Inventory Management MCQs

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The costs associated with inventory are purchase price of the inventory, Re-order costs, Inventory holding costs, Shortage costs.
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Inventory Management MCQs

The costs associated with inventory are purchase price of the inventory, Re-order costs, Inventory holding costs, Shortage costs. Here on MCQs.club we have designed Multiple-Choice Questions (MCQs) on Inventory Management that covers economic order quantity, reorder point, reorder level, reorder quantity, min max inventory with definition/calculation/formula/examples. Our MCQs are helpful for accountancy students and competitive exams.

  1. The costs associated with inventory is/are:
    1. Purchase price of the inventory
    2. Re-order costs
    3. Inventory holding costs, Shortage costs
    4. All of the above
  2. Re-order costs are the costs of making orders to purchase a quantity of a material item from a supplier. They include costs such as:
    1. The cost of delivery of the purchased items, if these are paid for by the buyer
    2. The costs associated with placing an order, such as the costs of telephone calls
    3. Costs associated with checking the inventory after delivery from the supplier
    4. Batch set up costs if the inventory is produced internally
    5. All of the above
  3. Inventory holding costs include:
    1. Cost of capital tied up
    2. Insurance costs
    3. Cost of warehousing, obsolescence, deterioration and theft
    4. All of the above
  4. Shortage costs of inventory include:
    1. Lost profit on sale
    2. Future loss of profit due to loss of customer goodwill
    3. Costs due to production stoppage due to shortage of raw materials
    4. All of the above
  5. The Economic Order Quantity model (EOQ) is a mathematical model used to calculate the quantity of inventory to order from a supplier each time that an order is made. The aim of the model is to identify the order quantity for any item of inventory that minimizes total annual inventory costs
    1. The above statement is correct
    2. The above statement is incorrect
  6. Which of the following is/are the assumptions of Economic order quantity (EOQ)?
    1. There are no bulk purchase discounts for making orders in large sizes. All units purchased for each item of material cost the same unit price.
    2. The order lead time (the time between placing an order and receiving delivery from the supplier) is constant and known.
    3. Annual demand and consumption for the inventory item is constant throughout the year.
    4. All of the above
  7. For the purpose of Economic order quantity (EOQ) the relevant costs are:
    1. The annual holding cost per item per annum
    2. The annual ordering costs
    3. Both A&B
    4. None
  8. The order quantity or purchase quantity that minimises the total annual cost of ordering the item plus holding it in store is called the economic order quantity or EOQ.
    1. True
    2. False
  9. In the economic order quantity or EOQ model the equation (Q/2) × CH calculates:
    1. The number of orders each year
    2. The total holding costs each year
    3. Total ordering costs each year
    4. None
  10. In the economic order quantity or EOQ model the equation D/Q calculates:
    1. The number of orders each year
    2. The total holding costs each year
    3. Total ordering costs each year
    4. None
  11. In the economic order quantity or EOQ model the equation (D/Q) × CO calculates:
    1. The number of orders each year
    2. The total holding costs each year
    3. Total ordering costs each year
    4. None
  12. The EOQ is the quantity that minimises the sum of the annual order costs and the annual holding costs. The annual holding costs equal the annual order costs at this level.
    1. True
    2. False
  13. To minimize the total cost of holding and ordering inventory using EOQ model. It is necessary to balance the relevant costs. These are:
    1. The variable costs of holding the inventory
    2. The fixed costs placing the order
    3. Both A&B
    4. None
  14. The EOQ can be calculated using a:
    1. Table
    2. Graph
    3. Formula
    4. All of the above
  15. Economic order theory assumes that the average inventory held is equal to one half of the reorder quantity.
    1. Correct
    2. Incorrect
  16. Supply lead time. This is the period of time between placing a new order with a supplier and receiving the delivery of the purchased items. The length of this supply lead time might be uncertain and might be several days, weeks or even months.
    1. The above is statement is correct
    2. The above statement is incorrect
  17. Reorder level is the level of inventory at which a new order for the item should be placed with the supplier.
    1. True
    2. False
  18. In an inventory control system, if there is uncertainty about the length of the supply lead time and demand during the lead time there might be following warning levels for inventory, to warn management that:
