CHAPTER 9

DISCUSSION QUESTIONS

Q9-1. The most frequently used documents in the
procurement and use of materials are purchase requisitions, purchase orders, receiving reports, materials requisitions, bills of
materials, and materials ledger records.
Q9-2. The invoice should be routed to the
Accounting Department immediately upon
receipt. A copy of the purchase order and a
copy of the receiving report with an inspection
report should be compared by the accounting
clerk. When the invoice is found to be correct
in all aspects or has been adjusted for errors
or rejects, the accounting clerk approves the
invoice, attaches it to the underlying documents if they are in hard-copy form, and
sends these documents to another clerk for
the preparation of the voucher.
Q9-3. Inventoriable cost should include all costs
incurred to get the product ready for sale to the
customer. It includes not only the net purchase
price but also the other associated costs,
such as freight-in, incurred up to the time
products are ready for sale to the customer.
Q9-4. No, administration costs are assumed to
expire with the passage of time and do not
attach to the product. Furthermore, administrative costs do not relate directly to inventories, but are incurred for the benefit of all
functions of the business.
Q9-5. The three key questions to answer in designing an inventory control system are:
(a) how much to order—economic order
quantity
(b) when to order—order point
(c) safety stock required
Q9-6. The firm benefits from these techniques by
having a consistent, standardized approach
to its inventory management. Inventory costs
and service to customers will be optimally
balanced.
Q9-7. The purpose of an economic order quantity
model is to determine the optimum quantity
to order or produce when filling inventory
needs. The optimum quantity is defined as
that quantity that minimizes the cost of inventory management.

Q9-8. The decision concerning how much to order
or produce at a given time involves a compromise between inventory carrying costs and
ordering or setup costs. Examples of inventory carrying costs are: interest on the money
invested in inventories that could have been
invested elsewhere, property tax and insurance, warehousing or storage, handling, deterioration, and obsolescence. Ordering costs
include the cost of preparing the requisition
and purchase order, receiving the order, and
accounting for the order. Setup costs involve
the costs of setting up equipment to make the
actual production runs. For all these costs,
only those that vary with activity are relevant
to the EOQ model.
Q9-9. The consequences of maintaining inadequate
inventory levels include higher purchasing,
handling, and transportation costs, loss of
quantity discounts, production disruptions,
inflation-related price increases when purchases are deferred, and lost sales and customer goodwill.
Measurement of the costs of lost orders
and lost repeat business is not easy because
measurement may be largely subjective. On
the other hand, the other factors listed can be
measured with fair certainty and greater ease.
Q9-10. In computing optimum production run size, CO
represents an estimate of the setup cost and
CU is the variable manufacturing cost per unit.
Q9-11. (a) The order point is the low point of stock
level that, when reached, means a
replenishing order should be placed.
(b) Lead time is the interval between placing
an order and delivery of the ordered
goods.
(c) Safety stock is the minimum inventory
that provides a cushion against reasonably expected maximum demands and
against variations in lead time.
Q9-12. Materials requirements planning (MRP) is a
computer simulation that integrates each
product’s bill of materials, inventory status,
and manufacturing process into a feasible
production plan.

9-1

9-2

Q9-13. Effective utilization of capital, which includes
investment in inventory, is the responsibility of
general management; therefore, the primary
interest is in financial control. Although general or top-level management is interested in
providing customers with good products and
services, the scheduling of production
involves unit control primarily and is the
responsibility of production and purchasing
departments.
Q9-14. In the control of materials, the opposing
needs are the maintenance of an inventory of
sufficient size and diversity for efficient operations, and the maintenance of an investment
in inventory at a level that will maximize earnings and minimize costs.
Q9-15. When a relatively few materials items account
for a considerable portion of total inventory
investment, selective control is indicated.
High value items would be under tight control,
while low-value items would be under simple
physical controls.
Automatic control refers to ordering when a
materials record shows that the balance on
hand has dropped to the order point. At this
time, the quantity to order is automatic, having been determined by balancing the cost to
order with the cost to carry inventory.
Automatic control is most effective in companies that use an EDP system.

