ch20 - Cost Accounting, 13e (Horngren et al.) Chapter 20 1...

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Unformatted text preview: Cost Accounting, 13e (Horngren et al.) Chapter 20 1 Inventory Managemen t, Just-inTime, and Simplified Costing 1) M e t h o d s Retailers generally have a high percentage of net income to revenues. Answer: FALSE Explanation: Retailers have a low percentage of net income to revenues. Diff: 2 Terms: inventory management Objective: 1 AACSB: Analytical skills 2) Inventory ent is the planning, organizing, and controlling activities that focus on the flow of materials into, through, and from the managem organization. Answer: TRUE Diff: 2 Terms: inventory management Objective: 1 AACSB: Analytical skills 3) Purchasin g costs generally include the freight and transportation costs on goods acquired from suppliers. Answer: TRUE Diff: 2 Terms: purchasing costs Objective: 1 AACSB: Analytical skills 4) Expeditin g costs of a stockout include the additional ordering costs, plus any associated transportation costs. Answer: TRUE Explanation: Expediting costs include the associated transportation costs. Diff: 2 Terms: stockout costs Objective: 1 AACSB: Analytical skills 5) Carrying costs arise when an organization experiences an ability to deliver its goods to its customers. Answer: FALSE Explanation: Carrying costs arise when an organization holds its goods for sale. Diff: 2 Terms: carrying costs Objective: 1 AACSB: Analytical skills 6) Shrinkage costs result from water damage to clothing and other soft goods. Answer: FALSE Explanation: Shrinkage costs result from theft by outsiders, embezzlement by employees, misclassifications, and clerical errors. Diff: 2 Terms: shrinkage Objective: 1 AACSB: Analytical skills 7) Shrinkage is measured by comparing the cost of inventory on the books to the cost of inventory physically counted. Answer: TRUE Diff: 2 Terms: shrinkage Objective: 1 AACSB: Analytical skills 8) All inventory costs are available in financial accounting systems. Answer: FALSE Explanation: Opportunity costs are rarely recorded in formal accounting systems and they are often a very significant cost component. Diff: 2 Terms: shrinkage Objective: 1 AACSB: Analytical skills 9) Sharing inventory data throughout the supply chain leads to more "rush" orders occurring. Answer: FALSE Explanation: Sharing inventory data throughout the supply chain leads to fewer "rush" orders occurring. Diff: 2 Terms: inventory management Objective: 1 AACSB: Analytical skills 10) The version of the Economic Order Quantity model incorporates only ordering costs, carrying costs, and purchasing costs into simplest the calculation. Answer: FALSE Explanation: Purchasing costs are ignored in the Economic Order Quantity. Diff: 2 Terms: economic order quantity (EOQ) Objective: 2 AACSB: Analytical skills 11) To the Economic Order Quantity, the relevant ordering costs are minimized and the relevant carrying costs are maximized. determine Answer: FALSE Explanation: We minimize both the relevant ordering costs and the relevant carrying costs. Diff: 2 Terms: economic order quantity (EOQ) Objective: 2 AACSB: Analytical skills 12) The Economic Order Quantity increases with demand and ordering costs and decreases with carrying costs. Answer: TRUE Diff: 2 Terms: economic order quantity (EOQ) Objective: 2 AACSB: Analytical skills 13) The annual relevant total costs are at a minimum where relevant ordering costs and their relevant carrying costs are equal. Answer: TRUE Diff: 2 Terms: economic order quantity (EOQ) Objective: 2 AACSB: Analytical skills 14) When retailers are uncertain about demand for their products or availability of their products from the suppliers, they often hold a fixed level of safety stock to make sure they will be able to fulfill the customers' needs. Answer: TRUE Diff: 2 Terms: safety stock Objective: 2 AACSB: Ethical reasoning 15) The annual relevant carrying costs of inventory consist of incremental costs plus the opportunity cost of capital. Answer: TRUE Diff: 3 Terms: carrying costs Objective: 3 AACSB: Analytical skills 16) Just-in- time purchasing requires organizations to place smaller purchase orders with their suppliers. Answer: TRUE Diff: 2 Terms: just-in-time (JIT) purchasing Objective: 3 AACSB: Analytical skills 17) Just-in- time purchasing is guided solely by the economic order quantity. Answer: FALSE Explanation: Inventory management also includes purchasing costs, stockout costs, and quality costs. Diff: 2 Terms: just-in-time (JIT) purchasing, economic order quantity (EOQ) Objective: 3 AACSB: Analytical skills 18) The higher level of variability at manufacturers rather than suppliers, and at retailers rather than manufacturers is called the "bullwhip effect." Answer: FALSE Explanation: The higher level of variability is at suppliers rather than manufacturers, and at manufacturers rather than at suppliers. Diff: 3 Terms: inventory management Objective: 3 AACSB: Reflective thinking 19) Just-in- g describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of time products to consumers, regardless of whether those activities occur in the same organization or in other organizations. purchasin Answer: FALSE Explanation: 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 organization or in other organizations. Diff: 3 Terms: supply chain Objective: 4 AACSB: Reflective thinking 20) A "push- system, often described as a just-in-time system, emphasizes simplicity and close coordination among work centers. through" Answer: FALSE Explanation: The narrative describes a Materials Requirement Planning system. Diff: 2 Terms: just-in-time (JIT) production Objective: 5 AACSB: Communication 21) Costs of setting up a production run are analogous to ordering costs in the Economic Order Quantity (EOQ) model. Answer: TRUE Diff: 2 Terms: ordering costs Objective: 5 AACSB: Analytical skills 22) A system, often described as a materials requirement planning system, focuses first on the forecasted amount and timing of "demand- finished goods and then determines the demand for materials components and subassemblies at each of the prior stages of pull" production. Answer: FALSE Explanation: The narrative describes a Diff: 2 Terms: material requirements planning (MRP) Objective: 5 AACSB: Reflective thinking 23) In a just- in-time inventory system, there is less emphasis on the need to eliminate scrap and rework problems. Answer: FALSE Explanation: There is more emphasis on the need to eliminate scrap and rework problems. Diff: 2 Terms: just-in-time (JIT) production Objective: 5 AACSB: Reflective thinking 24) Just-in- time systems are similar to materials requirement planning systems in that both systems are demand-pull systems. Answer: FALSE Explanation: Just-in-time systems are not similar to materials requirement planning systems in that just-intime production is a demand-pull system and materials requirements planning is a pushthrough approach. Diff: 2 Terms: just-in-time (JIT) production, materials requirements planning (MRP) Objective: 5, 6 AACSB: Analytical skills 25) A financial benefit of a just-in-time system is that inventory carrying costs are reduced. Answer: TRUE Diff: 2 Terms: just-in-time (JIT) production, just-intime (JIT) purchasing Objective: 6 AACSB: Reflective thinking 26) In a just- system, suppliers are selected primarily on the basis of their ability to provide materials and products at the lowest possible in-time price. Answer: FALSE Explanation: In a just-in-time system, suppliers are selected on the basis of their ability to deliver quality materials in a timely manner. Diff: 2 Terms: just-in-time (JIT) production, just-intime (JIT) purchasing Objective: 6 AACSB: Reflective thinking 27) An Resource Planning (ERP) System comprises a single database that collects data and feeds it into software applications Enterprise supporting all of a company's business activities. Answer: TRUE Diff: 2 Terms: enterprise resource planning (ERP) system Objective: 6 AACSB: Use of Information Technology 28) In a backflush-costing system, no record of work in process appears in the accounting records. Answer: TRUE Diff: 3 Terms: backflush costing Objective: 7 AACSB: Reflective thinking 29) Backflush a costing system that omits recording some or all of the journal entries relating to the stages from purchase of direct costing is materials to the sales of finished goods. Answer: TRUE Diff: 2 Terms: backflush costing Objective: 7 AACSB: Reflective thinking 30) A trigger point refers to the inventory level at which a reorder is generated. Answer: FALSE Explanation: A trigger point refers to the point at which a journal entry is made. Diff: 2 Terms: trigger point Objective: 7 AACSB: Reflective thinking 31) A firm using a backflush costing system will always use actual costs rather than standard costs. Answer: FALSE Explanation: A firm using a backflush costing system can use standard costs as well as actual costs. Diff: 2 Terms: backflush costing Objective: 7 AACSB: Reflective thinking 32) The "flush" in backflush refers to the fact that there are no variances in a backflush costing system using standard costs. Answer: FALSE Explanation: The "flush" in backflush refers to the fact that costs are "flushed" out of the system after the product has been produced or sold. Diff: 2 Terms: backflush costing Objective: 7 AACSB: Reflective thinking 33) Companie have fast manufacturing lead times usually find that a version of backflush costing will report cost numbers similar to what s that a sequential costing approach would report. Answer: TRUE Diff: 3 Terms: backflush costing Objective: 8 AACSB: Analytical skills 34) Backflush costing is usually restricted to companies adopting JIT production methods. Answer: FALSE Explanation: Backflush costing is also helpful in companies that have fast manufacturing times, and that have very stable inventory. Diff: 3 Terms: backflush costing, just-in-time (JIT) production Objective: 8 AACSB: Reflective thinking 35) A positive aspect of backflush costing is the presence of the visible audit trail. Answer: FALSE Explanation: In backflush costing, the visible audit trail diminishes. Diff: 3 Terms: backflush costing Objective: 8 AACSB: Reflective thinking 36) Lean g is a costing method that supports creating value for the customer by costing the entire value stream, not individual accountin products or departments, thereby eliminating waste in the accounting process. Answer: TRUE Diff: 3 Terms: lean accounting Objective: 9 AACSB: Reflective thinking 37) Which of the following industries would have the highest cost of goods sold percentage relative to sales? A) computer B) manufacturers retail C) organizations drug D) manufacturers The percentage will usually depend on the success of a particular company. Answer: B Diff: 2 Terms: inventory management Objective: 1 AACSB: Reflective thinking 38) The costs of goods acquired from suppliers including incoming freight or transportation costs are: A) purchasing B) costs ordering costs C) stockout costs D) carrying costs Answer: A Diff: 2 Terms: purchasing costs Objective: 1 AACSB: Reflective thinking 39) The costs of preparing, issuing, and paying purchase orders, plus receiving and inspecting the items included in orders is: A) purchasing B) costs ordering costs C) stockout costs D) carrying costs Answer: B Diff: 2 Terms: ordering costs Objective: 1 AACSB: Reflective thinking 40) The costs that result from theft of inventory are: A) shrinkage costs B) external failure costs C) stockout costs D) costs of quality Answer: A Diff: 2 Terms: shrinkage Objective: 1 AACSB: Reflective thinking 41) 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 Answer: C Diff: 2 Terms: stockout costs Objective: 1 AACSB: Reflective thinking 42) The costs that result when features and characteristics of a product or service are not in conformance with the specifications are: A) inspection costs B) costs of quality C) purchasing D) costs design costs Answer: B Diff: 2 Terms: stockout costs Objective: 1 AACSB: Reflective thinking 43) The costs that result when a company holds an inventory of goods for sale: A) purchasing B) costs carrying costs C) opportunity D) costs interest costs Answer: B Diff: 2 Terms: stockout costs Objective: 1 AACSB: Reflective thinking 44) Quality costs include: A) purchasing B) costs ordering costs C) stockout costs D) prevention costs Answer: D Diff: 2 Terms: quality costs Objective: 1 AACSB: Reflective thinking 45) Obsolesce nce is an example of which cost category? A) carrying costs B) labor costs C) ordering costs D) quality costs Answer: A Diff: 2 Terms: carrying costs Objective: 2 AACSB: Reflective thinking 46) The costs associated with storage are an example of which cost category? A) quality costs B) labor costs C) ordering costs D) carrying costs Answer: D Diff: 2 Terms: carrying costs Objective: 2 AACSB: Reflective thinking 47) Which of the following is an assumption of the economic-order-quantity decision model? A) The quantity B) ordered can vary at each reorder point. Demand C) ordering costs and carrying costs fluctuate. There will be timely labor costs. D) No stockouts occur. Answer: D Diff: 2 Terms: economic order quantity (EOQ) Objective: 2 AACSB: Reflective thinking 48) The economic order quantity ignores: A) purchasing B) costs relevant C) ordering costs stockout costs D) Both A and C are correct. Answer: D Diff: 3 Terms: economic order quantity (EOQ) Objective: 2 AACSB: Reflective thinking 49) The purchase-order lead time is the: A) difference B) between the times an order is placed and delivered difference C) between the products ordered and the products received discrepancies in purchase orders D) time required to correct errors in the products received Answer: A Diff: 2 Terms: purchase-order lead time Objective: 2 AACSB: Reflective thinking 50) Which of the following statements about the economic-order-quantity decision model is FALSE? A) It assumes B) purchasing costs are relevant when the cost per unit changes due to the quantity ordered. It assumes C) quality costs are irrelevant if quality is unaffected by the number of units purchased. It assumes D) stockout costs are irrelevant if no stockouts occur. It assumes ordering costs and carrying costs are relevant. Answer: A Diff: 3 Terms: economic order quantity (EOQ) Objective: 2 AACSB: Reflective thinking 51) Relevant total costs in the economic-order-quantity decision model equal relevant ordering costs plus relevant: