L4M7 Sample Questions Answers

Variable periodic reviews enable ATT to manage seasonal goods effectively by adjusting ordering based on:

Lead times and sales volume: Classifying products by these factors helps in planning, aligning with varying supplier delivery times and unpredictable sales demand.

Implementing a JIT or MRP system would require more sophisticated management tools, making option C the most feasible. This method aligns with whole-life asset management by supporting efficient inventory planning while minimizing stockouts or overstock situations.

Explanation

ABC analysis is an approach for classifying inventory items based on the items’ consumption val-ues. Consumption value is the total value of an item consumed over a specified time period, for example a year. The approach is based on the Pareto principle to help manage what matters and is applied in this context:

- A items are goods where annual consumption value is the highest. Applying the Pareto principle (also referred to as the 80/20 rule where 80 percent of the output is determined by 20 percent of the input), they comprise a relatively small number of items but have a relatively high consumption value. So it’s logical that analysis and control of this class is relatively intense, since there is the greatest potential to reduce costs or losses.

- B items are interclass items. Their consumption values are lower than A items but higher than C items. A key point of having this interclass group is to watch items close to A item and C item classes that would alter their stock management policies if they drift closer to class A or class C. Stock management is itself a cost. So there needs to be a balance between controls to protect the asset class and the value at risk of loss, or the cost of analysis and the potential value returned by reducing class costs. So, the scope of this class and the inventory management policies are determined by the estimated cost-benefit of class cost reduction, and loss control systems and processes.

- C items have the lowest consumption value. This class has a relatively high proportion of the total number of lines but with relatively low consumption values. Logically, it’s not usually cost-effective to deploy tight inventory controls, as the value at risk of significant loss is relatively low and the cost of analysis would typically yield relatively low returns.

LO 2, AC 2.1

Explanation

Obsolescent stock is stock, usually finished goods, which is in good condition and satisfactory working but for which demand is irreversibly falling towards zero. Once this demand reaches zero the stock can be considered 'obsolete'. It cannot be used or sold in its current state. Food ingredients (like candy canes) which are out of date are another example.

Maintenance and repair costs include:

Direct labor: Expenses for personnel performing maintenance tasks.

Warranty costs: Expenses associated with warranty obligations or repairs within the warranty period.

These costs are part of whole-life asset management, which aims to accurately budget for and manage ongoing equipment expenses.

Explanation

The Harmonized Commodity Description and Coding System, also known as the Harmonized System (HS) of tariff nomenclature is an internationally standardized system of names and numbers to classify traded products. It came into effect in 1988 and has since been developed and maintained by the World Customs Organization (WCO) (formerly the Customs Co-operation Council), an independent intergovernmental organization based in Brussels, Belgium, with over 200 member countries.

The Global Trade Item Number (GTIN) is an identifier for trade items, developed by GS1. Such identifiers are used to look up product information in a database (often by entering the number through a barcode scanner pointed at an actual product) which may belong to a retailer, manufacturer, collector, researcher, or other entity.

The Global Location Number can be used by companies to identify their locations, giving them complete flexibility to identify any type or level of location required.

The International Mobile Equipment Identity (IMEI) is a number, usually unique, to identify 3GPP and iDEN mobile phones, as well as some satellite phones.

Explanation

The purposes of a warehouse are to keep the inventories in good condition and to ensure that the operations is smooth. In the scenario, the warehouse has 2 stories, with goods-in and goods-out areas located on the ground floor and a lift connecting the stories. The lift could become a bottleneck if the goods inside the warehouse are not well-arranged.

Since the lift is often small with limited load capacity, putting heavy bulk items on the first floor will cause bottleneck and increase the chance of accidents. Therefore, palletised items (even they have low-usage) should be placed on the ground floor. Smaller and lighter items should be stored on the first floor.

This QUESTION NO: does appear in the real exam. To answer the question, students should imagine the situation.

Explanation

The net requirements are worked out using the following equation:

Net requirements = Total requirements - Available inventory

Where:

Total requirements = Gross requirements

Available inventory = Inventory on-hand + Units on-order

In the other words: Net requirements = Gross requirements - Inventory on-hand - Units on-order

Inventory on-hand is also known as Inventory level, whereas Units on-order can be called Scheduled receipt.

