FM Chapter 4 Questions – Management of working capital (2) – Inventory
68 Comments
R
Rafi·
What is the explanation for the correct answer to q2; it’s cut off on my page
L
LEONARD·
Thanks for the Questions they challenge you well enough esp after the lectures , however help clarify why we multiply by 4 instead of 3 on the solutions question 1.
L
LEONARD·
Got it , if you order in a frequency of 3 months , you`ll need to order 4 times ayear hence the 4*3 to get the annual cost.
J
John MoffatTutor·
Yes, that is correct :-)
B
Bless·
Thank you for the assignments. they really helpful
J
John MoffatTutor·
If the cost of ordering each time is lower, then they will place more orders of fewer items each time.
If the order quantity each time is lower, then so too will the average inventory level be lower and this will mean that the holding cost over the year will be lower.
B
Brian Kihoria·
Understood
J
John MoffatTutor·
I agree. Do make sure you buy a Revision Kit from one of the ACCA Approved Publishers so that you have lots of questions to practice before you take the exam.
M
Martin·
Thank-you for these EOQ questions - its not a hard concept but keeping it in the mind while thinking of all the other formulas is hard!
A
abbas·
can you please explain to me the answer for the 3rd question.
as per the formula
EOQ= sqrt( 9000 x 160) / 3.2
the answer is A 671
but the result shows answer 3
how?
A
abbas·
no problem got the answer right in the second time around. was making a mistake in the formula.
J
John MoffatTutor·
OK :-)
D
danielweldezghi·
Dear Sir.
Please I do not understand the logic in question 2 of chapter four.
If Inventory ordering cost to be decrease we have to order more inventory
for decreasing the frequency of ordering.
If we do so our level of inventory should increase as a result holding cost increases
but the answer stats both EOQ & Holding cost declines
Thank you very much for usual cooperation!!
J
John MoffatTutor·
If you look at the formula, then if Co is lower the EOQ will be lower to. (We will be placing more orders to get the same quantity in total, which makes sense because the cost of ordering each time is lower)
If the EOQ is lower then the average inventory is also lower and therefore the annual holding cost will be lower as well.
M
Maryam·
Hello dear, I have not quite get Q2. Now if ordering costs are decreasing, it means we make fewer orders, therefore higher quantities of inventory are held each time. Doesn’t this mean holding costs are increasing? Please answer my question.
J
John MoffatTutor·
No - it is the other way round. If the order cost each time is lower then they will end up making more orders and a lower order quantity each time.
The best way to convince yourself it to take one of the examples from our notes, then repeat it with a lower order cost each time and see what happens to the EOQ and the annual holding cost.
M
Maryam·
Many thanks for this clarification
V
Victoria·
Good day sir
In Chapter 4, question 1
How do you arrive at 1,461 as the answer
Why is Demand of 20,000 multiplied by 4
J
John MoffatTutor·
Because the demand is 20,000 in 3 months and there are 4 lots of three months in a year.
V
Victoria·
Many thanks
I now understand
J
John MoffatTutor·
You are welcome :-)
I
Ik·
Hi John Thanks for your Many Help but Question one is troubling me. Please where did 2 come from.
My solution would have been below:
Purchase Price = $25
3 Month demand = 20,000
Annual Demand = 20,000 X 4 = 80,000
Cost of order = 20
Cost of holding = 6% of $25 = 1.5
Therefore, EOC = square root of (80,000 X $20)/ 1.5 = 1,032.80
please where did i get it wrong?
J
John MoffatTutor·
Have you checked the formula? The numerator in the formula has a 2 in it :-)
Z
Zain·
Dear John,
there is mathematical error in your calculation for question 1.
EOQ Units= 730
2*20,000*20/1.5=533,333
=sqrt(533,333)
=730.29 units
but your suggested answers says 1461 units
Z
Zain·
Never mind ignored the requirement.
your answer is correct
J
John MoffatTutor·
Phew :-)
I am pleased that it is correct :-)
D
draganel·
Hi,
If compared the response in Question 2 with example 1 done by you in Chapter 1, I understand vice-versa. So, in example 1 as per calculation we have increase in EOQ(from 500 units to 750 units), that lead to decrease in ordering cost, and respectively the increase in holding costs. From the graph in this chapter i understand that if cost of ordering decreases this lead to increase in holding costs and so on. Can you please explain me what am thinking wrong?
Thanks in advance :)
A
Asher·
Thanks John. Helpful questions more so with the calculation of the demand and the holding cost.
