Chapter 2: Material

What is the difference between direct material and indirect material?

• Direct materials are raw materials that are directly traceable to the product, while indirect materials are not directly traceable.

• Direct materials are used in the production process, while indirect materials are not used at all.

• Direct materials are more expensive than indirect materials.

• Direct materials are always purchased in bulk, while indirect materials are not.

Answer explanation

The correct choice highlights that direct materials are raw materials directly traceable to the product, while indirect materials cannot be traced directly, distinguishing their roles in production.

The importance of material control is significant because:

• it ensures efficient use of resources and reduces waste.

• it complicates the production process.

• it increases the cost of production.

• it has no impact on the overall production process.

Answer explanation

The correct choice highlights that material control is crucial for ensuring efficient resource use and minimizing waste, which directly contributes to a more streamlined and cost-effective production process.

The material purchasing procedure involves several steps. Which of the following is NOT typically part of the material purchasing procedure?

• Identifying the need for materials

• Selecting suppliers

• Conducting a financial audit

• Placing an order

Answer explanation

Conducting a financial audit is not part of the material purchasing procedure. The typical steps include identifying the need for materials, selecting suppliers, and placing an order.

The objectives of storekeeping and store control are:

• To ensure efficient inventory management and minimize costs.

• To increase the number of products in the store.

• To reduce the number of employees in the store.

• To maximize the store's physical size.

Answer explanation

The correct choice emphasizes efficient inventory management and cost minimization, which are key objectives of storekeeping and store control, unlike the other options that do not align with these goals.

What factors influence the determination of EOQ?

• EOQ is influenced by order costs and holding costs.

• EOQ is influenced by production rates and lead times.

• EOQ is influenced by market trends and seasonal demand.

• EOQ is influenced by transportation costs and storage costs.

Answer explanation

EOQ (Economic Order Quantity) is primarily influenced by order costs, which are the costs associated with placing an order, and holding costs, which are the costs of storing inventory. These factors help determine the optimal order quantity.

What is the setting of stock level?

• Stock level is set based on demand and lead time.

• Stock level is set based on supply chain efficiency.

• Stock level is set based on inventory turnover.

• Stock level is set based on production capacity.

Answer explanation

Stock level is primarily determined by demand and lead time, ensuring that inventory meets customer needs without excess. This choice reflects the balance between supply availability and customer demand.

How is EOQ calculated?

Answer explanation

The correct formula for calculating EOQ (Economic Order Quantity) is \(\sqrt{\frac{2DS}{H}}\). This formula helps determine the optimal order quantity that minimizes total inventory costs.

How do you prepare a store ledger card using the FIFO method?

• By recording the oldest inventory costs first

• By recording the newest inventory costs first

• By averaging the inventory costs

• By using the LIFO method

Answer explanation

The FIFO (First In, First Out) method requires recording the oldest inventory costs first, ensuring that the earliest purchased items are sold before newer ones. This helps in accurately reflecting inventory costs.

What is the primary principle of the FIFO inventory valuation method?

• To sell the most recently purchased items first

• To sell the oldest items first

• To calculate an average cost for all items

• To prioritize items based on their expiration dates

Answer explanation

The FIFO (First In, First Out) method prioritizes selling the oldest items first. This approach helps manage inventory effectively, ensuring that older stock is sold before it becomes obsolete or expires.

Grace runs a small grocery store and is trying to decide on the best inventory valuation method. What are the advantages and disadvantages of FIFO, LIFO, and Weighted Average methods for her business?

• FIFO method is simple and reflects current market prices, but may not match actual physical flow of goods.

• LIFO method reduces tax liability during inflation but may not reflect current market prices.

• Weighted Average method smooths out price fluctuations but may not reflect actual cost of specific items.

• All of the above.

Answer explanation

The advantages and disadvantages of FIFO, LIFO, and Weighted Average methods highlight their unique impacts on inventory valuation. Therefore, 'All of the above' is correct as it encompasses all mentioned points.