Cost Accounting: A Managerial Emphasis, 16e (Horngren)
Chapter 20 Inventory Management, Just-in-Time, and Simplified
Costing Methods
20.1 Objective 20.1
1) Among different types of costs associated with inventory, the costs of obtaining purchase
approvals are ________.
A) purchasing costs
B) ordering costs
C) stockout costs
D) carrying costs
Answer: B
Diff: 2
Objective: 1
AACSB: Analytical thinking
2) Among different types of costs associated with inventory, the incoming freight charges of
inventories are ________.
A) purchasing costs
B) ordering costs
C) stockout costs
D) carrying costs
Answer: A
Diff: 2
Objective: 1
AACSB: Analytical thinking
3) Among different types of costs associated with inventory, the opportunity cost of the
investment tied up in inventory is a(n) ________.
A) purchasing cost
B) ordering cost
C) stockout cost
D) carrying cost
Answer: D
Diff: 2
Objective: 1
AACSB: Analytical thinking
4) 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
Objective: 1
AACSB: Analytical thinking
,5) 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
Objective: 1
AACSB: Analytical thinking
6) Which of the following is the best definition of inventory management?
A) planning and control of the flow inventory into and through an organization
B) planning, coordinating, and controlling activities related to the flow of inventory into,
through, and out of an organization
C) planning and coordinating activities related to the flow of inventory into and through an
organization
D) planning, coordinating, and control of inventory into an organization
Answer: B
Diff: 2
Objective: 1
AACSB: Analytical thinking
7) Which of the following statements is true of costs associated with goods for sale?
A) Appraisal costs is a subcategory of shrinkage costs.
B) Special processing costs are always part of purchasing costs.
C) Opportunity costs are not recorded in the accounting system.
D) Stockout costs are costs that arise when a company runs out of a particular item for
which there is no customer demand.
Answer: C
Diff: 2
Objective: 1
AACSB: Analytical thinking
8) Among different types of costs associated with inventory, four categories of quality costs
are ________.
A) control costs, inspection costs, internal failure costs, and external failure costs
B) prevention costs, inspection costs, internal failure costs, and external failure costs
C) prevention costs, appraisal costs, internal failure costs, and external failure costs
D) prevention costs, control costs, internal failure costs, and external failure costs
Answer: C
Diff: 2
Objective: 1
AACSB: Analytical thinking
,9) Which of the following statements is true of costs associated with goods for sale?
A) Information-gathering technology increases the reliability and timeliness of inventory
information and increases the costs related to inventory.
B) Opportunity costs are not recorded in financial accounting systems because they are not
a significant component in several cost categories.
C) Purchasing costs include incoming freight costs and are reduced by discounts
D) Opportunity costs are recorded in financial accounting systems but are a not significant
component in several cost categories.
Answer: C
Diff: 2
Objective: 1
AACSB: Analytical thinking
10) Carrying costs only include those costs that are entered into the financial accounting
system and do not include the opportunity cost of the investment tied up in inventory.
Answer: FALSE
Explanation: Opportunity costs associated with holding inventory are included in the
concept of carrying costs.
Diff: 2
Objective: 1
AACSB: Analytical thinking
11) Inventory management is the planning, organizing, and controlling activities that focus
on the flow of materials into, through, and out of the organization.
Answer: TRUE
Diff: 1
Objective: 1
AACSB: Analytical thinking
12) Purchasing costs arise in preparing and issuing purchase orders, receiving and
inspecting the items included in the orders, and matching invoices received, purchase
orders, and delivery records to make payments.
Answer: FALSE
Explanation: Ordering costs arise in preparing and issuing purchase orders, receiving and
inspecting the items included in the orders, and matching invoices received, purchase
orders, and delivery records to make payments.
Diff: 2
Objective: 1
AACSB: Analytical thinking
13) The opportunity cost of the stockout is the lost revenue on the sale not made plus any
lost revenue on future sales due to customer ill will.
Answer: FALSE
Explanation: The opportunity cost of the stockout is the lost contribution margin on the
sale not made plus any contribution margin lost on future sales due to customer ill will.
Diff: 2
Objective: 1
AACSB: Analytical thinking
, 14) Stockout costs arise when an organization experiences an ability to deliver its goods to
its customers.
Answer: FALSE
Explanation: Stockout costs are costs that arise when a company runs out of a particular
item for which there is customer demand.
Diff: 1
Objective: 1
AACSB: Application of knowledge
15) Shrinkage is measured by adding (a) the cost of the inventory recorded on the books in
the absence of theft and other incidents just mentioned, and (b) the cost of inventory when
physically counted.
Answer: FALSE
Explanation: Shrinkage is measured by the difference between (a) the cost of the inventory
recorded on the books in the absence of theft and other incidents just mentioned, and (b)
the cost of inventory when physically counted.
Diff: 2
Objective: 1
AACSB: Analytical thinking
16) Freight in charges forms part of purchasing costs of inventory.
