Material

Question 1

Ordering cost

Answer 1

• Clerical & administrative cost
• Transport costs
• Production run costs

Question 2

Holding cost

Answer 2

• Storage cost
• Interest/finance charges
• Insurance costs
• Obsolescence
• Deterioration
• Spoilage
• Theft

Question 3

Stockout costs

Answer 3

• Loss contribution
• Loss future sale
• Loss goodwill
• Production stoppages
• Labour inefficiency costs
• Extra ordering cost

Question 4

Obsolescence

Answer 4

Reduction in inventory value due to becoming irrelevant to organisation’s needs

Question 5

Deterioration

Answer 5

Reduction in inventory value due to degradation in its qualities

Question 6

Lead time

Answer 6

Time between placing and receiving an order for materials

Question 7

Average level formula

Answer 7

= Minimum level + (reorder quantity / 2

Question 8

Assumptions of EOQ/ Baumol Model

Answer 8

• Holding cost per unit is constant
• Average inventory is held
• Constant purchase price
• Constant demand
• Constant lead time
• Order cost independent of order quantity
• Holding-cost dependent on average inventory

Question 9

Working capital requirement formula (Receivable )

Answer 9

= ( Collection period ÷ 12/52/365) x Credit sales

Question 10

Standard hour meaning

Answer 10

Amount of work achievable in an hour