Chapter 17--Inventory and Production Management

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What are the most important relationships in the value chain? Why is management of inventory costs important to most firms? How do push and pull systems of production control work? Why do product life cycles affect profita ility? What is target costing" and how does it influence production cost management? What is the $ust%in%time philosophy? What modifications does &'( re)uire in accounting systems? What are fle+i le manufacturing systems? How can the theory of constraints help in determining production flow? ./ppendi+0 How are economic order )uantity" reorder point" and safety stock determined and used?

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"R&E()AL$E 12 /n investment in inventory yields a return when it is sold to a third party2 /345 ( 6'75 8oderate O9&5 1*%1

22 /n organi:ation;s value chain can aid in the reduction of non%value added activities2 /345 ( 6'75 <asy O9&5 1*%1

32 =urchases of inventory create a continuous cash outflow each period2 /345 ( 6'75 8oderate O9&5 1*%2

42 <fficient inventory management relies largely on cost%minimi:ation strategies2 /345 ( 6'75 <asy O9&5 1*%2

!2 7i+ed factory overhead is typically the production cost least likely to e minimi:ed in the short run2 /345 ( 6'75 8oderate O9&5 1*%2

#2 'n a push system of production control" inventory is produced in anticipation of customer or work center demand /345 ( 6'75 <asy O9&5 1*%3

*2 'n a pull system of production control" inventory is produced in anticipation of customer or work center demand /345 7 6'75 <asy O9&5 1*%3

,2 (he product life cycle has a significant impact on costs and profits2 /345 ( 6'75 <asy O9&5 1*%4

-2 >irtual reality has een used increasingly in the product design stage2 /345 ( 6'75 <asy O9&5 1*%!

112 =rofit ma+imi:ation is the ma$or focus of value engineering2 /345 7 6'75 8oderate O9&5 1*%!

112 ?ost minimi:ation is the ma$or focus of value engineering2 /345 ( 6'75 8oderate O9&5 1*%!

122 @ai:en costing is most often applied to new products2 /345 7 6'75 8oderate O9&5 1*%!

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132 (arget costing is most fre)uently used in the development stage of a product2 /345 ( 6'75 8oderate O9&5 1*%!

142 'n a $ust%in%time .&'(0 environment" the optimal situation is to have only one vendor for any given item2 /345 ( 6'75 8oderate O9&5 1*%#

1!2 'n a $ust%in%time .&'(0 environment" design changes may e made at any time during the production process2 /345 7 6'75 8oderate O9&5 1*%#

1#2 'n a $ust%in%time .&'(0 environment" design changes must e made early in the production process2 /345 ( 6'75 8oderate O9&5 1*%#

1*2 'n a $ust%in%time .&'(0 environment" )uality is determined continually during the manufacturing process2 /345 ( 6'75 8oderate O9&5 1*%#

1,2 'n a $ust%in%time .&'(0 environment" )uality is determined at )uality control checkpoints in the manufacturing process2 /345 7 6'75 8oderate O9&5 1*%#

1-2 'n a $ust%in%time .&'(0 environment" machines and workers are often rearranged into manufacturing cells2 /345 ( 6'75 8oderate O9&5 1*%#

212 'n a $ust%in%time .&'(0 environment" end%of%period variance analysis and reporting does not occur2 /345 ( 6'75 8oderate O9&5 1*%#

212 9ackflush costing re)uires fewer allocations than traditional accounting methods2 /345 ( 6'75 8oderate O9&5 1*%#

222 When a fle+i le manufacturing system .7840 is used" worker tasks are more diverse than under a traditional manufacturing system2 /345 ( 6'75 8oderate O9&5 1*%*

232 When a fle+i le manufacturing system .7840 is used" response time to needs of the market is slower than under a traditional manufacturing system2 /345 7 6'75 8oderate O9&5 1*%*

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242 Lean manufacturing and $ust%in%time .&'(0 systems are oth concerned with reduction of inventory levels2 /345 ( 6'75 <asy O9&5 1*%*

2!2 9ottlenecks in a production process will cause other parts of the process to e+perience idle time2 /345 ( 6'75 8oderate O9&5 1*%,

2#2 <conomic order )uantity .<OA0 is compati le with $ust%in%time systems2 /345 7 6'75 8oderate O9&5 1*%-

2*2 (he <OA formula can e modified to calculate the num er of units that should e manufactured in a production run2 /345 ( COMPLE"ION 12 (he interrelationships etween an organi:ation and its suppliers and customers are collectively referred to as a.n0BBBBBBBBBBBBBBBBBBBBBBBBBBBBB2 /345 value chain 6'75 <asy O9&5 1*%1 6'75 8oderate O9&5 1*%-

22 (he )uoted price for inventory minus discounts plus shipping charges is referred to as the BBBBBBBBBBBBBBBBBBBBBBBBBBBBBBB2 /345 purchasing cost 6'75 <asy O9&5 1*%2

32 / system of inventory production where goods are produced in anticipation of customer orders is referred to as a BBBBBBBBBBBBBBBBBBBBBBBBBBBBBBB2 /345 push system 6'75 <asy O9&5 1*%3

42 / system of producing inventory where goods are produced only when needed y a customer or work center is referred to as a BBBBBBBBBBBBBBBBBBBBBBBBBBBBBBB2 /345 pull system 6'75 <asy O9&5 1*%3

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!2 / method of product costing that develops an allowa le product cost y estimating what the market will pay for a product with specific characteristics is referred to as BBBBBBBBBBBBBBBBBBBBBBBBBBBB2 /345 target costing 6'75 8oderate O9&5 1*%!

#2 /n artificial" computer%generated environment in which the user has the impression of eing a part of the environment is referred as BBBBBBBBBBBBBBBBBBBBBBBB2 /345 virtual reality 6'75 <asy O9&5 1*%!

*2 / search for various feasi le com inations of resources and methods that will increase functionality and reduce costs is referred to as BBBBBBBBBBBBBBBBBBBBBBBBB2 /345 value engineering 6'75 8oderate O9&5 1*%!

