Short Type Questions - Business Arithmetic, Entrepreneurship, Class 12 | Additional Study Material for Commerce PDF Download

Q1. Explain any three factors that influence the decisions with regard to order of inventory. (CBSE 2013) (3 marks)
Ans. The entrepreneur should keep in mind the following factors while calculating the inventory level :
(i) Order Lead Time : It refers to average time between order placement and receiving of goods. If order lead time is big then large inventory is maintained.
(ii) Usage Rate : It refers to how frequently the material is withdrawn from stores over a period of time. If usage rate is more then also inventory should be maintained in large quantity.
(iii) Reorder Point : It is the time when new order must be placed so that the inventory level is maintained and stock level does not reach to zero.
Reorder Point = Usage Rate × Lead Time
For example, a company uses 10 times per day (usage rate) and order lead time is 7 days, then the new order must be placed when inventory level becomes 70 i.e. 10 × 7
Reorder Point = Usage Rate × lead time
= 10 × 7 = 70.

Q2. List the two important considerations for the purchase of materials. (CBSE 2008 Delhi) (3 marks)
Ans.
(1) Transportation cost.
(2) Cost of materials.
(3) Availability of material. (Any two)

Q3. A company uses 300 units of an item per day and the order lead time is 5 days. What should be the level of inventory when a new order is to be placed ? (CBSE 2008 Delhi) (3 marks)
Ans. When a new order is to be placed level of inventory should be :
Re-order point = Usage rate × Lead time
= 300 × 5 = 1500 units

Q4. State any four advantages of ‘Inventory Control’. (CBSE 2008 Delhi) (4 marks)
Ans. Four advantages of inventory control :
1. To know whether materials are readily available for production use.
2. To examine quantity discounts for large orders.
3. To ensure prompt delivery of materials to consumers.
4. To stabilise the fluctuation of demands.

Q5. What is a reorder point and how is it calculated ? (3 marks)
Ans. It is a level at which a new order must be placed so that the inventory is renewed before the stock reaches zero level. It is estimated by using the formula :
Reorder point = Usage rate × Lead time
Example : Suppose a company uses 15 units of an item per day, and the order lead time is 10 days, a new order must be placed when the inventory level reaches 150 units (reorder point 150 = usage rate 15 × lead time 10) so that inventory is replenished before a stock out occurs.

Q6. What is an Inventory ? (3 marks)
Ans. Inventory means detailed list of items used in the business. It refers to stock of goods in the form of raw materials, work in progress and finished goods. A firm can make up the product and keep it for sale in ordinary course of business. Thus, inventories make a linkage between production and sale of goods.

Q7. Give some examples of carrying costs. (3 marks)
Ans. Examples of carrying costs are :
(i) Money tied up in inventory.
(ii) Storage of inventories.
(iii) Taxes on inventories.
(iv) Obsolescence cost.
(v) Handling and transfer.
(vi) Deterioration of quality.
(vii) Cost of maintaining inventory records. (Any six)

Q8. What factors should be kept in mind for ordering an inventory ? (4 marks)
Ans. Inventory means list of materials used in a business. An entrepreneur must be very careful and wise while deciding about the level of inventory. An entrepreneur must avoid overstocking. Factors that influence the decision on such orders are :
(a) Order lead time.
(b) Usage rate or rate of consumption.
(c) Reorder-point or minimum quantity of the item to be kept.
An entrepreneur must maintain the supply line in a proper manner so that at any time he can have adequate flexibility to change the process of production according to customer’s requirement.

Q9. What are order processing costs ? (4 marks)
Ans. The cost associated with the placement of an order for the acquisition of inventories is called order processing cost. It is determined on the basis of expenses incurred in the purchase department. Some of the components of cost are :
(i) Finding the sources of supply.
(ii) Obtaining quotations.
(iii) Transportation cost.
(iv) Expenses and follow up an order.
(v) Forgone discounts.
(vi) Loss of sales and customer goodwill.
(vii) Higher prices paid for emergency purchases.

Q10. What is EOQ ? How is it calculated ? (4 marks)
Ans. Economic Order Quantity (EOQ) is an important tool in the purchase of raw materials and storage of finished goods. It is the order quantity of inventory that minimizes the total cost of inventory management.
EOQ = √2CS / 1
C = the annual usage of the item in units,
S = the cost to place one order,
I = annual carrying cost per unit.

