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/ 22
Not for CAICWA & MECICEC MASTER MINDS
2. MATERIAL COST
NO. OF PROBLEMS IN 40E OF CA INTER: CLASSROOM - 22, ASSIGNMENT - 26
NO. OF PROBLEMS IN 41E OF CA INTER: CLASSROOM - 22, ASSIGNMENT - 27
NO. OF PROBLEMS IN 42E OF CA INTER: CLASSROOM - 18, ASSIGNMENT - 17
SS aT SAT gt by
= 2 glelzlsz}e2 ele | 2/Ze/Z/¢
No.) Model Name SPS] E]EPTPE/E| S| ELT E] Ele F212
2/2/2/2]2/2/2]2] 22/2 /E/E]a/ 5/2
7, | £00, NO, OF ORDERS,
carnynesorvernc |. |.|./5]-| 5] s|s
cost
[INVENTORY LEVELS z A we
3._| MATERIAL TURNOVER
RATIO
[| RaW MATERIAL VALUATION
3. [RAWMATERALISSUE | , 7
INeTHODS
&_[stockout
7_[ ABC ANALYEIS
BTC Sa
Problem | Problem | Problem | Problem Tears
No.in this | No.innew | No.in old | No.inold uP op Remarks
material | SM SM Pu Re Linu
crt | Pa? | 12 = 2 z :
cr? | Pas | LL 7 c ~
CRS = : a MaNEO) =
CRA - - MBN)
aM
CRS wi =
CRE E : = Mir : z
CRT E : 5 a z
CRE = Naa
CRO 3 :
crt0 | Pad | 13 = =
CRT 7 = 6 a TEE
R12 7 = = : = Mig= all
cr13_ | UO | We | =
R14 ILA = 3
ort6 | 1-3_| 1-19 5 :
R16 " TL-18 : z
RAT : Mig— 10M
R18 MIeT(N) 5
Mi8-1 (0)
ast | 3 | 13 5
asG2 | id | Lbs
ase3 [Pot | WLS z = :
ASG : : Mid BM
ASGS E é : = Mra0)-
CA Inter _42e_Costing (P)_ Material Cost. 24 8851 25025/26 www.mastermind:
oM
ASG-E - - - MT8(N) - = -
M18(0)
ASGT = 5 3
ASGS iE : 2 iE : z z
ASG-9 = 5 ie 5 5 5 5
ASG-10 : : = : : : -
ASG-IT NaN)
ASG-12 = 7 Nir M18 -2IN) = -
M19 (N) | Mt8-2(0)
M19(0)_|_ M19 -(N) (O)
ase | LT | Wir a 7
PQ8
ASG-14 5 7 : i _
ASG-A5 = : 7 : : |
ASG-16 = - 21 : = Mit ‘|
asca7 [us | iL : zi
ECONOMIC ORDER QUANTITY
Purchase department in manufacturing concerns is usually faced with the problem of deciding the
“quantity of various items’ which they should purchase. If purchases of material are made in bulk then
inventory carrying cost will be high. On the other han size is small, then the ordering cost will
be high. In order to minimize ordering and carryi s it is necessary to determine the order
quantity which minimizes these two costs. The si ie order for which both ordering and carrying
cost are minimum is known as economic order,
Assumptions underlying E.0.Q: The cal is subject to the following assumptions:
unit per annum are known and they do not change.
a) Ordering cost per order and carrying
b) Anticipated usage of material in we ‘now in advance.
) Cost per unit of the material is constant and is known in advance
d) The quantity of material ordered is received immediately i.e. the lead time is zero.
How to calculate: An e.g.: Ordering cost per order: Rs.150. Carrying cost per unit: Rs.1.50 per unit
per annum, Annual usage of R.M. - 3,200 units. No discounts are offered. Find EOQ
Tabular or Trial & Error Metho
If the entire raw material required is purchased at a time, number of orders to be placed - 1
Ordering cost P.A. - 4 order x 150 150
Carrying cost -3,200x%x 1.50 = 2,400
Total cost 2,550
If two purchase orders are placed:
Ordering cost PA. - 2 orders x 150 = 300
Carrying cost - 1,600x %x 1.50 = 4,200 (3,200X % X %X 1.50)
Total cost 1,500
If 3 purchase orders are placed: Total cost - 1,250 (450 + 800)
If 4 purchase orders are placed: Total cost - 1,200 (600 + 600)
If 5 purchase orders are placed: Total cost - 1,230 (750 + 480)
Let us tabulat
No. of Qty./order | Avg. Inv. Ordering cost | Carrying cost | Total cost
Orders (1) (2) ()=2X% | (4)=(1)xX150_| (5)=(3)X1.50_| (6)=44+5
1 3,200 1,600 150, 2,400 2,550
CA Inter _42e_Costing (P)_ Material Cost, 2.2 No.1 for CAICWA & MECICEC MASTER MINDS
2 7,600 ‘B00 300 1,200 1,500
3 1066) 533 450 800 1,250
4 ‘800 ‘400 600 600 7,200 (*)
5 640 320 750 750 1,230
* Since the total cost is least here, EOQ is 800 units (i.e. 4 orders per annum)
Some Observations:
a) At EOQ, OC = CC.
b) Upto OQ, total cost is decreasing and thereafter itis increasing
Formula/Equation Method (Wilson's Formula):
RAO
E0a =
Where,
A= Annual usage ———__________
= Ordering cost per order [> Both must be for the same time period
© = Carrying cost per unit per annum
Costs associated with EO
1. Buying or Ordering Costs: These are costs associated with every purchase order and are
incurred every time a purchase order is made out. Some examples are:
a) Cost of paperwork - Purchase Requisition, Purch
b) Cost of placing advertisements in newspapers,it
) Cost of administration - negotiation and lia)
d) Cost of inspection, sample testing etc. Le
2. Carrying or Stockholding Costs: TI costs associated with carrying one unit of the raw
material in stock. It includes: wv
1a) Interest on working capital.
b) Insurance & Warehousing Charges.
¢) Loss due to deterioration of materials during storage & obsolescence etc.
ler.
‘quotations from suppliers.
suppliers.
