Ch21 – JIT & Inventory Mgmt | Test Bank – 17e

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Horngren's Cost Accounting: A Managerial Emphasis, 17e, Global Edition by Datar/Rajan

Chapter 21 Inventory Management, Just-in-Time, and Simplified Costing Methods

Objective 21.1

1) Among different types of costs associated with inventory, the costs of obtaining purchase approvals are:

A) purchasing costs

B) ordering costs

C) stockout costs

D) carrying costs

Diff: 2

Objective: 1

AACSB: Analytical thinking

2) Among different types of costs associated with inventory, the incoming freight charges of inventories are:

A) purchasing costs

B) ordering costs

C) stockout costs

D) carrying costs

Diff: 2

Objective: 1

AACSB: Analytical thinking

3) Among different types of costs associated with inventory, the opportunity cost of the investment tied up in inventory is a(n):

A) purchasing cost

B) ordering cost

C) stockout cost

D) carrying cost

Diff: 2

Objective: 1

AACSB: Analytical thinking

4) The costs that result from theft of inventory are:

A) shrinkage costs

B) external failure costs

C) stockout costs

D) costs of quality

Diff: 2

Objective: 1

AACSB: Analytical thinking

5) The costs that result when a company runs out of a particular item for which there is a customer demand are:

A) shrinkage costs

B) shortage costs

C) stockout costs

D) EOQ estimation costs

Diff: 2

Objective: 1

AACSB: Analytical thinking

6) Costs incurred by a company to expedite an order from a supplier in an attempt to not miss out of a sale are classified as:

A) shrinkage costs

B) external failure costs

C) stockout costs

D) costs of quality

Diff: 2

Objective: 1

AACSB: Analytical thinking

7) Which of the following is the best definition of inventory management?

A) planning and control of the flow inventory into and through an organization

B) planning, coordinating, and controlling activities related to the flow of inventory into, though, and out of an organization

C) planning and coordinating activities related to the flow of inventory into and through an organization

D) planning, coordinating, and control of inventory into an organization

Diff: 2

Objective: 1

AACSB: Analytical thinking

8) Which of the following statements is true of costs associated with goods for sale?

A) Appraisal costs is a subcategory of shrinkage costs.

B) Special processing costs are always part of purchasing costs.

C) Opportunity costs are not recorded in the accounting system.

D) Stockout costs are costs that arise when a company runs out of a particular item for which there is no customer demand.

Diff: 2

Objective: 1

AACSB: Analytical thinking

9) Among different types of costs associated with inventory, four categories of quality costs are:

A) control costs, inspection costs, internal failure costs, and external failure costs

B) prevention costs, inspection costs, internal failure costs, and external failure costs

C) prevention costs, appraisal costs, internal failure costs, and external failure costs

D) prevention costs, control costs, internal failure costs, and external failure costs

Diff: 2

Objective: 1

AACSB: Analytical thinking

10) Which of the following statements is true of costs associated with goods for sale?

A) Information-gathering technology increases the reliability and timeliness of inventory information and increases the costs related to inventory.

B) Opportunity costs are not recorded in financial accounting systems because they are not a significant component in several cost categories.

C) Purchasing costs include incoming freight costs and are reduced by discounts.

D) Opportunity costs are recorded in financial accounting systems but are a not significant component in several cost categories.

Diff: 2

Objective: 1

AACSB: Analytical thinking

11) Carrying costs only include those costs that are entered into the financial accounting system and do not include the opportunity cost of the investment tied up in inventory.

Diff: 2

Objective: 1

AACSB: Analytical thinking

12) Inventory management is the planning, organizing, and controlling activities that focus on the flow of materials into, through, and out of the organization.

Diff: 1

Objective: 1

AACSB: Analytical thinking

13) Purchasing costs arise in preparing and issuing purchase orders, receiving and inspecting the items included in the orders, and matching invoices received, purchase orders, and delivery records to make payments.

Diff: 2

Objective: 1

AACSB: Analytical thinking

14) The opportunity cost of the stockout is the lost revenue on the sale not made plus any lost revenue on future sales due to customer ill will.

Diff: 2

Objective: 1

AACSB: Analytical thinking

15) Stockout costs arise when an organization experiences an ability to deliver its goods to its customers.

Diff: 1

Objective: 1

AACSB: Application of knowledge

16) Shrinkage is measured by adding (a) the cost of the inventory recorded on the books in the absence of theft and other incidents just mentioned, and (b) the cost of inventory when physically counted.

Diff: 2

Objective: 1

AACSB: Analytical thinking

17) Freight in charges forms part of purchasing costs of inventory.

Diff: 1

Objective: 1

AACSB: Analytical thinking

18) All inventory costs are available in financial accounting systems.

Diff: 1

Objective: 1

AACSB: Analytical thinking

19) Managing inventories to increase net income requires companies to effectively manage costs associated with goods for sale.

Required:

Classify the below listed items as either Purchasing Costs, Ordering Costs, Carrying Costs, Stockout Costs, Costs of Quality, or Shrinkage Costs.

________ a. costs of obtaining purchase approvals

________ b. costs resulting from embezzlement by employees

________ c. internal failure costs

________ d. opportunity cost of the investment tied up in inventory

________ e. costs associated with storage

________ f. costs of lost sales as a result of not having an item requested by a customer

________ g. freight-in charges

________ h. special processing costs

________ i. costs of wages for work-in-process inspections

________ j. costs that result from misclassifications and clerical errors

a. Ordering Costs

b. Shrinkage Costs

c. Costs of Quality

d. Carrying Costs

e. Carrying Costs

f. Stockout Costs

g. Purchasing Costs

h. Ordering Costs

i. Costs of Quality

j. Shrinkage Costs

Diff: 2

Objective: 1

AACSB: Application of knowledge

Objective 21.2

1) Which of the following statements is true of the economic order quantity decision model?

A) The economic order quantity increases with higher demand and higher carrying costs and decreases with higher ordering costs.

B) The simplest version of the economic order quantity model assumes there are only ordering costs, carrying costs, stockout costs, and purchasing costs.

C) It assumes the purchase order lead time is not known with certainty.

D) The larger the order quantity, the lower the annual relevant ordering costs and the higher the annual relevant carrying costs.

Diff: 3

Objective: 2

AACSB: Analytical thinking

2) Which of the following is the correct mathematical expression to calculate annual relevant ordering costs?

A) Demand in units for a specified period / (Relevant ordering cost per purchase order × Size of each order)

B) Size of each order × Relevant ordering cost per purchase order / Demand in units for a specified period

C) (Demand in units for a specified period / Size of each order) × Relevant ordering cost per purchase order

D) (Demand in units for a specified period - Size of each order) × Relevant ordering cost per purchase order

Diff: 2

Objective: 2

AACSB: Analytical thinking

3) Under economic-order-quantity decision model, which of the following is an assumption of the model?

A) the quantity ordered can vary at each reorder point

B) demand, ordering costs, and carrying costs are uncertain

C) the purchasing cost per unit is affected by the order quantity

D) the same quantity is ordered at each reorder point

Diff: 2

Objective: 2

AACSB: Analytical thinking

4) The following information applies to Krynton Company, which supplies microscopes to laboratories throughout the country. Krynton purchases the microscopes from a manufacturer which has a reputation for very high quality in its manufacturing operation.

Annual demand (weekly demand = 1/52 of annual demand) 59,000 units

Orders per year 60

Lead time in days 20 days

Cost of placing an order $140

What is the reorder point? (Assume a 365 day year.)

