CPIM Inventory Management and Control 1 — Questions and Answers
Question 1: What does ABC analysis classify inventory items based on?
- Annual usage value (Correct answer)
- Physical size of items
- Lead time from suppliers
- Number of suppliers
Correct answer: Annual usage value
ABC analysis classifies inventory items by annual usage value, with A items representing the highest value (roughly 80% of total value) and C items the lowest.
Question 2: In ABC analysis, which category typically represents approximately 20% of SKUs but 80% of total inventory value?
- C items
- B items
- A items (Correct answer)
- D items
Correct answer: A items
A items follow the Pareto principle—roughly 20% of SKUs account for about 80% of total annual inventory value and receive the most management attention.
Question 3: What is cycle counting in inventory management?
- Counting all inventory at one time annually
- A continuous audit where a subset of inventory is counted on a rotating schedule (Correct answer)
- Counting items based on the production cycle time
- Counting items in a circular warehouse layout
Correct answer: A continuous audit where a subset of inventory is counted on a rotating schedule
Cycle counting is a perpetual auditing technique where a portion of inventory is counted regularly throughout the year rather than in a single annual physical count.
Question 4: Which inventory cost is incurred when a company cannot fulfill a customer order due to insufficient stock?
- Carrying cost
- Ordering cost
- Stockout cost (Correct answer)
- Setup cost
Correct answer: Stockout cost
Stockout costs arise when demand cannot be met due to inadequate inventory, encompassing lost sales, expediting fees, and customer dissatisfaction.
Question 5: What is the primary purpose of safety stock in an inventory system?
- To reduce ordering costs
- To buffer against demand and supply variability (Correct answer)
- To maximize inventory turnover
- To reduce storage space requirements
Correct answer: To buffer against demand and supply variability
Safety stock acts as a buffer to protect against unexpected increases in demand or replenishment lead time variability, reducing the risk of stockouts.
Question 6: Which of the following is an example of an inventory carrying cost?
- Purchase order processing fees
- Warehouse storage and insurance costs (Correct answer)
- Emergency expediting shipment fees
- Production run setup costs
Correct answer: Warehouse storage and insurance costs
Carrying costs are all costs associated with holding inventory over time, including warehousing, insurance, obsolescence, taxes, and the opportunity cost of capital tied up.
Question 7: What does the inventory turnover ratio measure?
- How quickly a company pays its suppliers
- How many times inventory is sold and replaced over a period (Correct answer)
- The ratio of finished goods to raw materials
- How often physical cycle counts are performed
Correct answer: How many times inventory is sold and replaced over a period
Inventory turnover ratio measures how many times a company sells and replenishes its inventory over a given period, indicating how efficiently inventory is being managed.
CPIM Inventory Management and Control 1
What does ABC analysis classify inventory items based on?