Question Tag: Inventory Management

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  • 20 Marks

MA – Mar 2025 – L2 – Q2 – Budgetary control

Explain eight stages in the budgeting process for a manufacturing organization.

a) The preparation of budgets is a lengthy process which requires great care if the ultimate master budget is to be useful for the purposes of management control within an organisation. Required: Explain EIGHT stages involved in the budgeting process in a manufacturing organisation

b) Budgeting serves a number of useful purposes. They include planning annual operations, coordinating the activities of the various parts of the organisation, communicating plans to various responsibility centre managers among others. Notwithstanding these useful purposes, budgeting has been criticised for several reasons. Required: Identify FIVE criticisms of budgeting.

c) Despite the benefits of minimised inventory cost, waste elimination and quick turnaround time for customers, a lean production model is beset with inherent limitations. Required: Explain FOUR limitations to the efficient implementation of a lean production model in an organization.

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  • 20 Marks

FM – Mar2025 – L2 – Q4 – Business valuations

Estimate the value of Obuorba LTD's stock at the end of Year 4 using dividend valuation model.

a) Mama Lomo is trying to value Obuorba LTD’s stock. She uses a spreadsheet model to easily see how a change in one or more assumptions affects the stock’s estimated value. The model has projections for the next four years based on the following assumptions.

  • Sales will be GH₵300 million in Year 1.
  • Sales will grow at 15% in Years 2 and 3 and 10% in Year 4.
  • Operating profits (EBIT) will be 17% of sales in each year.
  • Interest expense will be GH₵10 million per year.
  • Income tax rate is 30%.
  • Earnings retention ratio will stay at 60%.
  • The per-share dividend growth rate will be constant from Year 4 onwards, and the final growth rate will be 200 bps (2%) less than the growth rate from Year 3 to Year 4. This final growth rate should be used to derive the dividend growth from year 4 onwards.
    The company has 10 million shares outstanding. Mama Lomo has estimated the required return on Obuorba LTD’s stock to be 13%.
    Required:
    i) Estimate the value of the stock at the end of Year 4 based on the foregoing assumptions. (6 marks)

ii) Estimate the current value of the stock using the foregoing assumptions. (4 marks)

b) State THREE limitations of the dividend discount model of stock valuation. (5 marks)

c) In the healthcare sector, efficient inventory management and resource utilisation are critical to providing timely and high-quality patient care. The Korle-Bu Teaching Hospital, the largest teaching hospital in West Africa, has recently implemented a Just-in-Time (JIT) system to enhance its operational efficiency. The hospital adopted JIT production and purchasing strategies to manage its medical supplies and pharmaceuticals more effectively. The goal is to reduce inventory holding costs, minimise wastage and ensure that critical medical supplies are available when needed without overstocking.

However, the implementation of JIT systems in a healthcare setting like Korle-Bu Teaching Hospital presents several challenges. While JIT aims to streamline operations and reduce costs, it also introduces potential risks and problems, particularly in an environment where the timely availability of medical supplies is crucial for patient care.

Required:

i) Explain JIT purchasing. (2 marks)

ii) Discuss TWO potential problems associated with implementing JIT systems in a hospital environment. (3 marks)

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  • 20 Marks

FM – May 2018 – L3 – SB – Q3 – Working Capital Management

Calculate the optimal re-order quantity, compare suppliers, and evaluate limitations in Kehinde's inventory management.

Kehinde is a wholesaler who buys and sells a wide range of products, including electrical component TK. Kehinde sells 24,000 units of TK each year at a unit price of N2,000. Sales of TK normally follow an even pattern throughout the year. To prevent stock-outs, Kehinde keeps a minimum inventory of 1,000 units. Further supplies of TK are ordered whenever the inventory falls to this minimum level, and the time lag between ordering and delivery is small and can be ignored.

At present, Kehinde buys all his supplies of TK from Ajoke Limited and usually purchases them in batches of 5,000 units. His most recent invoice from Ajoke Limited was as follows:

Item Amount (N’000)
Basic price: 5,000 units of TK at N1,500 per unit 7,500
Delivery charges:
– Transport at N50 per unit 250
– Fixed shipment charge per order 100
Total 7,850

Kehinde also estimates an ordering cost of N50,000 per order, comprising administrative costs and sample checks, which does not vary with the order size.

Kehinde stores TK in a warehouse rented at N500 per square metre per annum, with excess capacity sublet at N400 per square metre annually. Each unit of TK in inventory requires 2 square metres of space. Other holding costs are estimated at N1,000 per unit per annum.

