Kretzinger Company Makes Extensive Use of Financial Performance Reports for Each

question 57

Essay

Kretzinger Company makes extensive use of financial performance reports for each of its departments.Although most departments have been reporting favorable cost variances with the company's current inventory system,management is concerned about the overall performance of the purchasing department.For example,the following information is for the purchasing of materials for a product the company has been manufacturing for several years:
$\begin{array}{|r|r|r|r|}\hline \text { Purchase Year } & \text { Quantity Used } & \begin{array}{r}\text { Average } \\\text { Inventory }\end{array}&\text { Price Variance } \\\hline20 \times 1 & 40,000 & 8,000 & \$ 1,000 \mathrm{~F} \\\hline 20 \times 2 & 60,000 & 15,000 & 10,000 \mathrm{~F} \\\hline 20 \times 3 & 60,000 & 20,000 & 12,000 \mathrm{~F} \\\hline 20 \times 4 & 50,000 & 12,500 & 20,000 \mathrm{U} \\\hline 20 \times 5 & 54,000 & 18,000 & 8,000 \mathrm{~F} \\\hline 20 \times 6 & 58,000 & 23,200 & 9,500 \mathrm{~F}\\\hline\end{array}$ Required:
a.Compute the inventory turnover for each year.Can any conclusions be drawn for a yearly comparison of the purchase price variance and the inventory turnover?
b.Identify problems likely to be caused by evaluating purchasing only on the basis of the purchase price variance.
c.What recommendations will improve the evaluation process?

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Definitions:

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