A) carrying costs B) stockout costs C) quality costs D) purchasing costs Answer: A Diff: 2 Terms: economic order quantity (EOQ), ordering costs, carrying costs Objective: 2 AACSB: Reflective thinking 52) Phonic which sells blank and recorded videos. Tape-Disk Mart purchases tapes from Phonic Goods at $3.00 per tape; tapes are Goods is shipped in packages of 20. Phonic Goods pays all incoming freight, and Tape-Disk Mart does not inspect the tapes due to a Phonic Goods' reputation for high quality. Annual demand is 104,000 tapes at a rate of 4,000 tapes per week. Tape-Disk distributor Mart earns 20% on its cash investments. The purchase-order lead time is two weeks. The following cost data are available: of videotape Relevant ordering costs per purchase order $90.50 s. TapeCarrying costs per package per year: Disk Mart Relevant insurance, materials handling, is a local breakage, etc., per year $ 4.50 retail outlet What is the required annual return on investment per package? A) $60.00 B) $2.50 C) $12.00 D) $0.60 Answer: C Explanation: C) 2 Diff: 3 T 3 AACSB: Analytical skills Answer the following questions using the information below: Stereo Goods is a distributor of videotapes. Video Mart is a local retail outlet which sells blank and recorded videos. Video Mart purchases tapes from Stereo Goods at $5.00 per tape; tapes are shipped in packages of 25. Stereo Goods pays all incoming freight, and Video Mart does not inspect the tapes due to Stereo Goods' reputation for high quality. Annual demand is 104,000 tapes at a rate of 2,000 tapes per week. Video 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 Carrying costs per package per year: Relevant insurance, materials handling, breakage, etc., per year 53) $94.50 $ 3.50 What is the economic order quantity? A) 874 packages B) 652 packages C) 200 packages D) 188 packages Answer: D Explanation: D) E Diff: 2 T 3 AACSB: Analytical skills 54) What are the relevant total costs? A) $6,150.50 B) $4,182.56 C) $2,560.20 D) $1,951.70 Answer: B Explanation: B) E Diff: 3 T R 3 AACSB: Analytical skills 55) How many deliveries will be made during each time period? A) 22.1 deliveries B) 26.0 deliveries C) 29.4 deliveries D) 32.0 deliveries Answer: A Explanation: A) E E [ economic order quantity (EOQ) Objective: 3 AACSB: Analytical skills Answer the following questions using the information below: Green Grass Incorporated is a distributor of golf balls. Garry's Golf Supplies is a local retail outlet which sells golf balls. Garry's purchases the golf balls from Green Grass Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72. Green Grass Incorporated pays all incoming freight, and Garry's Golf Supplies does not inspect the balls due to Green Grass' reputation for high quality. Annual demand is 172,800 golf balls at a rate of 3,322 balls per week. Garry'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 Carrying costs per carton per year: Relevant insurance, materials handling, breakage, etc., per year 56) $125.00 $ 0.77 If Garry's makes an order (1/12 of annual demand) once per month, what are the relevant total costs? A) $1,500 B) $2,085.67 C) 2,225.00 D) $3,000.00 Answer: C Explanation: C) O R C C R economic order quantity (EOQ), ordering costs, carrying costs Objective: 3 AACSB: Analytical skills 57) What is the economic order quantity? A) 200 cartons B) 288 cartons C) 300 cartons D) 388 cartons Answer: B Explanation: B) A C E E economic order quantity (EOQ) Objective: 3 AACSB: Analytical skills 58) Purchasin g at the EOQ recommended level, how many deliveries will be made during each time period? A) 2 deliveries B) 6.0 deliveries C) 8.3 deliveries D) 12 deliveries Answer: C Explanation: C) A C Diff: 3 T D 3 AACSB: Analytical skills 59) Purchasin g at the EOQ recommended level, what are the relevant total costs? A) $1,500.00 B) $2,085.67 C) $2,225.00 D) $3,000.00 Answer: B Explanation: B) A C E E R Y Diff: 3 Terms: economic order quantity (EOQ), ordering costs, carrying costs Objective: 3 AACSB: Analytical skills Answer the following questions using the information below: The Wood Furniture company produces a specialty wood furniture product, and has the following information available concerning its inventory items: Relevant ordering costs per purchase order Relevant carrying costs per year: Required annual return on investment Required other costs per year $150 10% $1.40 Annual demand is 10,000 packages per year. The purchase price per package is $16. 60) What is the economic order quantity? A) 150,000 units B) 1,000 units C) 75,000 units D) 5,000 units Answer: B Explanation: B) U Diff: 3 T 2 AACSB: Analytical skills 61) What are the relevant total costs at the economic order quantity? A) $1,000 B) $1,500 C) $3,000 D) $3,500 Answer: C Explanation: C) U Diff: 3 T R 2 AACSB: Analytical skills 62) What are the total relevant costs, assuming the quantity ordered equals 500 units? A) $3,500 B) $500 C) $4,000 D) $3,750 Answer: D Explanation: D) R Diff: 3 T 2 AACSB: Analytical skills 63) How many deliveries will be required at the economic order quantity? A) 1.0 delivery B) 5.1 deliveries C) 8.2 deliveries D) 10.0 deliveries Answer: D Explanation: D) 1 Diff: 3 T 2 AACSB: Analytical skills 64) The annual relevant total costs are at a minimum when relevant: A) ordering costs are greater than the relevant carrying costs B) carrying costs are greater than the relevant ordering costs C) carrying costs are equal to relevant ordering costs D) None of these answers is correct. Answer: C Diff: 3 Terms: economic order quantity (EOQ), ordering costs, carrying costs Objective: 2 AACSB: Reflective thinking 65) The reorder point is simplest to compute when: A) both demand B) and purchase-order lead times are known with certainty the number of units sold varies C) the safety stock amount never varies D) the relevant ordering costs and the relevant carrying costs are equal Answer: A Diff: 2 Terms: economic order quantity (EOQ), reorder point Objective: 3 AACSB: Reflective thinking 66) Diskette sells 200 discs per week. Purchase-order lead time is 1-1/2 weeks and the economic-order quantity is 450 units. What is Company the reorder point? A) 200 units B) 300 units C) 750 units D) 1,125 units Answer: B Explanation: B) 2 Diff: 2 T 4 AACSB: Analytical skills 67) Wilson's predict with virtual certainty the demand for its products. Wilson's sells 20 hams per week. Purchase-order lead time is 2 Deli can weeks and the economic-order quantity is 50 hams. What is the reorder point? A) 20 hams B) 30 hams C) 40 hams D) 50 hams Answer: C Explanation: C) 2 Diff: 2 T 4 AACSB: Analytical skills Answer the following questions using the information below: Owen-King Company sells optical equipment. Lens Company manufactures special glass lenses. Owen-King Company orders 5,200 lenses per year, 100 per week, at $20 per lens. Lens Company covers all shipping costs. Owen-King Company earns 30% on its cash investments. The purchase-order lead time is 2.5 weeks. Owen-King Company sells 125 lenses per week. The following data are available: Relevant ordering costs per purchase order Relevant insurance, materials handling, breakage, and so on, per year 68) $21.25 $ 2.50 What is the economic order quantity for Owen-King Company? A) 325 