Kehinde has recently learned that another supplier, Ema Limited, offers discounts for large orders. Ema Limited’s pricing structure is as follows:

Order Size Price per unit (N)
1 – 2,999 1,525
3,000 – 4,999 1,450
5,000 and over 1,425

In other respects (delivery charges and order lead time), Ema Limited’s terms match those of Ajoke Limited.

Required:

a. Calculate the relevant:
i. Cost per order
ii. Holding cost per unit per annum (4 Marks)

b. Irrespective of your answers in (a) above and assuming a cost per order of N150,000 and holding cost per unit per annum of N1,800, calculate the optimal re-order quantity for TK and the associated annual profit Kehinde can expect from the purchase and sale, assuming that he continues to buy from Ajoke Limited. (6 Marks)

c. Prepare calculations to determine if Kehinde should buy TK from Ema Limited instead of Ajoke Limited, and in what batch size. (7 Marks)

d. Discuss the key limitations of the method of analysis you used. (3 Marks)

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  • 20 Marks

AA – May 2016 – L2 – Q2 – Planning an Audit

Planning and identifying audit risks for a new client with an increased demand for products, using a standard costing system for inventory valuation.

Sweet Dreams, a limited liability company, is a new audit client and you are at the
planning meeting for the forthcoming audit. The company has grown rapidly and has
May 31 as year-end. The financial statements have not been audited in previous years
since the organization has only just converted from a partnership to a company.
The company’s bankers have requested that an audit be undertaken on the financial
statements for the year ending May 31, 2016. Higher levels of inventory required to
meet the increasing demand for its products have necessitated a request for an increase
in the bank’s overdraft facility.
The company makes beds, buying its materials directly. At the year-end, inventory
comprises raw materials, work-in-progress and finished goods. It does not undertake
continuous inventory counting but does intend to perform a full inventory count on
May 31, 2016. It uses standard costing system to value finished products and work-inprogress.

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  • 20 Marks

PM – May 2021 – L2 – Q5 – Decision-Making Techniques

Calculate the optimal order quantity to maximize expected profits considering ordering constraints and probability distribution of demand.

A national boutique chain sells a wide range of high-quality customized fashion goods. One particular outfit is bought at ₦8,000 and sold at ₦13,000. Mean holding costs per season per outfit are ₦500, and it costs ₦80,000 to order and receive goods in stock. The manufacturers require orders in advance, and once a batch is made, it is impossible to place a repeat order. Additionally, delivery cannot be staggered over the fashion season.

When a customer buys an outfit that requires adjustments, alterations are made, and the customer collects it later. Generally, if an outfit is out of stock at one boutique, it can be obtained from another branch within hours. However, if the chain as a whole runs out of stock, it loses both the outfit’s profit and an estimated ₦2,000 profit from additional items customers typically buy. If excess stock remains at season’s end, it is disposed of at ₦5,000 per outfit.

The sales pattern for a comparable outfit indicates the following probability distribution for total chain sales:

Outfits Sold Probability
1,100 0.30
1,200 0.40
1,300 0.20
1,400 0.10

The management accountant must determine the optimal order quantity for the upcoming season to maximize expected profit, factoring in overstocking and understocking costs.

Required:
a) Determine the number of outfits to order to maximize expected profits.
(17 Marks)

b) Compare and contrast the model developed with the classical Economic Order Quantity (EOQ) model.
(3 Marks)

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  • 20 Marks

PSAF – May 2017 – L2 – SA – Q3 – Accounting for Government Assets and Liabilities

Discuss store management, accounting officer responsibilities, and preventive actions for stock management in the public sector.

Engineer Paul Maihala assumed duty as the Managing Director/CEO of FCT Abuja Water Authority (FAWA) – a company fully owned by the Federal Government of Nigeria. FAWA is responsible for the supply of water to the Federal Capital. Engr. Maihala, before resuming at FAWA in October 2015, was the Director (General Services) at the Federal Ministry of Works and Housing. Upon resumption, he was determined to put an end to the shortage of water supply in the Federal Capital in fulfillment of the mandate given to him on his appointment.

At a meeting with his directors, the new Managing Director/CEO asked for a list of challenges facing the Authority and suggestions on how to solve them. Top on the list of challenges were the issues of unreliable public power supply and the excessive cost of running generators due to the high cost of diesel. There was also the case of shortage of raw materials such as chlorine (Sodium Hypochlorite) and other essential chemicals used for water treatment.

The Director, (Maintenance) decried the incessant cases of non-availability of essential chemicals and materials. He also said that there were cases of low-quality and unusable chemicals supplied to the store.

The Managing Director directed that adequate stock of diesel and essential chemicals must be kept at all times and that he would not tolerate any case of stock-out, diversion, or theft of diesel, chemicals, and other store items.