    1. The item should now be reordered (the reorder level)
    2. The inventory level is too high (a maximum inventory level)
    3. The inventory level is getting dangerously low (a minimum inventory level)
    4. All of the above
  19. If the supply lead time is certain and demand during the lead time is constant, a company would be able to set a reorder level such that it used the last item just as a new order arrived thus reducing holding costs to a minimum. The reorder level to do this is found as:
    1. Maximum demand for the material item per day/week × Maximum supply lead time in days/weeks
    2. Demand for the material item per day/week × Lead time in days/weeks
    3. Both A&B
    4. None
  20. If the supply lead time is uncertain, and demand during the lead time is also uncertain, there should be a safety level of inventory. A company may wish to ensure that they are never out of stock. The reorder level to achieve this is found as:
    1. Maximum demand for the material item per day/week × Maximum supply lead time in days/weeks
    2. Demand for the material item per day/week × Lead time in days/weeks
    3. Both A&B
    4. None
  21. Safety inventory is the average amount of inventory held in excess of average requirements in order to remove the risk of a stock-out.
    1. False
    2. True
  22. Safety inventory is also known as:
    1. Buffer stock
    2. Safety stock
    3. Both A&B
    4. None
  23. Buffer/safety inventory – the basic level of inventory kept for emergencies. A buffer is required because both demand and lead time will fluctuate and predictions can only be based on best estimates.
    1. The above statement is correct
    2. The above statement is incorrect
  24. Practically the risks associated with a stock out are so great that the company always tries to avoid it even if it leads to extra holding cost.
    1. Incorrect
    2. Correct
  25. The objective of good inventory management is to determine:
    1. The optimum re-order level
    2. How many items are left in inventory when the next order is placed
    3. The optimum re-order quantity – how many items should be ordered when the order is placed for all material inventory items.
    4. All of the above
  26. Inventory costs include:
    1. Purchase costs
    2. Holding costs, ordering costs
    3. Costs of running out of inventory
    4. All of the above
  27. What would be the possible reasons for holding inventories?
    1. To ensure sufficient goods are available to meet expected demand
    2. To provide a buffer between processes
    3. To meet any future shortages
    4. To take advantage of bulk purchasing discounts
    5. To absorb seasonal fluctuations and any variations in usage and demand
    6. To allow production processes to flow smoothly and efficiently
    7. As a necessary part of the production process
    8. As a deliberate investment policy, especially in times of inflation or possible shortages
      1. All of the above
      2. (I) (II) (III) only
      3. (III) and (VII) only
      4. None
  28. The cost which may arise if inventory is kept too low is the type associated with running out of inventory. There are a number of causes of stockout costs.
    1. Lost contribution from lost sales
    2. Loss of future sales due to disgruntled customers
    3. Loss of customer goodwill
    4. Cost of production stoppages
    5. Labour frustration over stoppages
    6. Extra costs of urgent, small quantity, replenishment orders
      1. (I) and (IV) only
      2. (I) (IV) (V) only
      3. All of the above
      4. None
  29. The overall objective of inventory control is, therefore, to maintain inventory levels so that the total of the ______________ costs is minimised.
    1. Holding costs
    2. Ordering costs
    3. Stockout costs
    4. Only A&B
    5. All of the above
  30. Inventory control levels can be calculated in order to maintain inventories at the optimum level. The three critical control levels are:
    1. Reorder level, minimum level and maximum level
    2. Reorder level, Safety stock and Average inventory
    3. Buffer stock, minimum level and maximum level
    4. None
  31. Minimum level is a warning level to draw management attention to the fact that inventories are approaching a dangerously low level and that stockouts are possible.
    1. True
    2. False
  32. This is the quantity of inventory which is to be ordered when inventory reaches the reorder level. If it is set so as to minimise the total costs associated with holding and ordering inventory, then it is known as the economic order quantity.
    1. The above statement is false
    2. The above statement is true
  33. The two-bin system of stores control (or visual method of control) is one whereby each stores item is kept in two storage bins.
    1. Correct
    2. Incorrect
  34. In the ABC method materials are classified A, B or C according to their expense – group A being the expensive, group B the medium-cost and group C the inexpensive materials.
    1. Incorrect
    2. Correct

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