lenses B) 297 lenses C) 210 lenses D) 161 lenses Answer: D Explanation: D) E Diff: 2 T 4 AACSB: Analytical skills 69) What is the reorder point? A) 220.5 lenses B) 312.5 lenses C) 397.5 lenses D) 415.5 lenses Answer: B Explanation: B) 1 Diff: 2 T 4 AACSB: Analytical skills Answer the following questions using the information below: The following information applies to Labs Plus, which supplies microscopes to laboratories throughout the country. Labs Plus 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) Orders per year Lead time in days Cost of placing an order 70) 15,600 units 20 15 days $100 What are the annual relevant carrying costs, assuming each order was made at the economic-order-quantity amount? A) $200 B) $1,000 C) $2,000 D) $6,000 Answer: C Explanation: C) A Diff: 2 T 2 AACSB: Analytical skills 71) What is the economic order quantity assuming each order was made at the economic-order-quantity amount? A) 15 units B) 20 units C) 780 units D) 1,040 units Answer: C Explanation: C) 1 Diff: 2 T 2 AACSB: Analytical skills 72) What is the reorder point? A) 780 units B) 643 units C) 1,560 units D) 1,680 units Answer: B Explanation: B) 1 Diff: 2 T 1 AACSB: Analytical skills 73) What are the major relevant costs in maintaining safety stock? A) carrying costs and purchasing costs B) ordering costs and purchasing costs C) ordering costs and stockout costs D) stockout costs and carrying costs Answer: D Diff: 2 Terms: safety stock Objective: 3 AACSB: Reflective thinking 74) If Ferry has a safety stock of 160 units and the average daily demand is 20 units, how many days can be covered if the shipment Company from the supplier is delayed by 12 days? A) 12.0 days B) 10.0 days C) 8.0 days D) 6.7 days Answer: C Explanation: C) 1 Diff: 3 T 2 AACSB: Analytical skills 75) If Jackson es, Inc. has a safety stock of 35 units and the average weekly demand is 14 units, how many days can be covered if the Collectibl shipment from the supplier is delayed ? A) 2.5 days B) 17.5 days C) 21 days D) 35 days Answer: B Explanation: B) 3 Diff: 3 T 2 AACSB: Analytical skills 76) 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 Answer: A Diff: 2 Terms: economic order quantity (EOQ), safety stock, stockout costs, carrying costs Objective: 2 AACSB: Reflective thinking 77) The annual relevant carrying costs of inventory consists of the sum of the: A) ordering costs and carrying costs B) stockout costs and carrying costs C) incremental D) costs plus the opportunity costs of capital incremental costs plus the carrying costs Answer: C Diff: 2 Terms: carrying costs Objective: 3 AACSB: Reflective thinking 78) Party stuffed animals. Party Animals orders 10,400 tigers per year, 200 per week, at $10 per tiger. The manufacturer covers all Animals shipping costs. Party Animals earns 12% on its cash investments. The purchase-order lead time is 3 weeks. Party Animals sells sells 210 tigers per week. The following data are available (based on management's estimates): stuffed tigers. Estimated ordering costs per purchase order $10 Products, Estimated insurance, materials handling, breakage, Inc., and so on, per year $3 manufact Actual ordering costs per order $15 ures many different What is the economic order quantity using the estimated amounts? A) 119 stuffed B) tigers 223 stuffed C) tigers 273 stuffed D) tigers 325 stuffed tigers Answer: B Explanation: B) E Diff: 3 T 3 AACSB: Analytical skills 79) A conflict the EOQ model's optimal order quantity and the order quantity the purchasing manager, evaluated on conventional between accounting numbers, regards as optimal is considered a(n): A) problem for the chief financial officer to resolve B) problem for the performance evaluation system to resolve C) goal congruence D) opportunity cost Answer: B Diff: 2 Terms: economic order quantity (EOQ) Objective: 3 AACSB: Analytical skills 80) Just-in- time purchasing requires: A) larger and less frequent purchase orders B) smaller and less frequent purchase orders C) smaller and D) more frequent purchase orders larger and more frequent purchase orders Answer: C Diff: 2 Terms: just-in-time (JIT) purchasing Objective: 3 AACSB: Analytical skills 81) Increases in the carrying cost and decreases in the ordering cost per purchase order result in: A) smaller EOQ B) amounts larger EOQ C) amounts larger relevant total costs D) smaller relevant total costs Answer: A Diff: 2 Terms: economic order quantity (EOQ), ordering costs, carrying costs Objective: 3 AACSB: Analytical skills 82) The describes 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 C) requirements plan (ERP) material D) requirements plan (MRP) supply chain Answer: D Diff: 2 Terms: supply chain Objective: 4 AACSB: Reflective thinking 83) When using a vendor-managed inventory system to enhance the features of supply chain management, a challenging issue is: A) problems of B) communication and trust the sharing of accurate, timely, and relevant information about sales forecasts C) potentially D) incompatible information systems all of the above Answer: D Diff: 2 Terms: supply chain Objective: 4 AACSB: Reflective thinking 84) A push- through system that manufactures finished goods for inventory on the basis of demand forecasts is referred to as: A) just-in-time B) purchasing materials C) requirements planning relevant total D) costs economic order quantity Answer: B Diff: 1 Terms: material requirements planning (MRP) Objective: 5 AACSB: Reflective thinking 85) A pull system in which each component in a production line is produced immediately as needed by the next step in the demand- production line is referred to as: A) just-in-time B) purchasing materials C) requirements planning relevant total D) costs economic order quantity Answer: A Diff: 1 Terms: just-in-time (JIT) purchasing Objective: 5 AACSB: Reflective thinking 86) The management accountant aids in MRP by: A) doing journal entries as requested B) preparing plant appropriation requests C) maintaining D) accurate records of inventory and its costs contacting vendors to make sure they can deliver the materials in time Answer: C Diff: 1 Terms: material requirements planning (MRP) Objective: 5 AACSB: Reflective thinking 87) A grouping of all the different types of equipment used to make a given product is referred to as: A) total quality B) management materials C) requirements planning manufacturing cells D) economic order quantity Answer: C Diff: 1 Terms: manufacturing cells Objective: 6 AACSB: Reflective thinking 88) The time required to get equipment, tools, and materials ready to start production is referred to as: A) setup time B) manufacturing lead time C) pass-through D) time None of these answers is correct. Answer: A Diff: 1 Terms: lean production Objective: 6 AACSB: Reflective thinking 89) The time from when an order is received by manufacturing until it becomes a finished good is referred to as: A) work-in-process time B) manufacturing lead time C) pass-through D) time None of these answers is correct. Answer: B Diff: 1 Terms: lean production Objective: 6 AACSB: Reflective thinking 90) All of the following are potential financial benefits of just-in-time EXCEPT: A) lower B) investments in inventories lower C) investments in plant space for inventories reducing