A) 3,120 units

B) 3,233 units

C) 983 units

D) 2,950 units

Diff: 2

Objective: 2

AACSB: Analytical thinking

5) The economic order quantity model completely ignores:

A) carrying costs

B) ordering costs

C) stockout costs

D) the size of a purchase order

Diff: 2

Objective: 2

AACSB: Analytical thinking

6) Globe Inc. is a distributor of DVDs. DVD Mart is a local retail outlet which sells blank and recorded DVDs. DVD Mart purchases DVDs from Globe at $28.00 per DVD; DVDs are shipped in packages of 68. Globe pays all incoming freight, and DVD Mart does not inspect the DVDs due to Globe's reputation for high quality. Annual demand is 320,000 DVDs at a rate of 6,900 DVDs per week. DVD Mart earns 13% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

Relevant ordering costs per purchase order $119.50

Carrying costs per package per year:

Relevant insurance, materials handling,

breakage, etc., per year $5.50

What is the economic order quantity?

A) 67.41 packages

B) 47.14 packages

C) 6.10 packages

D) 66.67 packages

Diff: 2

Objective: 2

AACSB: Application of knowledge

7) Globe Inc. is a distributor of DVDs. DVD Mart is a local retail outlet which sells blank and recorded DVDs. DVD Mart purchases DVDs from Globe at $25.00 per DVD; DVDs are shipped in packages of 60. Globe pays all incoming freight, and DVD Mart does not inspect the DVDs due to Globe's reputation for high quality. Annual demand is 321,000 DVDs at a rate of 6,300 DVDs per week. DVD Mart earns 11% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

Relevant ordering costs per purchase order $118.50

Carrying costs per package per year:

Relevant insurance, materials handling,

breakage, etc., per year $9.50

What are the annual relevant ordering costs?

A) $80,961

B) $10,518

C) $7,438

D) $7,232

Diff: 3

Objective: 2

AACSB: Application of knowledge

8) Globe Inc. is a distributor of DVDs. DVD Mart is a local retail outlet which sells blank and recorded DVDs. DVD Mart purchases DVDs from Globe at $27.00 per DVD; DVDs are shipped in packages of 63. Globe pays all incoming freight, and DVD Mart does not inspect the DVDs due to Globe's reputation for high quality. Annual demand is 315,000 DVDs at a rate of 6,400 DVDs per week. DVD Mart earns 14% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

Relevant ordering costs per purchase order $116.50

Carrying costs per package per year:

Relevant insurance, materials handling,

breakage, etc., per year $7.50

What are the annual relevant carrying costs?

A) $8,590

B) $8,459

C) $784

D) $5,981

Diff: 3

Objective: 2

AACSB: Application of knowledge

9) Globe Inc. is a distributor of DVDs. DVD Mart is a local retail outlet which sells blank and recorded DVDs. DVD Mart purchases DVDs from Globe at $30.00 per DVD; DVDs are shipped in packages of 61. Globe pays all incoming freight, and DVD Mart does not inspect the DVDs due to Globe's reputation for high quality. Annual demand is 320,000 DVDs at a rate of 7,000 DVDs per week. DVD Mart earns 13% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

Relevant ordering costs per purchase order $119.50

Carrying costs per package per year:

Relevant insurance, materials handling,

breakage, etc., per year $7.50

What are the relevant total costs?

A) $21,311

B) $96,676

C) $17,541

D) $14,837

Diff: 3

Objective: 2

AACSB: Application of knowledge

10) Globe Inc. is a distributor of DVDs. DVD Mart is a local retail outlet which sells blank and recorded DVDs. DVD Mart purchases DVDs from Globe at $27.00 per DVD; DVDs are shipped in packages of 64. Globe pays all incoming freight, and DVD Mart does not inspect the DVDs due to Globe's reputation for high quality. Annual demand is 319,000 DVDs at a rate of 7,000 DVDs per week. DVD Mart earns 15% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

Relevant ordering costs per purchase order $118.50

Carrying costs per package per year:

Relevant insurance, materials handling,

breakage, etc., per year $8.50

How many deliveries will be made during each time period?

A) 75.03 deliveries

B) 42.06 deliveries

C) 106.11 deliveries

D) 73.83 deliveries

Diff: 3

Objective: 2

AACSB: Application of knowledge

11) Short Grass Incorporated is a distributor of golf balls. Martin's Golf Supplies is a local retail outlet which sells golf balls. Martin's purchases the golf balls from Short Grass Incorporated at $1.15 per ball; the golf balls are shipped in cartons of 62. Short Grass Incorporated pays all incoming freight, and Martin's Golf Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is 159,520 golf balls at a rate of 2,991 balls per week. Martin's Golf Supplies earns 12% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

Relevant ordering costs per purchase order $129.00

Carrying costs per carton per year:

Relevant insurance, materials handling,

breakage, etc., per year $0.87

If Martin's makes an order (1 / 12 of annual demand) once per month, what are the relevant total costs? (Round costs to the nearest cent and quantities to the nearest whole number.)

A) $1,548.00

B) $1,010.51

C) $2,557.01

D) $3,096.00

Diff: 2

Objective: 2

AACSB: Application of knowledge

12) Short Grass Incorporated is a distributor of golf balls. Martin's Golf Supplies is a local retail outlet which sells golf balls. Martin's purchases the golf balls from Short Grass Incorporated at $1.15 per ball; the golf balls are shipped in cartons of 72. Short Grass Incorporated pays all incoming freight, and Martin's Golf Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is 159,520 golf balls at a rate of 3,691 balls per week. Martin's Golf Supplies earns 10% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

Relevant ordering costs per purchase order $132.00

Carrying costs per carton per year:

Relevant insurance, materials handling,

breakage, etc., per year $0.87

What is the economic order quantity? (Round costs to the nearest cent and quantities to the nearest whole number.)

A) 185 cartons

B) 253 cartons

C) 277 cartons

D) 369 cartons

Diff: 2

Objective: 2

AACSB: Application of knowledge

13) Short Grass Incorporated is a distributor of golf balls. Martin's Golf Supplies is a local retail outlet which sells golf balls. Martin's purchases the golf balls from Short Grass Incorporated at $0.95 per ball; the golf balls are shipped in cartons of 42. Short Grass Incorporated pays all incoming freight, and Martin's Golf Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is 156,520 golf balls at a rate of 3,391 balls per week. Martin's Golf Supplies earns 11% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

Relevant ordering costs per purchase order $130.00

Carrying costs per carton per year:

Relevant insurance, materials handling,

breakage, etc., per year $0.87

Purchasing at the EOQ recommended level, how many deliveries will be made during each time period? (Round costs to the nearest cent and quantities to the nearest whole number.)

A) 2 deliveries

B) 3.5 deliveries

C) 8.7 deliveries

D) 12 deliveries

Diff: 3

Objective: 2

AACSB: Application of knowledge

14) Short Grass Incorporated is a distributor of golf balls. Martin's Golf Supplies is a local retail outlet which sells golf balls. Martin's purchases the golf balls from Short Grass Incorporated at $0.85 per ball; the golf balls are shipped in cartons of 62. Short Grass Incorporated pays all incoming freight, and Martin's Golf Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is 158,520 golf balls at a rate of 3,691 balls per week. Martin's Golf Supplies earns 7% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

Relevant ordering costs per purchase order $131.00

Carrying costs per carton per year:

Relevant insurance, materials handling,

breakage, etc., per year $0.77

Purchasing at the EOQ recommended level, what are the relevant total costs? (Round costs to the nearest cent and quantities to the nearest whole number. Your answer might be slightly different from the best answer due to rounding.)

A) $1,572

B) $1,728

C) $864

D) $3,144

Diff: 3

Objective: 2

AACSB: Application of knowledge

15) The purchase-order lead time is the:

A) time between placing an order and its delivery

B) time between receiving a customer order and producing the products

C) time between receiving a customer order and delivering the items

D) time required to correct errors in the defective products

Diff: 2

Objective: 2

AACSB: Analytical thinking

16) Which of the following statements is true of the economic-order-quantity decision model?

A) It assumes purchasing costs are relevant because the cost per unit changes due to the quantity ordered.

B) Demand, ordering costs, and carrying costs are all known with certainty.

C) It assumes that stockout costs are relevant even if no stockouts occur.