The Director, (General Services), stated that the major challenge he faced was that the Authority’s store was porous and that the controls in the store were inadequate. He blamed the Finance and Accounts department for inadequate record-keeping, leading to frequent stock-outs and non-documentation of store discrepancies. He said that “he would have preferred a situation where the accounts department would leave his stores alone.”

The Director, Finance and Accounts, said in his presentation that he had no control over the store as the storekeeper reports to the Director, General Services. He said he was only responsible for the store accounting function and that the officer-in-charge of stores accounting had his office in the Accounts section. He further said that the storekeeper was not cooperating with the accounts staff and saw them as an unnecessary disturbance as they often presented themselves as “policemen.” The argument between the two directors was heated to the extent that the meeting had to be adjourned.

Required:

a. According to Government Financial Regulation (2009 Edition), explain the term “STORES” (2 Marks)

b. In line with the Treasury’s objective of ensuring an effective system of internal control in the management of stores, what are the responsibilities of the Accounting Officer? (4 Marks)

c. State SIX actions the Accounting Officer could take to prevent cases of: i. Stock-outs (6 Marks) ii. Diversion or theft of diesel or other store items. (6 Marks)

d. State TWO measures necessary to ensure that chemicals and other store materials meet the required standards. (2 Marks)

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  • 20 Marks

PM – May 2022 – L2 – SA – Q2 – Cash Budgeting and Working Capital

Preparation of a cash budget for Mega Laboratories PLC for the quarter ending June 30, 2021.

Mega Laboratories plc is a successful manufacturing company in the pharmaceutical industry. The company manufactures a number of household drugs. Since the advent of the Covid-2019 pandemic, its products have been in high demand. One of its newest products is known as vacineDcovid. In order to manufacture the product, a single raw material, Zithromax, is used.

Budgets are to be prepared for the quarter ending 30 June 2021, and the following information is available for this purpose:

(i) At 31 March 2021 various balances were as follows:

  • Receivables: N500,700
  • Creditors (suppliers of Zithromax): N153,000
  • Inventory of vacineDcovid: 20,300 units
  • Inventory of Zithromax: 200,000 kg

(ii) Extracts from the ‘standard cost card’ – vacineDcovid are as follows:

  • Direct material Zithromax, 10kg at N5.00 per kg: N50.00
  • Direct labour, 2 hours at N6.00 per hour: N12.00

(iii) Suppliers of Zithromax give two months credit to the company, whereas customers take one month’s credit.
(iv) Sales expectations for the quarter ending 30 June 2021 are as follows:

  • 25,000 units of vacineDcovid at a selling price of N95.00 per unit.
    (v) Assume that sales of vacineDcovid and purchases of Zithromax will be evenly spread over the three months to 30 June 2021.
    (vi) Depreciation relating to plant and machinery is N55,000 for the quarter ending 30 June 2021.
    (vii) Other expenses are paid immediately in cash and are estimated to be N200,000 for the quarter ending 30 June 2021.
    (viii) The anticipated inventory levels at 30 June 2021 are as follows:
  • Inventory of vacineDcovid: 15,000 units
  • Inventory of Zithromax: 150,500 kgs

(ix) Assume there is no work-in-progress and that stocks of vacineDcovid and Zithromax are valued at standard direct cost – see (ii) above.

Required:
For the quarter ending 30 June 2021 prepare:
a. A cash budget (amounts for each separate month are not required). (8 Marks)
b. Income Statement budget (clearly state any assumptions you have made). (5 Marks)
c. Briefly state the benefits of a Cash Budget to Mega Laboratories plc. (3 Marks)
d. Sales are often considered to be a principal budget factor of an organisation. Explain the meaning of a ‘principal budget factor’ and assuming that it is sales, explain how sales may be forecast, making appropriate reference to the use of statistical techniques and the use of computers. (4 Marks)

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  • 1 Marks

MI – Nov 2020 – L1 – SA – Q1 – Forecasting Techniques

The question asks to calculate the Economic Order Quantity (EOQ) based on holding costs, ordering costs, and annual demand.

A company uses 40,000 units of an item per annum. It is recorded that the holding costs are N4 per annum and the ordering cost is N50 per order. The Economic order Quantity is:

A. 2,500
B. 1,500
C. 1,000
D. 800
E. 500

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  • 20 Marks

QTB – Nov 2015 – L1 – SB – Q6 – Operations Research

Formulate a linear programming problem for optimizing investment in conservative and speculative inventories under given constraints.

Assume that the management of Community Bank Limited wants to invest up to N100,000 in inventory considered to be either conservative or speculative. The company’s board-approved investment policy is that the investment in conservative inventory should be at most N80,000, while the investment in the speculative inventory should be at least N12,000. Assume further that N1.6 return is expected on each naira invested in the conservative inventory, N2.0 return is expected on each investment in the speculative inventory, and that monetary policy regulations require that investment in the speculative inventory should be at most one-third of the investment in the conservative inventory.

