Chapter 20 Inventory Management, Just-in-Time, and Simplified Costing Methods
Objective 20.1
1) Which of the following industries would have the highest cost of goods sold percentage relative to
sales?
A) computer manufacturers
B) retail organizations
C) drug manufacturers
D) The percentage will usually depend on the success of a particular company.
Answer: B
Diff: 2
Terms: inventory management
Objective: 1
AACSB: Reflective thinking
2) The costs of goods acquired from suppliers including incoming freight or transportation costs are:
A) purchasing costs
B) ordering costs
C) stockout costs
D) carrying costs
Answer: A
Diff: 2
Terms: purchasing costs
Objective: 1
AACSB: Reflective thinking
3) The costs of preparing, issuing, and paying purchase orders, plus receiving and inspecting the items
included in orders is:
A) purchasing costs
B) ordering costs
C) stockout costs
D) carrying costs
Answer: B
Diff: 2
Terms: ordering costs
Objective: 1
AACSB: Reflective thinking
1
Copyright © 2012 Pearson Education, Inc.
,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
Terms: shrinkage
Objective: 1
AACSB: Reflective 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
Terms: stockout costs
Objective: 1
AACSB: Reflective thinking
6) 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 costs
D) design costs
Answer: B
Diff: 2
Terms: stockout costs
Objective: 1
AACSB: Reflective thinking
7) The costs that result when a company holds an inventory of goods for sale:
A) purchasing costs
B) carrying costs
C) opportunity costs
D) interest costs
Answer: B
Diff: 2
Terms: stockout costs
Objective: 1
AACSB: Reflective thinking
2
Copyright © 2012 Pearson Education, Inc.
,8) Quality costs include:
A) purchasing costs
B) ordering costs
C) stockout costs
D) prevention costs
Answer: D
Diff: 2
Terms: quality costs
Objective: 1
AACSB: Reflective thinking
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) 20,800 units
Orders per year 20
Lead time in days 15 days
Cost of placing an order $100
9) What is the reorder point?
A) 1,040 units
B) 857 units
C) 1,560 units
D) 2,080 units
Answer: B
Explanation: B) 20,800/52 = 400/7 = 57.14 daily demand × 15 = 857.1
Diff: 2
Terms: reorder point
Objective: 1
AACSB: Analytical skills
10) 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
11) Inventory management is the planning, organizing, and controlling activities that focus on the flow
of materials into, through, and from the organization.
Answer: TRUE
Diff: 2
Terms: inventory management
Objective: 1
AACSB: Analytical skills
3
Copyright © 2012 Pearson Education, Inc.
, 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
Terms: purchasing costs
Objective: 1
AACSB: Analytical skills
13) The opportunity cost of the stockout includes lost contribution margin on the sale NOT made plus
any contribution margin lost on future sales due to customer ill will.
Answer: TRUE
Diff: 2
Terms: stockout costs
Objective: 1
AACSB: Analytical skills
14) 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
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
Terms: shrinkage
Objective: 1
AACSB: Analytical skills
16) Shrinkage costs result from theft by outsiders, embezzlement by employees, misclassifications, and
clerical errors.
Answer: TRUE
Diff: 2
Terms: shrinkage
Objective: 1
AACSB: Analytical skills
4
Copyright © 2012 Pearson Education, Inc.
Objective 20.1
1) Which of the following industries would have the highest cost of goods sold percentage relative to
sales?
A) computer manufacturers
B) retail organizations
C) drug manufacturers
D) The percentage will usually depend on the success of a particular company.
Answer: B
Diff: 2
Terms: inventory management
Objective: 1
AACSB: Reflective thinking
2) The costs of goods acquired from suppliers including incoming freight or transportation costs are:
A) purchasing costs
B) ordering costs
C) stockout costs
D) carrying costs
Answer: A
Diff: 2
Terms: purchasing costs
Objective: 1
AACSB: Reflective thinking
3) The costs of preparing, issuing, and paying purchase orders, plus receiving and inspecting the items
included in orders is:
A) purchasing costs
B) ordering costs
C) stockout costs
D) carrying costs
Answer: B
Diff: 2
Terms: ordering costs
Objective: 1
AACSB: Reflective thinking
1
Copyright © 2012 Pearson Education, Inc.
,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
Terms: shrinkage
Objective: 1
AACSB: Reflective 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
Terms: stockout costs
Objective: 1
AACSB: Reflective thinking
6) 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 costs
D) design costs
Answer: B
Diff: 2
Terms: stockout costs
Objective: 1
AACSB: Reflective thinking
7) The costs that result when a company holds an inventory of goods for sale:
A) purchasing costs
B) carrying costs
C) opportunity costs
D) interest costs
Answer: B
Diff: 2
Terms: stockout costs
Objective: 1
AACSB: Reflective thinking
2
Copyright © 2012 Pearson Education, Inc.
,8) Quality costs include:
A) purchasing costs
B) ordering costs
C) stockout costs
D) prevention costs
Answer: D
Diff: 2
Terms: quality costs
Objective: 1
AACSB: Reflective thinking
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) 20,800 units
Orders per year 20
Lead time in days 15 days
Cost of placing an order $100
9) What is the reorder point?
A) 1,040 units
B) 857 units
C) 1,560 units
D) 2,080 units
Answer: B
Explanation: B) 20,800/52 = 400/7 = 57.14 daily demand × 15 = 857.1
Diff: 2
Terms: reorder point
Objective: 1
AACSB: Analytical skills
10) 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
11) Inventory management is the planning, organizing, and controlling activities that focus on the flow
of materials into, through, and from the organization.
Answer: TRUE
Diff: 2
Terms: inventory management
Objective: 1
AACSB: Analytical skills
3
Copyright © 2012 Pearson Education, Inc.
, 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
Terms: purchasing costs
Objective: 1
AACSB: Analytical skills
13) The opportunity cost of the stockout includes lost contribution margin on the sale NOT made plus
any contribution margin lost on future sales due to customer ill will.
Answer: TRUE
Diff: 2
Terms: stockout costs
Objective: 1
AACSB: Analytical skills
14) 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
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
Terms: shrinkage
Objective: 1
AACSB: Analytical skills
16) Shrinkage costs result from theft by outsiders, embezzlement by employees, misclassifications, and
clerical errors.
Answer: TRUE
Diff: 2
Terms: shrinkage
Objective: 1
AACSB: Analytical skills
4
Copyright © 2012 Pearson Education, Inc.
