ACCA MA · Chapter 4
Accounting for materials MCQs with Answers
11 multiple-choice questions on Accounting for materials for ACCA MA Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Annual demand for a component is 36,000 units. Each order costs $40 to place, and holding one unit in inventory costs $2 per year. What is the economic order quantity (EOQ)?
- A) 849 units
- B) 1,200 units
- C) 1,697 units
- D) 600 units
Show answer & explanation
Answer: B) 1,200 units
EOQ = square root of (2 x Co x D / Ch) = square root of (2 x 40 x 36,000 / 2) = square root of 1,440,000 = 1,200 units. Leaving out the '2' on the holding cost side (dividing by 1) gives 1,697, and dividing by 4 gives 849.
Question 2
A company uses 20,000 units of a material each year. The purchase price is $20 per unit, ordering costs are $50 per order, and holding costs are 10% of the purchase price per unit per year. If the company orders the EOQ, what is the total annual ordering and holding cost?
- A) $2,000
- B) $3,000
- C) $1,000
- D) $402,000
Show answer & explanation
Answer: A) $2,000
Holding cost per unit = 10% x $20 = $2. EOQ = square root of (2 x 50 x 20,000 / 2) = square root of 1,000,000 = 1,000 units. Ordering cost = (20,000 / 1,000) x 50 = $1,000. Holding cost = (1,000 / 2) x 2 = $1,000, based on average inventory. Total = $2,000; at the EOQ, ordering and holding costs are always equal. Including the purchase cost of $400,000 would give $402,000.
Question 3
Daily usage of a material ranges from 300 to 500 units, and the supplier lead time ranges from 8 to 12 days. To avoid running out of inventory, what should the reorder level be?
- A) 4,000 units
- B) 6,000 units
- C) 4,800 units
- D) 2,400 units
Show answer & explanation
Answer: B) 6,000 units
Reorder level = maximum usage x maximum lead time = 500 x 12 = 6,000 units. This means there is enough inventory to cover the worst case before the new order arrives. Average usage x average lead time (400 x 10 = 4,000) would risk a stockout.
Question 4
A company has a reorder level of 6,000 units and a reorder quantity of 5,000 units. Daily usage is between 300 and 500 units, and lead time is between 8 and 12 days. What is the maximum inventory level?
- A) 8,600 units
- B) 11,000 units
- C) 13,400 units
- D) 7,000 units
Show answer & explanation
Answer: A) 8,600 units
Maximum level = reorder level + reorder quantity - (minimum usage x minimum lead time) = 6,000 + 5,000 - (300 x 8) = 11,000 - 2,400 = 8,600 units.
Question 5
Inventory records for a material show: Day 1 Opening inventory 200 units at $5 Day 5 Purchased 300 units at $6 Day 10 Issued 400 units Day 15 Purchased 250 units at $7 Day 20 Issued 200 units Using FIFO, what is the value of closing inventory?
- A) $990
- B) $1,050
- C) $850
- D) $900
Show answer & explanation
Answer: B) $1,050
Closing units = 200 + 300 + 250 - 400 - 200 = 150. Under FIFO the oldest units are issued first, so the 150 units left are all from the latest purchase at $7. Closing inventory = 150 x 7 = $1,050. (The day 10 issue uses 200 at $5 and 200 at $6; the day 20 issue uses 100 at $6 and 100 at $7.)
Question 6
Inventory records for a material show: Day 1 Opening inventory 200 units at $5 Day 5 Purchased 300 units at $6 Day 10 Issued 400 units Day 15 Purchased 250 units at $7 Day 20 Issued 200 units Using the cumulative weighted average cost (AVCO) method, recalculated after each receipt, what is the total cost of the issues?
- A) $3,500
- B) $3,640
- C) $3,560
- D) $3,600
Show answer & explanation
Answer: C) $3,560
After day 5: 500 units costing 1,000 + 1,800 = $2,800, average $5.60. Day 10 issue: 400 x 5.60 = $2,240, leaving 100 units at $560. After day 15: 350 units costing 560 + 1,750 = $2,310, average $6.60. Day 20 issue: 200 x 6.60 = $1,320. Total issues = 2,240 + 1,320 = $3,560. FIFO would give $3,500.
Question 7
When prices are rising, how does FIFO compare with AVCO?
- A) FIFO gives a higher closing inventory value and a higher profit
- B) FIFO gives a lower closing inventory value and a higher profit
- C) FIFO gives a higher closing inventory value and a lower profit
- D) FIFO gives a lower closing inventory value and a lower profit
Show answer & explanation
Answer: A) FIFO gives a higher closing inventory value and a higher profit
Under FIFO, issues are charged at the older (cheaper) prices, so cost of sales is lower and profit is higher. Closing inventory is valued at the most recent (higher) prices, so it is higher than under AVCO, which mixes older and newer prices.
Question 8
Which document does the stores department send to the purchasing department to ask for materials to be bought?
- A) Purchase order
- B) Goods received note
- C) Materials requisition note
- D) Purchase requisition
Show answer & explanation
Answer: D) Purchase requisition
The stores department raises a purchase requisition when inventory needs topping up. The purchasing department then sends a purchase order to the supplier. A goods received note records the delivery, and a materials requisition note is used to issue materials from stores to production.
Question 9
Annual demand for a material is 36,000 units, with a purchase price of $10 per unit. Ordering costs are $40 per order, and holding costs are $2 per unit per year. The EOQ is 1,200 units. The supplier offers a 2% discount on all units if each order is for at least 3,000 units. What would the total annual cost (purchases, ordering and holding) be if the company ordered 3,000 units each time?
- A) $362,400
- B) $359,280
- C) $353,280
- D) $356,280
Show answer & explanation
Answer: D) $356,280
Purchases = 36,000 x $10 x 0.98 = $352,800. Ordering = (36,000 / 3,000) x 40 = 12 x 40 = $480. Holding = (3,000 / 2) x 2 = $3,000, based on average inventory. Total = 352,800 + 480 + 3,000 = $356,280. This is less than the $362,400 cost at the EOQ (360,000 + 1,200 + 1,200), so the discount is worth accepting.
Question 10
A stores record shows 2,400 units of a material physically in stock, 1,500 units on order from suppliers but not yet received, and 1,100 units set aside for production orders but not yet issued. What is the free inventory?
- A) 5,000 units
- B) 2,800 units
- C) 1,300 units
- D) 3,900 units
Show answer & explanation
Answer: B) 2,800 units
Free inventory = physical inventory + outstanding replenishment orders - unfulfilled requirements (allocated) = 2,400 + 1,500 - 1,100 = 2,800 units.
Question 11
Which of the following is an inventory holding cost?
- A) Administration cost of placing an order
- B) Delivery charge paid on each order
- C) Insurance of inventory kept in the warehouse
- D) Contribution lost when inventory runs out
Show answer & explanation
Answer: C) Insurance of inventory kept in the warehouse
Holding costs grow with the amount of inventory held, for example insurance, storage, obsolescence and the cost of capital tied up. Administration and delivery charges per order are ordering costs, and lost contribution is a stockout cost.