As the number of purchase orders decreases, quantity ordered every time increases. Hence carrying
cost also increases based on average inventory held
Total ordering cost = no. of orders X cost per order
Total can
cost = EOQ / order size X + X carrying cost pu/pa
INVENTORY LEVELS:
Reorder Level: This is the level of Raw material at which a fresh order for Raw material purchases
shall be made. This gives the answer to the questions - "When to purchase?”, "When the new
purchase shall be made?”
Reorder quantity: This gives the quantity to be purchased at a time. This gives the answer to the
question - “How much to purchase?”
Maximum Leve
is the level of stock beyond which inventory should not cross.
Minimum Level: It is the level of stock beyond which the inventory will not be allowed to fall
CA Inter _42e_Costing (P)_ Material Cost, Ph: 98851 25025/26 www.mastermind:
Reorder Level (Or) Lead time consumption + Safety stock (or)
Reorder point Maximum Usage X Maximum delivery period/lead time
Reorder quantity EOQ
Maximum Level Reorder Level + Reorder quantity - (Minimum usage X Minimum lead time)
(Or) EOQ + Safety Stock
Minimum Level Reorder level - (Normal consumption X Normal Lead time)
Or Safety Stock
Average Level Min + Max / 2 (Or) Min Level + % ROQ
Danger Level Emergency delivery period X Average usage / Minimum usage
Note:
a) Both usage and time must be taken for the same period of time,
b) Inthe absence of information relating to normal consumption & normal lead time, use the average
levels.
MATERIAL TURNOVER RATIO
Meaning: It measures the speed at which the raw materials are getting consumed. It can be
expressed either in number of days or in number of times. (E.g.: 36.5 days or 10 times)
Cost of materialsconsumedduringthe period
ITR (In times) =
Costof averagestock (Opening Closing/2)
ITR (In days) = nee. S
Conelusi Ss
a) More the number of times the faster i; vement of Raw Material.
b) Less the number of days the fast A movement of Raw Material.
COST OF RAW MATERIAL RECEIPTS
Total costof purchases"
Totalunits/kgs- NormalLossunits/Kgs
Cost per Kg. of Raw material
* Includes purchase price, taxes paid, carriage inwards, packing material, insurance etc
‘S.No. Items Treatment
Discounts and Subsidy
i) | Trade Discount Trade discount is deducted from the purchase price if it is not
shown as deduction in the invoice.
ii) | Quantity Discount | Like trade discount quantity discount is also shown as deduction
from the invoice. It is deducted from the purchase price if not
shown as deduction.
Cash Discount ‘Cash discount is not deducted from the purchase price. It is
treated as interest and finance charges. It is ignored.
iw) _ | Subsidy? ‘Any subsidy! grant/ incentive received from the Government or
Grant/Incentives from other sources deducted from the cost of purchase. Duties
and Taxes
Duties and Taxes
v) | Road Tax/ Toll Tax _| Road tax/ Toll tax if paid by the buyer then it is Included with
the cost of purchase.
vi) | Integrated Goods _| Integrated Goods and Service Tax (IGST) is paid on inter-state
And Service Tax supply of goods and provision of services and collected from the
(cst) buyers. It is excluded from the cost of purchase if credit for the
‘same is available. Unless mentioned specifically it should not
form part of cost of purchase.
CA Inter _42e_Costing (P)_ Material Cost, 24 No.1 for CAICWA & MECICEC MASTER MINDS
State Goods and State Goods and Service Tax (SGST) is paid on intra-state
Service Tax (SGST)_| supply and collected from the buyers. It is excluded from the
cost of purchase if credit for the same is available. Unless
mentioned specifically it should not form part of cost of
purchase.
viii) _ | Central Goods and _| Central Goods and Service Tax (CGST) is paid on manufacture
Service Tax (CGST) | and supply of goods and collected from the buyer. It is
‘excluded from the cost of purchase if the input credits available
for the same. Unless mentioned specifically CGST is not added
with the cost of purchase.
ix) | Basic Custom Duty | Basic Custom duty is paid on import of goods from outside India.
Itis added with the purchase cost.
Penalty and Charges
x) | Demurrage Demurrage is a penalty imposed by the transporter for delay in
uploading or offloading of materials. It is an abnormal cost and
not included with cost of purchase
xi) | Detention charges’ | Detention charges’ fines are imposed for noncompliance of rule
Fine or law by any statutory authority.
itis an abnormal cost and not included with cost of purchase
xii) | Penalty Penalty of any type is not included with the cost of purchase
Other expenditures
xiii) [Insurance charges _ | insurance charges are paid for protecting goods during transft. It
is added with the cost of purchase.
xiv) _ | Commission or ‘Commission or brokerage paid is added with the cost of
brokerage paid purchase. a
xv) _| Freight inwards Itis added with the G88of purchase as it is directly attributable
to procurement ial.
xvi) | Cost of containers | Treatment of ntainers are as follows :
iers is returned back then in this case cost of
fainers is not added with the cost of purchase.
‘+ if the amount of refund on returning the container is less
than the amount paid then only short fall is added with the
cost of purchase.
xvil) _| Shortage ‘Shortage in materials are treated as follows:
Shortage due to normal reasons: Good units absorb the cost
of shortage due to normal reasons. Losses due to breaking of
bulk, evaporation, due to unavoidable conditions etc. are the
reasons of normal loss.
Shortage due to abnormal reasons: shortage arises due to
abnormal reasons such as material mishandling, pilferage, due
to avoidable reasons are not absorbed by the good units.
Losses due to abnormal reasons are debited to costing profit
and loss account.
PRICING OF RAW MATERIAL ISSUES
FIFO: Under this method issues are priced on the assumption that materials purchased first are
issued first, The actual physical movement of materials may or may not follow this pattern,
b) LIFO: Under this method issues are priced on the assumption that materials purchased last are
issued first. The actual physical movement of materials may not follow this pattern.
c) Simple Average Method: Before each issue a simple average of the prices is calculated by
dividing all the prices of different lots of a material in stock at the time of issue by the total number
of prices (In conjunction with FIFO)
CA Inter _42e_Costing (P)_ Material Cost, 25 8851 25025/26 www.mastermind:
d) Weighted Average Method: This takes into account the price as well as the quantity of different
lots of a material in store. Before each issue the weighted average price cost is calculated by
dividing the total book value of materials in hand by the total quantity of materials in stock before
the issue (To be calculated at each purchase).