Answer: TRUE
Diff: 1
Objective: 1
AACSB: Analytical thinking
17) 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: 1
Objective: 1
AACSB: Analytical thinking
Chapter 20 Inventory Management, Just-in-Time, and Simplified
Costing Methods
20.1 Objective 20.1
1) Among different types of costs associated with inventory, the costs of obtaining purchase
approvals are ________.
A) purchasing costs
B) ordering costs
C) stockout costs
D) carrying costs
Answer: B
Diff: 2
Objective: 1
AACSB: Analytical thinking
2) Among different types of costs associated with inventory, the incoming freight charges of
inventories are ________.
A) purchasing costs
B) ordering costs
C) stockout costs
D) carrying costs
Answer: A
Diff: 2
Objective: 1
AACSB: Analytical thinking
3) Among different types of costs associated with inventory, the opportunity cost of the
investment tied up in inventory is a(n) ________.
A) purchasing cost
B) ordering cost
C) stockout cost
D) carrying cost
Answer: D
Diff: 2
Objective: 1
AACSB: Analytical thinking
4) 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
Objective: 1
AACSB: Analytical thinking
,5) 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
Objective: 1
AACSB: Analytical thinking
6) Which of the following is the best definition of inventory management?
A) planning and control of the flow inventory into and through an organization
B) planning, coordinating, and controlling activities related to the flow of inventory into,
through, and out of an organization
C) planning and coordinating activities related to the flow of inventory into and through an
organization
D) planning, coordinating, and control of inventory into an organization
Answer: B
Diff: 2
Objective: 1
AACSB: Analytical thinking
7) Which of the following statements is true of costs associated with goods for sale?
A) Appraisal costs is a subcategory of shrinkage costs.
B) Special processing costs are always part of purchasing costs.
C) Opportunity costs are not recorded in the accounting system.
D) Stockout costs are costs that arise when a company runs out of a particular item for
which there is no customer demand.
Answer: C
Diff: 2
Objective: 1
AACSB: Analytical thinking
8) Among different types of costs associated with inventory, four categories of quality costs
are ________.
A) control costs, inspection costs, internal failure costs, and external failure costs
B) prevention costs, inspection costs, internal failure costs, and external failure costs
C) prevention costs, appraisal costs, internal failure costs, and external failure costs
D) prevention costs, control costs, internal failure costs, and external failure costs
Answer: C
Diff: 2
Objective: 1
AACSB: Analytical thinking
,9) Which of the following statements is true of costs associated with goods for sale?
A) Information-gathering technology increases the reliability and timeliness of inventory
information and increases the costs related to inventory.
B) Opportunity costs are not recorded in financial accounting systems because they are not
a significant component in several cost categories.
C) Purchasing costs include incoming freight costs and are reduced by discounts
D) Opportunity costs are recorded in financial accounting systems but are a not significant
component in several cost categories.
Answer: C
Diff: 2
Objective: 1
AACSB: Analytical thinking
10) Carrying costs only include those costs that are entered into the financial accounting
system and do not include the opportunity cost of the investment tied up in inventory.
Answer: FALSE
Explanation: Opportunity costs associated with holding inventory are included in the
concept of carrying costs.
Diff: 2
Objective: 1
AACSB: Analytical thinking
11) Inventory management is the planning, organizing, and controlling activities that focus
on the flow of materials into, through, and out of the organization.
Answer: TRUE
Diff: 1
Objective: 1
AACSB: Analytical thinking
12) Purchasing costs arise in preparing and issuing purchase orders, receiving and
inspecting the items included in the orders, and matching invoices received, purchase
orders, and delivery records to make payments.
Answer: FALSE
Explanation: Ordering costs arise in preparing and issuing purchase orders, receiving and
inspecting the items included in the orders, and matching invoices received, purchase
orders, and delivery records to make payments.
Diff: 2
Objective: 1
AACSB: Analytical thinking
13) The opportunity cost of the stockout is the lost revenue on the sale not made plus any
lost revenue on future sales due to customer ill will.
Answer: FALSE
Explanation: The opportunity cost of the stockout is the lost contribution margin on the
sale not made plus any contribution margin lost on future sales due to customer ill will.
Diff: 2
Objective: 1
AACSB: Analytical thinking
, 14) Stockout costs arise when an organization experiences an ability to deliver its goods to
its customers.
Answer: FALSE
Explanation: Stockout costs are costs that arise when a company runs out of a particular
item for which there is customer demand.
Diff: 1
Objective: 1
AACSB: Application of knowledge
15) Shrinkage is measured by adding (a) the cost of the inventory recorded on the books in
the absence of theft and other incidents just mentioned, and (b) the cost of inventory when
physically counted.
Answer: FALSE
Explanation: Shrinkage is measured by the difference between (a) the cost of the inventory
recorded on the books in the absence of theft and other incidents just mentioned, and (b)
the cost of inventory when physically counted.
Diff: 2
Objective: 1
AACSB: Analytical thinking
16) Freight in charges forms part of purchasing costs of inventory.
Answer: TRUE
Diff: 1
Objective: 1
AACSB: Analytical thinking
17) 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: 1
Objective: 1
AACSB: Analytical thinking
