ACCA Financial Management (F9) Certification Practice Exam

Which manufacturing method minimizes the risk of obsolescence while also reducing holding costs?

1. Just-in-time production

2. Batch production

3. Make-to-stock production

4. Continuous production

The correct answer is: Just-in-time production

The chosen method, Just-in-time (JIT) production, is particularly effective in minimizing the risk of obsolescence and reducing holding costs. JIT production operates on the principle of producing goods only as they are needed, which aligns production schedules closely with customer demand. This practice minimizes inventory levels, so there is less risk of products becoming obsolete before they can be sold. By reducing the amount of inventory held at any point in time, companies can significantly decrease the costs associated with storing, handling, and insuring products. This lean inventory system enables manufacturers to respond more flexibly to changes in consumer preferences and demand patterns, thereby reducing waste and the risk that goods will become outdated. In contrast, other manufacturing methods like batch production and make-to-stock production generally involve producing goods in larger quantities and holding them in inventory until they are needed. This can lead to excess inventory and higher holding costs, as well as an increased risk of obsolescence. Continuous production, while it can optimize efficiency, often results in significant inventory levels as products are produced consistently, which may not align with fluctuating market demand. Thus, the attributes of JIT production — minimizing inventory levels and aligning production with actual demand — make it the most suitable choice for reducing both