€) Periodical Simple Average Method: This is similar to simple average method with the difference
that the issue price is calculated only periodically (weekly, fortnightly or monthly etc.) and not at
the time of each purchase. For the specified period the issue price remains unchanged. The work
of pricing of issues of materials is done only at the end of the period. During the period only the
quantities of material issued are entered in store ledger as and when issues are made. Price of
‘opening stock is excluded both in the numerator and denominator.
f) Periodical Weighted Average Method: This is similar to weighted average method with the
difference that the issue price is calculated only periodically (weekly, fortnightly or monthly etc.)
and not at the time of each purchase. For the specified period the issue price remains unchanged.
The work of pricing of issues of materials is done only at the end of the period. During the period
only the quantities of material issued are entered in store ledger as and when issues are made.
Price of opening stock is excluded both in the numerator and denominator.
9) Base Stock Method: Base stock represents the minimum stock of materials required to be
maintained at all times. No issue shall be made out of this stock. The quantity of materials in
excess of the base stock is available for production, while the base stock is used only in case of
‘emergency. The excess is priced in conjunction with one of the other methods such as FIFO or
LIFO. Thus this method can't be used independently.
SSS SESS |
‘MODEL 1:|
PROBLEM 4: G. Ltd. produces a produ
requires a component X which is pt
component is required. The orderin
has a monthly demand of 4,000 units. The product
id at Rs 20. For every finished product, one unit of
8 Rs 120 per order and the holding cost is 10% p.a
You are required to calculate:
i) Economic order quantity.
ii) If the minimum lot size to be supplied is 4,000 units, what is the extra cost, the company has to incur?
What is the minimum carrying cost, the company has to incur?
(A) (NEW SM, OLD SM) (ANS.: EOQ=2400 UNITS, RS.640, RS.2400)
(SOLVE PROBLEM NO. 1 OF ASSIGNMENT PROBLEMS AS REWORK)
Note:,
PROBLEM 2: The Gardner is deciding on the EOQ for two brands of fertilizer X and Y.
Particulars Fertilizer =
‘Annual usage 1,280 Bags
Relevant ordering cost per purchase order Rs. 1,400
Annual relevant carrying cost per bag. Rs. 560
Required:
a) Compute E0O for X & Y.
b) For the EOQ, annual ordering costs and total annual carrying costs for X & Y?
¢) For the EOQ, compute the number of deliveries per year for X & Y.
d) What is the time gap between two orders?
(A) (NEW SM, N60 818) (ANS. A. X: EOG=100BAGS Y: 80 BAGS, B. X: 48,000, Y: 44,800, C.X: 20, Y: 16, D. X: 18.25, ¥: 22.81
(SOLVE PROBLEM NO. 2, 3 OF ASSIGNMENT PROBLEMS AS REWORK)
CA Inter _42e_Costing (P)_ Material Cost, 2.6 No.1 for CAICWA & MECICEC MASTER MINDS
Concept questior
(1) If £09 increase then ordering cost increase or decrease.
(2) If EOQ decrease then carrying increase or decrease.
Note:
PROBLEM 3: A company manufactures a product from a raw material, which is purchased at Rs.60
per kg. The company incurs a handling cost of Rs.360 plus freight of Rs.390 per order. The carrying
cost of inventory of raw material is Re.0.50 per kg.per month. In addition, the cost of working capital
finance on the investment in inventory of raw material is Rs.9 per kg. per annum. The annual
production of the product is 1,00,000 units and 2.5 units are obtained from one kg of raw material.
a) Calculate the economic order quantity of raw materials, wor 10m)
b) Advice, how frequently should orders for procurement be placed,
¢) If the company proposes to rationalize placement of orders on quarterly basis, what percentage of
discount in the price of raw materials should be negotiated,
(A) (NEW SIA, OLD SM, OLD PM(MTP N18(NEO)) (ANS.: A. 2000, B. 18 DAYS, C. 2%)
(SOLVE PROBLEM NO.4 OF ASSICNMENT PROBLEMS AS REWORK)
Concept questior
(1) What is EO if can
Note:
\g cost per unit per quarter is RS.3 (Ans:R53.2,236)
PROBLEM 4: Ms. X private limited is manufacturing a s@886 product which requires a component
SSKY BLUE”. The following particulars are available f yéar ended 31% march, 2018,
Annual demand of “SKY BLUE”
Cost of placing an order ee 1800
= Cost per unit of "SKY BLUE”
- Carrying cost per annum s 18.75%
‘The company has been offered a quantity discount of 5% on the purchases of “SKY BLUE" provided
the order size is 3000 components at a time.
You are required to
1) Compute the Economic order quantity.
2) Advise whether the quantity discount offer can be accepted
{(A) (18 (NEW) ~ 5 MNANS:A.60OUNITS,B.77,52,000, 74,74,200)
(SOLVE PROBLEM NO.5,6 OF ASSIGNMENT PROBLEMS AS REWORK)
Note:,
PROBLEM 5: Amav Ltd. manufactures a product X which requires two raw materials A and B in a
ratio of 1:4. The sales department has estimated a demand of 5,00,000 units for the product for the
year. To produce one unit of finished product, 4 units of material A is required.
Stock position at the beginning of the year is as below:
Product X 12,000 units
Material A 24,000 units
Material B 52,000 units
To place an order the company has to spend Rs.15,000. The company is financing its Working
capital using a bank cash credit @13% p.a.
Product X is sold at Rs1,040 per unit. Material A and B is purchased at Rs.150 and Rs.200
Respectively.
CA Inter _42e_Costing (P)_ Material Cost, 27 www.mastermind:
Compute economic order quantity (EOQ):
(i) If purchase order for the both materials is placed separately.
