Materials Chapter -03

1) A manufacturing company has budgeted sales next year of 5,000 units of product T. Each
unit of product T uses 3 units of the component X. The company plans to increase
inventory levels of finished goods by 200 units by the end of the year, and to increase
inventory levels of component X by 400 units. What will be the budgeted purchase quantities of
component X for the year?
a) 15,200 units
b) 15,400 units
c) 15,600 units
d) 16,000 units

2) Once materials have been bought, which of the following departments must receive a
copy of the invoice?
a) The accounts department
b) The stores department
c) The goods received department
d) The marketing department

3) Which of the following is the correct description of a purchase requisition?

a) The order requesting the supplier to deliver specified materials
b) A request by the production department for stores to issue materials
c) A note sent by the supplier advising dispatch of materials
d) The authority for the purchasing department to obtain specified materials

4) A company has a safety stock of 500, a reorder quantity of 3,000 and a rate of demand
which varies between 200 and 700 per week. The average stock is approximately:
a) 2,000
b) 2,300
c) 2,500
d) 3,500

Data for questions 5 and 6

A national chain of tyre fitters stocks a popular tyre for which the following information is available:
Average usage 140 tyres per day
Minimum usage 90 tyres per day
Maximum usage 175 tyres per day
Lead time 10 to 16 days
Reorder quantity 3,000 tyres

5) Based on the data above, at what level of stocks should a replenishment order be issued?
a) 2,240 tyres
b) 2,800 tyres
c) 3,000 tyres
d) 5,740 tyres

6) Based on the data above, what is the maximum level of stocks possible?
a) 2,800 tyres
b) 3,000 tyres
c) 4,900 tyres

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d) 5,800 tyres

7) 25,000 kilograms (kg) of material Y are used evenly by a company in a year (50 weeks).
Order placed on the supplier of material Y is for the economic order quantity of 1,600kg.
The lead-time for receipt of materials ordered is two weeks. The minimum targeted stock
level (buffer stock) is 800 kg. The annual stockholding cost of material Y is $1 per kg.
What is the total expected annual stockholding cost of material Y?
a) $800
b) $1,600
c) $2,400
d) $1,200

8) A company determines its order quantity for a raw material by using the Economic Order
Quantity (EOQ) model. What would be the effects on the EOQ and the total annual
holding cost of decrease in the cost of ordering a batch of raw material?
EOQ Total annual holding cost
a) Higher Lower
b) Higher Higher
c) Lower Higher
d) Lower Lower

9) What would be the effects on the EOQ and the total annual ordering cost of an increase
in the annual cost of holding one unit of inventory?
EOQ Total ordering cost
a) Lower No effect
b) Lower Higher
c) Higher Lower
d) Higher No effect

10) The demand for a product is 12,500 units for a three-month period. Each unit of product
has a purchase price of $15 and ordering costs are $20 per order placed. The annual
holding cost of one unit of product is 10% of its purchase price. What is the economic
Order Quantity (to the nearest unit)?
a) 557
b) 816
c) 866
d) 1,155

11) The following information relates to a particular component:

Component price per unit $32
Component usage 6,000 units per month
Cost of placing an order $14
The cost of holding one unit in stock per annum is equal to 2% of the component unit price. What is
the economic order quantity for the component?
a) 112
b) 512
c) 2,219
d) 1,775

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12) A business buys 40,000 units of an item each year and each order costs $10 to place. The
cost of holding each unit in stock for a year would be $0.80 per unit. What is the
Economic Order Quantity for this item and how often should orders be placed?
EOQ Frequency
a) 707 units every 6 days
b) 707 units every 9 days
c) 1,000 units every 6 days
d) 1,000 units every 9 days

13) Bee Company has following details for its forth coming period:
Annual demand 40,000 units
Purchase cost $15 per unit
Ordering cost $150 per order
Holding cost 10% of purchase cost
Bee Company places 10 orders in a year of equal quantity.

1. What is the total annual cost of inventory?

a) $61,500
b) $604,500
c) $606,000
d) $661,500

2. What is Economic Order Quantity (EOQ) for Bee Company?

a) 3,000 units
b) 2,828 units
c) 894 units
d) 2,525 units

3. What additional cost Bee Company is currently incurring by not following EOQ model
for order placement?
a) $258
b) $1,664
c) $3,552
d) $8,500

14) The following represent the materials transactions for a company for the month of
December 20X6:
$000s
Materials purchases 176
Issued to production 165
Materials written off 4
Returned to stores 9
Returned to suppliers 8
The material inventory at 1 December 20X6 was $15,000. What is the closing balance on the
materials inventory account at 31 December 20X6?
a) $5,000
b) $16,000
c) $23,000
d) $31,000

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15) Which of the following procedures are carried out to minimize losses from inventory?
(i) use of standard costs for purchases
(ii) restricted access to stores
(iii) regular stocktaking
a) (i) and (ii)
b) (ii) and (iii)
c) (ii) only
d) All of them

16) A company manufactures a product in batches and then holds the items produced in
finished goods inventory until they are sold. It is capable of replenishing the product at
the rate of 100,000 units/year, but annual sales demand is just 40,000 units. The cost of
setting up a batch production run is $1,500 and the cost of holding a unit of the product
in inventory is $25/year. What is the economic batch quantity for manufacturing this
product?
a) 2,191 units
b) 2,828 units
c) 4,472 units
d) 10,954 units

