Certificate in Accounting and Finance
A
Cost and management accounting
SECTION
Objective test and
long-form questions
CHAPTER 1 – INVENTORY VALUATION
1.1 STEEL RODS
During the month of February the following transactions in steel rods took place:
1 February Purchased 10 tons @ Rs.600 per ton
2 February Purchased 3 tons @ Rs.550 per ton
3 February Sold 2 tons
5 February Purchased 2 tons @ Rs.560 per ton
6 February Sold 3 tons
10 February Purchased 8 tons @ Rs.555 per ton
12 February Sold 8 tons
15 February Purchased 2 tons @ Rs.555 per ton
16 February Sold 2 tons
20 February Purchased 5 tons @ Rs.560 per ton
25 February Sold 7 tons
Required
Calculate the prices to be applied to the issues and the closing balance figures
using:
(a) FIFO (6)
(b) Weighted average. (8)
(14)
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Cost and management accounting
1.2 XYZ LIMITED
Q.1 XYZ Limited manufactures four products. The related data for the year ended
December 31, 20X3 is given below:
A B C D
Opening inventory
- Units 10,000 15,000 20,000 25,000
- Cost (Rs.) 70,000 120,000 180,000 310,000
- NRV (Rs.) 75,000 110,000 180,000 300,000
- Production in units 50,000 60,000 75,000 100,000
Costs of goods produced (Rs.) 400,000 600,000 825,000 1,200,000
Variable selling costs (Rs.) 60,000 80,000 90,000 100,000
Closing inventory (units) 5,000 10,000 15,000 24,000
Damaged units included in closing
inventory 300 600 800 1,500
Weighted Weighted FIFO FIFO
Inventory valuation method in use
Average Average
Unit cost of purchase from market (Rs.) 10.50 11.00 11.50 13.00
Selling price per unit (Rs.) 10.00 12.00 12.00 12.50
Unit cost to repair damaged units (Rs.)
3.00 2.00 2.50 3.50
The company estimates that selling expenses will increase by 10% in January 20X4.
Required
Compute the amount of closing inventory that should be reported in the statement of
financial position as on December 31, 20X3. (15)
1.3 MEHANTI LIMITED
Mehanti Limited (ML) produces and markets a single product Wee. Two chemicals
Bee and Gee are used in the ratio of 60:40 for producing 1 litre of Wee. ML follows
perpetual inventory system and uses weighted average method for inventory
valuation. The purchase and issue of Bee and Gee for May 20X3, are as follows:
Date Bee Gee
Receipt Issue Receipt Issue
Litre Rate Litre Litre Rate Litre
02-05-20X3 - - 450 110 -
05-05-20X3 - - 560 - - 650
09-05-20X3 - - 300 - - 300
12-05-20X3 420 52 - 700 115 -
18-05-20X3 - - 250 - - 150
24-05-20X3 500 55 - 250 124 -
31-05-20X3 - - 500 - - 450
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Question bank: Objective test and long-form questions
Following further information is also available:
(i) Opening inventory of Bee and Gee was 1,000 litres at the rate of Rs. 50
per litre and 500 litres at the rate of Rs. 115 per litre respectively.
(ii) The physical inventories of Bee and Gee were 535 litres and 140 litres
respectively. The stock check was conducted on 01 June and 31 May 20X3 for
Bee and Gee respectively.
(iii) Due to contamination, 95 litres of Bee and 105 litres of Gee were excluded
from the stock check. Their net realisable values were Rs 20 and Rs. 50 per
litre respectively.
(iv) 250 litres of Bee which was received on 01 June 20X3 and 95 litres of Gee
which was issued on 31 May 20X3 after the physical count were included in
the physical inventory.
(v) 150 litres of chemical Bee was held by ML on behalf of a customer,
whereas 100 litres of chemical Gee was held by one of the suppliers on ML’s
behalf.
(vi) 100 litres of Bee and 200 litres of Gee were returned from the production
process on 31 May and 01 June 20X3 respectively.
(vii) 240 litres of chemical Bee purchased on 12th May and 150 litres of chemical
Gee purchased on 24th May 20X3 were inadvertently recorded as 420 litres
and 250 litres respectively.
Required
(a) Reconcile the physical inventory balances with the balances as per book.
(b) Determine the cost of closing inventory of chemical Bee and Gee. Also
compute the cost of contaminated materials as on 31 May 20X3. (15)
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Cost and management accounting
CHAPTER 2 - INVENTORY MANAGEMENT
2.1 STOCK ITEMS 6786 AND 6787
(a) A company uses 15,000 units of stock item 6786 each year. The item has a
purchase cost of Rs.4 per unit. The cost of placing an order for re-supply is
Rs.220. The annual holding cost of one unit of the item is 10% of its purchase
cost.
Required
(i) What is the economic order quantity for item 6786, to the nearest unit?
(ii) What would be the effect of an increase in the annual holding cost per
unit on (1) the EOQ and (2) total annual ordering costs?
(b) Data relating to stores item 6787 are as follows.
Daily use: 300 units
Lead time for re-supply: 5 – 20 days
Reorder quantity: 10,000 units
Required
What should be the reorder level for this stock item, to avoid the possibility of
inventory-outs?
2.2 INVENTORY CONTROL
Entity G uses 105 units of an item of inventory every week. These cost Rs.150 per
unit. They are stored in special storage units and the variable costs of holding the
item is Rs.4 per unit each year plus 2% of the inventory’s cost.
Required
(a) If placing an order for this item of material costs Rs.390 for each order, what is
the optimum order quantity to minimise annual costs? Assume that there are
52 weeks in each year.
(b) Suppose that the supplier offers a discount of 1% on the purchase price for
order sizes of 2,000 units or more. What will be the order size to minimise total
annual costs?
