QUESTION: 13

The ABC approach involves classifying inventory items by unit cost, with expensive items classi-fied as `A' items and low cost items classified as `C' items. Is this statement true?

Yes, 'A' items represent approximately 20% of total unit prices
Yes, 'C' items with the lowest unit prices are the tail spends
No, ABC analysis considers the usage of each inventory item
No, ABC analysis considers the supply risks associated with an inventory item

Answer(s): C

Explanation:

ABC analysis is an approach for classifying inventory items based on the items' consumption val-ues. Consumption value is the total value of an item consumed over a specified time period, for example a year. The approach is based on the Pareto principle to help manage what matters and is applied in this context:
- A items are goods where annual consumption value is the highest. Applying the Pareto principle (also referred to as the 80/20 rule where 80 percent of the output is determined by 20 percent of the input), they comprise a relatively small number of items but have a relatively high consumption value. So it's logical that analysis and control of this class is relatively intense, since there is the greatest potential to reduce costs or losses.
- B items are interclass items. Their consumption values are lower than A items but higher than C items. A key point of having this interclass group is to watch items close to A item and C item classes that would alter their stock management policies if they drift closer to class A or class C. Stock management is itself a cost. So there needs to be a balance between controls to protect the asset class and the value at risk of loss, or the cost of analysis and the potential value returned by reducing class costs. So, the scope of this class and the inventory management policies are determined by the estimated cost-benefit of class cost reduction, and loss control systems and processes.
- C items have the lowest consumption value. This class has a relatively high proportion of the total number of lines but with relatively low consumption values. Logically, it's not usually cost-effective to deploy tight inventory controls, as the value at risk of significant loss is relatively low and the cost of analysis would typically yield relatively low returns.
LO 2, AC 2.1

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QUESTION: 14

Which of the following costs does the EOQ minimise?

Total cost of safety stock
Total cost of ordering inventory
Total cost of annual inventory cost
Total cost of carrying stock

Answer(s): C

Explanation:

Economic order quantity (EOQ) was developed in 1913 by Ford W. Harris and has been refined over time. The formula assumes that demand, ordering, and holding costs all remain constant. The EOQ minimizes the total annual inventory cost.
EOQ formula is as follow:

LO 2, AC 2.3

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QUESTION: 15

A major investment bank is planning to purchase a complex banking system that will interface with multiple applications at varying times of the day. Before deploying the system, there are various levels of testing that must be performed through joint testing between the in-house team and off- shore testing consultants. The testing will be performed in a resource-constrained shared environment and managed by the on-shore development team. The costs for testing are generally classified as...?

Insurance
Maintenance costs
Acquisition costs
Purchase prices

Answer(s): C

Explanation:

In the scenario, the buying organisation (investment bank) must conduct various types of testing before the deployment of the software system. These tests can be functional testing, factory ac- ceptance testing and/or user acceptance testing. The costs for all these types of testing are classified as acquisition costs with regards of total cost of ownership.

Reference:

CIPS study guide page 150-152
LO 3, AC 3.1

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QUESTION: 16

What is the stock turn for a store holding products to the value of £250,000 with annual sales of these products amounting to £1,000,000?

10
4
0.25
0.4

Answer(s): B

Explanation:

Calculating Inventory Turnover (Stock Turn)
As with a typical turnover ratio, inventory turnover details how much inventory is sold over a period. To calculate the inventory turnover ratio, cost of goods (COGS) is divided by the average inventory for the same period.1
Cost of Goods Sold ÷ Average Inventory or Sales ÷ Inventory

In this exercise, the stock turn equal to sales divided by inventory, or 1,000,000:250,000 = 4.

Reference:

CIPS study guide page 131
LO 2, AC 2.3

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QUESTION: 13

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QUESTION: 14

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QUESTION: 15

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QUESTION: 16

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