(ii) If purchase order for the both materials is not placed separately
(A) (PO) (ANS.: () MATERIAL A = 54,462 UNITS; MATERIAL 8=04,600 UNITS AND (I) MATERIAL A = 21,592 Tons; MATERIAL
'B=86,860 UNITS) (SOLVE PROBLEM NO.6 OF ASSIGNMENT PROBLEMS AS REWORK)
Note:,
PROBLEM 6: Aditya Ltd. has a monthly requirement for an item of raw material is 1,000 units, The
purchase price per unit of material is Rs.60. The cost of processing an order is Rs.540 and the carrying
cost is 20%. There is a single supplier for the material which offers quantity discounts as under:
‘Order Quantity (in units) Price per unit (RS)
Less than 2,000 units, 60.00
2,000 units and less than 4,000 units. 59.80
4,000 units and less than 6,000 units. 59.50
6,000 units and less than 8,000 units. 58.90
8,000 units and above 58.40
The company uses the cash credit facility provided by the company’s banker to finance its raw
material purchase. The bank due to its own infrastructural constraint can accommodate a maximum
of five fund transfer (NEFT/ RTGS) requests for any, beneficiary per annum. The company in
short term is unable to arrange any other source of,
Required: WS
i) Cala the optimum purchase oder singh company
ii) Calculate the order level where the ‘could have minimised its total cost;
ili) The amount of loss that the =e S to bear due to bank's inabilty to process fund transfer
requests
(8) (RTP M17) (ANS.: | OQ = 1039UNITS;) AT ORDER LEVEL OF 2000 UNITS TOTAL COST THE COMPANY IS LEAST; t)
LOSS IS RS.1,852) (SOLVE PROBLEM NO. 7 OF ASSIGNMENT PROBLEMS AS REWORK)
Note:,
MODEL 2: INVENTORY LEVELS
PROBLEM 7: A company manufactures 5000 units of a product per month, The cost of placing an
order is Rs. 100. The purchase price of the raw material is Rs. 10 per kg. The re-order period is 4 to 8
weeks. The consumption of raw materials varies from 100 kg to 450 kg per week, the average
consumption being 275 kg. The carrying cost of inventory is 20% per annum.
You are required to calculate:
a) Re-order quantity
b) Re-order level
c) Maximum level
d) Minimum level
e) Average stock level.
(A) (OLD PM, NO2 — 6) (ANS.: ROQ = 1,196 KG'S, ROL = 3,600 KGS, MAXIMUM LEVEL = 4,996 KGS, MINIMULEVEL= 1,950
‘KGS, AVERAGE LEVEL = 3179KGSOR 2548 KGS)
(SOLVE PROBLEM NO.11 OF ASSIGNMENT PROBLEMS AS REWORK
Concept question:
What is ROO if carrying cost of inventory is 30% per annum (Ans:R3.976)
Note:
CA Inter _42e_Costing (P)_ Material Cost, 28 No.1 for CAICWA & MECICEC MASTER MINDS
PROBLEM 8: Following details are related to a manufacturing concer
Re-order Level 1,860,000 units
Economic Order Quality 90,000 units
Minimum Stock Level 1,00,000 units
Maximum Stock Level 1,90,000 units
Average Lead Time 6 days
Difference between minimum lead time and Maximum lead time 4 days
Calculat
(i). Maximum consumption per day
(i) Minimum consumption per day (©) (OLD PM, N14 - 5M) (ANS.:() 20,000 UNITS, (15,000 UNITS)
Note:
PROBLEM 8: M/s Tubes Ltd. are the manufactures of picture tubes for T.V. The following are the
details of their operation during 2011:
‘Average monthly market demand 2,000 Tubes
Ordering cost Rs. 100 per order
Inventory carrying cost 20% per annum
Cost of tubes Rs.500 per tube
Normal usage eC 100 tubes per week
Minimum usage SY 50 tubes per week
Maximum usage 200 tubes per week
Lead time to supply 3 6-8 weeks
Compute from the above: >
1. Economic order quantity. If the suppl ing to supply quarterly 1,500 units at a discount of
5%, is it worth accepting? W
2. Maximum level of stock.
3. Minimum level of stock
4. Re-order level
(A) (OLD PM, M98 — 10M, 1900 — 41, SIMILAR: RTP N1B (NEO) (ANS.: EQ = 102 UNITS, MAXIMUM LEVEL = 1,402 TUBES,
‘MINIMUM LEVEL = 900 TUBES, ROL = 1600 TUBES)
(SOLVE PROBLEM NO.8 OF ASSIGNMENT PROBLEMS AS REWORK)
Concept questi
(1) Suppose consumption of raw material (usage) is not given then EOQ (Ans:RS155)
Note:
PROBLEM 10: (PRINTED SOLUTION AVAILABLE) A company uses three raw materials A, B, and
C for which the following data apply:
Raw Usage per ROQ | Price/ |__Delivery period ROL | Min.
Material | product (Kgs.) | __Kgs._| Ka. ‘Average | Max. Level
A 10 10,000 |" 10 2 3 | 6000 | 7
8 4 5,000] 30 4 5 | 4750] 7
c 6 10,000 | _15 3 4 2 | 2,000
Weekly production varies from 175 to 225 units, averaging 200 units of the said product. Compute
Minimum Stock of A, Maximum Stock of 8, Re-order level of C & Average stock of A.
CA Inter _42e_Costing (P)_ Material Cost, 29 Ph: 98851 25025/26 www.mastermindsindia.com
(A) (NEW SM, OLD Pi ITP N13) (ANS. A. 4000, B. 7650, C. 5400 OR 5600, D. 8000 OR 10125)
(SOLVE PROBLEM NO.14 OF ASSIGNMENT PROBLEMS AS REWORK)
Note:
PROBLEM 14: Primex limited produces product ‘p’. it uses annually 60,000 units of a material ‘Rex’
costing 10 per unit. Other relevant information are:
Cost of placing an order Rs.800 per order
Carrying cost 15% per annum of average inventory
Re ~ order period 10 days
Safety stock 600 units,
‘The company operates 300 days in a year.