Acquisition costs include all expenses incurred to bring an asset to its operational state, such as installation and commissioning. These costs are essential to the total cost of ownership (TCO) in whole-life asset management, helping organizations understand the full initial investment required to make the asset usable.

Explanation

Holding costs (carrying costs) are the costs associated with the storage and handling of physical stock. There are two different types of holding costs:

- Costs related to the value of the goods: financial costs (i.e. the interest on the working capital tied up in inventory, which may be the bank borrowing rate or the company's target for return on capital); cost of insurance; losses due to product deterioration; losses due to obsolescence and redundancy of inventory; losses due to theft, accidental damage etc.

- Costs related to the physical characteristics of the inventory include the following: storage space; power, heat and lighting of the store; movement equipment; labour costs; administration costs.

Explanation

MRP I was some of the first business software to be widely adopted during the 1970s. Manufacturers sought these systems in order to improve efficiency and accuracy when it came to basic processes such as production scheduling and inventory management.

By the 1980s, manufacturers realized they needed software that could also tie into their accounting systems and forecast inventory requirements. Enter MRP II, which included these integrations in addition to all the capabilities offered by MRP I. Enterprise resource planning (ERP) software features—which we’ll cover later on—are included in the following table for comparison.

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Explanation

The system of slip sheet load handling involves the use of a thin sheet of material, the slip sheet, as a base on which items are assembled as a unit load for handling, storage, and transport. The slip sheet is used in conjunction with a pallet, if desired, at certain stages in the distribution cycle. If all lift trucks in the cycle are equipped with the proper attachment, an appropriate slip sheet is the only material handling base required. Slip sheet requires special push pull accessories and usually use thin and wide forks.

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Skids are generally described as single-deck pallets and do not have bottom flatted layer which makes them less bulky and cheaper than conventional pallets but also less universal in their use.

A picture containing building material Description automatically generated

Shrink wrap, also referred to as shrink film or shrink wrap, is a versatile polymer material used for the packaging of finished goods. Heat is applied to the film – by either a conveyor heat tunnel or an electric or gas heat gun – which catalyzes the film to shrink tightly around the item placed within. This process results in a clear, durable barrier of protection around the product.

Post pallets have a simple metal structure with four uprights and substantial feat to take the load. These may be free standing, but many are designed for the feet to interlock with the posts of another post pallet so that the stack can be created.

Explanation

ABC analysis is applied to stock and its management. It is based loosely on the Pareto principles, better known as 80/20 rule. Pareto principle is the theory that 80% of outcome results from 20% of inputs. For example, 80% of sales are to the top 20% of customers; 80% of spend on inventory is accounted for by the top 20% of stock items.

The ABC concept is based on Pareto's law. The following steps are carried out for the ABC analy-sis.

- Step 1: Compute the annual usage value for every item in the sample by multiplying the annual requirements by the cost per unit.

- Step 2: Arrange the items in descending order of the usage value calculated above.

- Step 3: Make a cumulative total of the number of items and the usage value.

- Step 4: Convert the cumulative total of the number of items and usage values into a percentage of their grand totals.

- Step 5: Draw a graph connecting cumulative % items and cumulative % usage value. The graph is divided approximately into three segments, where the curve sharply changes its shape. This indicates the three segments A, B and C.

LO 2, AC 2.1

Explanation

Consignment stock is stock legally owned by one party, but held by another, meaning that the risk and rewards regarding to the said stock remains with the first party while the second party is re-sponsible for distribution or retail operations. Ownership of consignment stock is passed only when the stock is used (issued or sold in the case of a shop). Unused stock in a warehouse may be returned to the supplier when it concerns standard manufactured products. With customer specific items, agreements concerning returning products, should be negotiated.

Explanation

Direct and indirect costs of holding inventory include the following:

1. Acquisition costs

2. Holding costs (carrying costs) are the costs associated with the storage and handling of physical stock. There are two different types of holding costs:

a. Costs related to the value of the goods: financial costs (i.e. the interest on the working capital tied up in inventory, which may be the bank borrowing rate or the company's target for return on capital); cost of insurance; losses due to product deterioration; losses due to obsolescence and redundancy of inventory; losses due to theft, accidental damage etc.

b. Costs related to the physical characteristics of the inventory include the following: storage space; power, heat and lighting of the store; movement equipment; labour costs; administration costs.

