Inventory Control MCQ Quiz - Objective Question with Answer for Inventory Control - Download Free PDF

Concept:

The Economic Order Quantity (EOQ) model is a fundamental inventory management formula used to determine the optimal order quantity that minimizes total inventory costs, including ordering and holding costs.

Standard Assumptions of EOQ:

• Demand is known, constant, and continuous
• Lead time (the time between ordering and receiving) is constant
• Replenishment is instantaneous (all items are delivered at once)
• No stockouts or shortages are allowed
• Ordering and holding costs are constant and known

Analysis:

Option 1: "Material cannot be supplied in variable quantities" – This is not a part of EOQ assumptions. EOQ aims to determine the best (variable) quantity to order, making this statement invalid in the EOQ context.

Explanation:

ABC Analysis stands for:

• A items – High value, low quantity (tight control)
• B items – Moderate value and quantity
• C items – Low value, high quantity (loose control)

This method is based on the Pareto Principle (80/20 Rule), where:

• 10–20% of items (A) account for 70–80% of consumption value
• 30–40% of items (B) account for 15–25%
• 50–60% of items (C) account for 5–10%

Concept:

EOQ (Economic Order Quantity) is calculated using the formula:

\( EOQ = \sqrt{\frac{2AD}{H}} \)

Where:

• A = Annual demand = 400 units
• D = Ordering cost = ₹20
• H = Holding cost per unit per year = 10% of ₹100 = ₹10

Calculation:

\( EOQ = \sqrt{\frac{2 \times 400 \times 20}{10}} = \sqrt{\frac{16000}{10}} = \sqrt{1600} = 40 \)

Concept:

ABC analysis is an inventory categorization technique where items are classified based on their consumption value.

Therefore, Class A items are those for which 10–20% of the items account for 70–80% of the consumption.

Explanation:

ABC Analysis:

• In ABC analysis of inventory control:
  • Class A items: ~10% of items account for ~70-80% of consumption value – very important and tightly controlled.
  • Class B items: ~30-40% of items account for ~30-40% of consumption value – moderately important.
  • Class C items: ~50-60% of items account for ~10-20% of consumption value – least important and loosely controlled.

Given:

The cost of 157 litre of oil is Rs.  29763.65

Calculation:

Cost price of 157 liters of oil = Rs. 29763.65

Cost price of 1 liter of oil = 29763.65/157

⇒ 189.577 ≈ 189.58

∴ The cost per liter is 189.58 (rounded off to two decimal places).

Explanation:

Various techniques of inventory control are explained in the table below:

Concept

Stock items:

• Stock items are defined as material resources that are held in storerooms and issued to activities that require the materials to be completed.
• The stock item record determines whether or not the type of stock can be purchased, repaired, tracked, and so on.

Bin cards:

• Bin means a rack, container, or room where goods are kept. Bin cards are printed cards used for accounting for the stock of material, in stores.
• A bin card is a quantitative record of receipts, issues, and closing balance of each item of stores. For every item of material, separate bin cards are kept.

Concept:

The inventory comprises of a large number of items. All items are not of equal importance. The firm, therefore, should pay more attention and care to those items whose usage value is high and less attention to those whose usage value is low.

There are different types of selective inventory control:

Concept:

This model is used when the replacement is instantaneous and no shortage is allowed. The Economic Order Quantity for this model is given by Wilson Formula.

\({Q^*} = \sqrt {\frac{{2D{C_o}}}{{{C_h}}}} \)

where Q^* = Economic Order Quantity (Units), D = Demand rate (Units/month or Units/year), C_o = Ordering cost/order (Rs.), C_h = Handling cost (Rs./unit/year)

[Note: Time unit of Demand & Handling Cost must be same i.e. units/year or units/month]

Calculation:

Given:

D = 12000 units/year, C_o = Rs. 100, C_h = Rs. 0.80/unit/month ⇒ Rs. 0.80 × 12/unit/year

∵\(\;{Q^*} = \sqrt {\frac{{2D{C_o}}}{{{C_h}}}} \)

\( \Rightarrow {Q^*} = \sqrt {\frac{{2 \times 12000 \times 100}}{{0.80 \times 12}}} \)

⇒ Q^* = 500 units.

Explanation:

Lead Time:

• The time gap between the placing of an order and its actual arrival in the inventory is known as Lead Time.
• Lead Time can be greater, less, or equal to Order Cycle.

Order Cycle:

• The time period between two successive orders is called Order Cycle.

Re-order Level (ROL):

• The quantity in hand while placing the order.
• ROL = Lead Time × Demand.

Concept:

The ordering quantity Q* at which holding cost becomes equal to ordering cost and the total inventory cost is minimum is known as Economic Order Quantity (EOQ).

