Question 1

How does a JIT system achieve the objective of minimizing purchase costs without carrying inventory?

Accepted Answer

A JIT (Just-In-Time) system minimizes purchase costs by negotiating long-term contracts with suppliers to secure low purchase prices, ensuring materials are available as needed without holding excess inventory.

Question 2

Lauren Company orders 250 units at a time and places 15 orders per year. Total ordering cost is $1,600, and total carrying cost is $1,250. Which statement best describes the economic order quantity?

Accepted Answer

The answer of Lauren Company orders 250 units at a...

Question 3

Cara Company
Cara Company has the following information pertaining to its two divisions for the current year: $\begin{array}{lrr}&\text { european division}&\text { american division}\
\text { Variable selling and administrative expenses } & \$ 40,000 & \$ 55,000 \
\text { Direct fixed manufacturing expenses } & 22,000 & 60,000 \
\text { Sales } & 120,000 & 220,000 \
\text { Direct fixed selling and administrative expenses } & 18,000 & 45,000 \
\text { Wariable manufacturing expenses } & 25,000 & 55,000
\end{array}$ Common expenses are $18,000 for the current year.
-Refer to Cara Company. What is the segment margin for the American Division?

Accepted Answer

The answer of Cara Company
Cara Company has the following information...

Question 4

Which inventory cost can include processing costs, cost of insurance for shipping, and unloading?

Accepted Answer

The ordering cost includes expenses related to processing orders, shipping, insurance, and unloading of inventory.

Question 5

Refer to Carmel Company. What is the EOQ?

Accepted Answer

The EOQ for Carmel Company is 64. It is the point where the ordering cost and holding cost are at the minimum, and it will help the company to minimize the total inventory cost. Therefore, the best choice for Carmel Company is D, which is the EOQ value of 64.

Question 6

The variable costing income statement for Kilem Company for this year is as follows: $\begin{array}{crr}
\text { Sales ( } 6,000 \text { units) }&&\$120,000\
\text { variable expenses: }\\text { Cost of Goods Sold } & \$ 36,000 & \
\text { Selling (10\% of sales) } & 12,000 & 48,000 \
\text { Contribution margin } & & \$ 72,000\\text { Fixed expenses: }\
\text { Manufacturing overhead } & \$ 32,000 \
\text { Administrative } & 14,400 & 38,400\
\text { Net income }&&\$25,600
\end{array}$ Selected data for this year concerning the operations of the company are as follows: $\begin{array}{lr}
\text { Beginning inventory } & -0 \text { - units } \
\text { Units produced } & 8,000 \text { units }\\
\text { Manufacturing costs: } &  \
\text { Direct labour } &\$ 3.00 \text { per unit } \
\text { Direct materials } & 1.40 \text { per unit }\
\text { Variable manufacturing overhead } & 1.60 \text { per unit } 
\end{array}$ Required: Prepare an absorption costing income statement for this year.

Accepted Answer

The answer of The variable costing income statement for Kilem...

Question 7

Cara Company
Cara Company has the following information pertaining to its two divisions for the current year: $\begin{array}{lrr}&\text { european division}&\text { american division}\
\text { Variable selling and administrative expenses } & \$ 40,000 & \$ 55,000 \
\text { Direct fixed manufacturing expenses } & 22,000 & 60,000 \
\text { Sales } & 120,000 & 220,000 \
\text { Direct fixed selling and administrative expenses } & 18,000 & 45,000 \
\text { Wariable manufacturing expenses } & 25,000 & 55,000
\end{array}$ Common expenses are $18,000 for the current year.
-Refer to Cara Company. What is the net income for Cara Company?

Accepted Answer

To find the net income, calculate the total expenses for each division and subtract from total sales. Total expenses for European division: $40,000 + $22,000 + $18,000 + $25,000 = $105,000. Total expenses for American division: $55,000 + $60,000 + $45,000 + $55,000 = $215,000. Total sales: $120,000 + $220,000 = $340,000. Total expenses: $105,000 + $215,000 + $18,000 (common expenses) = $338,000. Net income = $340,000 - $338,000 = $2,000.

Question 8

Which of the following occurs under a JIT system?

Accepted Answer

Under a JIT (Just-in-Time) system, inventory levels are kept low or even eliminated altogether, with customer demand pulling units through the production line. This means that products are only produced when they are actually needed, reducing waste and the costs associated with excess inventory. Stockouts may still occur in a JIT system, but they are managed through quick replenishment processes rather than relying on high levels of safety stock. Inventory levels are not set at a specific percentage of total production levels in a JIT system.