3. Costs of stockouts

Explanation

In a traditional warehouse, storage racks are arranged to create parallel picking aisles, perhaps with one or more cross aisles to allow workers to move quickly between picking aisles. This structure forces workers to travel rectilinear distances (north-south and east-west) to picking locations.

Kevin R. Gue and Russell D. Meller proposed alternative aisle designs:

- The 'Fan' shaped layout (or “Flying V”). This layout maintains parallel picking aisles, but al-lows the cross aisle to take on a different shape. If travel begins and ends at the bottom of the V, Gue and Meller expected distance to retrieve a single pallet is 10% less in this warehouse than in an equivalent traditional design.

- The Herringbone-shaped layout (or commonly referred as Fishbone layout) combines the verti-cal picking rows of a traditional warehouse with a second set of horizontal picking rows, divided by a V-shaped diagonal alley crossing the entire warehouse. This simple modification to the typical warehouse design allows employees (e.g. a forklift driver) to increase travel speed between picking locations. Efficiency gains achieved through a layout reconfiguration would reduce picking cost up to 23% compared to an equivalent warehouse using a traditional configuration.

Reference

Aisle Design - Kevin Gue

LO 1, AC 1.1

Low stock levels can lead to:

Delays and higher fulfillment costs: When stock is insufficient, emergency orders and expedited shipping may be necessary, increasing costs.

Stockouts during high demand: Insufficient inventory can lead to missed sales opportunities, negatively impacting customer satisfaction.

Whole-life asset management seeks to balance inventory levels to avoid stockouts while minimizing holding costs.

A life cycle asset management plan provides a comprehensive framework for planning, budgeting, and resource allocation throughout the asset's life. It considers costs from acquisition to disposal, ensuring that assets are managed efficiently and cost-effectively over their full lifecycle, which is central to whole-life asset management strategies.

Explanation

The core idea of lean manufacturing is actually quite simple…relentlessly work on eliminating waste from the manufacturing process. Waste is defined as any activity that does not add value from the customer’s perspective. According to research conducted by the Lean Enterprise Research Centre (LERC), fully 60% of production activities in a typical manufacturing operation are waste – they add no value at all for the customer.

On the other hand, agile manufacturing places an extremely strong focus on rapid response to the customer – turning speed and agility into a key competitive advantage.

Explanation

According to Hines and Rich, value stream refers to specific parts of the firms that actually add value to the specific product or service under consideration. XYZ Ltd is mapping the value stream by analysing the value-adding activities that contribute to their most important product.

Postponement is a business strategy which maximizes possible benefit and minimizes risk by delaying further investment into a product or service until the last possible moment. An example of this strategy is Dell Computers' build-to-order online store. One of the earliest references to the concept was in a paper by Zinn and Bowersox in the Journal of Business Logistics. They highlighted five types: Labelling, Packaging, Assembly, Manufacturing and Time postponements.

Kanban (看板) (signboard or billboard in Japanese) is a scheduling system for lean manufacturing and just-in-time manufacturing (JIT). Taiichi Ohno, an industrial engineer at Toyota, developed kanban to improve manufacturing efficiency. Kanban is one method to achieve JIT. The system takes its name from the cards that track production within a factory. For many in the automotive sector, kanban is known as the "Toyota nameplate system".

Put simply, silo working occurs when several departments or groups within that organisation do not want to share information or knowledge with other individuals they work with.

Staged payments linked to milestones (order, delivery, and acceptance testing) provide a fair and structured approach for both buyer and supplier. They ensure:

Alignment with performance: Payment is contingent on the supplier meeting specific contract stages, protecting the buyer.

Risk mitigation: The buyer avoids full payment upfront, reducing financial exposure.

In whole-life asset management, this approach enables better cost control and accountability throughout the equipment’s lifecycle.

The rate of stock turn (inventory turnover ratio) measures how often inventory is sold and replaced over a period. A lower turnover ratio indicates that inventory is sitting longer, tying up working capital. Calculating this rate helps procurement and finance assess inventory management efficiency, a key focus in whole-life asset management for optimizing working capital and reducing holding costs.

