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Cost and Management Accounting 2nd edition
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CHAPTER 16
ADDITIONAL QUESTIONS
16.1
Consider the following statements:
(i)
Stock carrying costs per unit consist of two elements, namely the cost of capital
and direct stockholding costs.
(ii)
Direct stockholding costs per unit include, inter alia, the purchase price of an
item.
(iii)
Direct stockholding costs per unit include, inter alia, the ordering cost per order.
(iv)
Direct stockholding costs per unit include, inter alia, costs related to insurance of
stock, rent of storage space and security costs.
Indicate which of the above statements is/are true:
A. Statement (i)
B. Statements (i) and (ii)
C. Statements (i) and (iii)
D. Statements (i) and (iv)
The following information is relevant for answering questions 16.2 and 16.3, bearing in mind
that questions must be considered independently from one another.
Jaycee (Pty) Ltd sells sportswear. Sales of particularly its arctic jacket are good. Sales of the jackets
are evenly distributed throughout the year. The business sells approximately 850 jackets per year.
They are open for business for 360 days per year.
Additional information:
Purchase price
Order costs
Lead time
R2 500
R75
10 days
Cost of capital (after taxation)
20%
Direct stockholding costs
R25
The current rate of inflation is 8% and the tax rate 28% per annum.
Cost and Management Accounting 2nd edition
Additional questions
16.2
The economic order quantity for the cricket bats is:
A. 20 units
B. 72 units
C. 4 units
D. 21 units
16.3
The reorder point for the arctic jackets if 20 jackets are kept as safety inventory is:
A. ≈20
B. ≈44
C. ≈155
D. ≈180
The following information is relevant for answering questions 16.4 to 16.6, bearing in mind
that questions must be considered independently from each other.
Sadida (Pty) Ltd provided you with the following information regarding one of its products:
Weekly demand
2 650 units
Purchase price per unit
R180
Cost of placing an order
R230
Insurance
10% of the purchase price
Direct stockholding costs
R17 per unit
Lead time
2 weeks
Safety inventory
1 week’s demand
16.4
Management decided to implement the economic order quantity model. The number of
units to be ordered will be:
A. 187 units
B. 1 811 units
C. 1 346 units
D. 3 492 units
16.5
The reorder point for the product will be:
A. 9 275 units
B. 7 950 units
C. 2 650 units
D. 5 300 units
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16.6
The supplier of the product has offered a quantity discount of 5% if 20 000 units or more
are ordered per order. The total stockholding cost per unit, if the offer is accepted, will
be:
A. R17.00
B. R17.10
C. R43.10
D. R171.00
16.7
Which of the following is generally found in most JIT environments?
A. A push or pull system, depending upon the rate of demand
B. Pull systems
C. A push system for purchased parts and a pull system for manufactured parts
D. Push systems
16.8
The implementation of JIT offers several advantages, including
A. Work-in-process increases
B. Rework reduction
C. Decreased profit margins
D. Increase in variability to better respond to variable demand
16.9
Which one of the following is a characteristic of a JIT partnership?
A. Large number of suppliers
B. Maximal product specifications imposed on supplier
C. Active pursuit of vertical integration
D. Steady output rate
16.10 Which one of the following statements is true regarding JIT inventory?
A. It exists just in case something goes wrong.
B. It is the minimum inventory necessary to keep a perfect system running.
C. It hides variability.
D. It is minimised with large lot production.
Cost and Management Accounting 2nd edition
Additional questions
16.11 Music (Pty) Ltd is a wholesaler of beginner guitars. Sales are evenly distributed
throughout the year, and the entity sells approximately 8 500 guitars per annum. The
organisation operates for 330 days per year.
Other information:
Purchase price
R250
Order costs
R75
Lead time
6 days
Cost of capital (after taxation)
20%
Direct stockholding costs
R25
The current rate of inflation is 8% and the tax rate 30% per annum.
