B) Not change
C) Decrease
D) Cannot be determined from the information given

Question 60

Hannafin Company decreased the size of inventory order quantities below the quantity determined by EOQ. What is the impact on total annual ordering costs?

A) Increase
B) No change
C) Decrease
D) Cannot be determined from the information given

Question 61

Which inventory costing method calculates operating income?

A) Absorption costing
B) Gross margin costing
C) Variable costing
D) Both absorption and variable costing

Question 62

Which inventory costing method creates an incentive to build up excess inventory?

A) Full costing
B) Gross margin costing
C) Contribution margin costing
D) Absorption costing

Question 63

Which inventory costing method expenses all selling and administrative expenses to the income statement in the period in which these costs occurred?

A) Absorption costing
B) Gross margin costing
C) Variable costing
D) Both absorption and variable costing

Question 64

Which of the following is the income statement formula for the variable costing method?

A) Sales Revenue - Cost of Goods Sold = Gross Margin - All Fixed Expenses = Operating Income
B) Sales Revenue - All Variable Costs = Contribution Margin - All Fixed Expenses = Operating Income
C) Sales Revenue - Variable Manufacturing Costs = Contribution Margin - Fixed Manufacturing Costs = Operating Income
D) Sales Revenue - Cost of Goods Sold = Gross Margin - Selling and Administrative Expenses = Operating Income

Question 65

Exhibit 20-5 Barron Company manufactured 150,000 units during the year but only sold 130,000 of these units. At the beginning of the year, Barron had no beginning finished goods inventory. The following unit costs were incurred during the year:
Refer to Exhibit 20-5. If Barron Company sold each unit for $13, what is Barron's net income for the year using variable costing?

A) $295,000
B) $335,000
C) $415,000
D) $780,000

Question 66

Exhibit 20-6 Vilas Company manufactured 80,000 units during July but only sold 65,000 of these units at a price of $20 each. At the beginning of the month, Vilas had 5,000 units in finished goods inventory. The following unit costs are known for June and July:
Vilas Company uses the first-in first-out (FIFO) method.
Refer to Exhibit 20-6. What is net income for July using the absorption costing method?

A) $205,000
B) $85,000
C) $215,000
D) $125,000

Question 67

Swanson Supplies has an economic order quantity of 100 units for item X of inventory. The annual demand for the product is 1,400 units and the cost to place an order is $25. What is the unit carrying cost?

A) $3.50
B) $7.00
C) $14.00
D) $10.00

Question 68

Which of the following is true regarding the variable inventory costing method?

A) Current fixed production costs are retained in inventory at the end of the period
B) Current fixed production costs are expensed to the income statement each period
C) Cost of goods sold can be manipulated by the number of units produced
D) It is the inventory costing method required by GAAP

Question 69

Which inventory costing method allows net income to be manipulated by changing production levels?

A) Full costing
B) Gross margin costing
C) Contribution margin costing
D) Absorption costing

Question 70

Which of the following is the income statement formula for the absorption costing method?

A) Sales Revenue - Cost of Goods Sold = Gross Margin - All Fixed Expenses = Operating Income
B) Sales Revenue - All Variable Costs = Contribution Margin - All Fixed Expenses = Operating Income
C) Sales Revenue - Variable Manufacturing Costs = Contribution Margin - Fixed Manufacturing Costs = Operating Income
D) Sales Revenue - Cost of Goods Sold = Gross Margin - Selling and Administrative Expenses = Operating Income

Question 71

Exhibit 20-5 Barron Company manufactured 150,000 units during the year but only sold 130,000 of these units. At the beginning of the year, Barron had no beginning finished goods inventory. The following unit costs were incurred during the year:
Refer to Exhibit 20-5. Using variable costing, what is the value of Barron's finished goods inventory at the end of the year?

A) $140,000
B) $60,000
C) $80,000
D) $120,000

Question 72

What is the main difference between an absorption costing system and a variable costing system?

A) The handling of variable production costs
B) The handling of fixed production costs
C) The handling of variable selling and administrative costs
D) The handling of fixed selling and administrative costs

Question 73

Exhibit 20-6 Vilas Company manufactured 80,000 units during July but only sold 65,000 of these units at a price of $20 each. At the beginning of the month, Vilas had 5,000 units in finished goods inventory. The following unit costs are known for June and July:
Vilas Company uses the first-in first-out (FIFO) method.
Refer to Exhibit 20-6. What is net income for July using the variable costing method?

A) $205,000
B) $85,000
C) $215,000
D) $125,000

Question 74

Last year, Racine Company's income under absorption costing was $15,000 lower than its income under variable costing. The company had total production costs of $24 per unit, of which $14 was variable costs. No selling expenses were incurred this year. Racine sold 25,000 units during the year. How many units were produced during the year?

A) 25,000
B) 23,500
C) 24,000
D) 26,500

Question 75

Which inventory costing method is required by GAAP?

A) Absorption costing
B) Variable costing
C) Full costing
D) Fixed costing

Question 76

Exhibit 20-5 Barron Company manufactured 150,000 units during the year but only sold 130,000 of these units. At the beginning of the year, Barron had no beginning finished goods inventory. The following unit costs were incurred during the year:
Refer to Exhibit 20-5. If Barron Company sold each unit for $13, what is Barron's net income for the year using absorption costing?

A) $295,000
B) $335,000
C) $415,000
D) $780,000

Question 77

Exhibit 20-5 Barron Company manufactured 150,000 units during the year but only sold 130,000 of these units. At the beginning of the year, Barron had no beginning finished goods inventory. The following unit costs were incurred during the year:
Refer to Exhibit 20-5. Using absorption costing, what is the value of Barron's finished goods inventory at the end of the year?

A) $140,000
B) $60,000
C) $80,000
D) $120,000

Question 78

Which inventory costing method assigns fixed production costs to inventory so as to report the full cost of creating inventory?

A) Variable costing
B) Gross margin costing
C) Full costing
D) Absorption costing

Question 80

Which inventory costing method calculates contribution margin instead of gross margin?

A) Full costing
B) Gross margin costing
C) Variable costing
D) Absorption costing