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

Explanation:

Break-Even Point in Cost–Volume Relationship

• In the context of cost-volume-profit (CVP) analysis, the Break-Even Point is a critical concept that represents the level of sales at which total revenue equals total costs. At this point, there is no profit or loss—the business simply "breaks even." This is a fundamental tool for decision-making in finance and management, helping businesses determine the minimum sales volume required to avoid losses.

In graphical representation of the cost–volume relationship:

• The Total Revenue line represents the income generated from selling products or services. It starts at the origin (for zero sales) and increases linearly as the volume of sales increases.
• The Total Costs line represents the sum of fixed costs and variable costs. The fixed costs remain constant, while variable costs increase with the volume of production or sales.

The point where these two lines intersect is the Break-Even Point. At this point:

• Total Revenue = Total Costs
• Profit = 0 (no profit, no loss)

This intersection reflects the exact sales volume required to cover all costs. Any sales beyond this point result in profit, while sales below this point lead to a loss.

Break-even chart:

• The break-even analysis is the study of the cost-volume-profit (CVP) relationship.
• It refers to a system of determining that level of operations where the organization neither earns profit nor suffer any loss i.e where the total cost is equal to total sales i.e the point of zero profit (Break-even point).
• In a broader sense, it refers to a system of analysis that can be used to determine probable profit at any level of activity.
• The figure below shows the break-even chart.

The various point mentioned in the graph are:

Fixed cost:

• The cost does not change for a given period (lifetime).
• This cost is independent of the volume of production (means it doesn’t affect whether the production is large or small).
• For example, rent, tax salaries of the supervisor, cost of the machine, insurance cost, etc.

Variable cost:

• This cost varies directly and proportionally with the output.
• Higher the output, the larger the variable cost.
• For example, the cost of raw material, cost of labor, etc.

Total Cost:

• Total cost is the sum of fixed cost and variable cost.

Total revenue/sales:

• It indicates the return obtained by selling the number of units produced.
• It is directly proportional to the volume of production.

Margin of safety:

• The Margin of safety is the distance between the break-even point and output is produced.
• A large margin of safety indicates that the business can earn profit even if there is a great reduction in output.
• A small margin of safety indicates that the profit will be small even if there is a small drop in output.

Break-even point:

• It is the point of intersection of the total cost line and total revenue line.
• There is neither profit nor loss at the break-even point.

Explanation:

Herzberg's Two-Factor Theory

Herzberg's Two-Factor Theory, also known as the Motivation-Hygiene Theory, is a psychological framework designed to understand employee satisfaction and motivation in the workplace. The theory classifies job-related factors into two categories:

• Motivators: These are intrinsic factors that lead to job satisfaction by fulfilling an employee's need for personal growth and achievement. Examples include recognition, responsibility, achievement, and advancement.
• Hygiene Factors: These are extrinsic factors that do not directly contribute to job satisfaction but can cause dissatisfaction if they are absent or inadequate. Examples include salary, company policies, working conditions, and job security.

Salary

• According to Herzberg's Two-Factor Theory, salary is classified as a hygiene factor. This means that while an adequate salary can prevent job dissatisfaction, it does not necessarily lead to job satisfaction or motivation. In other words, employees expect a fair salary as a basic requirement for their job, and its absence can lead to dissatisfaction. However, increasing salary alone might not significantly boost motivation or satisfaction unless accompanied by motivators like recognition and achievement.
• For instance, an employee may feel dissatisfied if they perceive their salary as unfair or insufficient compared to their peers. On the other hand, even if the salary is increased, the employee may not feel truly satisfied unless they also experience factors like career growth, acknowledgment of their efforts, or challenging work.

Important Information

• Option 1: Responsibility - Responsibility is a motivator in Herzberg's theory. It satisfies an employee's intrinsic need to feel important and in control of their work. Assigning more responsibility can lead to job satisfaction and motivation.
• Option 2: Achievement - Achievement is another motivator. It refers to the sense of accomplishment that employees feel when they successfully complete tasks or reach their goals. This intrinsic factor greatly enhances job satisfaction.
• Option 3: Recognition - Recognition is also a motivator. When employees are acknowledged for their contributions, it boosts their morale and job satisfaction, fostering a positive work environment.
• Option 4: Salary - As explained above, salary is a hygiene factor. It prevents dissatisfaction but does not inherently motivate employees or lead to job satisfaction.

