Business Quiz: Inventory Management
Questions and Answers
- 1.
Which of the following statements is most accurate about inventory management?
- A.
Inventories and production must be managed together
- B.
Inventory is not important at the production planning level
- C.
Inventories are usually insignificant on the balance sheet
- D.
Inventory does not cost much to carry
Correct Answer
A. Inventories and production must be managed togetherExplanation
Inventories and production must be managed together because the level of inventory directly affects the production process. If there is too much inventory, it can lead to increased carrying costs and risk of obsolescence. On the other hand, if there is too little inventory, it can result in stockouts and lost sales. Therefore, effective inventory management requires coordination and integration with production planning to ensure the right level of inventory is maintained to meet customer demand while minimizing costs.Rate this question:
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- 2.
What is the name of materials used in the production process that do not become part of the product?
- A.
Raw materials
- B.
Work in process
- C.
Finished goods
- D.
Maintenance, repair, and operating supplies
Correct Answer
D. Maintenance, repair, and operating suppliesExplanation
Maintenance, repair, and operating supplies are materials used in the production process that do not become part of the final product. These supplies are used for the maintenance and repair of equipment, as well as for day-to-day operations of the production facility. Unlike raw materials, work in process, and finished goods, maintenance, repair, and operating supplies are not transformed into the final product but are necessary for the smooth functioning of the production process.Rate this question:
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- 3.
What is the name given to inventories of items that are purchased or manufactured in quantities greater than needed immediately?
- A.
Fluctuation inventory
- B.
Lot size inventory
- C.
Transportation inventory
- D.
Scheduled receipts
Correct Answer
B. Lot size inventoryExplanation
Lot size inventory refers to inventories of items that are purchased or manufactured in quantities greater than needed immediately. This type of inventory is commonly used to take advantage of economies of scale in production or purchasing, where ordering or producing in larger quantities can result in lower costs per unit. By ordering or producing in larger batches, companies can reduce setup or ordering costs, minimize production downtime, and optimize transportation and storage costs. Lot size inventory helps to balance the trade-off between carrying costs and ordering or setup costs, ultimately improving efficiency and cost-effectiveness in inventory management.Rate this question:
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- 4.
Which of the following comapny objectives are in conflict?
- A.
Maximum customer service and low-cost plant operation
- B.
Low-cost plant operation and cash flow
- C.
Maximum inventory investment and customer service
- D.
Cash flow and profitability
Correct Answer
A. Maximum customer service and low-cost plant operationExplanation
The objective of maximum customer service focuses on providing the best possible service to customers, which may involve additional costs such as hiring more staff or using premium materials. On the other hand, the objective of low-cost plant operation aims to minimize expenses and maximize efficiency, which may involve cutting down on certain services or using cheaper materials. These two objectives are in conflict because maximizing customer service may require higher costs, while low-cost plant operation aims to minimize expenses.Rate this question:
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- 5.
Which of the following costs will increase if order quantity is increased?
- A.
Annual cost of carrying inventory
- B.
Cost of ordering
- C.
Cost of manufacturing operations
- D.
Cost of customer service
Correct Answer
A. Annual cost of carrying inventoryExplanation
If the order quantity is increased, the annual cost of carrying inventory will also increase. This is because carrying inventory for a longer period of time requires additional storage space and maintenance, which in turn leads to higher costs. Additionally, an increased order quantity may result in a higher risk of obsolescence or damage to the inventory, further increasing the annual carrying cost.Rate this question:
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- 6.
Which of the following are costs of carrying inventory?
- A.
Capital costs and production control costs
- B.
Capital costs and storage costs
- C.
Production control costs and purchase costs
- D.
Storage costs and purchasing costs
Correct Answer
B. Capital costs and storage costsExplanation
The costs of carrying inventory include capital costs and storage costs. Capital costs refer to the expenses incurred for financing the inventory, such as interest on loans or the opportunity cost of capital tied up in inventory. Storage costs, on the other hand, encompass the expenses related to storing and maintaining inventory, such as rent, utilities, insurance, and security. Both capital costs and storage costs are essential components of the total cost of carrying inventory.Rate this question:
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- 7.
Which of the following are considered order costs?
- A.
Production control costs
- B.
Capital costs
- C.
Risk costs
- D.
Obsolescence costs
Correct Answer
A. Production control costsExplanation
Production control costs are considered order costs because they are directly related to the process of managing and controlling the production of goods or services. These costs include expenses associated with planning, scheduling, and coordinating production activities, such as labor costs for production supervisors, software or systems for production planning, and costs of implementing quality control measures. These costs are incurred to ensure that production orders are executed efficiently and effectively, making them an essential part of the overall cost of fulfilling customer orders.Rate this question:
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- 8.
Which of the folloiwng equations is correct?
- A.
Assets = Liabilities - Owners' Equity
- B.
Income = Revenue - Liabilities
- C.
Owners' Equity = Assets - Liabilities
- D.
Revenue = Cost of Goods Sold - General and Administrative Expenses
Correct Answer
C. Owners' Equity = Assets - LiabilitiesExplanation
This equation is correct because it represents the fundamental accounting equation, which states that the owners' equity is equal to the assets minus the liabilities. This equation shows the relationship between what the company owns (assets) and what it owes (liabilities), and the remaining value is the owners' equity, which represents the net worth of the business.Rate this question:
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- 9.
If the annual cost of goods sold is $10 million and the average inventory is $2.5 million, what is the turns ratio?
- A.
$7.5 million
- B.
.25
- C.
2.5
- D.
4
Correct Answer
D. 4Explanation
The turns ratio is calculated by dividing the cost of goods sold by the average inventory. In this case, the cost of goods sold is $10 million and the average inventory is $2.5 million. Therefore, the turns ratio is 4, as $10 million divided by $2.5 million equals 4.Rate this question:
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- 10.
Which of the following costs is relevant to inventory management decisions?
- A.
Run costs
- B.
Storage costs
- C.
Marketing costs
- D.
New product development costs
Correct Answer
B. Storage costsExplanation
Storage costs are relevant to inventory management decisions because they directly impact the overall cost of holding inventory. These costs include expenses such as rent, utilities, insurance, and labor associated with storing and maintaining inventory. By considering storage costs, businesses can make informed decisions about the optimal level of inventory to hold, balancing the cost of holding excess inventory against the risk of stockouts. Additionally, storage costs are essential for determining the economic order quantity (EOQ) and setting appropriate inventory levels to minimize costs and maximize efficiency.Rate this question:
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