,2 / costing method that involves ongoing efforts for continuous improvement to reduce product costs" increase product )uality and improve the production process after manufacturing activities have egun is referred to as BBBBBBBBBBBBBBBBBBBBBBBBBB2 /345 kai:en costing 6'75 8oderate O9&5 1*%!

-2 (he cooperative strategic planning" controlling" and pro lem solving activities conducted y a company and its vendors and customers to generate efficient and effective transfers of goods and services is referred to as BBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBB2 /345 supply chain management 6'75 8oderate O9&5 1*%#

112 8aking only those items in demand y customers and making those items without waste is referred to as BBBBBBBBBBBBBBBBBBBBBBBBBBBBBB2 /345 lean manufacturing 6'75 8oderate O9&5 1*%*

112 (he theory that the flow of goods through a production process cannot e at a faster rate than the slowest constraint in the process is known as BBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBB2 /345 theory of constraints .(O?0 6'75 <asy O9&5 1*%,

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122 / formula that indicates the optimal num er of units to order is referred to as BBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBB2 /345 economic order )uantity .<OA0 6'75 8oderate M&L"IPLE C*OICE 12 Which of the following is not an ordering cost? a2 cost of receiving inventory 2 cost of preparing the order c2 cost of the merchandise ordered d2 cost of storing the inventory /345 6 6'75 <asy O9&5 1*%2 O9&5 1*%-

22 (he cost of receiving inventory is regarded as a2 an ordering cost2 2 a carrying cost2 c2 a purchasing cost2 d2 a cost of not carrying goods in stock2 /345 / 6'75 <asy O9&5 1*%2

32 / BBBBBBBBBBBBB system of production control is paced y product demand2 a2 <OA 2 /9? c2 push d2 pull /345 6 6'75 <asy O9&5 1*%3

42 Which of the following statements is +a,-e concerning electronic data interchange? a2 <lectronic data interchange .<6'0 is essential in a pull system2 2 One of the enefits reali:ed y <6' organi:ations is a faster processing of transactions2 c2 <lectronic data interchange is essential in a push system2 d2 <lectronic data interchange refers to computer%to%computer e+change of information2 /345 ? 6'75 8oderate O9&5 1*%#

!2 BBBBBBBBBBBBB is a CpullC system of production and inventory control2 a2 <6' 2 <OA c2 &'( d2 /9? /345 ? 6'75 <asy O9&5 1*%#

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#2 'n a &'( system" the )uality of each product egins with a2 a companyDs vendors2 2 employees2 c2 inspection of finished goods inventory2 d2 a good product warranty2 /345 / 6'75 <asy O9&5 1*%#

*2 Eeducing setup time is a ma$or aspect of a2 all push inventory systems2 2 the determination of safety stock )uantities2 c2 a &'( system2 d2 an <OA system2 /345 ? 6'75 <asy O9&5 1*%#

,2 Eeducing inventory to the lowest possi le levels is a ma$or focus of a2 &'(2 2 push inventory systems2 c2 <OA2 d2 /9?2 /345 / 6'75 <asy O9&5 1*%#

-2 &'( is a philosophy concerned with a2 when to do something2 2 how to do something2 c2 where to do something2 d2 how much of something should e done2 /345 / 6'75 <asy O9&5 1*%#

112 When &'( is implemented" which of the following changes in the accounting system would not e e+pected? a2 fewer cost allocations 2 elimination of standard costs c2 com ining la or and overhead into one product cost category d2 com ing raw material and materials in work%in%process into one product cost category /345 9 6'75 8oderate O9&5 1*%#

112 4triving for fle+i ility in the num er of products that can e produced in a short period of time is characteristic of a2 <OA systems2 2 push systems in general2 c2 &'(2 d2 pull systems in general2 /345 ? 6'75 <asy O9&5 1*%#

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122 &ust%in%time .&'(0 inventory systems a2 result in a greater num er of suppliers for each production process2 2 focus on a CpushC type of production system2 c2 can only e used with automated production processes2 d2 result in inventories eing either greatly reduced or eliminated2 /345 6 6'75 <asy O9&5 1*%#

132 (he &'( philosophy does not focus on a2 standardi:ing parts used in products2 2 eliminating waste in the production process2 c2 finding the a solute lowest price for purchased parts2 d2 improving )uality of output2 /345 ? 6'75 <asy O9&5 1*%#

142 'n a &'( manufacturing environment" product costing information is ,ea-t important for use in a2 work in process inventory valuation2 2 pricing decisions2 c2 product profita ility analysis2 d2 make%or% uy decisions2 /345 / 6'75 8oderate O9&5 1*%#

1!2 With &'( manufacturing" which of the following costs would e considered an indirect product cost? a2 cost of specific%purpose e)uipment 2 cost of e)uipment maintenance c2 property ta+es on the plant d2 salary of a manufacturing cell worker /345 ? 6'75 <asy O9&5 1*%#

1#2 With &'( manufacturing" which of the following costs would e considered a direct product cost? a2 insurance on the plant 2 repair parts for machinery c2 $anitorsD salaries d2 salary of the plant supervisor /345 9 6'75 8oderate O9&5 1*%#

1*2 Which of the following statements is not true? a2 &'( manufacturing strives for :ero inventories2 2 &'( manufacturing strives for :ero defects2 c2 &'( manufacturing uses manufacturing cells2 d2 &'( manufacturing utili:es long lead time and few deliveries2 /345 6 6'75 <asy O9&5 1*%#

1,2 (he &'( environment has caused a reassessment of product costing techni)ues2 Which of the following statements is true with respect to this reassessment? a2 (raditional cost allocations ased on direct la or are eing )uestioned and critici:ed2 2 (he federal government" through the 4<?" is responsi le for the reassessment2 c2 (he reassessment is caused y the replacement of machine hours with la or hours2 d2 3one of the a ove is true2 /345 / 6'75 8oderate O9&5 1*%#

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1-2 When a firm adopts the $ust%in%time method of management" a2 employees are retrained on different e)uipment" ut the plant layout generally remains unchanged2 2 new machinery and e)uipment must e purchased from franchised &'( dealers2 c2 machinery and e)uipment are moved into small autonomous production lines called islands or cells2 d2 new" more efficient machinery and e)uipment are purchased and installed in the original plant layout2 /345 ? 6'75 8oderate O9&5 1*%#

