(a) The economic order quantity (EOQ) formula was developed on the basis of the following assumptions: 1. Demand occurs at a constant rate throughout the year and is known with certainty. 2. Lead-time on the receipt of orders is constant. 3. The entire quantity ordered is received at one time. 4. The unit costs of the items ordered are constant; thus, there can be no quantity discounts. 5. There are no limitations on the size of the inventory. Answer (a) is correct because it is assumption 1. Answer (b) is incorrect because it contradicts assumption 5. Answers (c) and (d) are incorrect because they are the opposite of assumption 4.
(a) The requirement is to identify the impact of inventory levels on costs. Maintaining a low level of inventory requires that many smaller orders of inventory be made in order to satisfy customer demand. Answer (a) is correct because each order incurs ordering cost and as the quantity of orders increases the ordering costs will also increase. Answer (b) is incorrect because carrying costs are higher with a higher level of inventory. Answer (c) is incorrect because although the ordering costs are higher the carrying costs are lower. Answer (d) is incorrect because the ordering costs would be higher.
(d) The requirement is to identify an inventory carrying cost. The correct answer is (d). Part of the cost of holding inventory is the cost of obsolescence. Answer (a) is an example of a stockout cost. Answer (a) is a stock-out cost. Answer (b) and (c) are examples of ordering costs.
(d) The requirement is to identify the characteristic of JIT inventory systems. Answer (d) is correct because JIT systems rely on quality materials; otherwise production shutdowns will occur because no extra materials are available. Answer (a) is incorrect because there are no safety stocks in JIT systems. Answer (b) is incorrect because JIT is applicable to all size corporations. Answer (c) is incorrect because JIT generally is applied all along the supply chain.
(d) The requirement is to identify the factor not used in the economic order quantity formula. Answer (d) is correct because the volume of products in inventory is not a component of the economic order quantity formula. Answers (a), (b), and (c) are incorrect because they are all components of the EOQ formula.
(b) The requirement is to determine the factor that would increase inventory levels. In answering this question, you should consider the components of the EOQ formula. The correct answer is (b) because if the cost of holding inventory decreases it would enable the firm to carry more inventory. Answer (a) is incorrect because a decrease in sales would result in a decrease in the required level of inventory. Answer (c) is incorrect because a decrease in sales variability decreases the required level of inventory. Answer (d) is incorrect because a decrease in the cost of running out of stock decreases the required level of inventory.
(a) The requirement is to identify the technique used to plan and control manufacturing inventories. Answer (a) is correct because materials requirements planning is an inventory planning technique. Answer (b) is incorrect because regression analysis is a technique used to estimate the relationship between variables. Answer (c) is incorrect because capital budgeting is a technique used to evaluate investments in capital assets. Answer (d) is incorrect because linear programming is a technique used to determine the optimal decision when resources are constrained.
(a) The requirement is to determine the effect on an audit report of a client’s decision to use differing inventory costing methods for various portions of its inventory. Answer (a) is correct because a standard unmodified opinion may ordinarily be issued (see AU-C 708 for a discussion of the consistency standard). Answer (b) is incorrect because there is no lack of consistency between accounting periods. Answer (c) is incorrect because there is no departure from GAAP. Answer (d) is incorrect because adverse opinions are only issued when a departure from GAAP exists that makes the financial statements misleading.
Answer (C) is correct. The economic order quantity (EOQ) model is a mathematical tool for determining the order quantity that minimizes the sum of ordering costs and carrying costs. The following assumptions underlay the EOQ model: (1) Demand is uniform; (2) Order (setup) costs and carrying costs are constant; and (3) No quantity discounts are allowed.
Choice "c" is correct. A decrease in carrying costs would increase the Economic Order Quantity (EOQ). Order size Annual Sales quantity in units Cost per purchase Order Annual cost of Carrying one unit in stock for one year Order size gets larger as "S" or "0" gets bigger (numerator) or as "C" gets smaller (denominator).
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