Chapter 9

Q9-16. Appendix The average cost method assumes
that each batch taken from the
storeroom is composed of uniform
quantities from each shipment in
stock at the date of issue. The fifo
method is based on the assumption
that the first goods received are the
first issued. The lifo method is
based on the assumption that the
latest goods received are the first
issued.
Q9-17. Appendix In an inflationary economy, lifo provides a better matching of current
costs with current revenue
because costs of inventory issued
are at more recent purchase
prices. Net cash inflow is generally
increased because taxable income
is generally decreased, resulting in
payment of lower income tax.
Q9-18. Appendix Fifo. The higher costs of the earlier
purchases would be charged
against cost of goods sold.
CGA-Canada (adapted). Reprint with permission.
Q9-19. Appendix (a) fifo
(b) fifo
(c) fifo
(d) lifo
(e) fifo
(f) lifo
CGA-Canada (adapted). Reprint with permission.

.............600 16.20 = $126 88 66 $280 E9-2 Units September production ........500 Part A: Part B: Part C: (2) $ 8...........20 1 400 kilograms Part A: Part B: Part C: 630kg 440 330 1 400kg × × × $......... On order for September delivery ....... Quantity to order for November delivery ..... October production .....96 × ...........016 = $137.................. Quantity on hand......................500 4....20 = ................. November 30 ................400 .00 Freight allocated to materials based on shipping weight: $280 = $....................400 4........500 12.... November production .... 4..900 4.....20 = ....... On order for October delivery ..44 $280....600 5..................840 $17................. September 1 ...................016 per dollar of cost $17............. Total to be provided ...................016 = 80.500 × $......700 3.........060 3...600 4...60 × ...........400 3......016 = 61..... Desired Inventory.200 4............Chapter 9 9-3 EXERCISES E9-1 (1) Freight allocated to materials based on cost: $280 = $...................................

.000 units 8......... Quantity to order for March delivery .....800 4..............400 units 4..... On order for January and February delivery ................................. Total to be provided ........ February...............9-4 Chapter 9 E9-3 (1) Forecast usage: January .............250 × $12 = = 90........................ 000 = 300 Ajets ................600 14........................................ 5..... (a) March 1 inventory .........400 units Forecast usage—January and February...............400 5...... Scheduled supply: January 1 inventory ........................................ February delivery .................................800 4...................... On order: January delivery...60 $3 × 20% (3) EOQ = 2 × (1.........800 10...800 units January 1 inventory.....400 14........................ 6...000 × 80%) ....................... 440............ 9...................................................................600 = 240 units ................................... March 31 inventory ................ 000 2 × 2........ 000 = $25 25 = 57.............600 units 5. (2) 4...200 units 6.................................000 5..400 units Forecast usage—March ....... To order for March delivery (requirement (1)) .............200 × 3) × $200 1..800 units 5....800 20. Desired March 31 inventory level (6. 000 = = 121 = 11 units $55 × 15% 8..............600 15.............600 4...........25 (2) EOQ = 54..............800 units (b) E9-4 (1) EOQ = 2 × 100 × $5 1... March.................................000 units 3.................................................

000 Annual required units = = 35 orders per year Economic order quantity 707 365 days = 10. 000 $2. 000 $8 × 25% 2 = 707 cartons (b) 25. 000 = 42. 080.4 or every 10 days orders should be placed 35 orders (5) (a) EOQ = 540.000 = 424 (b) 18.000 = 30 orders per year 600 365 days in year = 12.50 × 20% 1 .7 or approximately one order every 9 days 42 orders (c) EOQ = 2 × 18. 000 = $6 × 20% 1. 000 × $20 1.50 = 1. 000 $7.167 or approximately 30 orderrs per year one order every 12 days EOQ = 2 × 18.20 = 450. 000 = = 1. 000 = = 360. 000 = 671 (6) (a) EOQ = 2 × 18. 000 2 × 18.45 or approximately 42 orders per year 424 365 days = 8. 000 × $15 540. 000 = = 500.Chapter 9 9-5 E9-4 (Continued) (4) (a) EOQ = 2 × 25. 000.000 × $15 = $15 × 20% 3 = 180. 039 units .. 000 × $15 540.5 = 600 units (b) (c) 18.50 × 20% . 000 × $15 540.