D) It assumes that ordering costs and carrying costs are irrelevant.

Diff: 3

Objective: 2

AACSB: Analytical thinking

17) Vision Company sells optical equipment. Blitz Company manufactures special glass lenses. Vision orders 11,400 lenses per year, 220 per week, at $44 per lens. Blitz covers all shipping costs. Vision earns 21% on its cash investments. The purchase-order lead time is 2.0 weeks. Vision sells 305 lenses per week. The following data are available:

Relevant ordering costs per purchase order $47.25

Relevant insurance, materials handling, breakage,

and so on, per year $5.50

What is the economic order quantity for Vision?

A) 443 lenses

B) 341 lenses

C) 270 lenses

D) 191 lenses

Diff: 3

Objective: 2

AACSB: Application of knowledge

18) Vision Company sells optical equipment. Blitz Company manufactures special glass lenses. Vision orders 12,200 lenses per year, 200 per week, at $42 per lens. Blitz covers all shipping costs. Vision earns 21% on its cash investments. The purchase-order lead time is 2.0 weeks. Vision sells 225 lenses per week. The following data are available:

Relevant ordering costs per purchase order $41.25

Relevant insurance, materials handling, breakage,

and so on, per year $8.50

What is the reorder point?

A) 400 lenses

B) 450.0 lenses

C) 869 lenses

D) 850.0 lenses

Diff: 2

Objective: 2

AACSB: Application of knowledge

19) Beryl Company sells 900 flash drives per week. Purchase-order lead time is 2 weeks and the economic-order quantity is 1,425 units. What is the reorder point?

A) 2,850 units

B) 1,050 units

C) 1,800 units

D) 1,425 units

Diff: 2

Objective: 2

AACSB: Application of knowledge

20) Delinz Company sells 115 hams per week. Purchase-order lead time is 3 weeks and the economic-order quantity is 200 hams. What is the reorder point?

A) 945 hams

B) 345 hams

C) 600 hams

D) 200 hams

Diff: 2

Objective: 2

AACSB: Analytical thinking

21) Miniature Company sells stuffed tigers. Birtal Inc. manufactures many different stuffed animals. Miniature orders 20,900 tigers per year, 402 per week, at $13 per tiger. The manufacturer covers all shipping costs. Miniature earns 23% on its cash investments. The purchase-order lead time is 2 weeks. Miniature sells 360 tigers per week. The following data are available (based on management's estimates):

Estimated ordering costs per purchase order $23

Estimated insurance, materials handling, breakage,

and so on, per year $7

Actual ordering costs per order $34

What is the economic order quantity using the estimated amounts?

A) 567.0 stuffed tigers

B) 310.2 stuffed tigers

C) 219.4 stuffed tigers

D) 401.0 stuffed tigers

Diff: 3

Objective: 2

AACSB: Application of knowledge

22) Relevant total costs in the economic order quantity decision model equal relevant ordering costs plus which of the following costs?

A) carrying costs

B) stockout costs

C) quality costs

D) purchasing costs

Diff: 2

Objective: 2

AACSB: Analytical thinking

23) The Allianz Company produces a specialty wood furniture product, and has the following information available concerning its inventory items:

Relevant ordering costs per purchase order $520

Relevant carrying costs per year for each product:

Required annual return on investment 16%

Required other costs per year $9

Annual demand is 32,000 products per year. The purchase price per product is $51.

What is the economic order quantity?

A) 2,019.51 units

B) 984.73 units

C) 1,392.62 units

D) 1,922.96 units

Diff: 2

Objective: 2

AACSB: Application of knowledge

24) The Allianz Company produces a specialty wood furniture product, and has the following information available concerning its inventory items:

Relevant ordering costs per purchase order $470

Relevant carrying costs per year for each product:

Required annual return on investment 16%

Required other costs per year $4

Annual demand is 33,000 products per year. The purchase price per product is $51.

What is the annual relevant ordering cost?

A) $5,570

B) $9,711

C) $7,955

D) $10,682

Diff: 3

Objective: 2

AACSB: Application of knowledge

25) The Allianz Company produces a specialty wood furniture product, and has the following information available concerning its inventory items:

Relevant ordering costs per purchase order $510

Relevant carrying costs per year for each product:

Required annual return on investment 15%

Required other costs per year $7

Annual demand is 30,000 products per year. The purchase price per product is $50.

What is the annual relevant carrying costs?

A) $15,158

B) $14,644

C) $10,532

D) $2,905

Diff: 3

Objective: 2

AACSB: Application of knowledge

26) The Allianz Company produces a specialty wood furniture product, and has the following information available concerning its inventory items:

Relevant ordering costs per purchase order $450

Relevant carrying costs per year for each product:

Required annual return on investment 13%

Required other costs per year $4

Annual demand is 30,000 products per year. The purchase price per product is $51.

What are the relevant total costs at the economic order quantity?

A) $16,941

B) $19,005

C) $9,576

D) $11,658

Diff: 3

Objective: 2

AACSB: Application of knowledge

27) The Allianz Company produces a specialty wood furniture product, and has the following information available concerning its inventory items:

Relevant ordering costs per purchase order $520

Relevant carrying costs per year for each product:

Required annual return on investment 18%

Required other costs per year $7

Annual demand is 30,000 products per year. The purchase price per product is $50.

Which of the following statements is true of Allianz's EOQ system costs?

A) At EOQ, the annual relevant ordering costs is exactly half of annual relevant carrying costs.

B) At EOQ, the annual relevant carrying costs is higher than the annual relevant ordering costs.

C) At EOQ, the annual relevant carrying costs is exactly half of the annual relevant total costs.

D) At EOQ, the annual relevant carrying costs is equal to the annual relevant total costs.

Diff: 3

Objective: 2

AACSB: Application of knowledge

28) The Allianz Company produces a specialty wood furniture product, and has the following information available concerning its inventory items:

Relevant ordering costs per purchase order $520

Relevant carrying costs per year for each product:

Required annual return on investment 16%

Required other costs per year $6

Annual demand is 35,000 products per year. The purchase price per product is $48.

What are the total relevant costs, assuming the quantity ordered equals 1,100 units?

A) $20,769

B) $20,945

C) $19,845

D) $24,069

Diff: 3

Objective: 2

AACSB: Application of knowledge

29) The Allianz Company produces a specialty wood furniture product, and has the following information available concerning its inventory items:

Relevant ordering costs per purchase order $460

Relevant carrying costs per year for each product:

Required annual return on investment 16%

Required other costs per year $6

Annual demand is 33,000 products per year. The purchase price per product is $51.

How many deliveries will be required at the economic order quantity?

A) 17.11 deliveries

B) 15.00 deliveries

C) 22.54 deliveries

D) 24.19 deliveries

Diff: 3

Objective: 2

AACSB: Application of knowledge

30) All of the following are reasons why a company might carry a safety stock EXCEPT:

A) a buffer against unexpected increases in demand

B) a contingency against the uncertainty about lead time

C) a strategy to lower the carrying cost of inventory

D) a way of softening the impact of sudden unavailability of stock from suppliers

Diff: 1

Objective: 2

AACSB: Analytical thinking

31) The following information applies to Krynton Corp. which supplies microscopes to laboratories throughout the country. Krynton purchases the microscopes from a manufacturer which has a reputation for very high quality in its manufacturing operation.

Annual demand (weekly demand= 1/52 of annual demand) 18,000 units

Orders per year as per EOQ model 17

Lead time in days 16 days

Annual relevant carrying costs $2,800

What are the annual relevant ordering costs, assuming that relevant total costs are minimal?

A) $1,059

B) $2,975

C) $2,800

D) $2,635

Diff: 2

Objective: 2

AACSB: Application of knowledge

32) The following information applies to Krynton Corp. which supplies microscopes to laboratories throughout the country. Krynton purchases the microscopes from a manufacturer which has a reputation for very high quality in its manufacturing operation.

