Financial Management for Project Managers Inventory Management 3 — Questions and Answers
Question 1: Which inventory metric measures the number of days a company takes to sell its average inventory on hand?
- Days Sales Outstanding (DSO)
- Days Inventory Outstanding (DIO) (Correct answer)
- Days Payable Outstanding (DPO)
- Cash Conversion Cycle (CCC)
Correct answer: Days Inventory Outstanding (DIO)
DIO (also called Days Inventory on Hand) = (Average Inventory ÷ COGS) × 365, measuring how long inventory sits before being sold.
Question 2: A project manager wants to minimize total inventory costs. At the EOQ, what is true about ordering costs and holding costs?
- Ordering costs exceed holding costs
- Holding costs exceed ordering costs
- Ordering costs and holding costs are equal (Correct answer)
- Both costs are minimized individually
Correct answer: Ordering costs and holding costs are equal
At the EOQ, total cost is minimized precisely when annual ordering costs equal annual holding costs.
Question 3: Which scenario best describes 'phantom inventory'?
- Inventory reserved for a specific customer order
- Inventory that appears in records but is missing physically (Correct answer)
- Safety stock held for demand surges
- Inventory in transit between warehouses
Correct answer: Inventory that appears in records but is missing physically
Phantom inventory refers to stock shown in the system as available but not physically present, often causing stockouts despite positive system balances.
Question 4: A company using a periodic inventory review system checks stock every 30 days. Lead time is 10 days. What is the maximum exposure period for a stockout?
- 10 days
- 20 days
- 30 days
- 40 days (Correct answer)
Correct answer: 40 days
In a periodic system, stockout exposure = review period + lead time = 30 + 10 = 40 days, because a shortage discovered at review still requires a full lead time to replenish.
Question 5: Which financial ratio is most directly impacted by a write-down of obsolete inventory?
- Current ratio (Correct answer)
- Debt-to-equity ratio
- Interest coverage ratio
- Return on equity
Correct answer: Current ratio
A write-down reduces inventory (a current asset), directly lowering the current ratio (Current Assets ÷ Current Liabilities).
Question 6: A project manager uses the '2-bin system' for managing small hardware items. What triggers a replenishment order in this system?
- When total inventory falls below EOQ
- When the first bin is emptied
- When the second bin is first opened (Correct answer)
- When safety stock is consumed
Correct answer: When the second bin is first opened
In the 2-bin system, an order is triggered when the first bin empties and the second bin must be opened, ensuring stock arrives before the second bin runs out.
Question 7: Which costing approach assigns both variable and fixed manufacturing overhead to inventory?
- Variable costing
- Absorption costing (Correct answer)
- Activity-based costing
- Standard costing
Correct answer: Absorption costing
Absorption (full) costing includes fixed manufacturing overhead in inventory cost, which is required under US GAAP for external reporting.
Financial Management for Project Managers Inventory Management 3
Which inventory metric measures the number of days a company takes to sell its average inventory on hand?