Required:

a. State the type of Operations Research problem described above. (2 Marks)

b. Formulate mathematically the:

i. Objective function. (4 Marks)

ii. Constraint inequalities. (8 Marks)

iii. Investment problem. (6 Marks)

(Total: 20 Marks)

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  • 20 Marks

MI – Nov 2015 – L1 – SB – Q3 – Accounting for Cost Elements

Determines inventory balance using FIFO and weighted average pricing methods.

A company located in Ijora area of Lagos extracted the following figures from its materials analysis sheet:

Date Transaction Quantity Unit price (N)
1st January Balance b/f 10,000 50
25th January Receipt 7,000 55
6th February Issue 14,000 –
3rd March Receipt 5,000 60
27th March Receipt 4,500 62
4th June Issue 7,500 –
24th June Issue 2,500 –
30th June Receipt 6,500 65

You are required to record the above transactions in the inventory ledger and determine the value of the inventory balance at the end of June 2015 using:
a. First-in-First-out pricing method. (10 Marks)
b. Weighted average pricing method. (10 Marks)

(Total 20 Marks)

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  • 2 Marks

MA – May 2016 – L2 – Q4a – Relevant Cost and Revenue

Calculate the amount of material ordered based on given inventory information.

Material X is a key raw material of XOXO Ltd. The storekeeper is interested in knowing the units they have placed on order because the supporting documents have been destroyed by fire. She is able to provide the following information: Immediately before the fire, materials in inventory were 1,250 units; materials requested by the factory but yet to be supplied were 375 units, and inventory balance was 3,255 units.

What is the amount of material X that XOXO has ordered from its suppliers?

(2 marks)

 

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  • 10 Marks

BMIS – April 2022 – L1 – Q3a – Operations strategy

Suggest five benefits a company would derive from adopting the Just-In-Time (JIT) inventory system.

You are the Accounts officer for Unimech Garages, a company that provides mobile vehicle repairs for faulty vehicles on the Accra – Kumasi and Accra – Takoradi highways. The company has adopted the Just-In-Time (JIT) inventory control system for its operations. The JIT inventory control system was adopted because all repairs performed vary from vehicle to vehicle, and there is no need to stock any spare parts since the repair team has no idea of the next repairs to be conducted as well as the type of spare parts they would require. Again, this inventory system was implemented to prevent employees from committing the offence of selling stocked spare parts for their individual gains.

Required:
Suggest FIVE (5) benefits the company would derive from this inventory system. (10 marks)

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  • 9 Marks

FM – May 2021 – L2 – Q5a – Inventory Management

Calculate the Economic Order Quantity (EOQ) and related inventory costs for Adom Furniture Ltd.

a) Adom Furniture Ltd is a reputable producer of office desks. A key material that is used in the production of office desks is processed wood boards. The company produces 200,000 units of office desks annually. The production of one unit of office desk requires three units of the processed wood board. The current production level and requirements will apply going forward.

Currently, the company buys 100,000 units of the processed wood board whenever it runs out of wood. The cost price of a processed wood board is GH¢120. It costs GH¢1,000 to place an order to replenish the inventory of processed wood board. On average, it costs GH¢10 to hold one processed wood board per annum.

The company has been financing each round of inventory purchase with short-term borrowing from a bank. The loan is typically granted for three months at an annual nominal interest rate of 24%. The bank charges a loan processing fee of 1.5% of the principal, which is paid upfront. The local distributor of the processed wood board is now willing to sell the product on credit terms 2/10 net 30.

Required:

i) Compute the optimal quantity of the processed wood board the company should order whenever it places an order. (3 marks)

ii) Compute the optimal number of orders to place. (2 marks)

iii) Compute the average costs associated with the current purchase plan of 100,000 units per order and the cost if the optimal quantity is ordered instead. (4 marks)

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  • 7 Marks

FM – Nov 2017 – L2 – Q4b – Inventory Management

Calculate the Economic Order Quantity (EOQ), total inventory costs, and the number of orders per year for a manufacturing company.

Asuo Ltd manufactures only one product, planks. The single raw material used in making planks is the dint. For each plank manufactured, twelve dints are required. The company manufactures 150,000 planks per year, and demand for planks is perfectly steady throughout the year. It costs GH¢200 each time dints are ordered, and the carrying costs are GH¢8 per dint per year.

Required:
i) Determine the Economic Order Quantity (EOQ) of dints. (3 marks)
ii) What are the total inventory costs for Asuo (carrying costs plus ordering costs)? (2 marks)
iii) How many times per year would inventory be ordered? (2 marks)

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