You are required to calculate:
a) Economic order quantity for material ‘REX’
b) Re order level
©) Maximum stock level
d) Average stock level
(A) (0L0 Pa, m3 ee 8,000 UNITS, 2,600 UNITS, 8,600 UNITS, 4,600 UNITS)
(SOLE RROELEM NO.10 OF ASSIGMAENT PROBLEMS AS REWORK)
Concept questior VW
(1) Find E0Q if re-order period is 20 days
Not
(Ans:RS.4600)
YS
PROBLEM 12: ACE Ltd. produces a product EMM using a material ‘REX’. To produce one unit of EMM
0.80 kg of ‘REX’ is required. As per the sales forecast conducted by company it will be able to sell 45,600
units of product EMIM in the coming year .There is an operating stock of 3150 units of product EMM and
company desires to maintain closing stock equal to one months forecasted sale Following is the
information regarding material "REX
Information regarding material ‘REX’
Purchase price per Kg Rs.25
Cost of placing order Rs.240 per order
Storage cost 2% per annum
Interest rate 10% per annum
Average lead time 8 days
Difference between minimum and maximum lead time 6 days
Maximum usage 150 kg
Minimum usage 90 kg
Opening stock of material ‘REX’ is 2100kg and closing stock will be 10% more than opening stock
Required:
i) Compute the EOQ and total cost as per EQ,
ii) Compute the re order level and maximum level
If the company places an order of 7500 kg of REX at a time, it gets 2% discount, should the offer
accepted
CA Inter _42e_Costing (P)_ Material Cost, 2.10 No.1 for CAICWA & MECICEC MASTER MINDS
(©) (MAY 19 OLD) (ANS.; (A). 2440 KG, RS.9,37,570 .,(B).1650 KG, 3640 KG.,(0).Accept the offer)
(SOLVE PROBLEM NO.12 OF ASSIGNMENT PROBLEMS AS REWORK)
Note:,
MODEL 3: INVENTORY TURNOVER RATIO
PROBLEM 13: The following data are available in respect of material X for the year ended 31st
March, 2014,
‘Opening stock Rs. 90,000
Purchases during the year: Rs.2,70,000
Closing stock Rs.1,10,000
Calculate:
a) Inventory turnover ratio, and
b) The number of days for which the average inventory is held.
(C) (NEW Sid, OLD Pl) (ANS.: (A) 25 TIMES, (B) 146 DAYS)
(SOLVE PROBLEM NO. 13 OF ASSIGNMENT PROBLEMS AS REWORK)
Concept questior
(1) High inventory tum over ratio (ITR) indicates?
Note:
MODEL 4: RAW MATERIALVALUATION
PROBLEM 14: An invoice in respect of a consign’ = A and B provides the following
information: e
‘Chemical A: 10,000 kgs. @Rs.10 per kg. 7,00,000
Chemical B: 6,000 kas. @Rs. 13 per kg. 7,04,000
Basic custom duty @ 10% (Credit is nofwlewed) 20,400
Railway freight 3,840
Total cost 2,28,240
A shortage of 500 Kgs. in chemical A and 320 kgs. In chemical B is noticed due to normal breakages.
You are required to determine the rate per kg. of each chemical, assuming a provision of 2% for
further deterioration (©) (NEW Si) (ANS.: COST PER KG: A-RS.12.04, B-RS.15.43)
(SOLVE PROBLEM NO. 14 OF ASSIGNMENT PROBLEMS AS REWORK)
Note:,
PROBLEM 45: The following information is provided by DCM for the first fortnight of April, 2002 in
respect of Material X.
Stock on 01/04/02 100 units at Rs.5 per unit.
05/04/02 300 units at Rs.6
08/04/02 500 units at Rs.7
12/04/02 600 units at Rs.8
Issues:
o6/o402 250 units.
0104/02 400 units:
14/04/02 500 units
CA Inter _42e_Costing (P)_ Material Cost, 8851 25025/26
www.mastermind:
(A) Calculate using FIFO, LIFO, Simple average, Weighted Average of pricing issues
a) The value of materials consumed during the period
b) The value of stock of materials on 15/04/02.
{B) Explain why the figures in (a) and (b) in part A of this question are different under the two
methods of pricing of material issues used. You need not draw up the Stores Ledgers.
(©) (NEW Sit, OLD SW) (RNS.: FIFO ~ RS. 7,800, RS. 2,800, LIFO~ RS. 8,300, RS. 2,300)
(SOLVE PROBLEM NO.15 OF ASSIGNMENT PROBLEMS AS REWORK)
Note:,
PROBLEM 16: (PRINTED SOLUTION AVAILABLE) “AT” itd
transactions for September, 2011
furnishes the following store
‘Opening Balance 25 units value Rs.162.50
Issues Req .No 85 8 units
Receipts from B & Co GRN No 26 50 units@ 5.75 per unit
Issues Req No.97 42 units
Return to B & co 40units
Issues Req. No.108 45 units
Issues Reg. No .110 > 20 units
Receipts from B&Co GRN No.3 25 units@ 6.10 per unit
Issues Req. No.121 40 units
Received replacement from BEG@GRN No.38 10 units
Returned from Department, of M& Co. MRR | 5 units
Nod &
Transfer from Job 182 «Yep 187 in the Dept MTR 6 _| 5 units
Issues Req. No 146 40 units
Transfer from Dept. ‘A’ to Dept 'B' MTR 10 5 units
Shortage in Stock Taking 2 units
Write up the priced stores ledger on FIFO method and discuss how you would treat the shortage in
stock taking (CJNEW SM) (ANS: SHORTAGE: 12.20, CLOSING STOCK: R5.167.30/)
(SOLVE PROBLEM NO.16 OF ASSIGNMENT PROBLEMS AS REWORK)
Note:,
PROBLEM 17: The following are the details of receipt and issue of material ‘CXE' in a manufacturing Co.
during the month of April 2019.
Date Particulars Quantity (kg) | Rate per kg
April 4 Purchase 3000 16
April & Issue 1000
April 15, Purchase 1500 18
April20 Issue 1200
April 25 Retum to supplier out of purchase made on April 15 300
April 26 Issue 1000
April 28 Purchase 500 7
Opening stock as on 01-04-2019 is 1000 kg @ Rs. 15 per kg
(On 30" April, 2019 it was found that 50 kg of material ‘CXE" was frequently misappropriated by the store
assistant and never recovered by the Company.
