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LIFO uses which method of inventory valuation?
Lower of Cost or Market
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FIFO uses which method of inventory valuation?
Lower of Cost or Net Realizable Value
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Weighted Avg Inventory uses which method of inventory valuation?
Lower of Cost or Net Realizable Value
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When using lower of cost or market, how is the market value determined?
- Use the middle value of
- (1) replacement cost
- (2) market ceiling (aka NRV) = selling price - cost to complete & dispose
- (3) market floor = market ceiling (aka NRV) - reasonable profit
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What is the difference between a (1) periodic or (2) perpetual inventory system? How is COGS determined?
- Periodic: requires physical count of inventory at least annually. COGs = beginning inventory + purchases - ending inventory
- Perpetual: The inventory balance is adjusted with each purchase. COGS is determined and assigned to each sale.
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What are the 5 cost flow assumptions used to track inventory?
- (1) specific identification used for unique, large or high-dollar products
- (2) FIFO
- (3) LIFO
- (4) weighted average is only used with a periodic inventory system
- (5) moving average is only used with a perpetual inventory system
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What is the effect on COGS, net income, and ending inventory during periods of (1) inflation and then (2) deflation for FIFO and LIFO?
- Inflation/FIFO: the least expensive are sold, the most expensive remain. COGS is less, net income is higher, ending inventory is higher.
- Inflation/LIFO: the most expensive are sold, the least expensive remain. COGS is higher, net income is lower, inventory is lower.
- Deflation/FIFO: the most expensive are sold, the least expensive remain. COGS is higher, net income is lower, inventory is lower.
- Deflation/LIFO: the least expensive are sold, the most expensive remain. COGS is less, net income is higher, ending inventory is higher.
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What is the most important factor to influence future inventory levels and planning?
An accurate sales forecast!
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What are the 4 primary inventory carrying costs?
- Storage
- Insurance
- Opportunity Costs (dollars are spent on storage of inventory that could be spent elsewhere)
- Lost inventory due to obsolescence or spoilage
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Fill in the blank: the [lower/higher] inventory carrying cost the [more/less] inventory a company is willing to carry.
- Lower = More OR
- Higher = Less
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What is safety stock?
A buffer of stock to ensure that manufacturing (raw materials stock) or customer supply requirements (finished goods stock) are met.
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What is the formula for the Reorder Point? What does this number imply? What should you be careful about when using this formula?
- Safety Stock + (Lead Time x Sales During Lead Time)
- Be Careful: whatever timeframe is used for the lead time (annual, monthly, weekly) the same timeframe must be used for the sales timeframe.
- Identifies the optimum inventory level at which to reorder so that the safety stock is at minimal risk of being violated
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What is the formula to determine the economic order quantity (EOQ)?
- 2-S-O-C
- Sqrt(2SO/C) where S=sales (in units), O=Ordering cost/PO, C=carrying cost/unit
- The purpose is to balance inventory costs vs reorder costs.
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For EOQ, what types of costs are included in the ordering cost?
- A fixed cost/order
- Shipping & handling cost
- Costs to set-up the equipment to make the product
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What are the primary components of the Supply Chain Operations Reference model and a brief explanation of each?
- Plan: developing a way to balance demand and supply and prepare for the necessary infrastructure. It all starts with an accurate sales forecast.
- Source: Procure the resources (labor and materials) required
- Make: Turn raw materials into finished products, tested and ready for shipment
- Deliver: Get the finished products into the hands of the customer. Watch -- pricing and A/Ris in this category rather than the planning stage.
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What are the benefits of implementing supply chain management?
- Reduced costs
- Increased profits
- Happy customers
- Happy and well-integrated suppliers
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What is the general rule for A/P management? What are some techniques to maximize return for the company?
- Stretch it out -- wait until the last minute to pay, unless a discount is involved.
- Take advantage of discounts.
- Take advantage of electronic funds transfer -- for receipt of funds from a client (no delay in receiving and then depositing a cheque)
- -- for payment of funds to a supplier (can use the absolute last minute)
- Defer payments so long as you don't damage the relationship with the supplier or incur interest or penalties
- Use a line a credit. This keeps cash in the acct to use as a buffer. Use this as temp float without invading the cash balance.
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What is the formula to determine the APR of a quick payment discount?
(360 / pay period-discount period) x (discount %/100-discount %)
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What is the name of the set of procedures to manage raw materials and WIP inventory?
Materials requirements planning
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If the EOQ for Product A is 200 units and the company maintains a 50-unit safety stock, what is the average inventory for Product A?
- 250 total units - 50 units safety stock = 200 units fluctuation.
- 200/2 = 100 units avg flux
- 100 units avg flux + 50 units safety stock = 150 units.
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What components determine the cost of carrying A/R?
- The variable cost of creating the A/R x the cost of the capital during the collection period.
- A/R Amt x variable cost ratio x IRR x (days carried/360)
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The A/R is decreasing, but the sales are increasing. What affect does this have on the avg collection period?
The avg collection period decreases.
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The SCOR (Supply Chain Operations Reference) model of supply chain management consists of which 4 components? Provide a brief explanation of what is contained in each component.
- Plan: (1) forecast sales, (2) determine all things inventory from raw materials needed to assessing if suppliers can handle the demand, (3) consider the entire vertical chain
- Source: procure the labor & materials needed; all things vendor
- Make: from manufacturing to packaging plus quality
- Deliver: pricing, delivering, A/R management
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