212 Which of the following descri es the effect on direct la or when management adopts the &'( philosophy? a2 <ach direct la or person performs a single task" there y allowing that person to reach his or her theoretical potential2 2 9ecause each person runs a single machine in a &'( environment" there are more employees classified as direct la or2 c2 (he environment ecomes more la or%intensive2 d2 8achine operators are e+pected to run several different types of machines" help set up for production runs" and identify and repair machinery needing maintenance2 /345 6 6'75 8oderate O9&5 1*%#

212 &'( concepts a2 can e effectively implemented in organi:ations that are only partially automated2 2 are only appropriate for use with ?'8 systems2 c2 involve shifting from a capital%intensive to a la or%intensive process2 d2 re)uire full computeri:ation of the &'( manufacturing process2 /345 / 6'75 <asy O9&5 1*%#

222 /ccording to &'( philosophy" a2 inventories of finished goods always should e availa le to meet customer demand2 2 push%through manufacturing flows are the most efficient2 c2 maintaining inventories wastes resources and fre)uently covers up poor work or other pro lems2 d2 long production runs and large production lot si:es take advantage of economies of scale2 /345 ? 6'75 8oderate O9&5 1*%#

232 /ccounting for product costs in a &'( environment a2 uses a $o order costing system2 2 classifies processing costs as raw .or direct0 material" direct la or" and overhead2 c2 is more comple+ than in other types of manufacturing environments2 d2 follows process costing procedures where y costs are accumulated y the process .cell0 and attached to units processed for the period2 /345 6 6'75 8oderate O9&5 1*%#

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242 /n implication of the demand%pull nature of the &'( production process is that a2 finished goods inventories must e availa le to meet customer demand" although raw material is delivered on an as%needed asis2 2 more storage space for inventories is necessary2 c2 finished products are packaged and shipped to customers immediately" thus re)uiring minimal finished goods inventories2 d2 pro lem areas ecome less visi le as inventories are reduced2 /345 ? 6'75 8oderate O9&5 1*%#

2!2 'n accounting for &'( operations" the Eaw 8aterial 'nventory account a2 is closely monitored to ensure that materials are always on hand in time2 2 can e e+pected to have a larger alance than with traditional manufacturing methods2 c2 is com ined with the Work 'n =rocess 'nventory account2 d2 is com ined with the 7inished Foods 'nventory account2 /345 ? 6'75 <asy O9&5 1*%#

2#2 / kan an plays an important role in a2 &'(2 2 <OA2 c2 /9?2 d2 ?=82 /345 / 6'75 <asy O9&5 1*%#

2*2 BBBBBBBBBBBBBBBBBBBB may involve relocation or plant moderni:ation y a vendor2 a2 7ocused factory arrangements 2 <conomic order )uantity c2 8ultiprocess handling d2 /ctivity% ased management /345 9 6'75 8oderate O9&5 1*%-

2,2 (he term CcellC is used to descri e a2 a grouping of one or more automated machines within a company2 2 a storage in for C?C type inventory in an /9? inventory system2 c2 files in a ?/6G?/8 system2 d2 a factoryDs area of conversion activity2 /345 / 6'75 <asy O9&5 1*%#

2-2 'n a production cell" a2 an individual worker may e e+pected to operate several different machines" do setups" and perform preventive maintenance on the e)uipment2 2 each worker ecomes an e+pert in the operation of a single piece of e)uipment2 c2 machines are arranged so that similar machines are grouped together2 d2 clear separation is maintained etween those workers who operate the machinery and those workers who set up and maintain the machinery2 /345 / 6'75 8oderate O9&5 1*%#

111

312 H%shaped groupings of workers and machines that improve materials handling and flow are known as a2 manufacturing cells2 2 efficiency stations2 c2 multi%flow modules2 d2 productivity islands2 /345 / 6'75 <asy O9&5 1*%#

312 7or workers in a multiprocess handling situation" which of the following happens? 8ore fle+i ility a2 2 c2 d2
no no yes yes

Less process involvement

no yes yes no

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322 (he process of BBBBBBBBB occurs when e)uipment is programmed to stop when a certain situation arises2 a2 throughput 2 automation c2 ackflushing d2 information sharing /345 9 6'75 <asy O9&5 1*%#

332 (he connection of two or more fle+i le manufacturing systems via a host computer and a networking information system is known as computer integrated manufacturing a2 2 c2 d2
yes yes no no

electronic data interchange

yes no no yes

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342 / key element of &apanDs success in world markets is a2 the elimination of waste in all operations2 2 automation of the illing function2 c2 inefficient la or forces in competing countries2 d2 the verification procedures incorporated into computer programs2 /345 / 6'75 <asy O9&5 1*%*

111

3!2 9ackflush costing is concerned with which of the following? 4tandard costs a2 2 c2 d2
yes no yes no

8inimal variances from standards

no no yes yes

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3#2 Which of the following areas offers an opportunity to eliminate waste? a2 raw material and la or 2 space and production time c2 recordkeeping and working capital d2 all of the a ove /345 6 6'75 <asy O9&5 1*%*

3*2 7le+i le manufacturing systems are a2 designed to provide more fle+i ility in a firmDs manufacturing process y using computer% aided machinery2 2 the same as computer%aided design systems2 c2 commonly used y firms that need to make large )uantities of one product2 d2 are very complicated and cause increased defect rates in output2 /345 / 6'75 <asy O9&5 1*%*

3,2 @ai:en means a2 doing it the &apanese way2 2 continuous improvement2 c2 employee empowerment2 d2 implementation of a centrali:ed organi:ational structure2 /345 9 6'75 <asy O9&5 1*%!

3-2 (he process that determines an allowa le product cost while setting market price and allowing for an accepta le profit margin is known as a2 target costing2 2 product life cycle costing2 c2 activity% ased costing2 d2 responsi ility costing2 /345 / 6'75 <asy O9&5 1*%!