CA Inter _42e_Costing (P)_ Material Cost, 2.42 No.1 for CAICWA & MECICEC MASTER MINDS
Required:
(i). Prepare a store ledger account under each of the following method of pricing the issue
a) Weighted Average Method
b) LIFO
(ii). What would be the value of material consumed and value of closing stock as on 30-04-2019 as per
these two method?
(©) (i 19(N) (ANS.: VALUE OF CLOSING STOCK UNDER FIFO -RS. 40,376 ; WEIGHTED AVERAGE METHOD :RS. 38650)
Note:
DEL 6: ABC ANALYSIS:
PROBLEM 18: (PRINTED SOLUTION AVAILABLE) A store keeper has prepared the below list of
items kept in the store of the factory,
tem Units Unit cost (Rs.)
A 12,000 30.00
B 18,000 3.00
Cc 6,000 35.00
D 750 220.00,
E 3,800 75.00
F 400 105.00
c 600 300.00
H 300 IS 350.00
I 3,000 g 250.00
J 20,000 7.50
K 11,500 27.50
L 2,400 oy 75.00
The store keeper requires your help to ctassiffthe lems for prioritization. You are required to APPLY
ABC analysis to classify the store items a
‘Store items which constitutes approx 70%8,20% and 10% of total value as A, B and C respectively.
(A) aUTPS M18 (NBO)
(SOLVE PROBLEM NO. 17 OF ASSIGNMENT PROBLEMS AS REWORK)
ASSIGNMENT PROBLEMS
MODEL 1: ECONOMIC ORDER QUANTITY
PROBLEM 1: Calculate the Economic Order Quantity from the following information. Also state the
number of orders to be placed in a year,
Note:,
Consumption of materials per annum. 10,000 kg
Order placing cost per order Rs.50
Cost per kg. of raw materials Rs.2
Storage costs 8% on average inventory
(A) (NEW SM, OLD St) (ANS..2.500 UNITS, 4 PER YEAR)
CA Inter _42e_Costing (P)_ Material Cost, Ph: 98851 25025/26 www.mastermind
PROBLEM 2: Compute E.0.Q. and the total variable cost for the following
Annual Demand = 5,000 units
Unit price = Rs. 20.00
Order cost = Rs.16.00
Storage rate = 2% perannum
Interest rate = 12% per annum
Obsolescence rate = 6% per annum
Determine the total variable cost that would result for the items if an incorrect price of Rs.12.80 is
used.
(A) (NEW Sis, OLD Sif) (ANS.: TOTAL VARIABLE COST - 800 (EXCLUDING MATERIAL COST), EOQ 200 UNITS, TOTAL
VARIABLE COST - 640)
PROBLEM 3: Anil & Company buys its annual requirement of 36,000 units in 6 installments. Each
unit cost Rs. 1 and the ordering cost is Rs. 25. The inventory carrying cost is estimated at 20% of unit
value. Find the total annual cost of the existing inventory policy. How much money can be saved by
Economic Order Quantity? (A) (NEW Sid, OLD SM) (ANS.:RS.750, RS.150)
PROBLEM 4: A company manufactures a product from a raw material, which is purchased at Rs. 80
per kg. The company incurs a handling cost of Rs. 370 plus freight of Rs. 380 per order. The
incremental carrying cost of inventory of raw material ig:Rs. 0.25 per kg per month. In addition, the
cost of working capital finance on the investment i tory of raw material is Rs. 12 per kg per
annum. The annual production of the product is Units and 2.5 units are obtained from one
kg. of raw material
Require QS
i) Caleulate the economie order quant materials
ii) Advice, how frequently coneergee ‘order for procurement be placed.
If the company proposes to rationalize placement of orders on quarterly basis, what percentage of
discount in the price of raw materials should be negotiated?
‘Assume 360 days ina year. (4) (OLD PM, M 14 81H) (ANS.:(P 2,000 KGS, (1) 0.0 MONTHS(OR) 18 DAYS, il) 1.5%)
PROBLEM 5: ASJ manufacturer produces a product which requires a component costing Rs.1000
per unit. Other information related to the component are as under:
Usage of component 1500 units per month
Ordering cost Rs.75 per order
Storage cost rate 2% per annum
Obsolescence rate 1% per annum
Maximum usage 400 units per week
Lead time 6-8 weeks
The firm has been offered a quantity discount of 5% by the supplier on the purchase of component, if
the order size is 6000 units at a time.
You are required to compute
(i) Economic Order Quantity (EOQ)
{ii) Re order level and advise whether the discount offer be accepted by the firm or not.
(4) (418 (OLD) - 5 0)
CA Inter _42e Costing (P)_MaterialCost__ No.1 for CAICWA & MECICEC MASTER MINDS
PROBLEM 6: Aditya Brothers supplies surgical gloves to nursing homes and polyciinics in the city
These surgical gloves are sold in pack of 10 pairs at price of Rs. 250 per pack. For the month of
November 2015, it has been anticipated that a demand for 60,000 packs of surgical gloves will arise
Aditya Brothers purchases these gloves from the manufacturer at Rs. 228 per pack within a 4 to 6
days lead time. The ordering and related cost is Rs. 240 per order. The storage cost is 10% p.a. of
average inventory investment,
Require
i) Calculated the Economic Order Quantity (EOQ)
Calculate the number of orders needed every year
Calculate the total cost of ordering and storage of the surgical gloves.
iv) Determine when the next order to be placed should. (Assuming that the company does maintain a
safety stock and that the present inventory level is 10,033 packs with a year of 360 working days).
5) (RTP M-18, RTP, NIS, ITP MI9 (N), RTP MI9{NE. 0) (ANS.: A. 3,894 PACKS, 8. 185 ORDERS, C. RS.88, 780.20, D.
IMMEDIATELY)
PROBLEM 7: RST Limited has received an offer of quantity discount on its order of materials as under:
Price per tone Tones number
Rs. 9,600 Less than 50
Rs. 9,360 50 and less than 100
Rs. 9,120 100 and less than 200
Rs. 8,880 200 and less than 300
Rs. 8,640 300 and above
‘The annual requirement for the material is 500 tonnes. 1! @ Gilering cost per order is Rs.12,500 and
the stock holding cost is estimated at 25% of the matet per annum.
pene ss
a) Compute the most economical purchase ha
b) Compute EOQ if there are no quantity di and the price per tonne is Rs. 10,500.