J
John MoffatTutor·
Thank you for your comment :-)
N
Naomi·
thanks for the questions sir. but i have a bit of a problem with how Co affects holding costs. i initially assumed Ch as the holding costs and thought they do not have any effect on the Co
J
John MoffatTutor·
I guess you are asking about question 2?
If so, then Ch is the holding cost per unit and the question asks what will happen to the total holding cost per year.
If the order cost decreases, then the EOQ decreases. If the EOQ decreases then the average inventory decreases and therefore the total holding cost per year decreases.
R
rohanyadav·
hii john sir ,
i want to ask that in fm exam , this types of mcq/questions comes or similarly to this or way different that this?
J
John MoffatTutor·
Questions in Section A are similar, but these are just meant to be short, quick tests.
You must buy a Revision Kit from one of the ACCA Approved Publishers - they are full of past exam (and other exam-standard) questions.
R
rohanyadav·
Thank you John sir ??
A
Ansu Koroma·
Thanks John
J
John MoffatTutor·
You are welcome :-)
S
Shivvy·
love all them..G8 MCQs!
A
apolina·
hi,
help plz
consider on your study notes, Chapter 4 example 3, can you help me on how to find stock holding cost ?
J
John MoffatTutor·
Example 3 says to use the information given in Example 1.
You should only be using the lecture notes if you are watching the lectures. It is in the lectures that I explain and expand on the notes (and I work through this example in the lectures). If you are not watching the lectures for any reason then you must buy a Study Text from one of the ACCA approved publishers and study from there.
T
Tan·
Hi John,
For the annual demand, is it always in quantities? or can I say Annual Demand = Annual Sales?
J
John MoffatTutor·
You always need annual demand in units for the formula, because the EOQ is always in units.
R
rejibee·
I am confused about F9 chapter 4 question 2. I thought EOQ will increase when ordering cost decreases. The formulae even proved my point. But I stand to be corrected. Can you pls clarify that a bit?
J
John MoffatTutor·
The formula certainly does not prove your point!!!
The ordering cost appears as part of the numerator in the formula. If it decreases then so to does the EOQ.
(I assume you watched the free lectures on this before attempting the test? The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.)
R
rejibee·
Thank you
J
John MoffatTutor·
You are welcome :-)
A
Akhil·
Hello. I was just revising all these chapters by doing these practise questions. They're really helpful . But question 5 of this question says that JIT approach may lead to more inventory shortages. But from what we've learnt from the lectures and notes. JIT ,tries to make sure there r no shortages of inventory when we need them by either getting suppliers to supply immeditaly and by training the working. So with this approach. Jit shouldn't really cause of problem with inventory shortages right?
J
John MoffatTutor·
But there is still a bigger risk of inventory shortages - however well JIT is organised, something may still go wrong :-)
A
arbayong·
To add to what John Moffat said, assume the supplier has sent out the order but the delivery van develops a fault on the way. This would mean the client could ran out of inventory for the hours or days required to fix the van or arrange alternative transportation.
That's the risk in JIT ... you have no buffer to fall on!
Y
yemisi·
Hello. As part of the study programme, I want to complete the Past Exam Question (Specimen Q1) however, Q1 does not seem to have anything to do with "Management of Working Capital - Inventory". Am I misunderstanding the study programme/the actual question or is it incorrect?
J
John MoffatTutor·
Please ask this in the Ask the Tutor Forum, and not as a comment on a practice test!
M
moraimatsoso·
why working examples have no answers to check against mine I have worked out to make sure everything is 100% correct. Even some are straight forward but it is to maximise marks as much as possible
J
John MoffatTutor·
If you are talking about answers to the questions in this test, then a pop-up window appears with the answer and workings when you submit your answer. Maybe you have a pop-up blocker, in which case you should turn it off!!
(If you are talking about answers to the examples in the lecture notes, then the answers are all in the lecture notes. Also I work through all the example in the free lectures that go with the notes, and it is completely pointless to use the notes without watching the lectures that go with them.)
C
chuckles·
These questions are a great help
J
John MoffatTutor·
That is good to hear :-)
(I hope that you are watching the free lectures also - they are a complete course for Paper F9 and cover everything needed to be able to pass the exam well.)
C
chuckles·
I am working my way through the lectures and then answering the questions, they put everything i have just learnt into practice.
J
John MoffatTutor·
Great :-)
L
lalalala·
Hi John how are we arriving to EOQ OF 945 in question 3
L
lalalala·
949***
J
John MoffatTutor·
We use the EOQ formula as I explain in the free lecture.
