CHAPTER 9
DISCUSSION QUESTIONS
Q9-1. The most frequently used documents in the Q9-8. The decision concerning how much to order
procurement and use of materials are pur- or produce at a given time involves a compro-
chase requisitions, purchase orders, receiv- mise between inventory carrying costs and
ing reports, materials requisitions, bills of ordering or setup costs. Examples of inven-
materials, and materials ledger records. tory carrying costs are: interest on the money
Q9-2. The invoice should be routed to the invested in inventories that could have been
Accounting Department immediately upon invested elsewhere, property tax and insur-
receipt. A copy of the purchase order and a ance, warehousing or storage, handling, dete-
copy of the receiving report with an inspection rioration, and obsolescence. Ordering costs
report should be compared by the accounting include the cost of preparing the requisition
clerk. When the invoice is found to be correct and purchase order, receiving the order, and
in all aspects or has been adjusted for errors accounting for the order. Setup costs involve
or rejects, the accounting clerk approves the the costs of setting up equipment to make the
invoice, attaches it to the underlying docu- actual production runs. For all these costs,
ments if they are in hard-copy form, and only those that vary with activity are relevant
sends these documents to another clerk for to the EOQ model.
the preparation of the voucher. Q9-9. The consequences of maintaining inadequate
Q9-3. Inventoriable cost should include all costs inventory levels include higher purchasing,
incurred to get the product ready for sale to the handling, and transportation costs, loss of
customer. It includes not only the net purchase quantity discounts, production disruptions,
price but also the other associated costs, inflation-related price increases when pur-
such as freight-in, incurred up to the time chases are deferred, and lost sales and cus-
products are ready for sale to the customer. tomer goodwill.
Q9-4. No, administration costs are assumed to Measurement of the costs of lost orders
expire with the passage of time and do not and lost repeat business is not easy because
attach to the product. Furthermore, adminis- measurement may be largely subjective. On
trative costs do not relate directly to invento- the other hand, the other factors listed can be
ries, but are incurred for the benefit of all measured with fair certainty and greater ease.
functions of the business. Q9-10. In computing optimum production run size, CO
Q9-5. The three key questions to answer in design- represents an estimate of the setup cost and
ing an inventory control system are: CU is the variable manufacturing cost per unit.
(a) how much to order—economic order Q9-11. (a) The order point is the low point of stock
quantity level that, when reached, means a
(b) when to order—order point replenishing order should be placed.
(c) safety stock required (b) Lead time is the interval between placing
Q9-6. The firm benefits from these techniques by an order and delivery of the ordered
having a consistent, standardized approach goods.
to its inventory management. Inventory costs (c) Safety stock is the minimum inventory
and service to customers will be optimally that provides a cushion against reason-
balanced. ably expected maximum demands and
Q9-7. The purpose of an economic order quantity against variations in lead time.
model is to determine the optimum quantity Q9-12. Materials requirements planning (MRP) is a
to order or produce when filling inventory computer simulation that integrates each
needs. The optimum quantity is defined as product’s bill of materials, inventory status,
that quantity that minimizes the cost of inven- and manufacturing process into a feasible
tory management. production plan.
9-1
,9-2 Chapter 9
Q9-13. Effective utilization of capital, which includes Q9-16. Appendix The average cost method assumes
investment in inventory, is the responsibility of that each batch taken from the
general management; therefore, the primary storeroom is composed of uniform
interest is in financial control. Although gen- quantities from each shipment in
eral or top-level management is interested in stock at the date of issue. The fifo
providing customers with good products and method is based on the assumption
services, the scheduling of production that the first goods received are the
involves unit control primarily and is the first issued. The lifo method is
responsibility of production and purchasing based on the assumption that the
departments. latest goods received are the first
Q9-14. In the control of materials, the opposing issued.