.. 000 10... 000 = $8 × 20% 1 ..40 = 632 dozen baseballs *$. 000 × $16 256..000 dozen baseballs ... 000 $20 × 12%* 2....... 000 = 2.500 columns (9) (a) EOQ = 2 × 12.40 + 10% return on investment = 12% $20 (b) RU × CO 48........ 000 × $16 384.......6 = 6. 000 = = 1. 000 = = 400.000 annual usage = 26 orders per year 462 EOQ 365 days = 14 days 26 orders (c) EOQ = 2 × 8....... 000 × $1. 333 = 462 units (b) The frequency of order placement: 12... 000 = = $9 × 20% 1.98 $9 × 22% = 360 units 129.9-6 Chapter 9 E9-4 (Continued) (7) (a) EOQ = 2 × 48. $1.560 Annual ordering cost = EOQ = (8) 2 × 5.. 293 .. 000 × $10 960....80 213... 000 × $10 = = $600 EOQ 800 CU × CC × EOQ Annual carrying cost = 2 $20 × 12% × 800 = 960 = 2 Total annual inventory cost to sell 48.. 250.... 000.

...10) = 54 units per order 500 × $6 $10 × ..........500 units Present costs: Carrying cost (..000 ÷ 600 = 10 runs Proposed costs: Carrying cost (.....50 = $123.000 $9.000 600 $15... Production initiation cost (10 × $300) .............22 + $61....5 56 + $67.. $15... 600.25 × 54 + = $55...... Expected annual savings .... 000 = 360.47 total ordering and carrying cost perr year (b) 49 + (49 × ...25 = $122. These two amounts are calculated as follows: Carrying cost = Annual cost of carrying (20%) × manufacturing cost ($50) × average annual inventory... 000 = 600 units 10 Average inventory: 600 ÷ 2 = 300 units Number of runs: 6. 400 = 49 units 500 × $6 $10 × .... the carrying cost and the production initiation cost must be calculated for each alternative..20 × $50 × 300).... Production initiation cost (2 × $300)... 000 = = $10 × ... Production initiation cost = Number of runs × cost to initiate a run ($300) Current situation: 2 production runs of 3.............000 $6..20 × $50 × 1... Production quantity: 2 × 6. (11) To compare the two alternatives..Chapter 9 9-7 E9-4 (Concluded) (10) (a) EOQ = 2 × 500 × $6 6.600 Proposed situation: The EOQ formula can be used to determine production run quantities by substituting cost per order with production initiation cost... 000 × $300 $50 × ....2 = 3.....50 2... $3....25 × 49 + 49 2 = $61..000 3..000 units per run Average inventory: 3..........600 ........25 2.06 54 2 The effect is small because the total cos st curve is relatively flat around the optimum level........500) ....000 units ÷ 2 = 1...

. 000 = 1............40...........00 × .....000 units 9 1......................... Cost to order and carry .................... 000 × $3 = 2......40 1..000 units $735 $450 735 1..........590 E9-6 (1) Ordering and carrying costs under current policy: ⎛ 12 ⎞ ⎛ 500 ⎞ ⎟= $2....000 × $2......225 units 14.... Cost of carrying inventory: 612..000 units should be ordered. Number of orders per year.... 510 related ordering ⎜ 2 ⎠ and carrying costs ⎝ 1.............. 800......... based on the following computations: QUANTITATIVE DATA Order size...........5 units 2...........140 2.......... 500) × $50 1........... 225 units $3 × ........... 1....... 500... 530 ⎜ × $380⎟+⎜ $1× ⎝2 ⎠ ⎝ 2 ⎠ (2) Economic orde er quantity and the related ordering and carrying costs: 380 2 × 3...85 × ....7 612...........510 ⎠ ⎝ .....000 ⎞ ⎛ 1...................700 $4170 $1...................... 280 + $250 = $2...................9-8 Chapter 9 E9-5 (1) EOQ = (2) 2 × (12 × 1.................500 × $3 × .......05) .. 1..40.....5 × $3............... Average inventory ..... Discounts lost (12 × 1... COST DATA Cost of placing orders at $50 . 510 units $1 ⎛ 3.20 Lots of 2. 280... 510 ⎞ × $380⎟+⎜ $1× ⎟= $755 + $755 = $1.......... 000 = 1......... 000 = = 1........

