## Managerial Accounting Study Set 1

Business

## Quiz 20 :

Inventory Management

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Q12 Q12 Q12

Economic Order Quantity,timing of orders and safety stock are three important considerations in inventory management.
Required:
A.EOQ is a mathematical model that minimizes the costs of ordering and holding inventory.Timing of orders takes into account any lead time necessary between placing and receiving the inventory ordered.Safety stock allows for fluctuations in usage and minimizes losses due to lost production.
A.Explain each of these considerations.
B.How is EOQ affected by the timing of orders and safety stock?
B.The need for a lead time when placing orders and maintenance of a safety stock will alter the selection of the EOQ.Proper weighting of the three will result in cost minimization by the company.

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Q13 Q13 Q13

Shields carries a part that is popular in the manufacture of automatic sprayers.Demand for this part is 4,000 units per year;order costs amount to $30 per order,and holding costs total $1.50 per unit.The company is considering the implementation of an economic order quantity model in an effort to better manage its inventories.
Required:
A.Compute the economic order quantity.
A.The EOQ can be figured by taking the square root of: (2 x annual requirement x cost per order)¸ annual holding cost per unit.The square root of (2 x 4,000 x $30)¸ $1.50,or 160,000,is 400.
B.Compute total annual inventory costs if Shields follows the EOQ policy.
B.The ordering cost is based on 10 orders (4,000 units ¸ 400 units)x $30,and totals $300;the holding cost is computed on the company's average inventory of 200 units (400 ¸ 2)and amounts to $300 (200 x $1.50).Thus,costs at the EOQ total $600 ($300 + $300).

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Q14 Q14 Q14

Shields carries a part that is popular in the manufacture of automatic sprayers.Demand for this part is 4,000 units per year;order costs amount to $30 per order,and holding costs total $1.50 per unit.
The company,which currently places four orders per year with its suppliers,is considering the implementation of an economic order quantity (EOQ)model to better manage its inventories.Preliminary EOQ calculations revealed an optimal order quantity of 400 units and total annual inventory costs of $600.
Required:
A.In comparison with its current policy,how much will Shields save by adopting the EOQ model?
A.Shields is currently ordering four times each year,resulting in order costs of $120 ($30 x 4).Each order is for 1,000 units (4,000 ¸ 4),which gives rise to an average inventory of 500 units (1,000 ¸ 2)and holding costs of $750 (500 x $1.50).Total costs under the current policy are $870 ($120 + $750),and the EOQ produces a $270 savings for the company ($870 - $600).
B.Briefly explain the philosophical difference between the EOQ model and the just-in-time model.Which of the two models will likely result in lower holding costs for the firm? Why?
B.The EOQ model assumes that some inventory is necessary for business operations,and the goal is to optimize the order quantity to produce a situation where ordering costs equal holding costs.In contrast,under JIT,holding inventory in a warehouse is deemed to be inefficient and wasteful.Thus,inventory should be minimized and even eliminated,if possible.
Inventory under a JIT system is typically lower and,thus,holding costs are lower with this approach.

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