the D) risk of obsolescence reducing manufacturing lead time Answer: C Diff: 1 Terms: just-in-time (JIT) production Objective: 6 AACSB: Analytical skills 91) A system comprises a single database that collects data and feeds it into software applications supporting all of a company's business that activities is known as a(n): A) economic order quantity (EOQ) system B) enterprise C) requirements planning (ERP) system just-in-time D) (JIT) system material requirements planning (MRP) system Answer: B Diff: 2 Terms: enterprise resource planning (ERP) system Objective: 6 AACSB: Use of Information Technology 92) One disadvantage of an enterprise resource planning (ERP) system is: A) the use of B) standard costing systems is not allowed these systems are not in accordance with Generally Accepted Accounting Principles (GAAP) C) the systems D) must often be customized to fit the strategic needs of the user the systems increase lead times when purchasing material from a supplier Answer: C Diff: 2 Terms: enterprise resource planning (ERP) system Objective: 6 AACSB: Reflective thinking 93) Traditiona l normal and standard costing systems use: A) backflush B) costing delayed costing C) post-deduct D) costing sequential tracking Answer: D Diff: 2 Terms: backflush costing Objective: 7 AACSB: Reflective thinking 94) A costing that omits recording some or all of the journal entries relating to the cycle from purchase of direct materials to the sale of system finished goods is called: A) dependent B) costing synchronous C) costing sequential D) costing backflush costing Answer: D Diff: 2 Terms: backflush costing Objective: 7 AACSB: Reflective thinking Answer the following questions using the information below: 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 Direct materials purchased March Units produced March Units sold March 95) $ 800,000 $2,140,000 117,600 83,600 Which of the following journal entries properly records the purchase of direct materials? A) Accounts Payable Control B) 2,140,000 Inventory: Raw and In-Process Control 2,140,000 Inventory: Raw Control and In-Process Accounts Payable Control C) 2,140,000 2,140,000 Inventory: Raw Control and In-Process Conversion Costs D) 2,140,000 2,140,000 Conversion Inventory: Raw and In-Process Control Costs 2,140,000 Answer: 2,140,000 B Diff: 3 Terms: backflush costing, trigger point Objective: 7 AACSB: Analytical skills 96) Which of the journal entries properly records conversion costs? A) Conversion Costs 800,000 B) Various Accounts 800,000 Various Accounts C) 800,000 Conversion Costs 800,000 Conversion Costs 800,000 D) Inventory: Direct Materials 800,000 Inventory: Direct Materials Conversion Costs Answer: 800,000 800,000 A Diff: 2 Terms: backflush costing Objective: 7 AACSB: Analytical skills 97) Which of the following entries properly records the cost of goods sold for the month? A) Finished Goods 2,090,000 B) Work in Process 2,090,000 Cost of Goods Sold 2,090,000 C) Finished Goods 2,090,000 Finished Goods 2,090,000 D) Cost of Goods Sold 2,090,000 Cost of Goods Work in Process Sold 2,090,000 Answer: 2,090,000 B Diff: 3 Terms: backflush costing Objective: 7 AACSB: Analytical skills Answer the following questions 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. 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 - October Direct materials purchased - October Units produced - October Units sold - October Selling price 98) $ 90,400 $250,400 80,000 units 75,000 units $10 each Which of the following journal entries properly reflects the purchase of materials in a JIT environment? A) Inventory: Raw and In-Process B) 250,400 Accounts Payable Control 250,400 Accounts Payable Control C) 250,400 Allocated Costs: Direct Materials 250,400 Accounts Payable Control D) 250,400 Materials Inventory 250,400 Allocated Materials Costs: Direct Inventory: Raw and Material Answer: 250,400 250,400 A Diff: 3 Terms: backflush costing Objective: 7 AACSB: Analytical skills 99) Which of the following journal entries would be recorded when units are sold for the month? A) Cost of Goods Sold 319,500 B) Inventory: Raw and In-Process 319,500 Cost of Goods Sold 319,500 C) Inventory: Raw and In-Process Conversion Costs Allocated 234,750 84,750 Inventory: Raw Conversion Costs Allocated and In-Process Cost of Goods Sold 234,750 D) 84,750 319,500 Cost of Goods Inventory: Raw and In-Process Sold 319,500 Conversion Costs Allocated Answer: 229,500 90,000 B Explanation: B) D C Diff: 3 T 7 AACSB: Analytical skills 100) Which of the following entries would occur if the only trigger point is the production of finished units? A) Cost of Goods Sold 319,500 B) Inventory: Raw and In-Process Control Conversion Costs Allocated 229,500 90,000 Inventory: Raw Conversion Costs Allocated and In-Process Cost of Goods Sold Control 234,750 C) 84,750 319,500 Finished Goods 340,800 D) Accounts Payable Control Conversion Costs Allocated 250,400 90,400 Accounts Conversion Costs Allocated Payable Control Finished Goods 250,400 Answer: 90,400 340,800 C Explanation: C) 8 Diff: 3 T 8 7 AACSB: Analytical skills 101) Companie s that would benefit from backflush costing include companies: A) which have fast manufacturing lead times B) whose C) inventories vary from period to period companies that require audit trails D) Both A and B are correct. Answer: A Diff: 2 Terms: backflush costing Objective: 8 AACSB: Reflective thinking 102) The implications of JIT and backflush costing systems for activity-based costing systems include: A) more of the B) costs are direct overhead cost allocations are reduced C) Neither of these answers is correct. D) Both of these answers are correct. Answer: D Diff: 2 Terms: just-in-time (JIT) production, backflush costing Objective: 8 AACSB: Reflective thinking 103) Lean accounting: A) is much simpler than traditional product costing. B) does not C) compute costs for individual products. Neither of these answers is correct. D) Both of these answers are correct. Answer: D Diff: 2 Terms: lean accounting Objective: 9 AACSB: Reflective thinking 104) Managing listed items as either Purchasing Costs, Ordering Costs, Carrying Costs, Stockout Costs, Costs of Quality, or inventorie Shrinkage Costs. s to increase ________ a. costs of obtaining purchase approvals net income ________ b. costs resulting from embezzlement by employees requires companie ________ c. internal failure costs s to effectivel ________ d. opportunity cost of the investment tied up in inventory y manage costs ________ e. spoilage of stored items associated with ________ f. costs of lost sales as a result of not having an item requested by a customer goods for sale. ________ g. costs of incoming freight Required ________ : ________ Classify the below ________ Answer: h. i. j. costs of matching invoices received to the items and the purchase orders costs of wages for work-in-process inspections costs that result from clerical errors a. b. c. d. Ordering Costs Shrinkage Costs Costs of Quality Carrying Costs Diff: 2 Terms: costs associated with goods for sale Objective: 1 AACSB: Analytical skills 105) Due to quantities that had been previously determined using an EOQ model. unprecede nted Required: growth during the Identify whether increasing the size of inventory