(©) (OLD PM, Nod - 6M, N10 58) (ANS.: I 300, lL 69 TONNES)
nei JENTORY LEVELS:
PROBLEM 8: PQR Ltd. manufactures a special product, which requires ‘ZED’. The following
Particulars were collected for the year 2005-06:
4. Monthly demand of ZED 7,500 units
2. Cost of placing an order Rs.500
3. Re-order period 5 to 8 weeks
4. Cost per unit Rs.60
5. Carrying cost % p.a. 10%
6. Normal usage 500 units per week
7. Minimum usage 250 units per week
8. Maximum usage 750 units per week
Requirec
a) Re- order quantity
b) Re -order level
¢) Minimum stock level,
d) Maximum stock level
) Average stock level
(A) (OLD PA, NOS 10M) (ANS.: 3.873 UNITS, 6,000 UNITS, 2,750 UNITS, 8,623 UNITS, 5,687 UNITS)
CA Inter _42e_Costing (P)_ Material Cost, 2.15 8851 25025/26 www.mastermind: m
PROBLEM 9: Re-order quantity of material ‘X’ is 5,000 kg, Maximum level 8,000 kg, Minimum usage
50 kgs per hour; minimum re-order period 4 days; daily working hours in the factory is 8 hours. You
are required to calculate the re-order level of material ‘X’ (6) (OLD PM, 10 - 2Y/ANS.: 4.600 KGS)
PROBLEM 10: SK Enterprise manufactures a special product "ZE". The following particulars were
collected for the year 2004:
Annual consumption 12,000 units (360 days)
Cost per unit Rs.
Ordering cost Rs. 12 per order
Inventory carrying cost 24%
Normal lead time 15 days
Safety stock 30 days consumption
Required:
i) Re-order quantity
ii) Re-order level
What should be the inventory level (ideally) immediately before the material order is received?
(8) (M 05— 4M) (Ans.: ROQ=t,100, ROL= 1,500, Safety Stocks 1000 Units)
PROBLEM 11: Ws. SJ Private Limited manufactures
placing an order is Rs.1500. The purchase price of
period is 5 to 7 weeks. The consumotion of raw
average consumption being 250 kg. The carryi
Units of a product per month. The cost of
fw material is Rs.100 per kg. The re-order
iS varies from 200 kg to 300 kg per week, the
of inventory is 9.75% per annum.
You are required to calculate; >
i) Re-order quantity SS
ii) Re-order level ©
iii) Maximum level
iv) Minimum level
Wl Average stock level (A) (Nt ~ 5
PROBLEM 42: Aditya Ltd. produces a product ‘Exe' using a raw material Dee. To produce one unit of
Exe, 2 kg of Dee is required. As per the sales forecast conducted by the company, it will able to sale
10,000 units of Exe in the coming year. The follovaing is the information regarding the raw material Dee:
1. The Re-order quantity is 200 kg. Less than the Economic Order Quantity (EOQ),
2. Maximum consumption per day is 20 kg. More than the average consumption per day.
8. There is an opening stock of 1,000 kg.
4. Time required to get the raw materials from the suppliers is 4 to 8 days.
5. The purchase price is Rs.125 per kg.
There is an opening stock of 900 units of the finished product Exe. The rate of interest charged by
bank on Cash Credit facility is 13.76%. To place an order company has to incur Rs. 720 on paper and
documentation work,
From the above information find out the followings in relation to raw material Dee:
a) Re-order Quantity
b) Maximum Stock level
¢) Minimum Stock level
CA Inter _42e_Costing (P)_ Material Cost, 2.16 No.1 for CAICWA & MECICEC MASTER MINDS
) Calculate the impact on the profitability of the company by not ordering the EOQ. [Take 364 days
fora year).
(OLD Pu, MTP2 M18, RTP M15. MTPI®, RTP19) (ANS. (A). 1,000 KG., (B). 1,440 KG., (C). 260 KG., (2). RS.344)
Note:,
‘MODEL 3: INVENTORY TURNOVER RATIO
rom the following data for the year ended 31° December calculate the inventory
of the two items, and put forward your comments on them.
PROBLEM 1;
turnover rat
Particulars Material A Material B
‘Opening Stock 10,000 9,000
Purchases during the year 52,000 27,000
Closing Stock 6,000 11,000
(©) (NEW Sim) (ANS.: MATERIAL A~ 7 TIMES, MATERIAL B - 2.5 TIMES)
)DEL 4: RAW MATERIAL WALUATION
PROBLEM 14; A Manufacturer of Surratt purchased the Chemicals A, B and C from Mumbai,
Chemical A: 3,000 kg. @ Re 4.20 per kg. 12,600
Chemical B: 5,000 kg. @ Re 3.60 per kg 19,000
Chemical C: 2,000 kg. @ Rs 4.75 per kg. 91500
Sales Tax om 2,055
Railway Freight & 000
Total cost 44,155,
n Sremical B and of 100 kgs in Chemical C was
At Surat, the manufacturer paid Octroi duty @
jemical A, Rs.63.12 for Chemical B and Rs.31.80
you would suggest for pricing issue for chemicals
terioration.
(©) (ANS.: FOR A: 5.2 PER KG, FOR B: 4.68 PER KG, FOR 5.76 PER KG)
‘MODELS: RM ISSUE METHODS:
PROBLEM 16: The following information has been extracted from the records of a cotton merchant,
for the month of March, 2013:
Sales for the month: Rs. 62,00,000
Opening Stock as on 01.03.2013: 22,000 kgs @ Rs. 58.50.
Purchases made during the month
A shortage of 200 kgs in chemical A, of 280 k
noticed due to breakages (Assume as nor
Rs.0.10 per kg. He also paid cartage Rs.2%
for Chemical C. Calculate the stock rat
assuming a provision of 5% towards furth&
Date ‘Quantity (kgs.) Rate (Rs)
(03.03.2013 35,000 59.00
18.03.2013 32,000 59.50
25.03.2013 22,000 60.00
(Onall the above purchases, freight is paid @ Rs. 1.75 per kgs)
Closing stock as on 31.03.2013: 23,000 kgs
Salary paid to accountant Rs. 11,000.