412 (he peak level of unit sales will occur in which stage of the product life cycle? a2 growth 2 maturity c2 decline d2 introduction /345 9 6'75 <asy O9&5 1*%4

112

412 7or product life cycle costing" EI6 costs are a2 e+pensed as incurred2 2 capitali:ed and allocated over the life cycle2 c2 deducted as period costs2 d2 charged to specific departments as incurred2 /345 9 6'75 <asy O9&5 1*%4

422 /n important focus in product life cycle costing is a2 the activity ase2 2 the target cost2 c2 the cost driver2 d2 varia le costs2 /345 9 6'75 <asy O9&5 1*%4

432 =ro$ected sales price minus a reasona le profit e)uals a2 the standard cost2 2 contri ution margin2 c2 pro$ected ?ost of Foods 4old2 d2 target cost2 /345 6 6'75 <asy O9&5 1*%!

442 /ppro+imately what percentage of future product costs is determined in the development stage of the product life cycle? a2 31J 2 !1J c2 *1J d2 -1J /345 6 6'75 <asy O9&5 1*%4

4!2 Which of the following fluctuate over the product life cycle? a2 sales price per unit 2 the types of costs that are incurred c2 product profita ility d2 all of the a ove /345 6 6'75 <asy O9&5 1*%4

4#2 'n which of the following stages of the product life cycle would operating losses not e e+pected? a2 growth 2 development c2 introduction d2 decline /345 / 6'75 <asy O9&5 1*%4

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4*2 6uring which stage of the product life cycle will a company witness the highest profit? a2 development 2 maturity c2 growth d2 decline /345 ? 6'75 <asy O9&5 1*%4

4,2 ?ost ta les are data ases that provide information on which of the following? a2 design specifications 2 manufacturing processes c2 impact on product costs when different inputs resources are used d2 all of the a ove /345 6 6'75 <asy O9&5 1*%!

4-2 Ongoing efforts to reduce costs" increase product )uality" andGor improve production process once manufacturing has egun is known as a2 cost management2 2 kai:en costing2 c2 target costing2 d2 life%cycle costing2 /345 9 6'75 <asy O9&5 1*%!

!12 @ai:en costing is used for which of the following types of products? 3ew products a2 2 c2 d2
yes no no yes

<+isting products
yes yes no no

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!12 / mandate to reduce costs" increase product )uality" andGor improve production processes through continuous improvement is known as a2 kai:en costing2 2 activity% ased costing2 c2 the theory of constraints2 d2 mass customi:ation2 /345 / 6'75 <asy O9&5 1*%!

!22 'f life%cycle costs e+ceed the target cost of a product" managers will strive to reduce a2 the cost of special orders2 2 the level of activities that are non%value%added2 c2 product variety2 d2 period costs2 /345 9 6'75 <asy O9&5 1*%!

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!32 (he pro$ected sales price for a new product .which is still in the development stage of the product life cycle0 is K!12 (he company has estimated the life%cycle cost to e K31 and the first%year cost to e K#12 On this type of product" the company re)uires a K12 per unit profit2 What is the target cost of the new product? a2 K#1 2 K31 c2 K3, d2 K42 /345 ? 6'75 <asy O9&5 1*%!

!42 (he theory of constraints can a2 identify what limitations e+ist with raw material suppliers2 2 follows a methodology similar to linear programming2 c2 e ignored since it assumes too many estimates in the production cycle2 d2 show where ottlenecks e+ist and sets the limit of output to these ottlenecks2 /345 6 6'75 <asy O9&5 1*%,

!!2 =lacing )uality inspection points ahead of ottlenecks will reduce a2 product flow2 2 the num er of defective products2 c2 the influence of constraints on production flow2 d2 the critical path time2 /345 ? 6'75 8oderate O9&5 1*%,

!#2 Auality inspection points should a2 precede ottlenecks2 2 follow ottlenecks2 c2 e placed at the end of all production processes2 d2 e placed at random points in the manufacturing process2 /345 / 6'75 <asy O9&5 1*%,

!*2 (he flow of goods through a production process cannot e at a faster rate than the slowest ottleneck is the definition for a2 mass customi:ation2 2 usiness process reengineering2 c2 the theory of constraints2 d2 the =areto principle2 /345 ? 6'75 <asy O9&5 1*%,

!,2 9ottlenecks are a2 machine constraints in the production line2 2 machine constraints that restrict the production cycle so idle time at other processes occurs2 c2 useful for identifying any production spot slowdown2 d2 restrictions on raw material sources ut not the )uantity of output2 /345 9 6'75 <asy O9&5 1*%,

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!-2 'n analy:ing production flow" a ottleneck is a2 an intermediate inventory2 2 always off the critical path2 c2 a capacity constraint2 d2 related to a non%value%adding activity2 /345 ? 6'75 <asy O9&5 1*%,

#12 =roduct profit margins are typically $udged on a =eriod% y%period asis a2 2 c2 d2
yes yes no no

Life%cycle asis
yes no yes no

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#12 Which approaches to costing should e associated with each of the following life%cycle stages? 6evelopment a2 2 c2 d2
Kaizen Target Target Kaizen

'ntroduction
Target Standard Kaizen Standard

8aturity
Standard Kaizen Standard Target

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#22 'n the introduction stage of a productDs life%cycle" which of the following type of costs typically may create losses rather than profits? a2 advertising 2 assem ly c2 design d2 overhead /345 / 6'75 8oderate O9&5 1*%4

#32 8ost studies have indicated that what percent of a productDs total life%cycle costs are determined in the developmentGdesign stage? a2 #1J%*1J 2 *1J%,1J c2 ,1J%-1J d2 -1J%-!J /345 ? 6'75 <asy O9&5 1*%4

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#42 Which of the following costing methods is the most effective in controlling a productDs total life%cycle cost? a2 kai:en costing 2 target costing c2 standard costing d2 process costing /345 9 6'75 8oderate O9&5 1*%!

#!2 Which of the following formulas is the est representation of the concept of target costing? a2 target cost L profit margin M selling price 2 selling price % target cost M profit margin c2 selling price % profit margin M target cost d2 target cost % standard cost M profit margin /345 ? 6'75 <asy O9&5 1*%!

