Exam 19: Inventory Cost Management Strategies

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.

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 economic order quantity and the annual total costs of inventory.

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

Peckford Ltd.purchases 900,000 units of its product every year.The ordering costs are $125 per order and the annual carrying cost of one unit is $1.50.Under its current inventory policy,it purchases the units 60 times during the year,in batches of 15,000 units per order. Required: a.Calculate the EOQ for Peckford Ltd. b.By ordering at the EOQ,how much in inventory costs will Peckford Ltd.save per year?

Backflush costing describes a costing system that omits recording some journal entries.

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

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

Quality control is more important when a just-in-time inventory systems is in use.

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

Criticism of backflush accounting included all of the following EXCEPT

Goal-congruence problems may occur when an inconsistency evolves between the decision model used and the model used to evaluate the performance of the person implementing the decision.

Answer the following question(s)using the information below: Sandrington Ltd.operates a retail bicycle shop.Wheel covers are popular with customers.Sandrington purchases these covers for $48 per pair,and expects to sell 5,000 pairs per year.Ordering costs are estimated at $180 per order and relevant insurance handling etc.costs are estimated at $3.60 per month.The company has established a 14% annual return on investment. -At the EOQ quantity,Sandrington's total annual relevant inventory costs would be:

In the EOQ formula the square root increases the sensitivity of the decision to errors in predicting its inputs.

Answer the following question(s)using the information below: Sandrington Ltd.operates a retail bicycle shop.Wheel covers are popular with customers.Sandrington purchases these covers for $48 per pair,and expects to sell 5,000 pairs per year.Ordering costs are estimated at $180 per order and relevant insurance handling etc.costs are estimated at $3.60 per month.The company has established a 14% annual return on investment. -The EOQ model is designed to emphasize the tradeoff between which of the following factors?

Backflush costing uses normal or standard costs.

The opportunity cost of the stockout includes lost contribution margin on the sale NOT made plus any contribution margin lost on future sales due to customer ill will.

Activity-based costing systems enhance backflush costing accounting because of the relatively more accurate budgeted conversion cost per unit for different products.

Use the information below to answer the following question(s). Office Supply House purchases 4,160 reams of paper per year,ordered in lots of 80 reams per week at $150 per ream.The vendor covers all shipping costs.Office Supply House is not required to inspect the shipment upon entry.Office Supply House earns 20% on its cash investments.The purchase order lead time is two weeks.The following cost data are available: -What is the economic order quantity?

What are the major relevant costs in maintaining safety stock?

Wilson's Deli can predict with virtual certainty the demand for its products.Wilson's sells 20 hams per week.Purchase order lead time is 2 weeks and the economic order quantity is 50 hams.What is the reorder point?