Management Notes

Reference Notes for Management

 A disadvantage of the fixed-period inventory system is that: 

A disadvantage of the fixed-period inventory system is that: 

 Options:

A. it involves higher ordering costs than the fixed quantity inventory system.
B. additional inventory records are required.
C. the average inventory level is decreased.
D. since there is no count of inventory during the review period, a stockout is possible.
E. orders usually are for larger quantities.

The Correct Answer Is:

D. since there is no count of inventory during the review period, a stockout is possible.

Correct Answer Explanation:

In a fixed-period inventory system, inventory levels are reviewed at specific intervals, and orders are placed to replenish stock. The answer, D, highlights a significant drawback of this system: the potential for stockouts due to the absence of real-time inventory checks during the review period.

Let’s delve into why this is the correct answer and why the other options are not accurate:

D. Since there is no count of inventory during the review period, a stockout is possible:

In a fixed-period inventory system, stock levels are not continuously monitored. Instead, inventory counts are taken at predetermined intervals, and orders are placed based on those counts. This can lead to uncertainties in inventory levels between reviews.

If unexpected demand arises or if inventory depletes quicker than anticipated, there’s a risk of running out of stock before the next review, potentially causing stockouts. These stockouts can lead to customer dissatisfaction, lost sales, and potential damage to the company’s reputation.

Now, let’s address why the other options are not the correct answer:

A. It involves higher ordering costs than the fixed quantity inventory system:

This statement is not necessarily true. Both fixed-period and fixed quantity inventory systems can have different cost structures based on ordering and carrying costs.

The comparison of ordering costs between the two systems might vary depending on specific circumstances, making it inaccurate to generalize that one system always incurs higher ordering costs than the other.

B. Additional inventory records are required:

In a fixed-period system, records are typically kept but not continuously updated. Inventory counts are taken periodically, leading to records being updated at specific intervals rather than continuously.

Therefore, while records are necessary, it might not require additional records beyond what is standard for inventory management.

C. The average inventory level is decreased:

This statement is not inherently linked to the disadvantages of a fixed-period inventory system. The average inventory level can fluctuate based on various factors, but the fixed-period system itself doesn’t dictate a decrease in average inventory levels.

It’s more about the timing and frequency of inventory checks and orders.

E. Orders usually are for larger quantities:

The order quantity in a fixed-period system can vary but isn’t inherently larger compared to a fixed quantity system. The order quantity might depend on demand forecasts, lead times, and other factors rather than being consistently larger in a fixed-period system.

In a fixed-period inventory system, order quantities may not necessarily be consistently larger. The ordering quantity could vary based on factors like demand fluctuations, lead times, and inventory carrying costs.

This system focuses more on the timing of orders rather than dictating larger quantities per order compared to a fixed quantity system, which specifies a set order amount each time an order is placed.

In summary, the correct answer, D, reflects a critical issue of the fixed-period inventory system, namely the potential for stockouts due to the lack of real-time inventory monitoring.

The other options, while they may have some relevance to inventory management considerations, don’t specifically highlight the core disadvantage associated with the fixed-period system.

Each option addresses aspects that may or may not apply depending on various factors, making them less directly related to the inherent drawback of the fixed-period inventory approach.

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