.... Normal maximum inventory ........... Normal use during lead time (500 × 5) .................................................. ($1 – $.......... Maximum use per day................ 1........................ $ 755 3.......................... Cost of carrying inventory: $1 × 755 ...............................Chapter 9 9-9 E9-6 (Concluded) (3) The company should decide to order in quantities of 3........................260 $1........................................... Order point ........ E9-7 E9-8 (1) 9... Normal use per day........................................000 units ...................................500 4.............................. Cost to order and carry ....................................... based on the following computations: QUANTITATIVE DATA Order size......................... Discount lost (3.000 units 2....000 units (3) Order point ......................400 600 units 500 100 units × 5 days of lead time = 500 units (2) Normal use per day (500) × days of lead time (5) ...........9868 Average inventory ................500 ................. 2................. 800 600 1........................000 × $5 × ............. 755 units COST DATA Cost of placing orders at $380.......05) × 1...............................805 CGA-Canada (adapted)...........................................500 units 500 3....05) ...............600 ÷ 240 = 40 units daily usage Normal lead time usage (20 days × 40 units) ............. Reprint with permission...... 1...........................510 units Number of orders per year................ Safety stock ................................000 units....................................... On hand at time order received .. Order point .................... Safety stock ((35 days – 20 days) × 40 units) ................................................................ Safety stock (maximum) ......................................500 500 units 3...............................................500 units $ 380 755 1.................................... Quantity ordered........................... 3...........425 750 $2...................................................................................................................000 units 1 1..........

....................000 3........2 x Cost Annual per Stockout Stockout = Cost + $75 $150...................... 3.............00 75 15................ Quantity ordered ........................................................ E9-10 Annual Safety Number Probability Stock Level of of (Units) Orders × Stockout 10 5 ... Absolute maximum inventory .... Safety stock (maximum) .................500 6...............500 3...................................................04 Expected Annual = Stockouts 2 1 ..... Minimum use during lead time (100 × 5).............................................................................................................................. Quantity ordered .......00 95...................9-10 Chapter 9 E9-8 (Concluded) (4) Order point .2 40 5 .. Normal use per day.............. Order point .....000 4.............. 1........400 units 1........................................ 2..................4 ...................08 80 5 .......................................... Quantity ordered .............................4 20 5 ........ Absolute maximum inventory ............................................ Annual Safety Stock Carrying Cost ($1 per unit) $10 20 40 80 Annual Combined = Cost $160.... E9-9 (1) Maximum use per day..................................................... 200 units 120 80 units × 12 days of lead time = 960 units (2) Normal use per day (120) × days of lead time (12) ......... Minimum use during lead time (80 × 12)................................................. Normal use during lead time (120 × 12) ...................00 ..........................00 75 75................00 The recommended level of safety stock is 40 units.................................................. Reprint with permission..........440 units CGA-Canada (adapted).......................................................................................... Normal maximum inventory .....440 units 3..440 units 960 2.............................440 960 units 3...............................400 units (3) Order point ....... Safety stock ............... On hand at time order received ..................................................................................... 2..000 500 2....................................00 70.........000 units units units units CGA-Canada (adapted)......960 units (4) Order point ....................................400 units 960 1................................ On hand at time order received ...................00 95...... On hand at time order received . Reprint with permission.......00 75 30...

100 1.30 520 500 1.25 250 850 520 500 1.370 842 Fifo costing: Date Jan.Unit Total Cost tity Cost Cost tity Cost Cost Balance 500 $1.Unit tity Cost 200 $1.25 175 400 1.20 600 200 1.25 250 400 1. 1 6 10 Received Quan.25 $700 540 1.25 175 60 1.40 700 882 .20 $600 $ 600 $250 500 1.040 1.Unit Cost tity Cost Cost tity Cost 500 $1.395 140 1.30 520 695 700 140 1.20 $250 700 1.30 338 500 1.370 500 $1.Unit Total Quan.32 400 1.40 15 25 27 Issued Inventory Total Quan.370 670 1.20 $600 140 1.Chapter 9 9-11 E9-11 APPENDIX (1) Average costing: Date Jan.30 500 1.25 75 400 1. 1 6 10 15 25 27 (2) Received Quan.25 175 140 1.30 500 1.25 400 1.25 700 1.20 600 200 1.32 Balance $ 600 850 1.25 400 1.25 560 $1.21 520 1.Unit Total Quan.30 520 1.30 182 260 1.40 Issued Inventory Total Quan.32 528 640 1.Unit tity Cost 200 $1.40 700 1.