The reorder point for the guitars if 25 guitars are kept as safety stock is:
A. ≈ 25
B. ≈ 26
C. ≈ 155
D. ≈ 180
16.12 The reorder point is:
A. The number of units left in inventory when a new order needs to be placed to ensure
that the new order is on time in order to avoid a situation where there is a lack of
inventory
B. The number of units that need to be ordered to ensure that the new order is enough in
order to avoid a situation where there is a lack of inventory
C. The number of extra units that an organisation prefers to keep on hand over and above
the required level as determined by demand
D. The optimum quantity of units of a product or components of a product to order at
one time that will result in an organisation incurring the lowest amount of holding and
ordering costs
16.13 A company has an EOQ of 500 units for a component it uses in manufacturing. Its yearly
demand for the component is 1 200 units. It takes seven days for an order to be delivered.
The company prefers to keep 10 units of the component as a safety inventory.
The reorder point for the company is:
A. 24 units
B. 35 units
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C. 23 units
D. 33 units
16.14 Rega (Pty) Ltd is a supplier of plastic toys. One of its products, the shopping trolley, is
selling at R120. The company sells on average approximately 1 025 trolleys per year. Sales
take place evenly throughout the year which consists of 320 days. The company purchases
the trolleys at a cost of R59 each. The cost to place an order amounts to R150 and orders are
executed within 10 days. Direct inventory holding costs are R6. The company implemented
the economic order quantity type to manage its inventory. The current required after tax cost
return on capital is 4% per annum.
The EOQ for the company is closest to:
A. 36 782 trolleys
B. 192 trolleys
C. 9 trolleys
D. 169 trolleys
16.15 Safety stock is important in a JIT inventory system.
A. True
B. False
16.16 Burty (Pty) Ltd is a wholesaler of electronic equipment. One of the company's products is a
scale for use by jewellers to measure the weight of precious stones. The company wants to
formulate a purchasing policy that will ensure minimum costs.
You are provided with the following information:
Annual demand:
1 700 scales
Purchase price:
R500 per scale
Cost of placing an order:
R60
Lead time:
15 days
Inventory holding costs consist of the following:
Direct costs:
R10 per motor per annum
Cost of capital:
20% per annum after tax
The current rate of inflation is 15% per annum. The company is operative for 312 days per
year. The supplier of the scales requested the company not to place more than 20 orders per
Cost and Management Accounting 2nd edition
Additional questions
year, in which case they are prepared to grant a discount of R2.50 per scale. The current rate
of taxation is 30%.
Required:
(a) Determine the following without taking the request of the contractor into account:
(i)
The economic order quantity
(ii)
The reorder point
(b) Determine whether the request to place 20 orders per annum should be met.
16.17 Harrow (Pty) Ltd manufactures genuine leather belts for men and women. The belt buckles
are imported from Spain. The company needs 50 000 buckles per year. The company
operates for 260 days per year. The following information relates to the buckles:
Ordering cost
R300
Purchase price
R75 per buckle
Required rate of return after tax
10%
Tax rate
28%
Safety inventory
100 buckles
Lead time
25 days
Direct inventory holding costs per buckle amount to R10.
The Spanish company offered Harrow (Pty) Ltd a discount of 10% if they agree to place 20
orders per year. Harrow (Pty) Ltd has very little storage space. In order to take the discount
and place 20 orders per year, the company will need to rent additional space at R500 per
month.
Required:
(a) Calculate the reorder point under the EOQ model.
(b) Determine whether Harrow (Pty) Ltd should accept the special offer.
(c) List three assumptions underlying the EOQ model.
Cost and Management Accounting 2nd edition
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16.18 Ortem (Pty) Ltd manufactures curtains. The company's budgeted production for the year
requires that 300 000 curtains be manufactured.
The production process is as follows:

Fabric is the main material input for the manufacture of curtains.

The fabric is purchased in rolls which are 2.00 metres wide and 100 metres long.

The fabric is cut and stitched and seamed to make the curtains.

Recent cost records for the production of curtains showed the following:
Period
Fabric
Curtains
processed
produced
Third term 20x0
188 032
36 160
Fourth term 20x0
308 360
59 300
First term 20x1
283 036
54 430
Second term 20x1
323 336
62 180
Third term 20x1
353 236
67 930
A roll of fabric delivered to the factory costs R1 500. It costs R25.50 in telephone and
clerical costs to place an order, plus R20.50 to process the supplier's invoice.