At EOQ:

Ordering cost = Holding cost

\(\frac{D}{{{Q^*}}}{C_o} = \frac{{{Q^*}}}{2}{C_h}\)

\({Q^*} = \sqrt {\frac{{2D{C_o}}}{{{C_h}}}} \)

D = Annual or yearly demand for inventory (unit/day)

Q = Quantity to be ordered at each order point (unit/order)

Co = Cost of placing one order [Rs/order]

Ch = Cost of holding one unit in inventory for one complete year [Rs/unit/day]

Cycle time:

Order cycle time refers to the time period between placing one order and the next order.

\(T=\frac{Q}{D}\)

Re-order Level (ROL): 

The quantity in hand while placing the order.

Case - I

When lead time is lower than cycle time (T_L < T).

ROL = Lead Time (T_L) × Demand (D).

Case - II

When lead time TL is greater than cycle time T, then:

ROL = (TL - T) × Demand (D)

Calculation:

Given:

D = 100 unit/day, Co = 400 unit/order, Ch = 0.08 Rs./unit/day, Lead time T_L = 13 days

EOQ:

\({Q^*} = \sqrt {\frac{{2D{C_o}}}{{{C_h}}}} \)

\({Q^*} = \sqrt {\frac{{2× 100×{400}}}{{{0.08}}}}=1000\;units \)

Cycle Time:

\(T=\frac{Q}{D}\)

\(T=\frac{1000}{100}=10\;days\)

T_L > T

ROL = (TL - T) × Demand (D)

ROL = (13 - 10) × 100 = 300 units.

Explanation:-

Shortage or Stockout cost

• Shortage simply means the absence of inventory and the loss associated with not serving the customer is known as Shortage or stockout cost. It includes potential profit delay loss, fast transportation cost

Important Points

Concept:

The total annual cost for the inventory system is given as:

 \(\mathbf{C~=~\frac{D}{Q}C_o~+~\frac{Q}{2}C_h}\)

where C is the total annual cost, D is the annual demand, Q is the order quantity, C_o is the ordering cost and C_h is the holding cost per unit per year.

In economic order quantity (EOQ), \(\mathbf{\frac{D}{Q}C_o~=~\frac{Q}{2}C_h}\)

Calculation:

Given:

In economic order quantity,  

\(\frac{D}{Q}C_o=\frac{Q}{2}C_h\) or C = \(\frac{Q}{2}C_h~+~\frac{Q}{2}C_h\)

⇒ C = QC_h

Now, the new order quantity is Q′ = 2Q, so the new total cost is

\(C^′~=~\frac{D}{Q^′ }C_o~+~\frac{Q^′}{2}C_h\) = \(C^′~=~\frac{D}{2Q }C_o~+~\frac{2Q}{2}C_h\)

⇒ \(\frac{1}{2}\left ( \frac{Q}{2}C_h \right)+QC_h\) = \( \frac{Q}{4}C_h~+~QC_h\) = \(\frac{5}{4}QC_h\)

∴ C′ = 1.25C  

Explanation:

Inventory

• The amount of material, a company has in stock at a specific time is known as inventory or in terms of money, it can be defined as the total capital investment over all the materials stocked in the company at any specific time.

Direct Inventories

• The items, playing the direct role in the production and becoming an integral part of the finished product, are referred as direct inventories.

Inventory may be in the form of

• raw material inventory
• in-process inventory
• finished goods inventory

​Raw Materials are machined or processed before they are ready to be used in the assembly of finished products.

In process Inventories (Work in progress) are semi-finished goods at various stages of manufacturing.

Purchased Parts these are purchased items from outside suppliers instead of manufacturing in the factory.

Finished Goods inventories contain finished goods which are ready for dispatch to the customers.

​Anticipation/ Seasonable inventories:

• These inventories are indirect inventories in which items are built up to meet anticipated demand in future like Big selling forecast, government policy change, price hike, strike, shut down etc.

Additional Information

Indirect Inventories

• These include the items essentially required for manufacturing, but not becoming an integral part of finished goods. These can be grouped as following:

Tools: These consist of

• Standard tools to be used on machines such as saws, drills, taps, milling cutters, inserts, dies, etc., and
• Hand tools such as hand saws, chisels, hammers, needles, spanners, etc.

Supplies:

• These include materials required in running of the plant or in making of company’s products, but do not enter into the product. Supplies may include:
• Miscellaneous consumable stores (such as cotton waste, toilet paper, cleaning powder, etc.)
• Welding, soldering, and tinning materials (such as electrodes, gas, welding rods, solder, flux, etc.)
• Abrasive materials (such as emery cloth, emery belts, sand paper, etc.)
• Shipping containers (such as bags, glass bottles, cardboard boxes, drums, etc.)
• Oils and greases (such as transformer oil, kerosene oil, petrol, diesel, lubricating oil, etc.) 
• General office supplies (such as pencils, refills, files, pins, etc.)
• Electric supplies (such as cables, fuses, lamps, etc.)
• Printed forms (such as envelopes, letter heads, enquiry forms, purchase order forms, etc.)

Machinery Spares:

• These are the materials required in maintenance machines, e.g., bearings, belts, oil seals, springs, etc