25 50 100 1.370 400 $1.30 $520 500 1.40 560 500 1.25 50 650 700 500 1.25 250 850 520 500 1.40 140 790 .20 600 40 1.20 600 200 1.350 400 1.Unit Total Cost tity Cost Cost tity Cost Cost Balance 500 $1.40 700 1.Unit tity Cost 200 $1.25 250 400 1.20 600 40 1.Unit Total Quan.25 400 1. 1 6 10 Received Quan.20 600 160 1.30 500 1.30 520 1.20 $600 $ 600 $250 500 1.20 600 200 1.40 15 25 27 Issued Inventory Total Quan.9-12 Chapter 9 E9-11 APPENDIX (Concluded) (3) Lifo costing: Date Jan.25 200 40 1.25 50 500 1.

5% applied acquisition = $18.5% applied acquisition Budgeted purchases $144.6 days Orders per year 100 (b) Number of days’ supply left in inventory: Units in inventory Days’ supply 400 × = × 3.20 57. 600 = = 240 units $10 × 10% 1 (1) EOQ = (2) Annual requirements 24. This conclusion is arrived at as follows: (a) Number of days’ supply in each order: 360 Days in year = = 3.000 costing rate for the month (2) $148.6 days = 6 days’ EOQ in each order 240 supply left (c) Days before ne ext order should be placed: (Days’ supply left) – (Delivery lead time) = 6 days – 3 days = 3 . 000 = = 100 orders needed per year EOQ 240 (3) (4) ( ) ( ) Annual requirements Ordering cost EOQ Carrying cost + r unit per order pe EOQ 2 240 24.20) = $120 + $120 = $240 total cost of 2 240 orderring and carrying blades for the year The next order should be placed in three days. 000 × $1.Chapter 9 9-13 PROBLEMS P9-1 (1) Budgeted acquisition cost = $ 18.50 ($18.562.50 applied cost – $18.562. 000 = ($ $10 × 10%) + ($1.200 actual cost) should be credited to Cost of Goods Sold or prorated to Cost of Goods Sold and inventories.500 net purchases × 12.000 = 12. P9-2 2 × 24.50 applied cost added costing to materials rate purchased during the month (3) The overapplied acquisition cost of $362.

..................... 000.....50 16..... Safety stock ................................................................................. ......... Reprint with permission.300 units (2) Order point .......... 000...800 units (4) Let S equal cost of storing one unit for one year....................... 000............................... 000 16.. 000 = CGA-Canada (adapted).......................... Order point .. 2......... EOQ = 4............................. (3) purchase price per unit.........500 800 units 4.... Quantity ordered...................... 000 S = = $........................................... Normal use during lead time (200 × 10) ..................000 units 300 2........ Minimum use during lead time (150 × 10)............... 000 = 2 × RU × CO CU × CC 2 × (200 × 250) × $80 S 8......................................... P9-3 (1) Normal use per day (200) × days of lead time (10) .................... (b) The EOQ formula requires estimates of (1) annual requirements............................... 2............................................................................................................................. On hand at time order received ...... Absolute maximum inventory ......................9-14 Chapter 9 P9-2 (Concluded) (5) Some of the difficulties most firms have in attempting to apply the EOQ formula to inventory problems are: (a) Inventory is not always used at a constant rate.......... (2) ordering cost....... 000 4................ 000.......300 units (3) Order point .... Quantity ordered............. 000 S 8.. 2... 000 = S 8........ Normal maximum inventory ...............300 units 2.................................. and (4) cost of carrying inventories... On hand at time order received ..300 units 1............................... 000..000 4......000 4....... These estimates may be extremely difficult to obtain with accuracy.................................000 300 units 4................ the constant usage assumption is implicit in the EOQ formula...

10 20 30 40 50 55 Units of Safety × Stock P9-4 $3 3 3 3 3 3 Carrying = Cost per Unit $ 30 60 90 120 150 165 Safety Stock + Carrying Cost 5 5 5 5 5 5 Orders × per Year 50% 40 30 20 10 3 Probability of Running out of Safety Stock × $80 80 80 80 80 80 $200 160 120 80 40 12 Stockout Cost per = Stockout Cost Occurence $230 220 210 200 190 177 lowest cost = Total Cost Chapter 9 9-15 .