needs are the maintenance of an inventory of Q9-17. Appendix In an inflationary economy, lifo pro-
sufficient size and diversity for efficient opera- vides a better matching of current
tions, and the maintenance of an investment costs with current revenue
in inventory at a level that will maximize earn- because costs of inventory issued
ings and minimize costs. are at more recent purchase
Q9-15. When a relatively few materials items account prices. Net cash inflow is generally
for a considerable portion of total inventory increased because taxable income
investment, selective control is indicated. is generally decreased, resulting in
High value items would be under tight control, payment of lower income tax.
while low-value items would be under simple Q9-18. Appendix Fifo. The higher costs of the earlier
physical controls. purchases would be charged
Automatic control refers to ordering when a against cost of goods sold.
materials record shows that the balance on CGA-Canada (adapted). Reprint with permission.
hand has dropped to the order point. At this Q9-19. Appendix (a) fifo
time, the quantity to order is automatic, hav- (b) fifo
ing been determined by balancing the cost to (c) fifo
order with the cost to carry inventory. (d) lifo
Automatic control is most effective in compa- (e) fifo
nies that use an EDP system. (f) lifo
CGA-Canada (adapted). Reprint with permission.
, Chapter 9 9-3
EXERCISES
E9-1
(1) Freight allocated to materials based on cost:
$280 = $.016 per dollar of cost
$17,500
Part A: $ 8,600 × $.016 = $137.60
Part B: 5,060 × .016 = 80.96
Part C: 3,840 × .016 = 61.44
$17,500 $280.00
(2) Freight allocated to materials based on shipping weight:
$280 = $.20
1 400 kilograms
Part A: 630kg × $.20 = $126
Part B: 440 × .20 = 88
Part C: 330 × .20 = 66
1 400kg $280
E9-2 Units
September production ................................................. 4,200
October production ...................................................... 4,400
November production .................................................. 4,700
Desired Inventory, November 30 ................................. 3,600
Total to be provided ............................................ 16,900
Quantity on hand, September 1 .................................. 4,400
On order for September delivery ................................ 3,600
On order for October delivery ..................................... 4,500 12,500
Quantity to order for November delivery ................... 4,400
DISCUSSION QUESTIONS
Q9-1. The most frequently used documents in the Q9-8. The decision concerning how much to order
procurement and use of materials are pur- or produce at a given time involves a compro-
chase requisitions, purchase orders, receiv- mise between inventory carrying costs and
ing reports, materials requisitions, bills of ordering or setup costs. Examples of inven-
materials, and materials ledger records. tory carrying costs are: interest on the money
Q9-2. The invoice should be routed to the invested in inventories that could have been
Accounting Department immediately upon invested elsewhere, property tax and insur-
receipt. A copy of the purchase order and a ance, warehousing or storage, handling, dete-
copy of the receiving report with an inspection rioration, and obsolescence. Ordering costs
report should be compared by the accounting include the cost of preparing the requisition
clerk. When the invoice is found to be correct and purchase order, receiving the order, and
in all aspects or has been adjusted for errors accounting for the order. Setup costs involve
or rejects, the accounting clerk approves the the costs of setting up equipment to make the
invoice, attaches it to the underlying docu- actual production runs. For all these costs,
ments if they are in hard-copy form, and only those that vary with activity are relevant
sends these documents to another clerk for to the EOQ model.
the preparation of the voucher. Q9-9. The consequences of maintaining inadequate
Q9-3. Inventoriable cost should include all costs inventory levels include higher purchasing,
incurred to get the product ready for sale to the handling, and transportation costs, loss of
customer. It includes not only the net purchase quantity discounts, production disruptions,
price but also the other associated costs, inflation-related price increases when pur-
such as freight-in, incurred up to the time chases are deferred, and lost sales and cus-
products are ready for sale to the customer. tomer goodwill.
Q9-4. No, administration costs are assumed to Measurement of the costs of lost orders
expire with the passage of time and do not and lost repeat business is not easy because
attach to the product. Furthermore, adminis- measurement may be largely subjective. On
trative costs do not relate directly to invento- the other hand, the other factors listed can be
ries, but are incurred for the benefit of all measured with fair certainty and greater ease.
functions of the business. Q9-10. In computing optimum production run size, CO
Q9-5. The three key questions to answer in design- represents an estimate of the setup cost and
ing an inventory control system are: CU is the variable manufacturing cost per unit.