© Emile Woolf International 4 The Institute of Chartered Accountants of Pakistan
Question bank: Objective test and long-form questions
2.3 ALPHA MOTORS (PVT.) LTD
Alpha Motors (Pvt.) Ltd. uses a special gasket for its automobiles which is
purchased from a local manufacturer. The following information has been made
available by the procurement department:
Annual requirement (no. of gaskets) 162,000
Cost per gasket (Rs.) 1,000
Ordering cost per order (Rs.) 27,000
Carrying cost per gasket (Rs.) 300
The gaskets are used evenly throughout the year. The lead time for an order is
normally 11 days but it can take as much as 15 days. The delivery time and the
probability of their occurrence are given below:
Delivery time (in days) Probability of occurrence
11 68%
12 12%
13 10%
14 6%
15 4%
Required
(a) Compute the Economic Order Quantity (EOQ) and the total Ordering Costs
based on EOQ. (04)
(b) What would be the safety stock and re-order level if the company is willing to
take:
a 20% risk of being out of stock?
a 10% risk of being out of stock? (08)
Note: Assume a 360 day year.
2.4 ABC
ABC has recently established a new unit in Multan. Its planning for the first
year of operation depicts the following:
(i) Cash sales 600,000 units
(ii) Credit sales 1,200,000 units
(iii) Ending inventory Equivalent to 15 days sales
(iv) Number of working days in the year 300
(v) Expected purchase price Rs. 450 per unit
(vi) Manufacturer offers 2% discount on purchase of 500 units or more as bulk
quantity discount. The company intends to avail this discount.
(vii) Carrying costs include:
Financial cost of investment in inventory @ 16% per annum.
Godown rent of Rs. 10,000 per month.
(viii) Ordering costs are Rs. 300 per order.
Required
Compute the Economic Order Quantity (EOQ) and the estimated carrying costs and
ordering costs for the first year of operation. (10)
© Emile Woolf International 5 The Institute of Chartered Accountants of Pakistan
Cost and management accounting
2.5 KARACHI LIMITED
(a) Karachi Limited is a large retailer of sports goods. The company buys footballs
from a supplier in Sialkot. Karachi Limited uses its own truck to pick the
footballs from Sialkot. The truck capacity is 2,000 footballs per trip and
the company has been getting a full load of footballs at each trip, making 12
trips each year.
Recently the supplier revised its prices and offered quantity discount as under:
Quantity Unit price (Rs.)
2,000 400
3,000 390
4,000 380
6,000 370
8,000 360
Other related data is given below:
All the purchases are required to be made in lots of 1,000 footballs.
The cost of making one trip is Rs. 15,000. The company has the option
to hire a third party for transportation which would charge Rs. 9 per
football.
The cost of placing an order is Rs. 2,000.
The carrying cost of one football for one year is Rs. 80.
Required
(i) Work out the most economical option.
(ii) Compute the annual savings in case the company revises its
policy in accordance with the computation in (i) above. (10)
(b) Briefly describe:
(i) Stock out costs
(ii) Lead time
(iii) Reorder point
(iv) Safety stock (04)
© Emile Woolf International 6 The Institute of Chartered Accountants of Pakistan
Question bank: Objective test and long-form questions
2.6 MODERN DISTRIBUTORS LIMITED
Modern Distributors Limited (MDL) is a distributor of CALTIN which is used in
various industries and its demand is evenly distributed throughout the year.
The related information is as follows:
(i) Annual demand in the country is 240,000 tons whereas MDL’s share is 32.5%
thereof.
(ii) The average sale price is Rs. 22,125 per ton whereas the profit margin is 25%
of cost.
(iii) The annual variable costs associated with purchasing department are
expected to be Rs. 4,224,000 during the current year. It has been estimated
that 10% of the variable costs relate to purchasing of CALTIN.
(iv) Presently, MDL follows the policy of purchasing 6,500 tons at a time.
(v) Carrying cost is estimated at 1% of cost of material.
(vi) MDL maintains a buffer stock of 2,000 tons.
Required
Compute the amount of savings that can be achieved if MDL adopts the policy of
placing orders based on Economic Order Quantity. (15)
2.7 ROBIN LIMITED
Robin Limited (RL) imports a high value component for its manufacturing process.
Following data, relating to the component, has been extracted from RL’s records for
the last twelve months:
Maximum usage in a month 300 units
Minimum usage in a month 200 units
Average usage in a month 225 units
Maximum lead time 6 months
Minimum lead time 2 months
Re-order quantity 750 units
Required
Calculate the average stock level for the component. (05)
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Cost and management accounting
2.8 ORE LIMITED
Ore Limited (OL) is a manufacturer of sports bicycles. The company buys tyres from
a local vendor.
Following data, relating to a pair of tyres, has been extracted from OL’s records:
Cost (per unit) Rs.
Storage cost based on average inventory 80
Insurance cost based on average inventory 60
Store keeper’s salary (included in absorbed overheads) 8
Cost incurred on final quality check at the time of delivery 10
Other relevant details are as follows:
(i) The purchase price is Rs. 900 per pair.
(ii) The annual demand for tyres is 200,000 pairs.
(iii) The ordering cost per order is Rs. 8,000.
(iv) The delivery cost per order is Rs. 3,000.
(v) OL’s rate of return on investment in inventory is 15%.
(vi) Recently the vendor has offered a quantity discount of 3% on orders of a
minimum of 5,000 pairs.
Required
Evaluate whether OL should avail the quantity discount from the vendor. (10)
2.9 EXPLAIN
Explain briefly what is meant by the term inventory control. Describe, giving reasons,
the method of stock valuation which should be used in times of fluctuating prices.
(05)
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