525 500 11.00 21.50 975 350 21.000 Balance $15.00 3.550 500 550 500 22.00 11.000 11.50 7.800 750 400 600 $20.00 $12.50 7.525 150 400 350 150 20.800 20.00 22 26 550 21.00 11.50 7.000 19.800 10.000 150 400 7.Unit Total QuanCost tity Cost Cost tity 750 $ 7.000 22.00 21.50 7.50 7.500 22.800 21.50 5 12 350 21.800 20.00 20.00 3.50 975 21.000 150 21.50 7.400 8.550 21.525 22.000 19.50 7.400 4.500 19.00 $15.9-16 Chapter 9 P9-5 APPENDIX (1) Fifo: Date March 1 3 Received Quan.00 3.00 8.000 400 200 Inventory Unit Total Cost Cost $20.525 19.400 .325 8.00 11.150 400 4.00 Issued Total Quan.800 18.50 975 21.00 28 31 200 20.400 8.000 50 350 19.00 15.000 12.000 11.550 22.Unit tity Cost 400 $19.00 3.825 350 11.000 19.50 6.000 50 350 500 50 19.50 15 18 500 22.000 11.000 20.525 19.00 22.

000 8.200 19.000 7.000 2.550 11.50 20.800 Balance $15.000 20.000 4.800 12.00 21.000 2.525 3.00 21.550 11.00 21.000 22.000 19.525 Inventory Unit Total Cost Cost $20.000 8.00 22.31 28 26 22 18 15 12 5 Date March 1 3 (2) Lifo: 200 550 500 350 400 20.000 11.000 8.000 $ 7.200 8.50 Received QuanUnit tity Cost P9-5 APPENDIX (Continued) 4.00 20.00 22.800 7.000 11.000 Chapter 9 9-17 .00 20.00 $19.50 $19.000 11.00 20.00 20.00 22.000 Total Cost 400 400 200 400 400 500 400 100 400 100 550 550 550 350 Quantity 750 750 400 20.750 10.000 21.00 22.50 8.550 2.00 20.200 11.800 Total Cost 550 100 400 350 150 400 200 Quantity 21.00 20.525 11.50 20.200 8.00 22.000 7.00 20.000 8.525 $ 7.00 21.000 8.000 18.800 4.000 8.00 22.00 $15.00 15.50 7.00 Issued Unit Cost 11.00 21.00 20.

40 8.750.477 13.895.50 $19.60 9-18 Chapter 9 .238.529.000 1.550 11.60 Issued Unit Cost Inventory QuanUnit tity Cost 750 $20.826 900 20.00 22.000 11.826 $11.323 1.461.150 19.190.00 400 350 500 550 200 Received QuanUnit tity Cost P9-5 APPENDIX (Concluded) 4.477 400 20.661.000 7.90 19.Date March 1 3 5 12 15 18 22 26 28 31 (3) Average: $19.154 21.20 10.00 21.323 500 21.50 22.70 22.904.525 $ 7.60 12.050 21.000.50 21.429.40 18.154 400 21.826 550 19.800 Total Cost 650 400 500 600 Quantity Total Cost 21.90 10.190.00 20.10 8.769 Balance $15.800.00 10.323 20.70 8.461.211.154 600 20.477 900 21.

200 100 100 1.100 10 10 12 10 12 10 12 14 10 12 10 12 17 1.200 1. 1 12 Received Quan.000 1.100 $3.000 100 @ 11 = 1.400 100 100 1.000 11 1.000 1.200 1.Chapter 9 9-19 P9-6 APPENDIX (1) Cost of the ending inventory under the fifo method when a periodic inventory system is used: 100 units @ $17 = $1.000 1.Unit tity Cost 100 $11 Feb.400 2.100 200 100 100 $11 $1.000 1.400 100 @ 12 = 1.000 $2.000 10 2.000 2.400 100 100 100 100 14 1.700 100 @ 14 = 1.400 1.900 CGA-Canada (adapted).Unit Total QuanCost tity Cost Cost tity 200 $1.200 $4.000 100 2.400 100 200 100 12 1.1 April 16 200 12 May 1 July 15 100 14 Nov.200 1.700 100 100 100 Inventory Unit Total Cost Cost Balance $10 $2.000 3.100 100 10 1. Reprint with permission.100 3.000 1.400 1.200 3.600 2.100 (b) When a perpetual inventory system is used: Date Jan. 5 100 17 Issued Total Quan.300 (2) Cost of the ending inventory under the lifo method: (a) When a periodic inventory system is used: 200 units @ $10 = $2.200 3.700 1. 10 Dec.200 1. .

