Learning Unit 5

Question 1

Explain the types of inventory

Answer 1

1- normal stock
2- buffer stock
3- safety stock
4- speculative stock
5- stock-in-transit
6- over stocking
7- understocking
8- average stock
9-maximum stock

Question 2

Identify the 4 categories of quality cost

Answer 2

1- prevention cost
2 - appraisal cost
3- internal failure costs
4- external failure costs

Question 3

Explain the total cost of holding and ordering

Answer 3

Number of orders: annual requirement/quantity per order
Annual ordering cost: no. of orders x cost per order
Average quantity in inventory: quantity per order/2
Annual holding cost: average quantity in inventory x annual carrying cost per container
Total annual cost of inventory: ordering cost + holding cost

Question 4

EOQ (economic order quantity)

Answer 4

Wortel (2DO)/(H + (P x i)

D = annual demand
O = cost per order
H = annual holding cost per unit
P = cost price per unit
i = interest rate used

Question 5

Reorder point for constant usage

Answer 5

Reorder point = lead time x average daily or weekly usage

Question 6

Reorder point variable usage

Answer 6

Reorder point = ( lead time x average or weekly usage) + safety stock

Safety stock = maximum expected usage - average usage x lead time

Question 7

Name the three methods of assigning service department costs

Answer 7

Direct method

Step method
Linea algebraic method

Question 8

Name the five steps of allocating overhead costs using ABC

Answer 8

Step 1: identify major activities
Step 2: assign overhead costs to cost centres
Step 3: determine cost drivers associated with each activity
Step 4: calculation of cost driver rate

Step 5: assign activity costs to produce

Question 9

Name the advantages and the limitations of the ABC

Answer 9

Advantages
Improved cost estimation and product pricing
Improved understanding of overheads
Identification of waste

Limitation
Time consuming
Expensive