Annual demand (weekly demand= 1/52 of annual demand) 14,000 units

Orders per year as per EOQ model 14

Lead time in days 20 days

Annual relevant carrying costs $3,300

Assuming each order was made at the economic order quantity amount, what is the cost of placing an order?

A) $888 per order

B) $236 per order

C) $165 per order

D) $1,269 per order

Diff: 3

Objective: 2

AACSB: Application of knowledge

33) The following information applies to Krynton Corp. which supplies microscopes to laboratories throughout the country. Krynton purchases the microscopes from a manufacturer which has a reputation for very high quality in its manufacturing operation.

Annual demand (weekly demand= 1/52 of annual demand) 17,000 units

Orders per year as per EOQ model 14

Lead time in days 18 days

Annual relevant carrying costs $2,800

What is the economic order quantity assuming each order was made at the economic-order-quantity amount?

A) 2,029 units

B) 1,214 units

C) 969 units

D) 3,600 units

Diff: 2

Objective: 2

AACSB: Application of knowledge

34) If Premium Company has a safety stock of 480 units and the average daily demand is 64 units, how many days can be covered if the shipment from the supplier is delayed by 7 days?

A) 8 days

B) 7 days

C) 15 days

D) 1 days

Diff: 2

Objective: 2

AACSB: Application of knowledge

35) If Kenton Inc. has a safety stock of 205 units and the average weekly demand is 55 units, how many days can be covered if the shipment from the supplier is delayed by 12 days?

A) 12 days

B) 26 days

C) 38 days

D) 14 days

Diff: 2

Objective: 2

AACSB: Application of knowledge

36) The optimal safety stock level is the quantity of safety stock that minimizes the sum of the annual relevant:

A) stockout costs and carrying costs

B) ordering costs and carrying costs

C) ordering costs and stockout costs

D) ordering costs and purchasing costs

Diff: 1

Objective: 2

AACSB: Analytical thinking

37) Flowers and Vases Inc. has projected its sales for June and has estimated the following probabilities of sales levels:

What is the chance of sales of 5,000 units or more?

A) 39%

B) 55%

C) 65%

D) 100%

Diff: 1

Objective: 2

AACSB: Analytical thinking

38) Companies use safety stock as a buffer against unexpected decreases in demand.

Diff: 1

Objective: 2

AACSB: Analytical thinking

39) The EOQ model factors in the probability of stockouts.

Diff: 2

Objective: 2

AACSB: Analytical thinking

40) The optimal safety-stock level is the quantity of safety stock that minimizes the sum of annual relevant stockout and ordering costs.

Diff: 2

Objective: 2

AACSB: Analytical thinking

41) The EOQ model is solved using calculus but the key intuition is that relevant total costs are minimized when relevant ordering costs equal relevant carrying costs.

Diff: 2

Objective: 2

AACSB: Analytical thinking

42) The reorder point is the quantity level of inventory at which a new purchase order is made.

Diff: 1

Objective: 2

AACSB: Analytical thinking

43) Due to unprecedented growth during the year, Flowers by Kelly 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:

Identify whether increasing the size of inventory orders will increase, decrease, or have no effect on each of the following items.

________ a. Average inventory

________ b. Cost of goods sold

________ c. Number of orders per year

________ d. Total annual carrying costs

________ e. Total annual carrying and ordering costs

________ f. Total annual ordering costs

a. Increase

b. No effect

c. Decrease

d. Increase

e. Depends which costs increase/decrease more

f. Decrease

Diff: 2

Objective: 2

AACSB: Application of knowledge

44) The only product of a company has an annual demand of 14,000 units. The cost of placing an order is $70 and the cost of carrying one unit in inventory for one year is $20.

Required:

Determine the economic order quantity.

Diff: 2

Objective: 2

AACSB: Application of knowledge

45) Picture Company has one particular product that has an annual demand of 5,000 units. Total manufacturing costs per unit total $50. Ordering costs for the product total $60 per purchase order. Currently, the carrying costs per unit are 25% of manufacturing costs.

Required:

Determine the economic manufacturing order quantity.

Diff: 2

Objective: 2

AACSB: Application of knowledge

46) Ralph was in the process of completing the quarterly planning for the purchasing department when a major computer malfunction lost most of his data. For direct material XXX he was able to recover the following:

Ralph purchases at the EOQ quantity level.

Required:

Determine the annual demand, the cost of placing an order, the annual carrying cost of one unit, and the economic order quantity.

Annual demand = 48 × 250 = 12,000

Cost of placing an order = $4,000/40 = $100 per order

Carrying cost of one unit = $6,000/200 = $30 per unit

EOQ = The square root of (2 × 12,000 × $100)/30 = 283 units

Diff: 3

Objective: 2

AACSB: Application of knowledge

47) Clothes, Inc., has an average annual demand for red, medium polo shirts of 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. Determine the safety stock required to prevent stockouts assuming the maximum lead time is 20 days and the maximum daily demand is 125 units.

a. The square root of [(2 × 25,000 × $80) / $25] = 400 units

b. Daily demand = 25,000/250 = 100 units Reorder point = 100 units per day × 10 days = 1,000 units

c.

Diff: 2

Objective: 2

AACSB: Application of knowledge

48) An inventory item of Avizone Corp. has an average daily demand of 25 units with a maximum daily demand of 30 units. The economic order quantity is 500 units. Without safety stocks, the reorder point is 125 units. Safety stocks are set at 235 units.

Required:

a. Determine the reorder point with safety stocks.

b. Determine the maximum inventory level.

c. Determine the average lead time.

a.

b.

c. Average lead time = 125 units at reorder point / 25 units a day = 5 days

Diff: 3

Objective: 2

AACSB: Application of knowledge

49) 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.

EOQ = The square root of [(2 × 250 × $100) / $20] = 50

Average inventory = 50/2 = 25

Orders per year = 250/50 = 5

Average daily demand = 250/250 = 1 unit

Reorder point = 10/1 = 10 units

Annual ordering costs = 5 × $100 = $500

Annual carrying costs = 25 × $20 = $500

Diff: 3

Objective: 2

AACSB: Application of knowledge

50) Discuss considerations that should be fully taken into account when developing inventory related relevant costs for use in an economic order quantity (EOQ) model.

Consider incremental carrying costs. If they are costs that will change with the quantity of inventory held, then they are relevant. If there are costs that would be unchanged regardless of how much inventory was in the warehouse (such as a clerical salary or material handler who was working at below full capacity), then those costs are not relevant for decision-making purposes. Relevant carrying costs are likely to be costs like shrinkage, breakage, obsolescence, and costs of hiring extra employees (or having existing employees work overtime) if higher levels of inventory will make those costs increase.

Consider incremental opportunity cost of capital. If there is a decision to carry more inventory, then there will be money spent to purchase the inventory. The opportunity cost of capital is what would the other most beneficial use of the money be if it wasn't needed to purchase the higher level of inventory. It is calculated by multiplying the company's required rate of return by the per unit costs and then by the number of units purchased for the inventory and incurred at the time the units are received.

Stockout costs require an estimate of the lost contribution margin on sales lost because of a stockout. Ordering costs are only those that change with the numbers of orders placed.

Diff: 2

Objective: 2

AACSB: Application of knowledge

Objective 21.3

1) Which of the following costs is a relevant inventory carrying cost of carrying inventory?

A) The lost contribution margin on future sales forgone as a result of customer dissatisfaction in product quality.

B) The lost contribution margin on sales forgone because of the shortage of inventory.

C) The costs of storage space owned that cannot be used for other profitable purposes when inventories decrease.

D) The costs of shrinkage.

Diff: 3

Objective: 3

AACSB: Analytical thinking

2) For inventory carrying costs, which of the following statements is true of the relevant opportunity cost of capital of inventory?

A) It is the return received by investing capital in inventory rather than elsewhere.