00 $2.20 4.000 5.00 Total Cost Quantity 2.000 7.500.200.(1) Date Jan.800.096 7.500 1.800 1.805.096 7.440.740.200 1.00 12.600 5.500 1.300 12.00 14.600 7.096 7.00 5.000.60 9-20 Chapter 9 .000 5.00 2.967.967. 2 15 31 Apr.00 17.000 5.00 11.000 1.000.900 Received QuanUnit tity Cost 2.00 7. 2 15 31 Feb.096 Balance $10.800.600 5.000 500 700 700 700 600 800 7.000 1.200 Total Cost $10.20 4.000 Quantity 600 900 Issued Unit Cost 4.096 7.00 3.00 4.600 5.772. 2 15 30 (a) 6 8 7 1. 2 15 28 Mar.100 Inventory Unit Cost $5.400 7.360.400 5.000 5.00 7.040.400 600 2.00 5.00 10.500 800 2.400 7.000 1.000 $5 Average method: P9-7 APPENDIX 13.400 7.440.840.00 4.360.00 3.500.80 7.600 $5.400 500 2.920.500.400 7.

000 200 1.200 6 7.Chapter 9 9-21 P9-7 APPENDIX (Continued) (b) First-in.200 8.Unit Total QuanDate tity Cost Cost tity Cost Cost tity Jan. 2 1.500 15 500 6 3.500 31 700 5 3.300 1.000 15 500 $5 $2. 2 1.000 $5 $10.000 700 6 4.700 .500 800 800 Feb.600 7.200 4.200 11.000 100 8 800 1. 2 2.800 100 7 700 1.800 13.000 1.400 31 800 8 6.200 28 200 5 1.800 4.900 7 13.800 30 700 7 4.200 6 6 8 3.Unit Total Quan.900 1.200 5 1.200 1.000 12.000 5 7.500 1.900 15 600 8 4.100 Inventory Unit Total Cost Cost Balance $5 $10.000 6 7.000 8 8 8 7 11.000 6 7.000 5 $ 4.400 600 600 Apr.100 7 7 12.500 8 12.500 5 4.300 18.000 15. 2 1.000 3.200 500 500 Mar.000 2. first-out method: Received Issued Quan.200 15 600 5 3.

....000 2.......200 Lifo $55.000....700 $34....900 500 100 500 Inventory Unit Total Cost Cost Balance $5 $10..9-22 Chapter 9 P9-7 APPENDIX (Concluded) (c) Last-in..500 1......000 1.500 5 4.....500 units @ $10).600 300 5 1.800 Gross profit ..60 $20...500 6.500 2..000 5 $ 4....000 15 500 $5 $2.000 $5 $10.500 8 12....300 2.......500 6..00 $42..500 800 13...500.305..Unit Total QuanDate tity Cost Cost tity Cost Cost tity Jan....400 11........000 $42...500 2..600 2...... 2 1.00 $55. $55..200 11...400 500 100 500 100 Apr..600 7.. Reprint with permission....900 500 100 1.200 1.....500 12..800 (2) Fifo Average Sales (5. 7. $42... April 30. $20.694..500 Less inventory..500 500 500 Mar.....900 15 700 7 4................200 5 4...........500 800 3.805..700 $19.............200 15 600 6 3....000 Cost of goods sold: Purchases. 2 1. 2 1.200 6 7...500 15 600 8 4...000 6 7.900 7 13.500 800 800 Feb....700 2....300 1.40 $34... first-out method: Received Issued Quan..600 5 5 8 5 8 5 8 5 8 7 5 8 7 5 8 7 2.60 7..500 31 700 5 3..000 14....500 800 8...700 2.....500 800 3.800 500 900 31 800 8 6...000 5 7....300 CGA-Canada (adapted)...500 7..200 9.200 30 700 7 4.. 2 2. .300 16...Unit Total Quan.000 6 3......600 800 600 28 600 6 3.800 $35...