Explanation

In the scenario, the buying organisation (investment bank) must conduct various types of testing before the deployment of the software system. These tests can be functional testing, factory ac-ceptance testing and/or user acceptance testing. The costs for all these types of testing are classified as acquisition costs with regards of total cost of ownership.

Explanation

Dependent demand is the requirement for stock item which is directly related to and therefore de-pendent upon the rate of production (examples are: raw materials, components, energy).

Independent demand is the requirement for stock item which is not directly related to, and is therefore independent of rate of production.

'Number of independent demand items may be derived from the forecast': Although independent demand is called thus, it can still be influenced by economic factors external to the demand-supply model such as general consumer sentiment and consumers' available disposal income. However, businesses that need to predict the number of products with independent demand needed to sate their customers have it easier than businesses that must calculate the demand for products with dependent demand because there are fewer factors to consider.

'Dependent demand items are not directly correlated with production rate': As mentioned above, dependent demand items are directly correlated with production rate.

'All indirect supplies are independent demand items': Though most indirect supplier are inde-pendent demand, some are determined by the production rate, i.e. energy consumption of a major machinery.

'Car engine is an example of independent demand items in a car assembly plant': Car engine is a component in car which is the finished good of a car assembly plant, it is a dependent demand item.

LO 2, AC 2.1

Explanation

Typically, ordering costs include expenses for a purchase order, labor costs for the inspection of goods received, labor costs for placing the goods received in stock, labor costs for issuing a supplier’s invoice and labor costs for issuing a supplier payment. These costs are irrelevant from the size of the order and are incurred every time a firm places an order.

The total ordering cost will be equal to ordering cost per order multiply with number of orders.

Explanation

The total cost of ownership would be the sum of all estimated costs.

The costs are as the following:

- Purchase price: $1,000

- Electricity consumption: $200

- Extended warranty: $75

Total expense = $1,000 + $200 +$75 = $1,275. Then subtract the resale price from this sum, the total cost of ownership is $1,025.

Decommissioning is the process of safely retiring equipment from use. It involves steps such as cleaning, dismantling, and responsibly disposing of the asset, especially if it contains hazardous materials. Whole-life asset management includes decommissioning as a key phase, ensuring that assets are disposed of cost-effectively and in compliance with environmental standards.

Explanation

Possible solutions to the high irregular or seasonal demand problems are listed below:

• Take advantage of the height of the warehouse

- Mezzanine floor

- High racking system (increase storage capacity but require high-reach material handling equip-ment)

• Eliminate dead stock or inventory

• Improve material flow

• Improve storage location method

• Consider using aisle space during demand peak

• Narrow aisles between racks (require narrow handling equipment)

• Carousel-type storage system

• Auto-storage and retrievals system (ASRS)

Explanation

One-dimensional (or 1D) barcodes systematically represent data by varying the widths and spac-ings of parallel lines. These include some of the most traditional and well-recognized barcode types, such as the UPC and EAN codes. 1D barcodes are also commonly referred to as linear barcodes.

Two-dimensional (2D) barcodes look like squares or rectangles that contain many small, individual dots. QR codes, Data matrix and Aztec codes are examples of 2D barcodes

Numerical code contains all numbers, no letters

There are two different scan engine types (laser scanner versus imager) for interpreting the infor-mation provided in the barcode. Many companies producing the technology capable of reading the barcode data uses the term “scanning” regardless of the type of scan engine used. For the purposes of these FAQs, we are trying to draw a clearer distinction for you.

Linear (1D) codes can be scanned with a traditional laser scanner. A laser scan engine uses a laser and mirror to create the bar that scans the information. 1D barcode scanners will only interpret the linear barcode scanning technology. 1D barcode scanners are typically less expensive since the type of encryptions they can decode is limited.

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LO 1, AC 1.2

Explanation

The design of a building should consider the advantages of natural light as this can reduce the cost of artificial lighting and improve the environmental performance of the building. Daylight entering the building can also help reduce heating costs. Unfortunately some stocks react badly to direct sunlight, and some stock reacts badly to extreme of temperature or may require a specific temperature for storage. Some stock may require a warmer temperature than the ambient temperature and other stocks may require cooler temperature. For example, fabric and garment are sensitive to direct sunlight as ultraviolet light catalyses a reaction between the water present in all fabrics and atmospheric oxygen to create hydrogen peroxide. This is a bleaching agent and breaks down the chemical bonds that give dyes their colour.

