Supply Chain Management Inventory Management 2 — Questions and Answers
Question 1: Which inventory costing method assumes that the most recently purchased items are sold first?
- FIFO
- LIFO (Correct answer)
- Weighted Average
- Specific Identification
Correct answer: LIFO
LIFO (Last-In, First-Out) assumes the most recently acquired inventory is the first to be sold or used.
Question 2: A company has a reorder point of 500 units and receives replenishment orders every 10 days. If daily demand is 50 units, what is the safety stock level?
- 0 units (Correct answer)
- 50 units
- 100 units
- 500 units
Correct answer: 0 units
With daily demand of 50 units and a 10-day lead time equaling exactly 500 units, the reorder point covers lead time demand with zero safety stock.
Question 3: What does the term 'dead stock' refer to in inventory management?
- Items that have reached their expiration date
- Inventory that has not been sold or used for a long period (Correct answer)
- Products returned by customers
- Raw materials awaiting processing
Correct answer: Inventory that has not been sold or used for a long period
Dead stock refers to inventory items that have not moved (sold or used) for an extended period and are unlikely to in the future.
Question 4: In the context of ABC analysis, which category represents items that are high-value but low in quantity?
- C items
- B items
- A items (Correct answer)
- D items
Correct answer: A items
A items are typically the top 10–20% of SKUs that account for approximately 70–80% of total inventory value.
Question 5: What is 'cycle counting' in inventory management?
- Counting all inventory once per year
- A continuous auditing process where a subset of inventory is counted on a rotating schedule (Correct answer)
- Tracking inventory through production cycles
- Measuring how many times inventory turns over in a year
Correct answer: A continuous auditing process where a subset of inventory is counted on a rotating schedule
Cycle counting involves regularly counting a rotating subset of inventory items instead of performing a single annual physical count.
Question 6: Which of the following best describes 'vendor-managed inventory' (VMI)?
- The buyer monitors and controls the supplier's stock levels
- The supplier takes responsibility for managing the buyer's inventory levels (Correct answer)
- A third-party logistics provider manages both buyer and seller inventory
- Inventory is managed jointly by procurement and warehouse teams
Correct answer: The supplier takes responsibility for managing the buyer's inventory levels
In VMI, the supplier monitors the buyer's inventory levels and takes responsibility for replenishment decisions to maintain agreed stock levels.
Question 7: If a company's cost of goods sold is $1,200,000 and average inventory is $200,000, what is the inventory turnover ratio?
- 2
- 4
- 6 (Correct answer)
- 8
Correct answer: 6
Inventory turnover = COGS ÷ Average Inventory = $1,200,000 ÷ $200,000 = 6.
Supply Chain Management Inventory Management 2
Which inventory costing method assumes that the most recently purchased items are sold first?