The company estimates its cost of capital at 16% per annum. The estimated cost to take a
roll of fabric from the supplier's trucks and to place it into stock is R20.00 per roll.
The factory operates for 360 days per year. The lead time to receive an order of wood after
the order has been placed, is twenty days.
It costs R52.00 per roll to take the fabric out of inventory and to put it into production.
Required:
(a) Determine the standard quantity of fabric required in order to manufacture a curtain.
(b) Determine the optimal stock ordering policy for fabric by using the economic order
quantity model.
(c) Calculate the total ordering costs as well as the inventory carrying costs for the year,
should the optimal ordering policy be implemented.
Cost and Management Accounting 2nd edition
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16.19 Sunny-Side-Up (Pty) Ltd is a seller of state of the art sports sunglasses. The sunglasses are
purchased from the supplier at a price of R350 each. The enterprise requires an 8% return on
capital invested in stock. Direct inventory holding costs amount to R24 per pair of
sunglasses per year. Based on the above information, an annual demand of 2 500 pairs of
sunglasses and an ordering cost of R40 per order, the accountant of the organisation has
calculated the economic order quantity for the sunglasses as 63 units. Safety stock should
amount to the sales requirement of five working days, assuming that the enterprise trades for
360 days per year. The lead time for delivery of sunglasses is five working days. There is no
seasonal fluctuation in the demand for sunglasses. The organisation has been approached by
another supplier, offering a price of R345 per pair of sunglasses, provided that orders are
placed in batches of at least 100 units each. In such a case, however, additional store space
would be required, costing R700 per month. The lead time for delivery would remain five
working days.
Required:
(a) Advise the accountant of Sunny-Side-Up (Pty) Ltd whether the offer to purchase
sunglasses at R345 each should be accepted.
(b) Determine the reorder point for sunglasses.
16.20 BardotB manufactures a range of electronic products. The supplier of component Yankee
has informed BardotB that it will offer a quantity discount of 10% if BardotB places an
order of 10 000 components or more at any one time.
Details of component Yankee are as follows:
Cost per component before discount
R20.00
Annual purchases
1 500 000 components
Ordering costs
R450 per order
Holding costs
R30.00 per component per annum
The current after tax cost of capital is 5% per annum.
Required:
(a) Calculate the total annual cost of holding and ordering inventory of component Yankee
using the economic order quantity and ignoring the quantity discount.
(b) Calculate whether there is a financial benefit to BardotB from increasing the order size
to 10 000 components to qualify for the 10% quantity discount.
Cost and Management Accounting 2nd edition
Additional questions
16.21 XY, a company that manufactures a range of timber products, is considering changing to a
just-in-time (JIT) production system.
Currently XY employs staff who are contracted to work and be paid for a total of 3 937.75
hours per month. Their labour efficiency ratio is 96% and, as a result, they are able to
produce 3 780 standard hours of output each month in normal working hours.
Overtime working is used to meet additional demand, though the management of XY tries to
avoid the need for this because it is paid at a 50% premium to the normal hourly rate of $10
per hour. Instead, XY plans production so that in months of lower demand, inventory levels
increase to enable sales demand to be met in other months. XY has determined that the cost
of holding inventory is $6 per month for each standard hour of output that is held in
inventory.
XY has forecast the demand for its products for the next six months as follows:
Month
Demand (Standard hours)
1
3 100
2
3 700
3
4 000
4
3 300
5
3 600
6
4 980
You may assume that all production costs (other than labour) are either fixed or are not
driven by labour hours worked, and that there is zero inventory at the start of month 1 and at
the end of month 6. Assume also that production and sales occur evenly during each month
at present, and that the minimum contracted hours will remain the same with the JIT system.
Required:
(a) With the current production system:
(i)
Calculate for each of the six months and the period in total, the total inventory
holding costs.
(ii)
Calculate the total production cost savings made by changing to a JIT production
system.
(6 marks)
(b) Explain TWO other factors that should be considered by XY before changing to a JIT
production system.