D = 9,000 per year; Co = 160; and Ch = 8% x $40 = 3.20
T
Tahir·
As we know the D in the EOQ formula means one period.That not means per annum demand.
So why in the two above questions where the demand was in 3 months time but we had to multiply 3 with 4 to get the annual demand?
J
John MoffatTutor·
Use any period you want, but the prior used for the demand must be the period used for the stockholding cost (Ch).
So by all means use the 3 month demand, but also use the 3 month Ch. You will end up with exactly the same answer!!!
T
Tahir·
You are saying because the cost of holding one unit is per annum so the demand must related likewise?
T
Tahir·
ok i got i tired it and got exactly the same answer.Thanks
J
John MoffatTutor·
You are welcome :-)
W
whizz·
Thank you. These tests really help drum in which figures to pick and perform correct calcs.
If the order quantity each time is lower, then so too will the average inventory level be lower and this will mean that the holding cost over the year will be lower.
as per the formula
EOQ= sqrt( 9000 x 160) / 3.2
the answer is A 671
but the result shows answer 3
how?
Please I do not understand the logic in question 2 of chapter four.
If Inventory ordering cost to be decrease we have to order more inventory
for decreasing the frequency of ordering.
If we do so our level of inventory should increase as a result holding cost increases
but the answer stats both EOQ & Holding cost declines
Thank you very much for usual cooperation!!
If the EOQ is lower then the average inventory is also lower and therefore the annual holding cost will be lower as well.
The best way to convince yourself it to take one of the examples from our notes, then repeat it with a lower order cost each time and see what happens to the EOQ and the annual holding cost.
In Chapter 4, question 1
How do you arrive at 1,461 as the answer
Why is Demand of 20,000 multiplied by 4
I now understand
My solution would have been below:
Purchase Price = $25
3 Month demand = 20,000
Annual Demand = 20,000 X 4 = 80,000
Cost of order = 20
Cost of holding = 6% of $25 = 1.5
Therefore, EOC = square root of (80,000 X $20)/ 1.5 = 1,032.80
please where did i get it wrong?
there is mathematical error in your calculation for question 1.
EOQ Units= 730
2*20,000*20/1.5=533,333
=sqrt(533,333)
=730.29 units
but your suggested answers says 1461 units
your answer is correct
I am pleased that it is correct :-)
If compared the response in Question 2 with example 1 done by you in Chapter 1, I understand vice-versa. So, in example 1 as per calculation we have increase in EOQ(from 500 units to 750 units), that lead to decrease in ordering cost, and respectively the increase in holding costs. From the graph in this chapter i understand that if cost of ordering decreases this lead to increase in holding costs and so on. Can you please explain me what am thinking wrong?
Thanks in advance :)
If so, then Ch is the holding cost per unit and the question asks what will happen to the total holding cost per year.
If the order cost decreases, then the EOQ decreases. If the EOQ decreases then the average inventory decreases and therefore the total holding cost per year decreases.
i want to ask that in fm exam , this types of mcq/questions comes or similarly to this or way different that this?
You must buy a Revision Kit from one of the ACCA Approved Publishers - they are full of past exam (and other exam-standard) questions.
help plz
consider on your study notes, Chapter 4 example 3, can you help me on how to find stock holding cost ?
You should only be using the lecture notes if you are watching the lectures. It is in the lectures that I explain and expand on the notes (and I work through this example in the lectures). If you are not watching the lectures for any reason then you must buy a Study Text from one of the ACCA approved publishers and study from there.
For the annual demand, is it always in quantities? or can I say Annual Demand = Annual Sales?
The ordering cost appears as part of the numerator in the formula. If it decreases then so to does the EOQ.
(I assume you watched the free lectures on this before attempting the test? The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.)
That's the risk in JIT ... you have no buffer to fall on!
(If you are talking about answers to the examples in the lecture notes, then the answers are all in the lecture notes. Also I work through all the example in the free lectures that go with the notes, and it is completely pointless to use the notes without watching the lectures that go with them.)
(I hope that you are watching the free lectures also - they are a complete course for Paper F9 and cover everything needed to be able to pass the exam well.)
D = 9,000 per year; Co = 160; and Ch = 8% x $40 = 3.20
So why in the two above questions where the demand was in 3 months time but we had to multiply 3 with 4 to get the annual demand?
So by all means use the 3 month demand, but also use the 3 month Ch. You will end up with exactly the same answer!!!