Q11. Give the formula of EOQ and write down its assumptions. (4 marks)
Ans. EOQ = √2CS / 1
where, C = the annual usage of the item in units,
S = the cost to place one order,
I = annual carrying cost per unit.
The above formula is based on following assumptions :
(a) Ordering cost is constant i.e., it is independent of the size of order.
(b) The cost of carrying the additional inventory is constant.
(c) There are no quantity discounts available.
(d) The consumption is in a steady rate.

Q12. A stationery shop sells 30,000 pens per year. Purchase cost in ` 2 per pen, holding cost is 20% of the purchase cost, ordering cost is ` 15. Calculate EOQ from the details for the stationery shop. (SQP) (3 marks)
Ans. Economic Order Quantity (EOQ) = √2DO / C

Where : D = Annual demand
O = Ordering cost per unit
C = Carrying cost per unit
EOQ = √2 × 30,000 × `15 / ` 0.40
= 1,500 units

Q13. What is ABC analysis ? (3 marks)
Ans. In ABC analysis, a company reviews its inventory and sorts all SKUs into three categories, called “A”, “B” and “C” items. “A” inventory means : 20% of SKUs and 80% of value. “B” inventory means 30% of SKUs and 15% of value. “C” inventory means 50% of SKUs and 5% of value. It may be different for different companies but on the same pattern.
Once a company has conducted its ABC analysis, it can devise an inventory-control strategy that focuses effort where it will have the greatest effect.

Q14. What is Pareto’s principle ? (TBQ) (3 marks)
Ans. Pareto’s principle states that in a given system, a relative handful of “causes” will produce the majority of “effects”. For example, one may find that 20% of customers are responsible for 80% of sales, or 30% of the product lines result in 70% of returns.

Q15. Why is return on investment deemed as a yardstick for the performance of an enterprise ? (4 marks)
Ans. Return on investment is a relationship between profit before interest and tax and capital employed. It is deemed as a yardstick for the performance of an enterprise because it measures the overall profitability and efficiency of the enterprise in relationship to investment made by an entrepreneur in business. Higher the ratio, higher the overall profitability of the business. The ratio is compared with earlier years ratio and important conclusions are drawn from such comparisions. As a yardstick it also shows how efficiently the resources are used in the business.

Q16. State the significance of ROI. (4 marks)
Ans.
(i) ROI indicates how well management has used its assets.
(ii) ROI can be compared with the previous year’s ROI to see the progress.
(iii) ROI can be compared with the ROI of other firms in the same industry to find out firm’s position.
(iv) It provides an indication of productivity of the capital.
(v) High ROI attracts more investors to invest in the firm.

Q17. Write a note on depreciation and amortization. (4 marks)
Ans. There are different options avaiable to depreciate (tangible assets) or amortize (intangible assets). One company may use a particular method and another one a totally different one. One may write off slowly and another one fast-both being allowed by the authorities. So to avoid distortion due to differing practice being followed, depreciation and amortization is added back.

Q18. Pareto’s law formed the basis for a technique. Name it. (4 marks)
Ans. The principle is named for Vilfredo Pareto, an Italian economist who studied land ownership in Italy in the early 1900’s and found that roughly 20% of the population held title to about 80% of the land. Pareto’s law has applications throughout science as well as business, including inventory control, where it forms the basis for a technique called ABC analysis.

Q19. State the objectives of Inventory Control. (4 marks)
Ans. The objectives of Inventory Control are :
(i) To ensure that the supply of raw materials and finished goods remain continuous so that production process is not halted and demands of customers are duly met.
(ii) To minimise carrying cost of inventory.
(iii) To keep investment in inventory at optimum level.
(iv) To reduce the loses due to theft, obsolescence and wastage, etc.
(v) To make arrangement for sale of slow moving items.
(vi) To minimise inventory ordering costs.

Q20. Explain the various catagories of inventory. (4 marks)
Ans. The three catagories of inventory are as follows :
(i) Raw Material : Those materials which have been purchased and stored in warehouses at a particular time for future production.
(ii) Work-in-Progress : They are the good in the course of manufacture. It consists of material, labour and factory expenses applied to the unit upto the last stage. In these the goods are in semi-finished stage.
(iii) Finished Goods : These are the goods reached at the final stage of production process. These goods are ready for sale.