CPPB Inventory Management 1 — Questions and Answers
Question 1: Which inventory valuation method assumes that the most recently purchased items are the first to be used or sold?
- First In, First Out (FIFO)
- Last In, First Out (LIFO) (Correct answer)
- Weighted Average Cost
- Specific Identification
Correct answer: Last In, First Out (LIFO)
LIFO (Last In, First Out) assumes the most recently acquired items are consumed or sold first, which affects cost reporting and taxes.
Question 2: The Economic Order Quantity (EOQ) model is used to determine which of the following?
- The optimal reorder point for an item
- The optimal order quantity that minimizes total inventory costs (Correct answer)
- The maximum inventory level that should be maintained
- The number of suppliers needed for a commodity
Correct answer: The optimal order quantity that minimizes total inventory costs
EOQ calculates the order quantity that minimizes the combined costs of ordering and holding inventory.
Question 3: In public procurement, a 'stockout' occurs when:
- Inventory exceeds maximum storage capacity
- An item is available but not yet requisitioned
- Demand cannot be met due to insufficient inventory on hand (Correct answer)
- A vendor fails to deliver within the lead time
Correct answer: Demand cannot be met due to insufficient inventory on hand
A stockout happens when current inventory is depleted and cannot fulfill a request, disrupting agency operations.
Question 4: ABC analysis in inventory management classifies items primarily based on:
- Alphabetical order of item names
- Annual consumption value (Correct answer)
- Physical size and storage requirements
- Frequency of vendor deliveries
Correct answer: Annual consumption value
ABC analysis ranks items by their annual consumption value so that high-value (A) items receive the most management attention.
Question 5: What is the primary purpose of safety stock in a public agency's inventory system?
- To reduce the number of purchase orders issued
- To serve as a buffer against unexpected demand or supply delays (Correct answer)
- To comply with minimum stocking requirements set by law
- To take advantage of vendor quantity discount pricing
Correct answer: To serve as a buffer against unexpected demand or supply delays
Safety stock is maintained as a cushion to prevent stockouts caused by demand variability or longer-than-expected lead times.
Question 6: Which of the following best describes a 'perpetual inventory system'?
- Inventory is counted and reconciled once a year
- Inventory records are updated continuously with each transaction (Correct answer)
- Inventory is ordered on a fixed schedule regardless of stock levels
- Inventory is managed exclusively by a third-party logistics provider
Correct answer: Inventory records are updated continuously with each transaction
A perpetual system updates inventory balances in real time as items are received, issued, or transferred, providing an ongoing accurate count.
Question 7: The reorder point (ROP) for an inventory item is calculated using which formula?
- ROP = Safety Stock + (Average Daily Usage × Lead Time) (Correct answer)
- ROP = EOQ / Average Daily Usage
- ROP = Maximum Usage × Maximum Lead Time
- ROP = Annual Demand / Number of Orders
Correct answer: ROP = Safety Stock + (Average Daily Usage × Lead Time)
The reorder point equals safety stock added to the product of average daily usage and the procurement lead time.
