INVENTORY MANAGEMENT

Problem 1: A television manufacturer buys wooden cabinet from outside suppliers at P400 per set.
Total annual needs are 5,000 units at a rate of 20 sets per working data. The following cost data are
available:
Desired annual returns on inventory investment (10% @ P400) P40
Rent, Insurance, and Taxes per unit P10
Annual Carrying Costs per unit P50
Cost of Ordering P50/order
Required:
1. Using the tabular method and the following order sizes, compute the EOQ of the raw materials:
(20, 40, 50, 100, 200, 300)
2. Using the formula method, compute for the EOQ
3. Using the computed EOQ, compute the annual ordering costs and annual carrying costs.

Problem 2: Manila uses EOQ logic to determine the order quantity for the nylon fabric its uses in the
manufacturing of its flags. Forecasted monthly demand for nylon fabric is for 100,000 yards. The setup
costs associated with placing and receiving each nylon fabric order is P50.00. It is estimated that the
cost to carry a yard of nylon fabric in inventory for a year is P10.00.
Required:
1. Calculate the nylon fabric EOQ for Manila.
2. Compute for the annual carrying cost of Manila using its EOQ.
3. How much is the annual ordering cost of Manila using its EOQ?

Problem 3: The following information is available for Panay Corporation:

Annual demand (in units) 100,000
Working days per year 250 days
Normal Lead Time in Working days 3 days
Required:
1. Compute Panay’s Re-order Point.
2. Compute Panay’s safety stock level and re-order point if based on experience its maximum lead
time is 7 working days.

Problem 4: The current inventory level of a particular raw material is 4,000 units. It was determined
that the company 25 days left before it needs to re-order. The annual demand of the raw material is
36,000 and there is 360 production days in a year.
Required:
1. What is the re-order point?
2. If the normal lead time is 10 days, how many was in the safety stock?
3. What was the maximum lead time used in determining the level of safety stock?
 ACTIVITY BASED COSTING (ABC)

Activity Based Costing - Identifies the causal relationship between the incurrence of cost and
activities, determines the underlying driver of activities, establishes cost pools related to individual
drivers, develops costing rates, and applies cost to product on the basis of resources consumed (drivers).

Definitions:
 Activity - is an event, task or unit of work with a specified purpose. Examples of activities are
designing products and setting up machines.
 Unit-level activities - These activities are performed for each unit that is produced. Some
examples are hours of work, inspecting each item, operating a machine and performing a
specific assembly task.
 Batch-level activities - These activities occur each time a batch is produced. Some
examples are machine setup, purchasing, scheduling, materials handling and batch
inspection.
 Product-sustaining activities - These activities are incurred in order to support the
production of a different product from what is currently produced. Examples include
product design and engineering changes.
 Facility-sustaining activities - These activities are incurred to support production in
general, such as security, maintenance, plant management, depreciation of the factory
and property taxes.

 Cost object - is anything for which costs are accumulated for managerial purposes.

 Cost driver - is anything (it can be an activity, an event or a volume of something) that causes
cost to be incurred each time the driver occurs. Examples of cost drivers are set-ups, moving,
number of parts, casting, packaging or handling.

Problem 1: Otto Boutique, a garment business, uses activity based costing and accumulates overhead
costs in the following cost pools:
1. Power
2. Machining
3. Direct labor
4. Materials handling
5. Ordering
6. Machine set-ups
7. Product inspections
8. Product Design Changes
9. Testing Routines
10.Plant Supervision
11.Personnel administration
12.Security
13.Engineering Design Changes
14.Receiving of Supplies purchased
15.Assembly

Problem 2: Consider the activities that follow.

1. Microsoft: Developing computer coding for a new spreadsheet package.
2. General Mills: Painting the office of a maintenance supervisor at a plant that produces cereal.
3. Mayo Clinic: Examining a new patient.
4. American Airlines: The 90 minutes that a Boeing 757 sits idle on the ground between flights.
5. Office Depot: Moving cases of paper from one location to another in the same warehouse.
6. Rolex: Attaching a watch band to the watch’s face.
 7. United States Postal Service: Reprocessing mail that had been sorted incorrectly on a
malfunctioning sorting machine.
8. Fidelity Investments: Correcting errors made by company personnel in customer accounts.
9. Marriott: Upgrading the quality of bedding used at hotels in very competitive marketplaces.
10. Shoemart: Arrangement of the grocery cart at the entrance of the supermarket.

Required: Categorize each of the activities as either value-added or non-value added for the companies
noted.

Problem 3: The company is planning to use activity based costing for its external financial reports. The
company’s activity cost pools and associated data for the coming year appear below:

Activity Cost Pool Activity Measure Estimated Expected Activity

Overhead Cost
Machining……………………Machine-hours P330,000 6,000 MHs
Purchase orders…………Number of orders 140,000 2,000 orders
Parts management…...Number of part types 25,000 500 part types
Testing…………………..Number of tests 15,000 800 tests
General factory……..Direct labor-hours 150,000 15,000 DLHs

Required:Compute the pre-determined rate for each cost pool.