B) It is calculated as the per-unit costs of carrying inventory divided by the required rate of return.

C) It is the return foregone by investing capital elsewhere rather than in inventory.

D) It is calculated as the required rate of return multiplied by the per-unit costs of acquiring inventory including the purchase price, incoming freight, and incoming inspection.

Diff: 2

Objective: 3

AACSB: Analytical thinking

3) Which of the following statements is true of relevant inventory costs?

A) The salaries paid to clerks, stock keepers, and materials handlers are relevant carrying costs if they are unaffected by changes in inventory levels.

B) The costs of expediting an order from a supplier are relevant incremental costs of stockouts.

C) Warehouse rent, warehouse workers' salaries and costs of insurance,that change with the quantity of inventory held are irrelevant carrying costs.

D) Those ordering costs that change with the number of orders placed are irrelevant ordering costs.

Diff: 2

Objective: 3

AACSB: Analytical thinking

4) The annual relevant carrying costs of inventory consists of the sum of the:

A) relevant ordering costs and the relevant costs of quality

B) relevant ordering costs plus the relevant opportunity costs of capital

C) relevant incremental costs plus the relevant opportunity costs of capital

D) relevant incremental costs plus the relevant ordering costs

Diff: 2

Objective: 3

AACSB: Analytical thinking

5) Which of the following costs is a relevant inventory stockout cost?

A) The costs of obsolescence and costs of insurance that change with the quantity of inventory held.

B) The return forgone by investing capital in inventory rather than elsewhere.

C) The lost contribution margin on sales forgone as a result of customer dissatisfaction due to unavailability of goods.

D) The costs of storage space owned that cannot be used for other profitable purposes when inventories decrease.

Diff: 2

Objective: 3

AACSB: Analytical thinking

6) Increases in the carrying cost and decreases in the ordering cost per purchase order result in:

A) smaller EOQ amounts

B) larger EOQ amounts

C) larger relevant total costs

D) smaller relevant total costs

Diff: 2

Objective: 3

AACSB: Analytical thinking

7) The costs of storage space owned are always relevant costs of carrying inventory.

Diff: 2

Objective: 3

AACSB: Analytical thinking

8) The cost of breakage and obsolescence are relevant incremental costs of carrying inventory.

Diff: 1

Objective: 3

AACSB: Analytical thinking

9) When managers responsible for inventory control are evaluated on financial accounting results, opportunity costs are often a significant factor.

Diff: 2

Objective: 3

AACSB: Analytical thinking

10) 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% 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.

a. The square root of [(2 × 720 × $25) / $40] = 30 units

b.

c. Average daily demand = 720 / 360 = 2 per day

Average days' supply in EOQ = 30/2 = 15 days

(1) 20-day shelf life allows for up to 40 units (20 × 2), EOQ is acceptable.

(2) 10-day shelf life allows for up to 20 units (10 × 2), EOQ is not acceptable.

Diff: 3

Objective: 2, 3

AACSB: Analytical thinking

11) Why do conflicts arise between the EOQ model's optimal order quantity and the order quantity that managers regard as optimal?

Diff: 2

Objective: 3

AACSB: Analytical thinking

12) 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?

Diff: 2

Objective: 3

AACSB: Application of knowledge

Objective 21.4

1) Which of the following statements is true of just-in-time (JIT) purchasing?

A) In JIT purchasing, the optimal safety-stock level is the quantity of safety stock that minimizes the sum of annual relevant stockout and carrying costs.

B) JIT purchasing is guided solely by the EOQ model because that model emphasizes the tradeoff between relevant carrying and ordering costs.

C) In JIT purchasing, raw materials (or goods) are purchased so that products are delivered just as needed for production or sales.

D) Only disadvantage of JIT purchasing is the higher level carrying and inspection costs.

Diff: 2

Objective: 4

AACSB: Analytical thinking

2) Which of the following is NOT a reason why a company would adopt JIT purchasing practices?

A) high shrinkage costs

B) low ordering costs

C) low carrying costs of inventory

D) reliable supply chains

Diff: 2

Objective: 4

AACSB: Analytical thinking

3) Just-in-time purchasing is the buying of goods or materials for production in a way that they are delivered in small orders directly to the production floor based on:

A) economic order quantity

B) annual monthly purchasing budgets

C) production schedules

D) sales forecasts

Diff: 2

Objective: 4

AACSB: Analytical thinking

4) Which of the following term is defined as: "the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers"?

A) customer list

B) enterprise requirements plan (ERP)

C) material requirements plan (MRP)

D) supply chain

Diff: 1

Objective: 4

AACSB: Analytical thinking

5) Sharing sales information throughout the supply chain leads to which of the following?

A) larger stockouts

B) increased manufacturing of products not immediately needed by retailers

C) fewer manufacturing orders that had to be expedited

D) higher inventories held by each company in the supply chain

Diff: 2

Objective: 4

AACSB: Analytical thinking

6) The flow of services, goods or information from the buying material for product delivery to the customers is known as:

A) supply chain

B) value chain

C) direct material value chain

D) manufacturing value chain

Diff: 1

Objective: 4

AACSB: Analytical thinking

7) A company's inventory levels are dependent on a number of variables including the demand for the product, supplier relationships, and supplier relationships with their manufacturers.

Diff: 2

Objective: 4

AACSB: Analytical thinking

8) Companies that implement JIT purchasing will emphasize developing short-term supplier relationships with many suppliers to attain flexibility.

Diff: 2

Objective: 4

AACSB: Analytical thinking

9) Just-in-time purchasing describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers, regardless of whether those activities occur in the same organization or in other organizations.

Diff: 2

Objective: 4

AACSB: Analytical thinking

10) The supply chain describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers, regardless of whether those activities occur in the same company or in other companies.

Diff: 1

Objective: 4

AACSB: Analytical thinking

11) 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 favorable. However, recently, things have turned negative.

In recent months, everything seems to be operating in a crisis management mode. Although most cost variances remain favorable, 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?

A beginning recommendation is to implement a materials required planning system where each workstation controls what it produces, and pushes it to the next workstation. This can be accomplished by tighter controls over the scheduling of production units by workstation. This would be incorporated with a master production schedule, bill of materials, and timely inventory system.

Diff: 3

Objective: 4

AACSB: Application of knowledge

12) What is a supply chain, and what are the benefits of a supply chain analysis? Provide an example of these benefits.

Diff: 2

Objective: 4

AACSB: Analytical thinking

13) What are the benefits of using JIT techniques to reduce uncertainty throughout the supply chain?

Diff: 2

Objective: 4

AACSB: Analytical thinking

Objective 21.5

1) A push-through system that manufactures finished goods for inventory on the basis of demand forecasts and produces a master schedule for quantity and timing of units to be produced.

A) just-in-time purchasing

B) materials requirements planning

C) relevant total costs

D) economic order quantity

Diff: 1

Objective: 5

AACSB: Analytical thinking

2) A demand-pull system in which each component in a production line is produced immediately as needed by the next step in the production line is referred to as:

A) just-in-time production

B) materials requirements planning

C) relevant total costs

D) economic order quantity

Diff: 1

Objective: 5

AACSB: Analytical thinking

3) Which of the following statements best defines a just-in-time production system?

A) a push-through system that manufactures finished goods for inventory on the basis of demand forecasts

B) a push-through system in which each component in a production line is produced immediately as needed by the next step in the production line

C) a demand-pull system that manufactures finished goods for inventory on the basis of demand forecasts

D) a demand-pull system in which each component in a production line is produced immediately as needed by the next step in the production line

Diff: 2

Objective: 5

AACSB: Analytical thinking

4) Which of the following statements best defines a materials requirements planning system?