##2 4uccessful product development should include a2 kai:en costing2 2 value engineering2 c2 kan an implementation2 d2 all of the a ove2 /345 9 6'75 8oderate O9&5 1*%!

#*2 >alue engineering seeks to o tain increased a2 product life%cycle and reduced direct la or inputs2 2 planning team mem ership and reduced time%to%market2 c2 product performance ratio and reduced su stitute goods2 d2 product functionality and reduced costs2 /345 6 6'75 6ifficult O9&5 1*%!

#,2 (arget costing a2 can e applied to services if they are sufficiently uniform2 2 can e applied to services only if they are automated2 c2 can e applied to services that are performed in a manufacturing environment2 d2 cannot e applied to services2 /345 / 6'75 8oderate O9&5 1*%!

#-2 @ai:en costing helps to a2 reduce product costs of products in the design and development stage2 2 keep the target cost as the primary focus after a product enters production2 c2 keep profit margin relatively sta le as product price declines over the product life cycle2 d2 reduce the cost of engineering change orders during each stage of the product life cycle2 /345 ? 6'75 6ifficult O9&5 1*%!

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*12 'n which life%cycle stage are product )uality improvements and sta le selling prices likely to occur? a2 introduction 2 growth c2 maturity d2 decline /345 9 6'75 8oderate O9&5 1*%4

*12 7rom a cost management view" research and development cost represents a2 a life%cycle investment 2 a period e+pense2 c2 an unearned revenue2 d2 a risk reserve2 /345 / 6'75 8oderate O9&5 1*%4

*22 Life%cycle costing is especially important in which of the following types of companies? ?omputers a2 2 c2 d2
yes no yes yes

7urniture
yes yes no no

(e+t ooks
yes yes no yes

/utomo iles
yes no yes yes

/345 ?

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*32 Kanban is the &apanese word for a2 production2 2 $ust%in%time2 c2 card2 d2 target costing2 /345 ? 6'75 <asy O9&5 1*%#

*42 &'( seeks to a2 reduce production cost while increasing )uality2 2 radically redesign the production process for effectiveness2 c2 modify all non%value%added activities2 d2 all of the a ove2 /345 / 6'75 6ifficult O9&5 1*%#

*!2 (he &'( philosophy indicates that inventory" as well as which of the following" should e eliminated? 4uppliers a2 2 c2 d2
yes yes no no

4torage
yes yes no yes

<mployees
yes no yes no

9usiness%>alue% /dded /ctivities

yes no no yes

/345 6

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*#2 ?ompanies have often produced significant amounts of unwanted inventory ecause of a2 varia le overhead allocation methodologies2 2 fi+ed overhead allocation methodologies2 c2 varia le and fi+ed overhead allocation methodologies2 d2 the financial accounting re)uirement to e+pense research and development as incurred2 /345 9 6'75 8oderate O9&5 1*%#

**2 Foods will flow through a production process at the rate of the a2 slowest part of the process2 2 fastest part of the process2 c2 average of all the parts of the process2 d2 time standards set using e+ternally cali rated enchmarks2 /345 / 6'75 8oderate O9&5 1*%,

*,2 / machine constraint creates a2 an autonomation2 2 a ottleneck2 c2 a push inventory system2 d2 the need for third%party logistics2 /345 9 6'75 <asy O9&5 1*%,

*-2 'n a production process with a machine constraint" if a )uality control point is to e esta lished" it should e set up a2 within the machineDs processes2 2 directly after the machine has performed its functions2 c2 immediately efore the machine2 d2 at the end of the production process2 /345 ? 6'75 <asy O9&5 1*%,

,12 8anaging constraints is a process of a2 ackflush costing2 2 design for manufactura ility2 c2 $ust%in%time redesign2 d2 continuous improvement2 /345 6 6'75 8oderate O9&5 1*%,

,12 =recious &ewels ?orporation produces )uality $ewelry items for various retailers2 7or the coming year" it has estimated it will consume !11 ounces of gold2 'ts carrying costs for a year are K2 per ounce2 3o safety stock is maintained2 'f the <OA is 111 ounces" what is the cost per order? a2 K41 2 K21 c2 K! d2 K2! /345 9 <OA M 111 M 11"111 M !11+ K21 M + 6'75 8oderate O9&5 1*%-

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,22 =recious &ewels ?orporation produces )uality $ewelry items for various retailers2 7or the coming year" it has estimated it will consume !11 ounces of gold2 'ts carrying costs for a year are K2 per ounce2 3o safety stock is maintained2 'f the <OA is 111 ounces" what would e the estimate for =recious &ewels; total carrying costs for the coming year? a2 K211 2 K2!1 c2 K111 d2 K1"111 /345 ? !11 o:G111 o: M ! orders per year N K21 per order cost M K111 6'75 8oderate O9&5 1*%-

,32 / firm estimates that its annual carrying cost for material O is K231 per l 2 'f the firm re)uires !1"111 l s2 per year" and ordering costs are K111 per order" what is the <OA .rounded to the nearest pound0? a2 !"**4 l s2 2 4"1,2 l s2 c2 1"*32 l s2 d2 1"22! l s2 /345 / <OA M <OA M !"**4 l s2 6'75 8oderate .ed,ar Corporation Pedlar ?orporationDs <OA for 8aterial / is !11 units2 (his <OA is ased on5 /nnual demand Ordering costs !"111 units K122!1 O9&5 1*%-

,42 Eefer to Pedlar ?orporation2 What is the annual carrying cost per unit for 8aterial /? a2 K12!1 2 K2211 c2 K22!1 d2 K!211 /345 / <OA M !11 units M ?? M K12!1 6'75 8oderate O9&5 1*%-

111

,!2 Eefer to Pedlar ?orporation2 What are Pedlar;s ?orp2Ds total annual ordering costs for 8aterial /? a2 K#"111 2 K#11 c2 K12! d2 K1"111 /345 ? Q of orders per year M !"111G!11 M 11 orders per year 11 orders per year N K122!1 M K12!211 6'75 8oderate O9&5 1*%-