orders will increase, decrease, or have no effect on each of the following year, items. Flowers by Kelly ________ a. Average inventory decided to use some ________ b. Cost of goods sold of its surplus ________ c. Number of orders per year cash to increase ________ d. Total annual carrying costs the size of several ________ e. Total annual carrying and ordering costs inventory order ________ f. Total annual ordering costs Answer: a. Increase b. No effect c. Decrease d. Increase e. Depends which costs increase/decrease more f. Decrease Diff: 2 Terms: economic order quantity (EOQ) Objective: 2 AACSB: Analytical skills 106) The only demand of 2,000 units. The cost of placing an order is $40 and the cost of carrying one unit in inventory for one year is product of $16. a company Required: has an annual Determine the economic order quantity. Answer: The square root of [(2 × 2,000 × $40) / $16] = 100 units Diff: 1 Terms: economic order quantity (EOQ), ordering costs, carrying costs Objective: 2 AACSB: Analytical skills 107) Video Boy has one particular product that has an annual demand of 1,000 units. Total manufacturing costs per unit total $40 and setup costs per batch are $15. Direct material ordering costs for the product total $10 per order. Currently, the carrying costs per unit are 25% of manufacturing costs. Required: Determine the economic manufacturing order quantity. Answer: The square root of [(2 × 1,000 × $25) / $10] = 70.71 units Diff: 2 Terms: economic order quantity (EOQ), ordering costs, carrying costs Objective: 3 AACSB: Analytical skills 108) Ralph was on lost most of his data. For direct material XXX he was able to recover the following: in the process of Average inventory level of XXX 200 completin Orders per year 40 g the Average daily demand 48 quarterly Working days per year 250 planning Annual ordering costs $4,000 for the Annual carrying costs $6,000 purchasin g Ralph purchases at the EOQ quantity level. departme nt when a Required: major computer Determine the annual demand, the cost of placing an order, the annual carrying cost of one unit, and the economic order malfuncti quantity. Answer: 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 Terms: economic order quantity (EOQ), ordering costs, carrying costs Objective: 2 AACSB: Analytical skills 109) 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. b. Use the economic-order-quantity model to determine the optimal order size. 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. Answer: a. The square root of [(2 × 25,000 × $80) / $25] = 400 units b. Daily demand = 25,000/250 = 100 Diff: 2 Terms: Maximum Maximum Maximum Reorder p Safety sto economic order quantity (EOQ), reorder point, safety stock Objective: 2 AACSB: Analytical skills 110) An inventory item of XYZ Manufact uring has an average daily demand of 10 units with a maximum daily demand of 12 units. The economic order quantity is 200 units. Without safety stocks, the reorder point is 50 units. Safety stocks are set at 94 units. Required: a. Determine the reorder point with safety stocks. b. Determine the maximum inventory level. c. Determine the average lead time. d. Determine the maximum lead time. Answer: a. Reorder point without safety stocks Safety stock Reorder point with safety stocks b. Economic-order quantity Safety stocks Maximum inventory level c. Average lead time = 50 units at reorder point/10 units a day = 5 days d. Reorder point with safety stocks is 144 Maximum demand is 12 Maximum lead time = 144/12 = 12 days 50 units 94 units 144 units 200 units 94 units 294 units Diff: 2 Terms: economic order quantity (EOQ), reorder point, safety stock Objective: 2 AACSB: Analytical skills 111) For salesperson who calls on the company monthly. A new purchasing agent has been hired by the company who wants to start supply using the economic-order-quantity method and its supporting decision elements. She has gathered the following item information: ABC, Andrews Annual demand in units 250 Company Days used per year 250 has been Lead time, in days 10 ordering Ordering costs $100 125 units Annual unit carrying costs $20 based on the Required: recomme ndation of Determine the EOQ, average inventory, orders per year, average daily demand, reorder point, annual ordering costs, and the annual carrying costs. Answer: 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: 2 Terms: economic order quantity (EOQ), reorder point, ordering costs, carrying costs Objective: 2 AACSB: Analytical skills 112) 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. Answer: a. The square root of [(2 × 720 × $25) / $40] = 30 units b. Current 10-unit order: Ordering costs ($25 × 720/10) Carrying costs ($100 × 0.40 × 10/2) EOQ 30-unit order: Ordering costs ($25 × 720/30) Carrying costs ($100 × 0.40 × 30/2) Annual savings 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 $1,800 200 600 600 $2,000 1,200 $ 800 Diff: 3 Terms: economic order quantity (EOQ) Objective: 3 AACSB: Analytical skills 113) The Jarvis uring and inventory system. Jarvis is considering the installation of a just-in-time inventory system to improve its cost Corporati structure. In doing a full study using its manufacturing engineering team as well as consulting with industry JIT experts on and the main vendors and suppliers of the components Jarvis uses to manufacture the bucket loader assemblies, the produces following incremental cost-benefit relevant information is available for analysis: bucket loader The Jarvis cost of investment capital hurdle rate is 15%. assemblie One time cost to rearrange the shop floor to create the manufacturing cell workstations is $275,000. s for the One time cost to retrain the existing workforce for the JIT required skills is $60,000. tractor Anticipated defect reduction is 40%. Currently there is a cost of quality defect assessment listed as $150,000 per year. industry. The setup time for each of the existing functions will be reduced by 67%. Currently the forecast for setup costs are The $225,000 per year. product Jarvis will expect to save $200,000 per year in carrying costs as a result of having a lower inventory. has a long term life The suppliers will require a 15% premium over the current level of prices in order to position themselves to supply the expectanc material on a smaller and more frequent schedule. Currently the materials purchases are $1,500,000 per year. y. Jarvis has a Required: traditional manufact Determine whether it is in the best interest of Jarvis Corporation to install a JIT system. Answer: 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 Carring 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 Terms: just-in-time (JIT) production Objective: 6 AACSB: Analytical skills 114) Vision Enterprise s manufact ures converter boxes for high definition TVs. All processin g 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: Actual conversion costs Standard materials costs per unit Standard conversion cost per unit Units produced Units sold Required: Record all journal entries for the monthly activities related to the above transactions if backflush costing is used. Answer: $435,000 115 85 7,900 7,600 To record actual conversion costs: Conversion Costs Various Accounts To record finished goods: Diff: 2 Terms: 435,000 435,000 Finished Invento Control ( Conver Cost of F Finishe backflush costing Objective: 7 AACSB: Analytical skills 115) Tornado Electronic s manufact ures stereos. All processin g 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: Actual conversion costs Standard materials costs per unit Standard conversion cost per unit Units produced Units sold Required: Record all journal entries for the monthly activities related to the above transactions if backflush costing is used. Answer: $232,000 60 140 3,200 2,800 To record actual conversion costs: Conversion Costs Various Accounts To record finished goods: Finished Goods (3,200 × $200) Accounts Payable Control (3,200 × 60) Conversion Costs Allocated (3,200 × 140) To record sale of 2,800 units: Cost of Finished Goods Sold (2,800 × 200) Finished Goods 560,000 560,000 640,000 192,000 448,000 232,000 232,000 Diff: 2 Terms: backflush costing Objective: 7 AACSB: Analytical skills 116) Corry Corporati on manufact ures filters for cars, vans, and trucks. A backflush costing system is used and standard costs for a filter are as follows: Direct materials Conversion costs Total $2.60 4.20 $6.80 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. Answer: Materials Inventory Accounts Payable Conversion Costs Various Credits Diff: 2 Terms: 8,450 8,450 13,650 13,650 Cost of G Materia Conver backflush costing Objective: 7 AACSB: Analytical skills 117) Discuss ions that should be fully taken into account when developing inventory related relevant costs for use in an economic order considerat quantity (EOQ) model. Answer: It is crucial that the costs be incremental. 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 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 Terms: economic order quantity (EOQ), ordering costs, carrying costs Objective: 2 AACSB: Reflective thinking 118) The because the cost of materials has not been in line with the budget for several periods, even after implementing an EOQ executive model. The company has the normal direct material variance computations of price and efficiency at the end of each vice month. The price variance of the direct materials used is usually near expectations. The vice president does not understand president how the budget differences are always larger than the material price variances. of Robotics, Required: Inc., is concerned What explanation can you give for the evaluation problems presented? Answer: An EOQ model does not solve all inventory related problems. The first problem is the timing of material price variance computations. They should be at the time of purchase, not at the time of usage. By changing when the variance is computed, the responsibility is placed where it should be, in purchasing, not in production. Also, the timing of when materials are used could explain the difference between the budget variances and the material price variances. Materials may be purchased in one period and not used until another period. Also, material usage may include items purchased during several previous periods. Diff: 2 Terms: inventory management, economic order quantity (EOQ) Objective: 3 AACSB: Reflective thinking 119) The operations three years ago, it had the best of everything. It had modern equipment, well-trained employees, engineered manufact work and assembly stations, and a controlled environment. During the first two years, the evaluation results were very uring good with almost all cost variances being favorable. However, recently, things have turned negative. manager of New In recent months, everything seems to be operating in a crisis management mode. Although most cost variances remain Technolo favorable, the plant's segment contribution is declining and customers are complaining about poor quality and slow gy delivery. Several customers have suggested that they may take their business elsewhere if things do not improve. Company is The shop floor is in continual turmoil. In-process inventory is everywhere, production employees have difficulty finding concerned jobs that need to be worked on, and scheduling has requested a larger computer to keep track of work in process. about the company' The vice president of sales does not know where to begin with solving the customers' problems. It seems that everyone is s newest working very hard and the plant has the best facilities and trained employees in the industry. plant. When the Required: plant began What is the nature of the plant's problems? What recommendation would you make to help improve the situation? Answer: The basic problem appears to be too much work-inprocess inventory and a lack of control over the flow of this inventory. Since the plant had two good years of production, it may be that increased demands are pushing the plant near its capacity and management has lost control of how to manage a nearcapacity situation. Although the employees are well trained and skilled in what they do, that is not enough to ensure the production process runs smoothly. All activities must be organized to be efficient. 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: 2 Terms: inventory management, material requirements planning (MRP) Objective: 4 AACSB: Communication 120) What is a supply chain, and what are the benefits of a supply chain analysis? Provide an example of these benefits. Answer: 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 customers, regardless of whether these activities occur in the same organization or in other organizations. Utilizing supply chain analysis allows companies to coordinate their activities and reduce inventories throughout the supply chain. An example of the benefits of supply chain analysis might be the emergence of supplier or vendormanaged inventories such as the relationship between Procter & Gamble and Walmart. Diff: 2 Terms: inventory management Objective: 4 AACSB: Reflective thinking 121) Kretzinge r Company makes extensive use of financial performan ce reports for each of its departme nts. Although most departme nts 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: Purchase Year 20X1 20X2 20X3 20X4 20X5 20X6 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. Quantity Used 40,000 60,000 60,000 50,000 54,000 58,000 Average Price Variance Inventory 8,000 $ 1,000 F 15,000 10,000 F 20,000 12,000 F 12,500 20,000 U 18,000 8,000 F 23,200 9,500 F c. What recommendations will improve the evaluation process? Answer: a. Year 20X1 20X2 20X3 20X4 20X5 20X6 Quantity used 40,000 60,000 60,000 50,000 54,000 58,000 divided by divided by divided by divided by divided by divided by Average inventory 8,000 15,000 20,000 12,500 18,000 23,200 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, 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 Terms: inventory management, justin-time (JIT) production Objective: 5 AACSB: Analytical skills 122) Minnesot a Ore Company mines iron ore for productio n 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. Answer: The company can probably benefit from changing to a just-in-time system for inventory control. This would allow the company to be responsive to actual needs rather than finished goods inventory building. The advantages would be: 1. Lower inventory requirements; 