CIM CIM Inventory Costing & Valuation 2 — Questions and Answers
Question 1: What does Days Inventory Outstanding (DIO) represent?
- Days to receive a purchase order
- Average days inventory is held before being sold (Correct answer)
- Time between order placement and supplier acknowledgment
- Days a product remains out of stock
Correct answer: Average days inventory is held before being sold
DIO (Average Inventory ÷ COGS × 365) measures how many days on average a company holds inventory before converting it to a sale.
Question 2: Which category of inventory cost includes warehousing rent, insurance, and obsolescence?
- Ordering cost
- Purchase cost
- Carrying cost (Correct answer)
- Shortage cost
Correct answer: Carrying cost
Carrying costs (holding costs) encompass all expenses incurred to store and maintain inventory, including rent, insurance, handling, and opportunity cost.
Question 3: What is the primary purpose of standard costing in inventory management?
- To track actual costs in real time for each SKU
- To set predetermined cost benchmarks for budgeting and variance analysis (Correct answer)
- To calculate the economic order quantity
- To determine safety stock levels
Correct answer: To set predetermined cost benchmarks for budgeting and variance analysis
Standard costing establishes pre-set cost targets that are compared with actual costs to identify and investigate variances for management action.
Question 4: In inventory accounting, 'shrinkage' refers to:
- Physical inventory loss due to theft, damage, or recording error (Correct answer)
- A reduction in order quantities to cut costs
- Decrease in carrying costs through process improvement
- Reduction in supplier lead time
Correct answer: Physical inventory loss due to theft, damage, or recording error
Inventory shrinkage is the discrepancy between recorded inventory quantities and actual physical counts, caused by theft, spoilage, damage, or administrative error.
Question 5: Which of the following is an example of an ordering cost?
- Warehouse rent
- Inventory insurance premiums
- Purchase order processing fees (Correct answer)
- Obsolescence write-down charges
Correct answer: Purchase order processing fees
Ordering costs are incurred each time a purchase order is placed and include administrative processing, communication, and receiving inspection expenses.
Question 6: Fill rate in inventory management measures:
- Percentage of warehouse capacity utilized
- Proportion of orders fulfilled immediately from available stock (Correct answer)
- Ratio of ordered units to received units
- Percentage of items meeting quality standards
Correct answer: Proportion of orders fulfilled immediately from available stock
Fill rate is the percentage of customer orders that can be fully satisfied from on-hand inventory without backorders or lost sales.
CIM CIM Inventory Costing & Valuation 2
What does Days Inventory Outstanding (DIO) represent?