C,ear 'ay Corporation ?lear 6ay ?orporation manufactures various glass products including a car window2 (he setup cost to produce the car window is K1"2112 (he cost to carry a window in inventory is K3 per year2 /nnual demand for the car window is 12"111 units2 ,#2 Eefer to ?lear 6ay ?orporation2 What is the most economical production run .rounded to the nearest unit0? a2 #"111 units 2 3"111 units c2 -"2-! units d2 3"1-, units /345 6 <OA M <OA M 3"1-, units 6'75 8oderate O9&5 1*%-

,*2 Eefer to ?lear 6ay ?orporation2 'f the annual demand for the car window was to increase to 1!"111 units" a2 the num er of setups would decrease2 2 the total carrying costs would increase2 c2 the economic order )uantity would decline2 d2 all of the a ove would occur2 /345 9 6'75 <asy O9&5 1*%-

111

,,2 / company has estimated its economic order )uantity for =art / at 2"411 units for the coming year2 'f ordering costs are K211 and carrying costs are K2!1 per unit per year" what is the estimated total annual usage? a2 #"111 units 2 2,",11 units c2 *"211 units d2 2"411 units /345 ? <OA M 2"411 units M /H M *"211 units 6'75 8oderate O9&5 1*%-

,-2 / company annually consumes 11"111 units of =art ?2 (he carrying cost of this part is K2 per year and the ordering costs are K1112 (he company uses an order )uantity of !11 units2 9y how much could the company reduce its total costs if it purchased the economic order )uantity instead of !11 units? a2 K!11 2 K2"111 c2 K2"!11 d2 K1 /345 / <OA M <OA M 1"111 units /t present" 21 orders are placed for a total annual cost of K2"1112 'f the <OA is used" 11 orders will e placed at a cost of K1"111 9ecause an average of an additional 2!1 units will e on hand" carrying costs will increase y K!112 (he net difference is a savings of K!112 6'75 8oderate O9&5 1*%-

-12 / company annually consumes 11"111 units of =art ?2 (he carrying cost of this part is K2 per year and the ordering costs are K1112 (he company uses an order )uantity of !11 units2 'f the company operates 211 days per year" and the lead time for ordering =art ? is ! days" what is the order point? a2 2!1 units 2 1"111 units c2 !11 units d2 2"111 units /345 / Order point M 6aily use N Lead time M .11"111G2110 N ! M 2!1 units 6'75 8oderate O9&5 1*%-

112

-12 Which of the following tells management CwhenC to order? a2 safety stock level 2 order point c2 the economic order )uantity d2 the =areto inventory analysis /345 9 6'75 <asy O9&5 1*%-

-22 Which of the following affects the order point? a2 daily usage 2 lead time c2 safety stock d2 all of the a ove /345 6 6'75 <asy O9&5 1*%-

-32 / decrease in the lead time would reduce the a2 order point2 2 safety stock2 c2 economic order )uantity2 d2 ordering costs2 /345 / 6'75 <asy O9&5 1*%-

-42 (he si:e of the safety stock is directly affected y all of the following" e/cept the a2 cost of a stockout2 2 pro a ility of a stockout2 c2 carrying cost of stock2 d2 economic order )uantity2 /345 6 6'75 <asy O9&5 1*%-

-!2 'f no safety stock is carried" the average inventory is e)ual to the a2 order pointG22 2 order point + 22 c2 economic order )uantityG22 d2 economic order )uantity + 22 /345 ? 6'75 <asy O9&5 1*%-

-#2 (he role of safety stock in an organi:ation is to a2 reduce the lead time for an order to e received2 2 reduce the pro a ility of a stockout2 c2 reduce the order point2 d2 decrease the economic order )uantity2 /345 9 6'75 <asy O9&5 1*%-

-*2 (he optimal si:e of the safety stock is defined y the point where the a2 costs of carrying the safety stock e)ual stockout costs2 2 setup costs e)ual stockout costs2 c2 ordering costs e)ual stockout costs2 d2 reorder point e)uals safety stock2 /345 / 6'75 8oderate O9&5 1*%-

113

-,2 'f a company carries safety stock and its annual carrying costs per unit are K1231" what formula yields the total annual carrying costs? a2 K1231 + R.<OAG20 L 4afety stock0S 2 K1231 + .<OA L 4afety stock0 c2 K1231 + R.<OA + 20 L 4afety stock0S d2 K1231 + .<OA % 4afety stock0 /345 / 6'75 <asy O9&5 1*%-

'oug,a- Corporation 6ouglas ?orporation operates its factory 311 days per year2 'ts annual consumption of 8aterial T is 1"211"111 gallons2 't carries a 11"111 gallon safety stock of 8aterial T and its lead time is 12 usiness days2 --2 Eefer to 6ouglas ?orporation2 What is the order point for 8aterial T? a2 11"111 gallons 2 3,"111 gallons c2 4,"111 gallons d2 !,"111 gallons /345 6 Order point M .6aily use N Lead time0 L 4afety 4tock M .4"111 N 120 L 11"111 M !,"111 gallons 6'75 8oderate O9&5 1*%-

1112 Eefer to 6ouglas ?orporation2 'f the <OA for 8aterial T is 31"111 gallons" and the carrying cost per gallon per year is K22!" what is the total annual carrying cost for 8aterial T? a2 K3"*!1 2 K*"!11 c2 K#"2!1 d2 K11"111 /345 ? /nnual carrying cost M R.<OAG20 L 4afety stockS N per unit carrying cost M .1!"111 L 11"1110 N K122! M K#"2!1 6'75 8oderate O9&5 1*%-

114

1112 /tkins ?orporation consumes 1"211"111 gallons of 8aterial T per year2 'ts order )uantity is 31"111 gallons2 't maintains a safety stock of 11"111 gallons and its annual carrying costs are K122! per gallon per year2 'f the ordering cost is K21 per order" what are the total annual ordering costs? a2 K#11 2 K,11 c2 K,"311 d2 K1"211 /345 9 /nnual ordering costs M .1"211"111G31"1110 N K21 M 41 orders N K21 M K,11 6'75 8oderate O9&5 1*%-