(a) how much to order—economic order Q9-11. (a) The order point is the low point of stock
quantity level that, when reached, means a
(b) when to order—order point replenishing order should be placed.
(c) safety stock required (b) Lead time is the interval between placing
Q9-6. The firm benefits from these techniques by an order and delivery of the ordered
having a consistent, standardized approach goods.
to its inventory management. Inventory costs (c) Safety stock is the minimum inventory
and service to customers will be optimally that provides a cushion against reason-
balanced. ably expected maximum demands and
Q9-7. The purpose of an economic order quantity against variations in lead time.
model is to determine the optimum quantity Q9-12. Materials requirements planning (MRP) is a
to order or produce when filling inventory computer simulation that integrates each
needs. The optimum quantity is defined as product’s bill of materials, inventory status,
that quantity that minimizes the cost of inven- and manufacturing process into a feasible
tory management. production plan.
9-1
,9-2 Chapter 9
Q9-13. Effective utilization of capital, which includes Q9-16. Appendix The average cost method assumes
investment in inventory, is the responsibility of that each batch taken from the
general management; therefore, the primary storeroom is composed of uniform
interest is in financial control. Although gen- quantities from each shipment in
eral or top-level management is interested in stock at the date of issue. The fifo
providing customers with good products and method is based on the assumption
services, the scheduling of production that the first goods received are the
involves unit control primarily and is the first issued. The lifo method is
responsibility of production and purchasing based on the assumption that the
departments. latest goods received are the first
Q9-14. In the control of materials, the opposing issued.
needs are the maintenance of an inventory of Q9-17. Appendix In an inflationary economy, lifo pro-
sufficient size and diversity for efficient opera- vides a better matching of current
tions, and the maintenance of an investment costs with current revenue
in inventory at a level that will maximize earn- because costs of inventory issued
ings and minimize costs. are at more recent purchase
Q9-15. When a relatively few materials items account prices. Net cash inflow is generally
for a considerable portion of total inventory increased because taxable income
investment, selective control is indicated. is generally decreased, resulting in
High value items would be under tight control, payment of lower income tax.
while low-value items would be under simple Q9-18. Appendix Fifo. The higher costs of the earlier
physical controls. purchases would be charged
Automatic control refers to ordering when a against cost of goods sold.
materials record shows that the balance on CGA-Canada (adapted). Reprint with permission.
hand has dropped to the order point. At this Q9-19. Appendix (a) fifo
time, the quantity to order is automatic, hav- (b) fifo
ing been determined by balancing the cost to (c) fifo
order with the cost to carry inventory. (d) lifo
Automatic control is most effective in compa- (e) fifo
nies that use an EDP system. (f) lifo
CGA-Canada (adapted). Reprint with permission.
, Chapter 9 9-3
EXERCISES
E9-1
(1) Freight allocated to materials based on cost:
$280 = $.016 per dollar of cost
$17,500
Part A: $ 8,600 × $.016 = $137.60
Part B: 5,060 × .016 = 80.96
Part C: 3,840 × .016 = 61.44
$17,500 $280.00
(2) Freight allocated to materials based on shipping weight:
$280 = $.20
1 400 kilograms
Part A: 630kg × $.20 = $126
Part B: 440 × .20 = 88
Part C: 330 × .20 = 66
1 400kg $280
E9-2 Units
September production ................................................. 4,200
October production ...................................................... 4,400
November production .................................................. 4,700
Desired Inventory, November 30 ................................. 3,600
Total to be provided ............................................ 16,900
Quantity on hand, September 1 .................................. 4,400
On order for September delivery ................................ 3,600
On order for October delivery ..................................... 4,500 12,500
Quantity to order for November delivery ................... 4,400