Problem 4: Actual activity for the year was as follows:

Activity Cost Pool Actual Activity
Machining 5,800 MHs
Purchase orders 1,900 Orders
Parts management 550 part types
Testing 900 Tests
General factory 14,700 DLHs
Apply overhead using activity based costing and determine the amount of under or over applied
overhead and the amount of cost of goods sold for the period.

Problem 5: Abby incurs about P860,000 in manufacturing overhead. The company works about
100,000 direct labor hours per month to which the previous controller has allocated overhead costs, so
the overhead rate on the average is P8.60. The following information is provided to you:

Cost Driver Amount in Pool Amount of Activity

Direct Labor Hours P520,000 100,000
Number of Batches 160,000 360
Engineering Changes 60,000 120
Number of Parts 120,000 3,200
Total Overhead Costs P860,000

The controller asks you to analyze two product lines using the existing method of allocating overhead
based on DLH, and using activity-based rates. She gives you the following data regarding two product
lines. Blue is a bread and butter line that the company makes in large batches, while White is a specialty
line that only a few customer buy.

Blue White
Direct labor hours 1,600 200
Number of Batches 4 12
Engineering Changes 2 14
Number of Parts 22 88
Required:
a. Assuming that the overhead is to be allocated to each line using DLH as the only cost driver, how
much is the overhead allocation rate per direct labor hour?
b. Determine the overhead to be allocated to each line using DLH as the only cost driver.
c. Determine the overhead to be allocated to each line using the four drivers identified above.

Problem 6: HiTech Products manufactures three types of remote-control devices: Economy, Standard,
and Deluxe. The company, which uses activity-based costing, has identified five activities (and related
cost drivers). Each activity, its budgeted cost, and related cost driver is identified below.
Activity Cost Cost Driver
Material Handling P225,000 Number of parts
Material Insertion 2,475,000 Number of parts
Automated Machinery 840,000 Machine Hours
Finishing 170,000 Direct Labor Hours
Packaging 170,000 Orders Shipped
Total P3,880,000
The following information pertains to the three product lines for next year:
Economy Standard Deluxe
Units produced 10,000 5,000 2,000
Orders Shipped 1,000 500 200
Number of parts per unit 10 15 25
Machine Hours per unit 1 3 5
Labor hours per unit 2 2 2

1. What is HiTech’s pool rate for the material-handling activity?

a. P1.00/part c. P6.62/labor hour
b. P2.25/part d. P13.23/part

2. What is HiTech’s pool rate for the automated machinery activity?

a. P24.00/machine hour c. P24.50/labor hour
b. P49.42/unit d. P50.00/machine hour

3. What is HiTech’s pool rate for the finishing activity?

a. P5.00 per labor hour c. P5.00 per machine hour
b. P5.00 per unit d. P7.50 per unit

4. What is HiTech’s pool rate for the packaging activity?

a. P4.86 per machine hour c. P5.00 per labor hour
b. P10.00 per unit d. P100.00 per order shipped

5. Under an activity-based costing system, what is the per-unit overhead cost of Economy?
a. P141 c. P225
b. P164 d. P228

6. Under an activity-based costing system, what is the per-unit overhead cost of Standard?
a. P164 c. P272
b. P228 d. P282

7. Under an activity-based costing system, what is the per-unit overhead cost of Deluxe?
a. P272 c. P320
b. P282 d. P440
8. Assume that HiTech is using a volume-based costing system, and the preceding overhead costs are
applied to all products on the basis of direct labor hours. The overhead cost that would be assigned to
the Deluxe product line is closest to:
a. P456,471 c. P961,176
b. P646,471 d. P1,141,176

9. Assume that HiTech is using a volume-based costing system, and the preceding overhead costs are
applied to all products on the basis of direct labor hours. The overhead cost that would be assigned to
the Standard product line is closest to:
a. P456,471 c. P961,176
b. P646,471 d. P1,141,176

Problem 7: Anastascia Inc. produces three products. Production and cost information is as follows:
Model A Model B Model C
Units produced 2,000 6,000 12,000
Direct labor hours 4,000 2,000 4,000
Number of set-ups 100 150 250
Number of shipments 200 225 275
Engineering change orders 15 10 5
Overhead costs include setups P45,000; shipping costs P70,000; engineering costs P90,000.
1. What would be the per unit overhead cost for Model A if direct labor hours were the allocation base?
a. P10.25 c. P41.00
b. P20.50 d. None of the above

2. What would be the per unit overhead cost for Model A if activity based costing were used?
a. P10.25 c. P41.00
b. P37.00 d. None of the above