Ra0-on Corporation Eawson ?orporation;s order )uantity for 8aterial ( is !"111 l s2 'f the company maintains a safety stock of ( at !11 l s2" and its order point is 1"!11 l s2 1122 Eefer to Eawson ?orporation2 What is the lead time assuming daily usage is !1 l s2? a2 31 days 2 111 days c2 11 days d2 21 days /345 6 Order point M .6aily use N Lead time0 L 4afety 4tock 1"!11 M .!1 N L(0 L !11 1"111 M .!1 N L(0 21 M L( 6'75 8oderate O9&5 1*%-

1132 Eefer to Eawson ?orporation2 What would e the total annual carrying costs assuming the carrying cost per unit is K1221? a2 K1"111 2 K#11 c2 K111 d2 K1"111 /345 9 .!"111unitsG20 L !11 units M 3"111 units NK1221Gunit M K#11 6'75 8oderate O9&5 1*%-

11!

1142 7or Eaw 8aterial 9" a company maintains a safety stock of !"111 pounds2 'ts average inventory .taking into account the safety stock0 is ,"111 pounds2 What is the apparent order )uantity? a2 1#"111 l s2 2 #"111 l s2 c2 11"111 l s2 d2 21"111 l s2 /345 9 .,"111 % !"1110 l s N 2 M #"111 l s2 6'75 8oderate O9&5 1*%-

11!2 'n an =areto inventory analysis" the items that are mo-t ,i1e,y to e controlled with a red%line system are the a2 / items2 2 9 items2 c2 ? items2 d2 items on a perpetual inventory2 /345 ? 6'75 <asy O9&5 1*%-

11#2 Which of the following might e appropriate for items in the C?C category of an =areto inventory analysis? a2 a red%line system 2 a two% in system c2 a periodic inventory system d2 all of the a ove /345 6 6'75 8oderate O9&5 1*%-

11*2 (he BBBBBBBBBBBBBBBBBB would not affect the economic order )uantity2 a2 companyDs weighted average cost of capital 2 cost of purchase re)uisition forms c2 cost of insuring inventory d2 cost of a stockout /345 6 6'75 8oderate O9&5 1*%-

11,2 /ll other factors e)ual" a decrease in the order )uantity will a2 decrease the annual carrying costs2 2 decrease the annual ordering costs2 c2 increase the lead time2 d2 reduce the safety stock2 /345 / 6'75 <asy O9&5 1*%-

11-2 (he economic order )uantity is not affected y the a2 estimate of the annual material consumption2 2 cost of insuring a unit of inventory for a year2 c2 cost of purchase%order forms2 d2 safety stock level2 /345 6 6'75 <asy O9&5 1*%-

11#

1112 / decrease in the price of a raw material could result in a.n0 a2 increase in the lead time2 2 increase in the <OA2 c2 decrease in the order point2 d2 increase in the setup costs2 /345 9 6'75 8oderate O9&5 1*%-

1112 (he num er of orders that will e su mitted each year for raw material is given y which formula? a2 <conomic order )uantity + order point 2 (otal annual material needsGeconomic order )uantity c2 Order pointGeconomic order )uantity d2 (otal annual material needsGsafety stock /345 9 6'75 <asy O9&5 1*%-

1122 (he economic production run )uantity directly affects the a2 order point for raw material inventories2 2 safety stock for finished goods inventory2 c2 level of finished goods inventory2 d2 lead time for producing finished goods inventory2 /345 ? $*OR" AN$2ER 12 Why may a &'( control system e useful in disclosing a firmDs inefficiencies and pro lems? /345 (he &'( control system is ased on a philosophy that inventory is undesira le2 4u scri ers to the &'( philosophy elieve inventory reductions e+pose organi:ational pro lems and inefficiencies2 (hese pro lems and inefficiencies may not e rought to managementDs attention if inventories are not pushed to lower and lower levels2 (hey would remain hidden and undetecta le at higher levels of inventory2 6'75 8oderate O9&5 1*%# 6'75 8oderate O9&5 1*%-

22 What is the purpose of the <OA model? /345 (he purpose of the <OA model is to identify the least cost )uantity of a material to e purchased at each order point2 (he model e+plicitly considers the carrying and ordering costs and identifies the purchase )uantity that minimi:es the total of these costs2 6'75 8oderate O9&5 1*%-

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32 Why does a CpushC ased inventory control system generate larger inventory levels than a CpullC system? /345 Larger levels of inventory e+ist y design in push production control systems2 (he inventory uffers permit lower levels of communication etween usiness segments" permit longer production runs" and protect the firm from environmental uncertainties and unforeseen interruptions in production or supplies2 6'75 8oderate O9&5 1*%3

42 What does the term CpullC mean in the conte+t of production control? /345 =ull simply refers to the fact that the pace and level of production are geared to product demand2 <ach work center sets the pace for the ne+t upstream work center2 ?ustomer demand paces the final downstream work center2 6'75 8oderate O9&5 1*%3

!2 'dentify and discuss how sales and costs are affected during the five stages of the product life cycle2 /345 (he five stages of the product life cycle are .10 development" .20 introduction" .30 growth" .40 maturity" and .!0 decline2 'n the development stage" no production costs or sales e+ist" ut E I 6 costs are e+tremely high2 6uring the introduction stage low unit sales e+ist while high advertising costs are evident2 (he growth stage sees increasing unit sales and decreasing production costs per unit2 (he maturity stage witnesses peak unit sales and a sta ili:ation of production costs per unit2 6uring the decline stage unit sales decrease while production costs per unit increase2 6'75 8oderate O9&5 1*%4

#2 6iscuss differences in approach and potential usage etween target and kai:en costing2 /345 (arget costing is considered a procedural approach that is used to determine a ma+imum allowa le cost for a product" while kai:en costing is a mandate to reduce costs" increase product )uality" andGor improve production process through continuous improvement2 (arget costing has a large potential for cost reduction in life%long product cost ecause these costs are em edded in the product during design and development2 @ai:en costing has limited potential in cost reduction of e+isting products" ut may e useful in target costing in the future2 6'75 8oderate O9&5 1*%!