Question 9

What is the formula to calculate total carrying cost?

Accepted Answer

Total carrying cost can be calculated by multiplying the average number of units in inventory by the cost of carrying one unit in inventory.

Question 10

Refer to Carmel Company. The company has decided to begin ordering 60 units at a time. What is the average annual carrying cost of this new policy?

Accepted Answer

The average inventory is half of the order quantity, so 60/2 = 30 units. If the carrying cost per unit is $4, then the average annual carrying cost is 30 units * $4 = $120.

Question 11

What is characteristic of the economic order quantity (EOQ)?

Accepted Answer

The economic order quantity (EOQ) is the quantity that minimizes total inventory-related costs, including ordering costs and carrying costs. The EOQ formula takes into account the trade-off between these costs to determine the most cost-effective order quantity. Maximizing total profit or minimizing only ordering costs or carrying costs would not necessarily result in the optimal order quantity.

Question 12

Which inventory cost can include insurance, inventory taxes, and obsolescence?

Accepted Answer

Carrying cost includes expenses such as insurance, inventory taxes, and obsolescence. The setup cost pertains to the cost of preparation for production or operation, the ordering cost involves the cost of placing the order, and stockout cost pertains to the cost of running out of stock.

Question 13

Refer to Carmel Company. The company has decided to begin ordering 60 units at a time. What is the average annual ordering cost of this new policy?

Accepted Answer

To calculate the annual ordering cost, we need to divide the total number of units ordered in a year (800) by the new order size (60) to get the number of orders placed in a year (13.33). Then, we multiply this number by the ordering cost per order ($10) to get the average annual ordering cost:

13.33 x $10 = $133.33

Therefore, the best choice is B ($135) as it is the closest option to the calculated $133.33.

Question 14

2L1S Company orders 250 units at a time and places 15 orders per year. Total ordering cost is $1,100, and total carrying cost is $1,750. Which statement best describes the economic order quantity?

Accepted Answer

The economic order quantity (EOQ) formula is:
√((2DS)/H)
where:
D = annual demand or units sold
S = ordering cost per order
H = holding or carrying cost per unit per year

Plugging in the given values, we get:
√((2x250x15)/1750) ≈ 16

Since the optimal EOQ is less than the ordering quantity (250), the best choice is C. This means that 2L1S company should order fewer units each time, but more frequently, in order to minimize their total inventory cost.

Question 15

Which of the following reflects the two major costs associated with inventory assuming demand is known with certainty?

Accepted Answer

The two major costs associated with inventory assuming demand is known with certainty are ordering costs and carrying costs. Ordering costs include expenses incurred in placing and receiving orders such as shipping, handling, and administrative costs. Carrying costs include expenses associated with holding inventory such as storage, handling, insurance, and obsolescence costs. Setup costs and stockout costs are associated with uncertain demand, and stockout costs and carrying costs are not the two major costs associated with inventory assuming demand is known with certainty.

Question 16

Which inventory cost can include lost sales, cost of expediting, and cost of interrupted production?

Accepted Answer

The cost of stockouts includes not just the lost sales, but also the cost of expediting (if items need to be rushed to avoid stockouts) and the cost of interrupted production (if the missing item is needed for production). The setup cost refers to the cost of preparing machines or equipment for production, while the carrying cost refers to the cost of storing inventory over time. The ordering cost refers to the cost of placing an order (e.g. labor costs, paperwork) but not the cost of the stockouts.

Question 17

LaTiffa Company orders 250 units at a time and places 15 orders per year. Total ordering cost is $1,100, and total carrying cost is $1,100. Which statement best describes the economic order quantity?

Accepted Answer

The economic order quantity (EOQ) is the order quantity that minimizes the total cost of inventory, which includes both ordering and carrying costs. Since the total ordering cost equals the total carrying cost at the current order quantity of 250 units, this indicates that 250 is the EOQ.

Question 18

Which of the following is NOT a traditional reason for carrying inventory?

Accepted Answer

The answer of Which of the following is NOT a...

Question 19

Which of the following reflects the formula to calculate ordering cost?

Accepted Answer

The formula to calculate ordering cost is number of orders per year multiplied by cost of placing an order.

Question 20

Which type of cost reflects the ordering costs when the economic order quantity (EOQ) model is applied to units produced within the company?

Accepted Answer

In the EOQ model, when units are produced internally, the ordering cost is reflected as the setup cost, which includes the costs associated with preparing equipment or processes for production.

Quiz 8: Absorption and Variable Costing, and Inventory Management