2. Reductions in carrying and handling costs of inventories; 3. Reduction in risks of obsolete inventories; 4. Reduction in total manufacturing costs; and 5. Reductions in paperwork. Diff: 2 Terms: inventory management, justin-time (JIT) production Objective: 5 AACSB: Reflective thinking 123) What are five features of a just-in-time manufacturing system? Answer: A just-in-time (JIT) system has many positive features. It organizes production in manufacturing cell groups which allow for all equipment used for a given product to be grouped together. This reduces material handling costs and sequences the production process. A second feature of a JIT system is that workers are trained to be multiskilled. They are trained to operate various machines as well as to do light maintenance and repairs on the machines. A third feature of JIT is that it aggressively works to eliminate defects. Because there is a tight link between the steps, defects are quickly noticed in the next step and addressed before large numbers of units become backlogged. A fourth feature of a JIT system is that it reduces setup time and manufacturing lead time. Reduced setup costs make it more practical to produce smaller batches and react faster to changes in customer demand. A fifth feature of a JIT system is the firm positive features. It organizes production in manufacturing cell groups which allow for all equipment used for a given product to be grouped together. This reduces material handling costs and sequences the production process. A second feature of a JIT system is that workers are trained to be multiskilled. They are trained to operate various machines as well as to do light maintenance and repairs on the machines. A third feature of JIT is that it aggressively works to eliminate defects. Because there is a tight link between the steps, defects are quickly noticed in the next step and addressed before large numbers of units become backlogged. A fourth feature of a JIT system is that it reduces setup time and manufacturing lead time. Reduced setup costs make it more practical to produce smaller batches and react faster to changes in customer demand. A fifth feature of a JIT system is the firm only uses suppliers who are capable of in manufacturing cell groups which allow for all equipment used for a given product to be grouped together. This reduces material handling costs and sequences the production process. A second feature of a JIT system is that workers are trained to be multiskilled. They are trained to operate various machines as well as to do light maintenance and repairs on the machines. A third feature of JIT is that it aggressively works to eliminate defects. Because there is a tight link between the steps, defects are quickly noticed in the next step and addressed before large numbers of units become backlogged. A fourth feature of a JIT system is that it reduces setup time and manufacturing lead time. Reduced setup costs make it more practical to produce smaller batches and react faster to changes in customer demand. A fifth feature of a JIT system is the firm only uses suppliers who are capable of meeting delivery demands in a timely allow for all equipment used for a given product to be grouped together. This reduces material handling costs and sequences the production process. A second feature of a JIT system is that workers are trained to be multiskilled. They are trained to operate various machines as well as to do light maintenance and repairs on the machines. A third feature of JIT is that it aggressively works to eliminate defects. Because there is a tight link between the steps, defects are quickly noticed in the next step and addressed before large numbers of units become backlogged. A fourth feature of a JIT system is that it reduces setup time and manufacturing lead time. Reduced setup costs make it more practical to produce smaller batches and react faster to changes in customer demand. A fifth feature of a JIT system is the firm only uses suppliers who are capable of meeting delivery demands in a timely fashion. This also causes an increase in given product to be grouped together. This reduces material handling costs and sequences the production process. A second feature of a JIT system is that workers are trained to be multiskilled. They are trained to operate various machines as well as to do light maintenance and repairs on the machines. A third feature of JIT is that it aggressively works to eliminate defects. Because there is a tight link between the steps, defects are quickly noticed in the next step and addressed before large numbers of units become backlogged. A fourth feature of a JIT system is that it reduces setup time and manufacturing lead time. Reduced setup costs make it more practical to produce smaller batches and react faster to changes in customer demand. A fifth feature of a JIT system is the firm only uses suppliers who are capable of meeting delivery demands in a timely fashion. This also causes an increase in the quality of the goods being received This reduces material handling costs and sequences the production process. A second feature of a JIT system is that workers are trained to be multiskilled. They are trained to operate various machines as well as to do light maintenance and repairs on the machines. A third feature of JIT is that it aggressively works to eliminate defects. Because there is a tight link between the steps, defects are quickly noticed in the next step and addressed before large numbers of units become backlogged. A fourth feature of a JIT system is that it reduces setup time and manufacturing lead time. Reduced setup costs make it more practical to produce smaller batches and react faster to changes in customer demand. A fifth feature of a JIT system is the firm only uses suppliers who are capable of meeting delivery demands in a timely fashion. This also causes an increase in the quality of the goods being received by the firm. Diff: 2 Terms: just-in-time (JIT) production Objective: 6 AACSB: Reflective thinking 124) Backflush does not strictly adhere to generally accepted accounting principles. Explain why. Also, describe the types of businesses costing that might use backflush costing. Answer: The principal reason why backflush costing does not strictly adhere to GAAP is that the work-in-process accounts are not recognized in the accounting records. Work in process consists of unfinished goods. Substantial business resources were dedicated to their production, and should be recognized in the accounts as an asset. This approach to costing is usually used by companies that adopt JIT production methods. While not totally devoid of inventories, such companies seek to minimize inventories thus minimizing the problems associated with no work-inprocess accounts. 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 Terms: backflush costing Objective: 8 AACSB: Reflective thinking 125) What are the principles of lean accounting? Are there any limitations? Discuss. Answer: 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 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 Terms: lean accounting Objective: 9 AACSB: Reflective thinking ...
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