A) a demand-pull system in which each component in a production line is produced immediately as needed by the next step in the production line

B) a push-through system that manufactures finished goods for inventory on the basis of demand forecasts

C) a demand-pull system that manufactures finished goods for inventory on the basis of demand forecasts

D) a push-through system in which each component in a production line is produced immediately as needed by the next step in the production line

Diff: 2

Objective: 5

AACSB: Analytical thinking

5) A system that emphasizes lean production techniques, low quantities of inventory, and close coordination among production workstations is called:

A) economic order quantity production

B) just-in-time production

C) materials requirements planning production

D) push-through system

Diff: 1

Objective: 5

AACSB: Analytical thinking

6) The management accountant aids in MRP by:

A) doing journal entries as requested

B) preparing plant appropriation requests

C) maintaining accurate records of inventory and its costs

D) contacting vendors to make sure they can deliver the materials in time

Diff: 1

Objective: 5

AACSB: Analytical thinking

7) The demand-pull feature of JIT production systems results in close coordination among workstations and smooths the flow of goods.

Diff: 1

Objective: 5

AACSB: Analytical thinking

8) JIT purchasing and production systems can be used in service industries as supplies and the labor to manage those supplies can be a significant cost element in some service organizations.

Diff: 2

Objective: 5

AACSB: Analytical thinking

9) A "push-through" system, often described as a materials requirement planning system, focuses first on the forecasted amount and timing of finished goods and then determines the demand for materials components and subassemblies at each of the prior stages of production.

Diff: 2

Objective: 5

AACSB: Analytical thinking

10) Just-in-Time (JIT) production systems are also referred to as lean production.

Diff: 1

Objective: 5

AACSB: Analytical thinking

11) Just-in-time systems are similar to materials requirement planning systems as both systems are demand-pull systems.

Diff: 2

Objective: 5

AACSB: Analytical thinking

12) Sales forecasts for final products, bills of materials, and information about a company's inventories of materials, components, and products are inputs into MRP systems.

Diff: 1

Objective: 5

AACSB: Analytical thinking

13) Kretzinger Company makes extensive use of financial performance reports for each of its departments. Although most departments have been reporting favorable cost variances with the company's current inventory system, management is concerned about the overall performance of the purchasing department. For example, the following information is for the purchasing of materials for a product the company has been manufacturing for several years:

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. What recommendations will improve the evaluation process?

a.

Favorable purchase prices appear to be associated with decreases in inventory turnover and increases in average inventory levels. Decreases in inventory turnover are a possible signal of the buildup of excess inventory. Excess inventory will reduce return on investment of the company and the above information indicates a need for a just-in-time inventory system.

b. To achieve quantity discounts and favorable materials price variances, purchasing may be ordering excess inventory, thereby increasing subsequent storage, obsolescence, and handling costs. To obtain a low price, purchasing may be ordering from a supplier whose goods have inferior quality which may, in turn, lead to increased inspection, rework, and, perhaps, dissatisfied customers.

c. It appears that two items may help improve the situation. First, consider the change to a just-in-time inventory system that would greatly improve the inventory turnover and reduce the amount of inventory carried. Second, additional measures should be used in the evaluation of the purchasing department. Either different financial measures should be used or the addition of nonfinancial measures should be implemented.

Diff: 3

Objective: 5

AACSB: Application of knowledge

Objective 21.6

1) A grouping of all the different types of equipment used to make a given product is referred to as:

A) total quality management

B) materials requirements planning

C) manufacturing cells

D) economic order quantity

Diff: 1

Objective: 6

AACSB: Analytical thinking

2) Which of the following statements best defines manufacturing cells?

A) They are manufacturing areas that use a "push-through" approach whereby finished goods are manufactured on the basis of demand forecasts.

B) They are manufacturing centers which focuses on production of a single product and in which workers focus on master one skill so as to be efficient and effective in their work.

C) They are work areas with different types of equipment grouped together to make related products and to minimize handling costs.

D) They are production centers positioned in various areas throughout a production facility, close to the associated talent (direct laborers) in which goods are manufactured only after receiving customer orders.

Diff: 2

Objective: 6

AACSB: Analytical thinking

3) Which of the following terms is defined as the time required to get equipment, tools, and materials ready to start production?

A) setup time

B) delivery time

C) manufacturing-cycle time

D) product design time

Diff: 1

Objective: 6

AACSB: Analytical thinking

4) Which of the following statements best defines setup time?

A) It is the time required to manufacture an item, including order preparation time, inspection time, and customer delivery time.

B) It is the time required to get equipment, tools, and materials ready to start the production of a component or product.

C) It is a time or period ranging from the time when a customer orders goods to the time when they are delivered to the customer.

D) It is the time required to create a new product to be sold by a business to its customers.

Diff: 2

Objective: 6

AACSB: Analytical thinking

5) An order is received by a company and then spends 1 day in assembly and 3 days in finishing before being stored in the warehouse. On average, the units are stored for 3 days before being shipped to a customer. Which of the following measures would be true?

A) work-in-process time of 7 days

B) manufacturing cycle time of 4 days

C) pass-through time of 6 days

D) manufacturing cycle time of 7 days

Diff: 1

Objective: 6

AACSB: Analytical thinking

6) Which of the following statements best defines manufacturing cycle time in a JIT production system?

A) the time from when raw materials are received until it becomes a finished good

B) the time from when an order is received until it becomes a finished good

C) the time from when raw materials are received until it is delivered to the customers

D) the time from when an order is received until it is delivered to the customers

Diff: 2

Objective: 6

AACSB: Analytical thinking

7) Which of the following statements is true of just-in-time production systems?

A) In a just-in-time production system, a master production schedule specifies the quantity and timing of each item to be produced.

B) Sales budget triggers each step of the production process in a just in time production system.

C) Defects arising at one workstation affect other workstations in the line quickly because of the tight links between workstations.

D) Production is organized in manufacturing cells in a just in time production system, which are production centers that use a "push-through" approach whereby finished goods are manufactured on the basis of demand forecasts.

Diff: 2

Objective: 6

AACSB: Analytical thinking

8) JIT production systems usually require:

A) workers that are multi-skilled and capable of performing a variety of operations and tasks

B) workers that are highly specialized and trained in one specific area of manufacturing so as to be highly efficient

C) suppliers that deliver products to strategically located but highly efficient warehouses for further distribution

D) additional cost commitments by management in the setup activities of the production area in preparation of highly efficient manufacturing

Diff: 2

Objective: 6

AACSB: Analytical thinking

9) A system that comprises a single database that collects data and feeds it into software applications supporting all of a company's business activities is known as a(n):

A) economic order quantity (EOQ) system

B) enterprise resource planning (ERP) system

C) just-in-time (JIT) system

D) material requirements planning (MRP) system

Diff: 1

Objective: 6

AACSB: Analytical thinking

10) Which of the following statements best defines an enterprise resource planning (ERP) system?

A) a demand-pull system in which each component in a production line is produced immediately as needed by the next step in the production line as planned by enterprise resource management

B) a system that comprises a single database that collects data and feeds it into software applications supporting all of a company's business activities

C) a planning system that omits recording some of the journal entries relating to the stages from the purchase of direct materials to the sale of finished goods

D) a system that is made up of work areas with different types of equipment grouped together to make related products

Diff: 2

Objective: 6

AACSB: Analytical thinking

11) Which of the following is a disadvantage of an enterprise resource planning (ERP) system?

A) The use of standard costing systems is not allowed in an ERP system.

B) Shifting manufacturing and distribution plans rapidly in response to changes in supply and demand is not possible in an ERP system.

C) The ERP systems must often be customized to fit the strategic needs of the user.

D) The ERP system increases lead times when purchasing material from a different supplier.

Diff: 2

Objective: 6

AACSB: Analytical thinking

12) Which of the following statements is true of the financial and nonfinancial measures in just-in-time production systems?

A) The inventory turnover ratio is expected to decrease.

B) Units produced per hour are expected to increase.

C) Manufacturing cycle time is expected to increase.

D) Total setup time for machines with respect to total manufacturing time is expected to increase.

