Chapter 6

Question 1

Define inventory.

Answer 1

Inventory is defined as stockpile or store of goods.
Inventory is one of the most expensive assets.

Question 2

How to calculate ROI?

Answer 2

ROI = profit - Tax/Total assets.

Question 3

What are the types of inventory and explain them.

Answer 3

1. Raw materials - the material that is going to be used in order to produce the product.
2. Work in progress - goods entered the production process but are not emerged yet.
3. Finished goods - goods that are ready to be delivered to customers.
4. Maintenance and repair
5. Pipeline - goods are in transit between the business and the customer.

Question 4

What is just-in-time (JIT) and give an example.

Answer 4

JIT is an inventory management approach where goods are received from the supplier only when they are required.
Example is Shein. (Customer makes an order, Shein receives goods from supplier and manufactors the product and sends it to customer.)

Question 5

What are the 5 reasons for holding inventory?

Answer 5

1. There is an insecure supply of raw materials.
2. To prevent stockout due to suppliers delivering late.
3. To avoid price increase.
4. To smooth the production requirements.
5. To take advantage of the supplier discounts.

Question 6

How to calculate inventory turnover?

Answer 6

Inventory turnover = Cost of goods sold/ average inventory level.

*Cost of goods sold = unit cots x annual sales.

Question 7

What are the 2 basic functions that management must perform?

Answer 7

1. To determine how much to order and when the order should take place.
   To keep track of the entire inventory of the business.

Question 8

What are the counting systems and explain them.

Answer 8

1. Periodic counting system - requires regular counts of inventory (namely daily, weekly, monthly or yearly). The information gathered is then used to determine when orders should be placed.
2. Perpetual counting system - also known as the continuous counting system, because each time an item is withdrawn from the inventory the records are updated.

Question 9

How to calculate cost of goods sold in a periodic system?

Answer 9

Cost of goods sold = beginning inventory + purchases - ending inventory.

Question 10

An advantage of perpetual system.

Answer 10

The management has good amount of control over the inventory.

Question 11

Costs incurred when inventory is carried.

Answer 11

1. Holding cost
2. Ordering cost
3. Shortage cost

Question 12

What are holding costs and examples of holding cost?

Answer 12

Holding costs are the costs incurred for the actual storage of the inventory in a specific period of time.
1. Depreciation cost of goods held in inventory.
2. Insurance cost for theft and damages.
3. Interest payable for loans to build the warehouse.

Question 13

What are ordering costs and examples of ordering costs?

Answer 13

Ordering costs are costs associated with ordering and receipt of goods.
1. The cost to prepare a purchase order.
2. The cost of labour for the inspection of the goods when they are received.
3. The cost to put away goods after they have been received.

Question 14

What are shortage costs and give examples.

Answer 14

Shortage costs are the cost incurred when demand exceeds supply.
1. Overnight courier costs to get goods that are not in stock.
2. The cost of losing a sale due to stockout.
3. Lost of goodwill of the customer.