Explanation

Decommissioning or disposal should start with the original specifications of the assets so that the organisation and supplier can make an appropriate plan. Some specifications also mention the is-sues regarding to end-of-life environmental factors.

Explanation

Just-in-time (JIT) purchasing is a systems approach for developing and operating the purchasing function. JIT purchasing along with the total quality management in many industries has been suc-cessful in reducing inventory and increasing the overall effectiveness of purchasing function and hence the productivity of manufacturing.

The just-in-time objectives of eliminating waste can be summarised in the 'five zeros: zero defects, zero set-up times, zero inventories, zero handling and zero lead times.

The correct answer should be 'In JIT purchasing, raw materials (or goods) are purchased so that products are delivered just as needed for production or sales' because it expresses that upstream activity (purchasing) only occurs as the downstream activity (production or sales) triggers.

Holding costs include expenses associated with storing inventory. These typically comprise:

Damaged goods: Losses due to items being stored improperly or deteriorating over time.

Storage space: Costs of renting or maintaining warehouse space.

Insurance: Fees for insuring stored items against potential risks.

These costs are integral to whole-life asset management, as they impact overall inventory and storage expenses.

Explanation

Tail Spend is derived from ABC Analysis, Class A high value suppliers, Tail Spend is formed from class B & C suppliers, equates to 20% of the total spend, B is Mid Tail and C is Long tail. Effective Spend Analysis and tail spend management, ensures that procurement can focus on creating an optimum and efficient sourcing strategy.

Procurement Spend Analysis

Procurement organisations effectively identify and manage suppliers using a sourcing strategy. Tail suppliers normally have low strategic value and makes the category management, very difficult . Spend Analysis and Category Management are very closely aligned, Spend Analysis including ABC, provides the category manager, with spend visibility.

Spend Analysis and procurement metrics are used to create category plans, build supplier relation-ships, to maintain service levels and deliver the best possible price and quality for goods and ser-vices bought. The acquisition of Spend data and subsequent Spend Analysis, provides Category Managers access to a well-structured procurement process,

Explanation

The purposes of stores and warehouses are:

1. Maximum use of space.

2. Ready access to all items.

3. Efficient movement of goods.

4. Effective utilization of labour & equipment’s

5. Maximum protection of items

6. Good-house-keeping.

Explanation

The triple bottom line is a sustainability framework that examines a company’s social, environment, and economic impact (or People, Planet, Profit).

Vendor-owned stock allows the hospital to keep essential items available without holding costs. The vendor retains ownership until the item is used, helping the hospital avoid large upfront costs for low-frequency items. This technique aligns with whole-life asset management principles by reducing inventory holding costs while ensuring critical items are readily accessible.

Explanation

Dependent demand is the requirement for stock item which is directly related to and therefore de-pendent upon the rate of production (examples are: raw materials, components, energy)

Independent demand is the requirement for stock item which is not directly related to, and is therefore independent of rate of production. Although independent demand is called thus, it can still be influenced by economic factors external to the demand-supply model such as general consumer sentiment and consumers' available disposal income. However, businesses that need to predict the number of products with independent demand needed to sate their customers have it easier than businesses that must calculate the demand for products with dependent demand because there are fewer factors to consider.

In this scenario, the new drug is finished good which is dependent on the demand of the market, and the firm needs to forecast before initiating the production process. The item is independent from rate of production, therefore, it must be independent demand item.

Explanation

Cross-docking is the practice of unloading goods from inbound delivery vehicles and loading them directly onto outbound vehicles. By eliminating or minimizing warehouse storage costs, space requirements and inventory handling, cross-docking can streamline supply chains and help them move goods to market faster and more efficiently.

Cross-docking usually takes place in a dedicated docking terminal in a warehouse, where inbound goods are first received at a dock and sorted according to their final destinations. They are then moved to the other side of the dock via forklift, conveyor belt or other equipment and loaded on outbound vehicles.

Cross-docking works best with products that need to be transported quickly, such as food, that have already been sorted and labeled for customers, do not need quality inspections or have steady demand.