Explanation:

ABC Analysis Derived from Pareto's 80/20 Rule:

• ABC analysis is a method of categorizing inventory or other items into three distinct groups (A, B, and C) based on their importance and contribution to overall value. This concept is derived from the Pareto Principle or 80/20 rule, which states that 80% of consequences come from 20% of causes. In inventory management, this translates to the idea that a small percentage of items (Category A) accounts for the majority of the value or impact, while the majority of items (Categories B and C) contribute less significantly.

ABC analysis divides inventory into three categories:

• Category A: These are high-value items that contribute the most to the overall value. Typically, this category represents around 20% of the total items but accounts for approximately 80% of the total value.
• Category B: These are medium-value items that contribute moderately to the overall value. They usually represent around 30% of the items and account for 15% of the total value.
• Category C: These are low-value items that contribute the least to the overall value. This category often represents around 50% of the items but accounts for only 5% of the total value.

Steps to Perform ABC Analysis:

1. List all items and their respective values (e.g., cost, revenue, or impact).
2. Rank the items in descending order based on their values.
3. Calculate the cumulative percentage of the total value and the cumulative percentage of the total items.
4. Divide the items into categories (A, B, and C) based on their contribution to the cumulative value.

Benefits of ABC Analysis:

• Helps prioritize resources and efforts for high-value items.
• Enables better inventory management by focusing on critical items.
• Improves decision-making and operational efficiency.
• Reduces costs and waste by optimizing the management of lower-value items.

Applications of ABC Analysis:

• Inventory management in manufacturing, retail, and logistics.
• Cost control and budgeting.
• Supplier management and procurement strategies.
• Focus on high-value customers in marketing and sales.

Explanation:

Profit Zone:

• The break-even analysis is a vital tool in understanding the financial health of a business. The area between the 'Total Revenue' line and the 'Total Costs' line to the right of the break-even point represents the profit zone. This is the region where a company starts generating profit after covering all its costs (both fixed and variable).

Break-even chart:

• The break-even analysis is the study of cost-volume-profit (CVP) relationship in which a graph is drawn between volume of production (Quantity) and income (Sales).
• It refers to a system of determining that level of operations where the organisation neither earns profit nor suffer any loss i.e where the total cost is equal to total sales i.e the point of zero profit (Break-even point).
• In a broader sense, it refers to a system of analysis that can be used to determine probable profit at any level of activity.
• The figure below shows the break-even chart.

The various point mentioned in the graph are:

Fixed cost:

• The cost which does not change for a given period (lifetime).
• This cost is independent of the volume of production (means it doesn’t affect by whether the production is large or small).
• For example, rent, taxes salaries of the supervisor, cost of the machine, insurance cost, etc.

Variable cost:

• This cost varies directly and proportionally with the output.
• Higher the output, larger the variable cost.
• For example, the cost of raw material, cost of labour, etc.

Total Cost:

• Total cost is the sum of fixed cost and variable cost.

Total revenue/sales:

• It indicates the return obtained by selling the number of units produced.
• It is directly proportional to the volume of production.

Margin of safety:

• The Margin of safety is the distance between the break-even point and output is produced.
• A large margin of safety indicates that the business can earn profit even if there is a great reduction in output.
• A small margin of safety indicates that the profit will be small even if there is a small drop in output.

Break-even point:

• It is the point of intersection of the total cost line and total revenue line.
• There is neither profit nor loss at the break-even point.

Concept:

Economic Order Quantity-

• How much to buy at a time, or more specifically, for how much inventory to place an order at a time, is one of the crucial decisions that a company must make when managing its inventory.
• The term "Economic Ordering Quantity" applies to this.
• Baumol's cash management model is the foundation of the EOQ model.
• Economic Order Quantity = \(\begin{equation} E O Q=\sqrt{\frac{2 DC_o}{C_h}} \end{equation}\)

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).

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.

Explanation:

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

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