Diff: 2

Objective: 6

AACSB: Analytical thinking

13) A successful implementation of a JIT production system should result in a lowering of the inventory turnover ratio.

Diff: 1

Objective: 6

AACSB: Analytical thinking

14) In a just-in-time system, suppliers are selected primarily on the basis of their ability to provide materials and products at the lowest possible price.

Diff: 2

Objective: 6

AACSB: Analytical thinking

15) Successful implementation of a JIT production system and effective accomplishments of its goals should result in a decrease in the inventory turnover ratio and a decrease in the number of days of inventory on hand.

Diff: 2

Objective: 6

AACSB: Analytical thinking

16) 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.

1. Initial Investment = $275,000 + 60,000 = $335,000

2. Annual Savings:

Defect Cost Reduction = 40% of $150,000 = $60,000

Setup Cost Reduction = 67% of $225,000 = $150,750

Carrying Cost reduction = $200,000

Total Savings = (60,000 + 150,750 + 200,000) = $410,750

3. Annual Increased Costs:

Vendor Premium = 15% of $1,500,000 = $225,000

4. Net Annual Savings = (410,750 - 225,000) = $185,750

5. Savings/Initial Investment = (185,750 / 335,000) = 55 %

Since the net savings is returning 55% per year on the initial investment (which is far in excess of the companies hurdle rate of 15%), the JIT project should be implemented.

Diff: 3

Objective: 6

AACSB: Analytical thinking

17) What are five features of a just-in-time manufacturing system?

Diff: 2

Objective: 6

AACSB: Analytical thinking

18) In evaluating the successful implementation of a JIT production system, check the column of results that you would expect to see.

Expected to

Diff: 2

Objective: 6

AACSB: Application of knowledge

19) The Controller of Nip-it-in-the-Bud Inc. has studied the possibility of implementing a JIT production system. The annual incremental retooling costs of the JIT system is projected to be about $67,000 however, the new system will lower insurance costs by $10,000 and storage costs will drop by $20,000 a year as the company will be able to reuse warehouse space for other strategic purposes. In addition, material handling costs will drop by $10,000 a year and because of a resulting increase in quality and faster delivery, the company's contribution margin on the product will increase by $2.00 on annual sales of 20,000 units.

Required:

Calculate the net incremental benefit of the JIT system implementation.

Incremental savings in insurance and storage costs $30,000

Incremental savings in material handling costs 10,000

Additional contribution margin ($2.00 × 20,000) 40,000

Total incremental operating income $80,000

Less: Incremental annual retooling costs (67,000)

Net Incremental benefit $13,000

Diff: 2

Objective: 6

AACSB: Application of knowledge

Objective 21.7

1) Traditional normal and standard costing systems usually use 4 trigger points to record the flow of costs through the production system. Such costing is called:

A) backflush costing

B) delayed costing

C) variable tracking

D) sequential tracking

Diff: 1

Objective: 7

AACSB: Analytical thinking

2) A costing system that omits recording some or all of the journal entries relating to the cycle from purchase of direct materials to the sale of finished goods is called:

A) dependent costing

B) synchronous costing

C) sequential costing

D) backflush costing

Diff: 1

Objective: 7

AACSB: Analytical thinking

3) Which of the following statements best defines backflush costing system?

A) an integrated costing system covering a company's accounting, distribution, manufacturing, purchasing, human resources, and other functions

B) a costing system that omits recording some of the journal entries relating to the stages from the purchase of direct materials to the sale of finished goods

C) a push-through system in which each component in a production line is produced immediately as needed by the next step in the production line

D) a costing system that comprises a single database that collects data and feeds it into software applications supporting all of a company's business activities

Diff: 2

Objective: 7

AACSB: Analytical thinking

4) Backflush costing is a system that:

A) requires additional journal entries related to the rapid conversion of direct materials to a finished good

B) simplifies cost accounting by eliminating some of the journal entries related to the value-added process from purchase of materials to sale of finished goods

C) requires four trigger points of journal entries in strict sequence from purchasing to the sale of products

D) eliminates all journal entries except for those that record the sales of the product and the related cost of goods sold

Diff: 2

Objective: 7

AACSB: Analytical thinking

5) Games R Us manufactures various games. 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 materials are purchased and when conversion costs are allocated under backflush costing.

Conversion costs — March $400,000

Direct materials purchased — March $1,160,000

Units produced — March 59,800

Units sold — March 45,800

Which of the following journal entries properly records the purchase of direct materials?

A)

Accounts Payable Control 400,000

Inventory: Raw and In-Process Control 400,000

B)

Inventory: Materials and In-Process Control 1,160,000

Accounts Payable Control 1,160,000

C)

Inventory: Raw and In-Process Control 1,160,000

Conversion Costs 1,160,000

D)

Conversion Costs 1,160,000

Inventory: Raw and In-Process Control 1,160,000

Diff: 3

Objective: 7

AACSB: Application of knowledge

6) Games R Us manufactures various games. 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 materials are purchased and when conversion costs are allocated under backflush costing.

Conversion costs — March $460,000

Direct materials purchased — March $1,110,000

Units produced — March 62,800

Units sold — March 44,800

Which of the journal entries properly records conversion costs?

A)

Conversion Costs 460,000

Various Accounts (such as wages payable) 460,000

B)

Various Accounts (such as wages payable) 460,000

Conversion Costs 460,000

C)

Conversion Costs 460,000

Inventory: Direct Materials 460,000

D)

Inventory: Direct Materials 460,000

Conversion Costs 460,000

Diff: 2

Objective: 7

AACSB: Application of knowledge

7) Games R Us manufactures various games. 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 materials are purchased and when conversion costs are allocated under backflush costing.

Conversion costs — March $430,000

Direct materials purchased — March $1,090,000

Units produced — March 60,800

Units sold — March 42,800

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

A)

Finished Goods 1,070,000

Work in Process 1,070,000

B)

Cost of Goods Sold 1,070,000

Finished Goods 1,070,000

C)

Finished Goods 1,070,000

Cost of Goods Sold 1,070,000

D)

Cost of Goods Sold 1,070,000

Work in Process 1,070,000

Diff: 3

Objective: 7

AACSB: Application of knowledge

8) Vision Company manufactures digital cameras. For May, 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 materials are purchased and when units are sold.

Conversion costs - May $103,625

Direct materials purchased - May $254,575

Units produced - May 89,500 units

Units sold - May 87,500 units

Selling price $20 each

Which of the following journal entries properly reflects the purchase of materials under backflush costing?

A)

Inventory Control $254,575

Accounts Payable Control $254,575

B)

Accounts Payable Control $254,575

Allocated Costs: Direct Materials $254,575

C)

Accounts Payable Control $254,575

Materials Inventory $254,575

D)

Allocated Costs: Direct Materials $254,575

Inventory: Raw and Material $254,575

Diff: 2

Objective: 7

AACSB: Application of knowledge

9) Vision Company manufactures digital cameras. For May, 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 materials are purchased and when units are sold.

Conversion costs - May $109,625

Direct materials purchased - May $255,575

Units produced - May 87,500 units

Units sold - May 77,500 units

Selling price $28 each

Which of the following journal entries would be recorded when units are sold for the month under backflush costing? Please round intermediate calculations to two decimal places (i.e., unit costs)

A)

Cost of Goods Sold $323,175

Inventory: Raw and In-Process $323,175

B)

Cost of Goods Sold $323,175

Inventory Control $226,300

Conversion Costs Allocated $96,875

C)

Inventory Control $226,300

Conversion Costs Allocated $96,875

Cost of Goods Sold $323,175

D)

Cost of Goods Sold $352,450

Inventory: Raw and In-Process $255,575

Conversion Costs Allocated $96,875

Diff: 3

Objective: 7

AACSB: Application of knowledge

10) Vision Company manufactures digital cameras. For May, 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 materials are purchased and when units are sold.