.............................40 $50 * × 10..............40 Per unit carrying cost $50 × 10.................Chapter 9 9-23 CASES C9-1 (1) (a) Topp Desk Company would be attempting to minimize total setup cost and total carrying cost. Direct labor .... Number of desks destroyed..................8% ................ 000 = = 5......... i.............. 000 Optimum productiion run (a) The following factors affect the desired size of the safety stock for any inventory item................ Stockout cost $2.. 295 = 425 desks = = $5......... (b) Variable manufacturing costs per unit: Direct materials ....................... 000 units × $600 setup cost 21......8% 4.......................................... 000.... $ 30 14 6 $ 50 × 12 $600 Optimum production run: 2 × 18. 295 $2.... 000 desks *Variable manufacturing cost per unit (2) (c) Numberr of production runs per year: 18................................ Variable factory overhead . 000 Annual demand = = 9 production runs 2...... 600....................................e............................. Total setup cost....... 000 = 2. Total variable manufacturing cost per unit .................. (1) Variability of product demand (2) Variability of lead time (3) Stockout costs (4) Carrying costs (b) The minimum safety stock level that could be maintained without being worse off than being unable to fill orders equal to an average day’s demand is the level at which the safety stock carrying cost equals the cost of a stockout.

.......... Variable factory overhead: Direct labor hours base (25 × $2... a full 25 hours of cost are assigned to the setup cost................ therefore.............. therefore...... (e) The variable factory overhead costs of the production department applied on the machine hours base are incurred as a function of the operation of the machinery....... (f) All production department fixed factory overhead costs (both those applied on the basis of direct labor and those applied on the basis of machine hours) are not included in the setup cost because they would be incurred regardless of the activity in the department.......00 $108..25 150.......... If the workers could have been assigned to other jobs during the changeover... 1 hour is assigned to setup cost for the 1 hour the machinery is used in testing.....50 68.80 [$9.........25 Explanation of costs: (a) The full cost of the maintenance salaries and employee benefits is included because the $10......................75 5...00 18......00 $187......00 + ($9............00 × 20%)] incurred per labor hour is incurred solely for the purpose of effecting the changeover...... (c) The salaries of the 5 production workers for the full 5 hours each are included in the setup cost because they must be in attendance all of the time...................00 $519....... (g) The net materials cost of $150 is included because it represents the unsalvageable portion of the materials used for the setup and not for the production of a salable desk..... Direct materials ($200 – $50) .00 261..... Machine hours base (1 × $5) . Estimate of Model JE 40 setup costs ..........75) .... (d) The variable factory overhead costs of the production department applied on the direct labor hours base are incurred as a function of the direct labor hours...... then the full amount would not be charged to setup.. though they are needed only part of the time... ... Production department costs: Salaries (5 × 5 × $7..... (b) The other costs of the Equipment Maintenance Department are not included in the estimate because they are fixed costs of the department and will be incurred regardless of the maintenance workers’ activities................ $ 90..........50).... Employee benefits ($90 × 20%) .9-24 Chapter 9 C9-2 (1) Equipment Maintenance Department costs: Salaries (2 × 5 × $9)....

Are production schedules clearly defined to reduce the potential for stockouts? (2) Circumstances necessary to shift finished goods inventory carrying costs to the customer include: (a) Understanding customers. Can production schedules be refined to such an extent that delays in the sale and distribution of the finished inventory are minimized? (c) Careful control of inventory requirements. (c) Careful control of inventory requirements. Are customer orders carefully monitored and anticipated to reduce the probability of finished goods stockouts? . (b) The cost of the funds committed to the investment in inventory. Will the supplier ship products on a more rigorous timetable and be willing to keep inventory within its own storage facilities? (b) Adequate alternative supply sources.Chapter 9 9-25 C9-2 (Concluded) (2) The cost items that would be included in an estimate of Pointer Furniture Company’s cost of carrying desks in inventory include: (a) All costs related to warehousing and handling the desks in inventory that vary in amount by the number of items stored. C9-3 (1) Circumstances necessary to shift raw materials inventory carrying costs to the supplier include: (a) Reliability of the supplier. A large number of qualified alternative suppliers will increase the possibility for favorable contract terms. Are customers willing to take the risk of inventory storage for an extended period of time? (b) Closer production planning.

Sign up to vote on this title
UsefulNot useful

Master Your Semester with Scribd & The New York Times

Special offer: Get 4 months of Scribd and The New York Times for just $1.87 per week!

Master Your Semester with a Special Offer from Scribd & The New York Times