17) Which of the following are included in the cost of holding inventory?
(i) The cost of insurance
(ii) Rental payments on storage space
(iii) The cost of placing an order
a) (i) and (ii)
b) (i) and (iii)
c) (ii) and (iii)
d) (i), (ii) and (iii)

18) A company uses components at the rate of 600 units per month, which are bought in at
a cost of $2.24 each from the supplier. It costs $8.75 each time to place an order,
regardless of the quantity ordered. The supplier offers a 5% discount on the purchase
price for order quantities of 2,000 items or more. The current EOQ is 750 units. The total
holding cost is 10% per annum of the value of inventory held. What is the change in total
cost to the company of moving to an order quantity of 2,000 units?
a) $601 additional cost
b) $730 additional cost
c) $730 saving
d) $601 saving

19) A company makes a component for one of its products in-house. It uses an average of
5,000 of these throughout the year. The production rate for these components is 500 per
week and the cost of holding one item for the year is $1.50. The factory is open for 50
weeks per year. The company has calculated that the economic batch quantity is 2,000.
What is the production setup cost per batch?
a) $213
b) $240
c) $480
d) $960

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20) Which of the following functions are fulfilled by a goods received note (GRN)?
(i) Provides information to update the inventory records on receipt of goods
(ii) Provides information to check the quantity on the supplier's invoice
(iii) Provides information to check the price on the supplier's invoice
a) (i) and (ii) only
b) (i) and (iii) only
c) (ii) and (iii) only

21) Which of the following is correct with regard to inventories?

(i) Stock-outs arise when too little inventory is held
(ii) Safety inventories are the level of units maintained in case there is unexpected demand
(iii) A re-order level can be established by looking at the maximum usage and the maximum lead-time
a) (i) and (ii) only
b) (i) and (iii) only
c) (ii) and (iii) only
d) (i), (ii) and (iii)

Data for questions 22 – 23

Receipts and issues of part number 6288 for the month of August are as follows:
Receipts Total Issued
Units value units
₤
3 August 2,000 6,000
7 August 3,000 9,900
11 August 2,000 8,000
16 August 4,000
24 August 3,000 10,500
30 August 5,000
Opening stocks of part number 6288 were 1,000 units, valued at ₤2800.

22) Using a FIFO method of stock valuation, the cost of Issued parts in the month was
a) 30,200
b) 30,400
c) 30,900
d) 31,100

23) Using a LIFO method of stock valuation, the cost of issued parts in the month was
a) 30,900
b) 31,100
c) 31,400
d) 33,100

24) A firm has a high level of stock turnover and uses the first in first out (FIFO) issue pricing
system. In a period of rising purchase prices, the closing stock valuation is:
a) Close to current purchase prices.
b) Based on the prices of the first items received.
c) Much lower than current purchase prices.
d) The average of all goods purchased in the period.

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25) Details of the stock movements and cost prices of raw material XX for a period are:
Kg Cost price/Kg
Day 1 Opening balance 1,100 $8.60
Day 2 Issue 200
Day 3 Receipt 1,000 $9.00
Day 4 Issue 400
Day 5 Issue 500
Day 7 Receipt 1,000 $9.00
Day 9 Issue 600
Day 10 Issue 500
Day 12 Receipt 1,200 $9.30
Day 14 Issue 400
The cost of raw materials is charged to the work in progress account immediately after each issue
occurs. The company uses the weighted average method to establish the cost price of
material issues (to two decimal places of $) _________

26) Using the First In First Out (FIFO) system for pricing stock issues means that, when
prices are rising:
a) Product costs are overstated and profits understated.
b) Product costs are kept in line with price changes.
c) Product costs are understated and profits understated.
d) Product costs are understated and profits overstated.

27) The double entry for an issue of indirect production materials would be;
a) Dr Materials control account Cr Finished goods control account
b) Dr Production overhead control a/c Cr Materials control account
c) Dr Work-in-progress control account Cr Production overhead control a/c
d) Dr Work-in-progress control account Cr Materials control account

28) Appleby buys and sells inventory during the month of August as follows:
Opening inventory 100 units $2.52/unit
4 August Sales 20 units
8 August Purchase 140 units $2.56/unit
10 August Sales 90 units
18 August Purchase 200 units $2.78/unit
20 August Sales 180 units
The periodic weighted average for the month is calculated as follows;
Total value of inventory (opening inventory plus purchase cost during the month) divided by total units
(opening inventory plus purchase cost during the month). Which of the following statements is
true?
a) Closing inventory is $19.50 higher when using FIFO method instead of the periodic weighted
average
b) Closing inventory is $19.50 lower when using the FIFO method instead of the periodic weighted
average
c) Closing inventory is $17.50 higher when using the FIFO method instead of the periodic weighted
average
d) Closing inventory is $17.50 lower when using the FIFO method instead of the periodic weighted
average

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29) Perpetual inventory is the counting and valuing of selected items on a rotating basis.
This statement is;
a) True
b) False

30) The material stores control account for a company for March look like this;
MATERIAL STORES CONTROL ACCOUNT
$ $
Balance b/d 12,000 Work in progress 40,000
Suppliers 49,000 Overhead control 12,000
Work in progress 18,000 Balance c/d 27,000
79,000 79,000
Balance b/d 27,000
Which of the following statements are correct?
1. Issues of direct materials during March were $18,000
2. Issues of direct materials during March were $40,000
3. Issues of indirect materials during March were $12,000
4. Purchases of materials during March were $49,000
a) 1 & 4 only
b) 2 & 4 only
c) 2, 3 & 4 only
d) All of them

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