(4 marks)
(From: CIMA P2, May 2010 – Question Three)
Cost and Management Accounting 2nd edition
Additional questions
16.22 RSH (Pty) Ltd is in the process of implementing a policy for holding inventory. Duvet sets,
one of the major stock items, are acquired from suppliers at a price of R700 each. The
company requires a 5% return on capital invested in inventory. Direct inventory holding
costs amount to R24 per duvet set per annum. Based on the above information, an annual
demand of 3 000 duvet sets and an ordering cost of R120 per order, the accountant
calculated the economic order quantity for duvet sets as 111. Safety stock should amount to
the sales requirement of three working days, assuming that the company trades for 320 days
per year. The lead time for delivery of duvet sets amounts to six working days. There is no
seasonal fluctuation in the demand for duvet sets. The company has been approached by
another supplier, offering a price of R650 per duvet set, provided that orders are placed in
batches of at least 1 000 units each. In such a case, however, additional storage space would
be required, costing R700 per month. The lead time for delivery would remain six working
days.
Required:
(a) Advise the accountant of RSH whether the offer to purchase the duvet sets at R650 each
should be accepted.
(18)
(b) Determine the reorder point for the duvet sets.
(3)
16.23 CP Ltd manufactures leather shoes. The soles for these shoes are imported from a supplier
based in Rome and local craftsmen are employed to hand stitch the leather to the soles. Fifty
thousand soles are required annually. The financial year consists of 260 working days.
The following information relates to the soles:
Ordering cost
R100 per order
Purchase price
R90 per sole
Required rate of return of the taxation
10%
Right of taxation
28%
Safety stock
200 soles
Lead time
21 working days
In addition to the required rate of return, direct stockholding costs amount to R5 per sole.
CP uses the economic order quantity model to manage inventory. The row suppliers have
offered them a discount of 5% should they agree to place 20 orders per year.
Cost and Management Accounting 2nd edition
Additional questions
Due to the fact that the premises is very small, in order to make use of the discount offered
by the supplier, additional storage space would have to be rented for R250 per month.
Required:
(a) Calculate the reorder point under the current inventory model.
(b) Determine whether the company should accept the special offer.
(c) List three assumptions underlying the economic order quantity model.
(3)
(20)
(2)
16.24 Atlas sells toy atlases. Annual sales of these atlases are 3 800. The following information is
available:
Ordering cost
R220 per order
Purchase price
R50 per unit
Required rate of return per annum
10%
Safety stock level
50 units
In addition to the required rate of return, direct stockholding costs amount to R2 per unit per
annum, and insurance at 5% of the total cost per year. Atlas currently applies the economic
order quantity (EOQ) model. They have calculated the EOQ to be 420 units. The supplier of
the atlases offered to sell the product at R49 per unit, should Atlas agree to place 10 orders
per year. If Atlantic (Pty) Ltd accepts this special offer, additional storage space at a cost of
R500 per month will be required
Required:
Determine, from a financial perspective, whether the EOQ model should be applied or the
special price per unit from the supplier should be accepted
(10)
16.25 Huntsmen (Pty) Ltd distributes hunting jackets. The jackets are so popular (even amongst
non-hunters) that the company struggles to keep up with demand. The average annual sales
for these jackets is 10 000 units and the sales are distributed evenly throughout the year
based on 320 operating days per annum.
The following additional information is available for these cars:
Safety stock*
200 units
Lead time
10 days
Inventory holding cost
R10 per unit per year
Purchase price
R550 per unit
Cost and Management Accounting 2nd edition
Additional questions
Cost of capital (after tax)
10%
Ordering cost (irrespective of supplier) R200 per order
*Assume that safety stock will be maintained throughout the period.
A supplier in Europe offered the company a price of R450 per jacket irrespective of the
exchange rate, provided it purchases in 12 orders (resulting in an order being placed each
month). Management will stop to hold any safety stock if this offer is accepted. Import
duties that are not refundable by SARS amount to R10 000 per order.
Required:
(a) Calculate the economic order quantity of Huntsmen (Pty) Ltd. Ignore the new offer. (3)
(b) Calculate the reorder point for the jackets if safety stock is maintained at 200 units.
(2)
(c) Advise the management of Huntsmen (Pty) Ltd whether they should accept the price
offered by the European supplier.
Note: Round your answers to the nearest unit.
(6)