Explanation

Stockout is a situation where an inventory item is not available when required. The costs associated with a stockout include the following:

- Lost of production output - there will be no production until the stockout is resolved (new stock is acquired). For factory operating 24/7 with no spare capacity, this lost output will not be able to be recovered.

- Costs of machine downtime and of overhead spread over a reduced level of output

- Costs of any action required to deal with the stockout...

- Loss of customer goodwill through inability to supply or late delivery

- Loss of sales or new orders

- Loss of market creditability

Explanation

Maintenance can represent a significant portion of the cost in asset intensive organisations (such as Sidel - a food processor), as breakdowns have an impact on the capacity, quality and cost of operation. However, the formulation of a maintenance strategy depends on a number of factors, including the cost of down time, reliability characteristics and redundancy of assets. Consequently, the balance between preventive maintenance (PM) and corrective maintenance (CM) for minimising costs varies between organisations and assets. Nevertheless, there are some rules of thumb on the balance between PM and CM, such as the 80/20 rule.

Preventive maintenance is a type of proactive maintenance, while corrective maintenance is an example of reactive maintenance. Therefore, the answer should be "Balance between proactive maintenance and reactive maintenance".

The Economic Order Quantity (EOQ) is the ideal order size that minimizes total inventory costs, balancing the ordering cost (costs related to placing and receiving orders) and the holding cost (costs related to storing inventory). The EOQ model is a fundamental concept in inventory management and is derived from the following formula:

EOQ=2DSHEOQ = \sqrt{\frac{2DS}{H}}EOQ=H2DS​​

where:

DDD = demand rate (units per period),

SSS = cost per order,

HHH = holding cost per unit per period.

The EOQ model assumes constant demand and lead time, and it does not consider discounts for bulk purchases. By minimizing both ordering and holding costs, EOQ contributes to overall cost efficiency in inventory management, which is essential for whole-life asset management in balancing long-term expenses.

Leasing allows an organization to predict costs accurately, as installment payments are pre-agreed. This makes financial planning simpler, which is especially beneficial in whole-life asset management where minimizing upfront capital expenditure is often a priority. Leasing also reduces the risk associated with asset obsolescence.

Automated Guided Vehicles (AGVs) are best suited for environments with repetitive tasks, such as fixed routes in production lines. In non-repetitive tasks, their efficiency and effectiveness decrease. Whole-life asset management prioritizes choosing automation that aligns with operational needs, ensuring cost-effectiveness and suitability for the given tasks.

Holding costs, or carrying costs, include all costs associated with storing unsold goods. These typically consist of:

Insurance costs: Fees associated with insuring stored goods.

Deterioration costs: Potential loss from goods that deteriorate, expire, or are rendered unusable over time.

Pilferage costs: Losses due to theft or misplacement of goods.

These factors affect the total cost of ownership in asset management, ensuring that only essential stock levels are maintained to avoid unnecessary holding costs.

Options 1 and 2 include costs not generally classified under holding costs (such as the cost of sales), making D the correct answer.

Barcode technology has several limitations:

Requires line-of-sight scanning (LOS): Barcodes must be directly visible to scanners, reducing flexibility in scanning items in bulk.

No read/write capabilities: Barcodes can only store static data, limiting functionality in dynamic inventory environments.

Labour-intensive: Each barcode must be scanned individually, making it time-consuming in high-volume environments.

Despite these limitations, barcodes are widely used due to their low cost. Whole-life asset management often considers RFID as a more efficient alternative to barcodes, especially in high-value asset tracking.

Just-in-Time (JIT) aims to:

Improve quality by ensuring defect-free products that meet customer expectations.

Reduce inventory levels: The JIT approach minimizes holding costs by producing and delivering goods as needed.

Whole-life asset management values JIT for optimizing inventory control, reducing waste, and enhancing quality while keeping storage costs minimal.

Explanation

Net present value (NPV) is the 'today' net value that deprives from 'future' cash flow of an invest-ment or a capital purchase.