Conversion costs - May $103,625

Direct materials purchased - May $258,575

Units produced - May 84,500 units

Units sold - May 79,500 units

Selling price $21 each

If the two trigger points are completion of good finished units of product and sale of finished goods, which of the following entries would be used to record cost of finished units completed under backflush costing? (Round intermediate calculations to the nearest cent and final calculations to the nearest dollar.)

A)

Finished Goods $341,055

Inventory Control $243,270

Conversion Costs Allocated $97,785

B)

Finished Goods $362,200

Inventory: Raw Materials $258,575

Conversion Costs Allocated $103,625

C)

Finished Goods $362,200

Accounts Payable Control $258,575

Conversion Costs Allocated $103,625

D)

Inventory Control $243,270

Conversion Costs Allocated $97,785

Finished Goods $341,055

Diff: 3

Objective: 7

AACSB: Application of knowledge

11) Under backflush costing approach where three trigger points are used (stage A, stage C, and stage D), the purchase of materials is:

A) credited to the Materials and In-Process Inventory Control account

B) debited to the Materials and In-Process Inventory Control account

C) debited to the Materials Inventory Control account

D) ignored because the manufacturing process moves so quickly from acquisition of materials to the sale of the finished good

Diff: 2

Objective: 7

AACSB: Analytical thinking

12) Which of the following statements is true of a backflush costing system?

A) All costs are tracked sequentially as products pass through each stage of production.

B) When inventories are minimal, as in JIT production systems, backflush costing complicates costing systems.

C) Usage of a backflush costing system does not satisfy the absorption costing rules of GAAP.

D) Backflush costing increases the ability of the accounting system to pinpoint the uses of resources at each step in the production process.

Diff: 2

Objective: 7

AACSB: Analytical thinking

13) Which of the following statements best defines a trigger point in a sequential-tracking costing system?

A) the inventory level at which a new purchase order is generated

B) the point at which the sum of annual relevant stockout and ordering costs is minimal

C) the production level at which the costing system becomes incapable of tracking the production costs

D) a stage in the production cycle at which journal entries are made in the accounting system

Diff: 2

Objective: 7

AACSB: Analytical thinking

14) In a backflush-costing system, no record of work in process appears in the accounting records.

Diff: 1

Objective: 7

AACSB: Analytical thinking

15) Companies that utilize backflush costing typically prorate underallocated or overallocated conversion costs between work-in-process, finished goods, and cost of goods sold.

Diff: 2

Objective: 7

AACSB: Analytical thinking

16) A firm using a backflush costing system will always use actual costs rather than standard costs.

Diff: 2

Objective: 7

AACSB: Analytical thinking

17) Companies that have low manufacturing lead time usually find that a version of backflush costing will report cost numbers totally different to what a sequential costing approach would report.

Diff: 3

Objective: 7

AACSB: Analytical thinking

18) The journal entry to dispose of the difference between actual conversion costs incurred and standard conversion costs allocated is different under backflush costing and sequential tracking.

Diff: 2

Objective: 7

AACSB: Analytical thinking

19) A positive aspect of backflush costing is the presence of the visible audit trail.

Diff: 1

Objective: 7

AACSB: Analytical thinking

20) To comply with GAAP, backflush cost numbers can be adjusted by recording a journal entry.

Diff: 2

Objective: 7

AACSB: Analytical thinking

21) 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. Backflush costing is used with a finished goods trigger point. Additional information is as follows:

Required:

Record all journal entries for the monthly activities related to the above transactions if backflush costing is used.

To record actual conversion costs:

To record finished goods:

To record sale of 7,600 units:

Diff: 3

Objective: 7

AACSB: Application of knowledge

22) Tornado Electronics manufactures stereos. 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. Backflush costing is used with a finished goods trigger point. Additional information is as follows:

Required:

Record all journal entries for the monthly activities related to the above transactions if backflush costing is used.

To record actual conversion costs:

To record finished goods:

To record sale of 2,800 units:

Diff: 3

Objective: 7

AACSB: Application of knowledge

23) 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.

Required:

Prepare journal entries to record December's costs for the production of the filters.

Diff: 2

Objective: 7

AACSB: Application of knowledge

24) What are the implications of JIT and backflush costing systems for activity-based costing (ABC) systems?

Diff: 2

Objective: 7

AACSB: Analytical thinking

25) Backflush costing does not strictly adhere to generally accepted accounting principles. Explain why. Also, describe the types of businesses that might use backflush costing.

The type of business which would use backflush costing would be firms that use JIT production, have fast manufacturing lead times, or have very stable inventory levels from period to period. For these companies, backflush costing will report cost numbers similar to what a sequential costing approach would report.

Diff: 3

Objective: 7

AACSB: Analytical thinking

Objective 21.8

1) Which of the following statements is true of lean accounting?

A) It is much complex than traditional product costing but produces more accurate product unit costs.

B) It does not always compute costs for individual products but does emphasize product costs by value stream.

C) It omits recording some of the journal entries relating to the stages from the purchase of direct materials to the sale of finished goods.

D) It is acceptable under GAAP.

Diff: 2

Objective: 8

AACSB: Analytical thinking

2) Which of the following statements best defines lean accounting?

A) an accounting system that comprises a single database that collects data and feeds it into software applications supporting all of a company's business activities

B) a costing method that supports creating value for the customer by costing the entire value stream thereby eliminating waste in the accounting process

C) an accounting system that omits recording some of the journal entries relating to the stages from the purchase of direct materials to the sale of finished goods

D) an integrated costing system covering a company's accounting, distribution, manufacturing, purchasing, human resources, and other functions

Diff: 2

Objective: 8

AACSB: Analytical thinking

3) Lean accounting is much simpler than traditional product costing because:

A) it compares value stream costs against costs that include costs of all purchased materials

B) it computes the cost of individual products

C) calculating actual product costs by value streams requires less overhead allocation

D) adding a larger markup on value stream costs to compensate for some of the excluded costs is easier than tracing all non value added costs

Diff: 2

Objective: 8

AACSB: Analytical thinking

4) Lean accounting focuses on the:

A) purchasing and the sales process

B) purchasing, production, and shipping

C) financial and operational reporting around the whole value stream

D) efficiency of individual departments, processes, and products

Diff: 2

Objective: 8

AACSB: Analytical thinking

5) Proponents of lean accounting argue that the lack of individual product cost information is irrelevant because most decisions about products are made at the product line level making value stream costs more relevant than product costs.

Diff: 2

Objective: 8

AACSB: Analytical thinking

6) In lean accounting environments, it is critical that work-in-process and finished goods accounting be accurate for accurate financial accounting and pricing decisions.

Diff: 2

Objective: 8

AACSB: Analytical thinking

7) Lean accounting takes in to consideration all costs associated with inventories.

Diff: 1

Objective: 8

AACSB: Analytical thinking

8) Lean accounting is much simpler than traditional product costing. Why?

Diff: 1

Objective: 8

AACSB: Analytical thinking

9) What are the principles of lean accounting? Are there any limitations? Discuss.

Lean accounting is a costing method that supports creating value for the customer by costing the entire value stream, not individual products or departments, thereby eliminating waste in the accounting process. If there are multiple, related products made in a single value stream, then product costs for the individual products are not even computed.

It is a simpler means by which to calculate values and costs consistent with the emphasis of JIT and remaining focused on the supply chain concept.

Regarding limitations of the lean accounting: (1) it does not compute costs for individual products - this may restrict its value for certain types of decisions; (2) it excludes many of the support costs and unused capacity costs; (3) it does not account for inventories under generally accepted accounting principles.

Proponents of lean accounting argue that by focusing on the specific value stream and allocating all other costs that do not directly contribute to the value stream, those other costs will be highlighted in a way that will cause managers to reduce those costs and/or find other alternative uses for the excess capacity that may contribute to them.

Diff: 2

Objective: 8

AACSB: Analytical thinking