*2 How does adopting a &'( system affect the firmDs relationship with suppliers and how must suppliers change their way of doing usiness? /345 (he &'( manufacturer will limit the num er of suppliers to a few2 Long%term contracts are entered into with suppliers2 4uppliersD raw material must e top )uality with no defects2

11,

4mall )uantities of raw material are delivered fre)uently and little or no raw material is maintained y the uyer2 4uppliers must e located close enough to the &'( uyer to deliver small )uantities very )uickly2 (he supplier must agree to providing a top%)uality product to its &'( customer2 6'75 8oderate O9&5 1*%#

,2 Why is it important for a company to e .geographically0 close to its suppliers to implement a &'( inventory control system? /345 (he geographical pro+imity is important to minimi:e shipping and handling costs of supplies and materials2 Feographical pro+imity also facilitates fre)uent communication and $oint planning etween a supplier and customer2 6'75 8oderate O9&5 1*%#

-2 Why might it e necessary to make ad$ustments to the accounting system in a firm that adopts &'(? /345 &'( production control systems foster automation and reduced levels of inventory2 ?onse)uently" raw material inventories and direct la or costs may e too small to warrant separate cost pools%they can e com ined with other cost pools2 /dditional ad$ustments may e necessary to accommodate standard costs" which are constantly ad$usted to reflect the latest technological changes in production methods2 /lso" more costs could e traced to specific products and fewer costs would have to e allocated2 6'75 8oderate O9&5 1*%#

112 What is the relationship etween warehouse space and the length of production runs? /345 Longer production runs increase the levels of specific inventories2 (o accommodate long production runs" significant warehouse space needs to e availa le for storing intermediate and final products2 6'75 8oderate O9&5 1*%-

112 What are the three primary goals of the $ust%in%time .&'(0 philosophy? /345 12 <limination of any production process or operation that does not add value to the product or service2 22 ?ontinuous improvement in productionGperformance efficiency2 32 Eeduction in the total cost of productionGperformance while increasing )uality2 6'75 8oderate O9&5 1*%#

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122 What are the principal characteristics of the 'nternet usiness model? /345 (his model refers to a usiness with few physical assets" little management hierarchy" and a direct pipeline to customers2 6'75 8oderate O9&5 1*%#

132 ?ompare and contrast traditional manufacturing systems with fle+i le manufacturing systems on the following factors5 )actor "raditiona, Manu+acturing ),e/i3,e Manu+acturing $y-tem =roduct >ariety Eesponse time to market needs Worker tasks =roduction runs Lot si:es 4etups 'nformation re)uirements =roduction activity /345 )actor =roduct >ariety Eesponse time to market needs Worker tasks =roduction runs Lot si:es 4etups 'nformation re)uirements =roduction activity 6'75 6ifficult PRO LEM 12 4print 8anufacturing ?ompany estimates that it will consume 411"111 units of =art 111 in the coming year2 (he ordering cost for this unit is K32212 What would e the carrying costs per unit if the <OA model indicates that it is optimal to place e+actly !1 orders for the upcoming year? /345 'f pro$ected usage for the year is 411"111 units" the <OA would e ,"111 units .411"111G!102 (o determine the carrying costs per unit" the following e)uation is solved5 "raditiona, Manu+acturing Limited 4low 4peciali:ed Long Large 4low and e+pensive 9atch%oriented La or intensive ),e/i3,e Manu+acturing $y-tem <+tensive Eapid 6iverse 4hort 4mall 7ast and ine+pensive On%line real time (echnology intensive

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22 Orange ?orporation estimates that it will consume 411"111 units of =art 313 in the coming year2 (he ordering cost for this unit is K32212 Orange ?orporation wants to maintain a safety stock of 1"111 units" and its factory operates 211 days per year2 What is the order point if the lead time is 2 days? /345 (he order point M .daily usage + lead time0 L safety stock daily usage M 411"111G211 M 2"111U lead time M 2 days" safety stock M 1"111 Order point M .2"111 + 20 L 1"111 M !"111 units 6'75 8oderate O9&5 1*%-

32 4crumptious 4pices manufactures a special lend of eef marinade2 (he company uys one of the spices used in the marinade in 11%pound ags that cost K! each2 (he company uses !1"111 of the ags per year" and usage occurs evenly throughout the year2 (he average cost to carry a 11%pound ag in inventory per year is K12 (he cost to place an order is K122 12 6etermine the economic order )uantity for the spice in terms of 11 pound ags2

22 'f the company works 2!1 days per year" on average how many ags of spice are used per working day?

32 'f the lead time for an order is normally five working days" determine the reorder point2

42 'f the company normally carries !1 ags as safety stock" determine the reorder point for the spice2

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/345 12 <OA M where <OA M <conomic order )uantity = M ?ost of placing and receiving an order 6 M /nnual demand in units ? M annual cost of carrying one unit in stock for one year <OA M M 1"1-! ags 22 9ags used per day M !1"111G2!1 M 211 ags per working day2 32 Eeorder point M Eate of usage + Lead time M 211 ags + ! working days M 1"111 ags 42 Eeorder point M ./verage rate of usage + Lead time0 L 4afety stock M .211 ags + ! days0 L !1 days M 1"1!1 ags 6'75 8oderate O9&5 1*%-

42 9enoit ?orporation produces lawn chairs2 'n order to produce the frames for the furniture" special e)uipment must e set up2 (he setup cost per frame is K!12 (he cost of carrying frames in inventory is K4 per frame per year2 (he company produces 11"111 lawn chairs per year2 12 ?ompute the num er of frames that should e produced per setup in order to minimi:e total setup and carrying costs2

22 ?ompute the total setup and carrying costs associated with the economic order )uantity? /345 12 <OA M <OA M !11 frames should e produced per setup2 22 (otal setup costs M .K!10.11"111G!110 K1"111 (otal carrying costs M .K40.!11G20 M K1"111 6'75 8oderate O9&5 1*%-

122