The following formula is used to calculate NPV

Chart Description automatically generated with low confidence

Where:

Rt is the net cash flow (cash inflow - cash outflow) during the period t

i is the discount rate

t is the number of time periods

As you can conclude from the above formula, the net present value increases when the numerators (net cash flows) increase and/or denominators (1+i) decrease. So the correct answer should be "Net cash flow during a time period increases"

The purpose of this exercise is to help you identify the factors that influence the net present value and how to increase/decrease NPV in real-world scenario.

Explanation

The product code is often the key to obtaining documentation relating to products.

Product codes are often use to link to internal processes. Some computerised inventory systems trigger alerts when specific items or volume are ordered - this could be an out-of-stock warning or potential volume errors.

In many cases, an organisation will use its own product code system. The organisation constructs a code that is effective and fits with its software and the variety of items covered. So these codes may or may not comply with any international standards (such as GS1 specifications, ISO standards, etc.). As organisations make up the code themselves, the codes may look identical to others. For example, SKU414675 reveals that it is used for many items, including the following:

- A UK wholesaler's six-pack of branded cola

- An Australian snack food

- UK flower seeds

- An Italian desk sold in Japan

- A Brazilian light fitting

Explanation

Assets in their end of life need to be removed or disposed. Though an organisation can incur some costs in decommissioning or removal of the assets, it may recover costs by reselling the assets. Therefore, sometimes the organisation can gain positive cash flow from removal and disposal of assets. The answer should be "No, the organisation may recover the value of the assets by reselling it".

LO 3, AC 3.3

Explanation

LO 2, AC 2.3

Explanation

Fixed assets may be sold anytime during their useful life. This gives rise to the need to derecognize the asset from balance sheet and recognize any resulting gain or loss in the income statement.

The accounting for disposal of fixed assets can be summarized as follows:

- Record cash receive or the receivable created from the sale:

Debit Cash/Receivable

- Remove the asset from the balance sheet

Credit Fixed Asset (Net Book Value)

- Recognize the resulting gain or loss

Debit/Credit Gain or Loss (Income Statement)

Example

ABC LTD purchased a machine for $2000 on 1st January 2001 which had a useful life of 5 years and an estimated residual value of $500. The machine was being depreciated on straight line basis. However, ABC LTD decided to sell the asset on1 January 2003 for $1500 in order to raise cash for the purchase of a new machine.

The disposal of the fixed asset will be recorded as follows:

Record cash received or the receivable arising from the sale:

Debit Cash $1,500

Remove the asset from the balance sheet

As a fixed asset is recognized in the balance sheet at the Net Book Value (i.e. Cost less Accumulated Depreciation), the machine will be removed from the accounts of ABC LTD in two parts:

First, the Machine Cost must be removed by crediting the ledger:

Credit Machine Cost $2,500

Second, the Accumulated Depreciation in respect of the machine must be removed by debiting the ledger:

Debit Accumalated Depreciation $600*

*Accumulated Depreciation: (2000 - 500)/5 x 2 Years

The combined effect of the above two transactions would be to remove the machine's net book value of $1400 (2000 - 600) from the balance sheet.

Recognize the resulting gain or loss on the sale of machine

ABC LTD received $1500 for an asset with a balance sheet worth of $1400. It therefore earned a gain of $100. The gain will be recorded as follows:

Credit Gain on Disposal $100

Explanation

A 'U' flow occurs when the goods receipt and dispatch functions are located at the same end of a warehouse building.

Products flow in at receiving, move in to storage in the back of the warehouse, and then to shipping, which is located at the adjacent to receiving on the same side of the building.

Items with higher throughput level are located closer to the loading bays. An example of a 'U' flow design can be seen in the diagram below.

Advantages of 'U' Flow

- Excellent utilization of dock resources because the receiving and shipping processes can share dock doors

- Facilitating cross-docking because the receiving and shipping docks are adjacent to one another and may be co-mingled

- Excellent lift truck utilization because put away and retrieval trips are easily combined and be-cause the storage locations closest to the receiving and shipping docks are natural locations to house fast moving items

- Yields excellent security because there is a single side of the building used for entry and exit

Explanation

Material Requirements Planning (MRP) software manages material requirements for manufacturing processes.

LO 2, AC 2.3

Warehouse location selection depends on:

Land cost: Directly affects budget planning and long-term operational expenses.

Nature of items to be stored: Determines special requirements (e.g., climate control).

Access to transport: Proximity to transport hubs reduces logistics costs and improves efficiency.

These considerations are critical for effective whole-life asset management, optimizing operational costs and logistics.

Demand forecasting accuracy relies on the validity and reliability of available data. Forecasting is strengthened when information sources are credible, accurate, and consistently updated. In whole-life asset management, precise forecasting minimizes excess inventory and aligns inventory levels with demand, reducing holding costs and improving supply chain efficiency.

Explanation

An inventory write-off is a process of removing from the general ledger any inventory that has no value.

Using the direct write-off method, a business will record a credit to the inventory asset account and a debit to the expense account. For example, say a company with $100,000 worth of inventory decides to write off $10,000 in inventory at the end of the year. First, the firm will credit the inventory account with the value of the write-off to reduce the balance. The value of the gross inventory will be reduced as such: $100,000 - $10,000 = $90,000. Next, the inventory write-off expense account will be increased with a debit to reflect the loss.

The expense account is reflected in the income statement, reducing the firm’s net income and thus its retained earnings. A decrease in retained earnings translates into a corresponding decrease in the shareholders’ equity section of the balance sheet.

If the inventory write-off is immaterial, a business will often charge the inventory write-off to the cost of goods sold (COGS) account. The problem with charging the amount to the COGS account is that it distorts the gross margin of the business, as there is no corresponding revenue entered for the sale of the product. Most inventory write-offs are small, annual expenses. A large inventory write-off (such as one caused by a warehouse fire) may be categorized as a non-recurring loss.

Explanation

Where stock turn (inventory turnover) is low and there are potential risks of redundancy or obsolescence, the buying organisation may adopt vendor owned stock. In this system, a supplier (vendor) maintains a stock of items ready to be used at the point of customer consumption. The supplier owns the stock until it is used by the purchaser; only then is the purchaser invoiced for it.

Just in case and larger safety stock would significantly increase the stock level, which may cause redundancy or obsolescence.

Forrester effect (or Bullwhip effect) is a distribution channel phenomenon in which forecasts yield supply chain inefficiencies. It refers to increasing swings in inventory in response to shifts in customer demand as one moves further up the supply chain.

Explanation

The normal breakdown in a manufacturing organisation would be raw materials, components, work in progress and finished goods.

Following are the different types of inventory:

Raw materials are the basic materials that a manufacturing company buys from its suppliers, and that is used by the former to convert them into the final products by applying a set of manufacturing processes. For example, aluminum scrap is the raw material for a company that produces aluminum ingots. Flour is the raw material for a company that produces bread or pizza. Similarly, metal parts and ingots are the raw materials bought by a company that manufactures cars, and crude oil is the raw material for an oil refinery.

Work in progress inventory can also be called semi-finished goods. They are the raw materials that have been taken out of the raw materials store and are now undergoing the process of their conversion into the final products. These are the partly processed raw materials lying on the production floor. And they have also not reached the stage where they have been converted into the final product.

Finished goods are indeed the final products obtained after the application of the manufacturing processes on the raw materials and the semi-finished goods discussed above in the article. They are saleable, and their sale contributes fully to the revenue from the core operations of the company.

Breaking bulk is the process of dividing large shipments of goods into smaller lots for easier distribution. This is a standard practice in warehousing and logistics to facilitate delivery to various locations or end users. Unlike cross-docking, which involves minimal storage time, breaking bulk focuses on redistributing large shipments into smaller, manageable batches. In whole-life asset management, breaking bulk helps maintain streamlined operations and reduces holding costs by ensuring goods are moved efficiently and without prolonged storage.

When selecting a warehouse location, it’s essential to consider:

Cost: The expense of the location directly impacts the budget.

Access to transport networks: Proximity to transportation infrastructure facilitates efficient shipping and receiving.

These factors align with whole-life asset management principles by ensuring cost-effective and accessible storage solutions, contributing to reduced transportation costs and improved logistics.

While storage space is important, traffic flow and accessibility are crucial for efficient warehouse design. Proper layout ensures safe, quick movement of goods and minimizes bottlenecks, reducing operational costs and enhancing efficiency. In whole-life asset management, effective space utilization and efficient layout planning are key for long-term warehouse performance.