From the above information you are required to calculate the following:
i) Value of closing stock as on 31.03.2013 (using First In First Out (FIFO) method)
ii) Cost of goods sold during March, 2013 and
iii) Profit for the month of March, 2013.
(©) (RTP. M13) (ANS. VALUE OF CLOSING STOCK =14,19,750, COST OF GOODS SOLD = 53,12,000, PROFIT 8,77,000)
CA Inter _42e_Costing (P)_ Material Cost, 247 8851 25025/26 www.mastermindsindia.com
PROBLEM 16; Prepare a Store Ledger Account from the following transactions of XY Company Ltd.
April, 2014
1 Opening balance 200 units @ Rs. 10 per unit,
5 Receipt 250 units costing Rs. 2,000
8 Receipt 150 units costing Rs. 1,275
10 Issue 100 units
15 Receipt 50 units costing Rs. 500
20 Shortage 10 units
21 Receipt 60 units costing Rs. 540
22 Issue 400 units
The issues upto 10-4-11 will be priced at LIFO and from 11-4-11 issues will be priced at FIFO.
Shortage will be charged as overhead (8) (M11 - 514, OLD PM) (ANS.: CLOSING STOCK = 1,785)
MODELG:ABC ANALYSIS
PROBLEM 17: From the following details, draw a plan of ABC selective control:
Item Units Unit cost (Rs)
1 7,000 5.00
2 24,000 3.00
3 1,500 & 10.00
4 600 22.00
5 38, 000.5 1.50
6 40, 0.50
7 oe 0.20
8 CAO 3.50
3 S300 8.00
10. 29,000 0.40
14 41,500 7.10
12 4,100 6.20
() (NEW Si)
PU SRST ta ita
MODEL 1; ECONOMIC ORDER QUANTITY
PROBLEM 1:
i) The annual demand for an item of raw material is 4,000 units and the purchase Price is expected
to be Rs. 90 per unit. Cost of processing of an order is Rs. 135 and annual cost of storage is
estimated to be Rs. 12 per unit. Find out the optimal order quantity and total relevant cost for the
order?
If the estimated cost of Rs.135 for processing of an order is incorrect and the correct cost is Rs.
80 only. find out the difference in total cost due to error in estimation?
iii) A supplier is ready to supply the raw materials at a price of Rs. 86 per unit if the entire annual
demand is ordered at a time. Suggest the order quantity that should be placed to lower total cost.
Information regarding ordering cost and carrying cost given at (?) above is to be taken.
(8) (UTP N19(NLO).NI7) (ANS.: () ORDER QUANTITY IS 200 UNITS AND TOTAL RELEVANT COST IS RS.2600 ;() DIFFERENCE
INTOTAL COST IS RS.829; (ll) THIS SPECIAL OFFER AT RS.86 PER UNIT SHOULD NOT BE ACCEPTED AS TOTAL COST WILL
INCREASE BY RS.4,535)
CA Inter _42e_Costing (P)_ Material Cost, 2.18, No.1 for CAICWA & MECICEC MASTER MINDS
PROBLEM 9: Assume that the following quantity discount schedule for a particular bearing is
available toa
Retail store:
‘Order size (unit) Discount
0-49 0%
50 - 99 5%
100 - 198) 10%
200 and above 12%
The cost of a single bearing with no discount is Rs. 30. The annual demand is 250 units. Ordering
cost is Rs. 20 per order and annual inventory carrying cost is Rs. 4 per unit. Determine the optimal
order quantity and the associated minimal total cost of inventory and purchasing costs, if shortages
are not allowed. (A) (OLD PM) (ANS.:100 UNITS, RS.7,000)
MODEL 2: INVENTORY LEVELS
PROBLEM 2: (PRINTED SOLUTION AVAILABLE) IPL Limited uses a small casting in one of its
finished products. The castings are purchased from a foundry. IPL Limited purchases 54,000 castings
per year at a cost of Rs. 800 per casting. The castings are used evenly throughout the year in the
production process on a 360-days-per-year basis. The company estimates that it costs Rs.9,000 to
place a single purchase order and about Rs.300 to carry one casting in inventory for a year. The high
carrying costs result from the need to keep the castings in carefully controlled temperature and
humidity conditions, and from the high cost of insurance. Delivery from the foundry generally takes 6
days, but it can take as much as 10 days. The days of delivery time and percentage of their
occurrence are shown in the following tabulation:
Delivery time (days) :
Percentage of occurrence :
Required: eS
a) Compute the economic order quantity (EQQ)<2>
b) Assume the company is wiling to asst 15% risk of being out of stock. What would be the
safety stock? The re-order point?
c) Assume the company is willing to asSume a 5% risk of being out of stock. What would be the
safety stock? The re-order point?
d) Assume 5% stock-out risk. What would be the total cost of ordering and carrying inventory for one year?
€) Refer to the original data. Assume that using process re-engineering the company reduces its
cost of placing a purchase order to only Rs.600. In addition company estimates that when the
waste and inefficiency caused by inventories are considered, the true cost of carrying a unit in
stock is Rs. 720 per year.
i) Compute the new EOQ.
ii) How frequently would the company be placing an order, as compared to the old purchasing policy?
(4) (OLD Pit (ANS: (4) 1,800 CASTINGS, (8) 1,050 CASTIGS (©) 450 CASTINGS, 1,250 CASTINGS, (0) RS 9, 70,00,
'R5.4,08,000, () 300 CASTINGS, 2 DAYS)
Note:
MODEL 3: RM ISSUE METHODS:
PROBLEM 26: The following transactions in respect of material Y occurred during the six months
ended 30th June, 20X1:
Month Purchase (units) Price per unit (Rs) Issued units
January 200 25 Nil
February, 300 24 250
March 425 26 300
CA Inter _42e_Costing (P)_ Material Cost, www.mastermind:
April 475 2 550
Maj 500 25) ‘800
June! 600 20 400
Require
a) The Chief Accountant argues that the value of closing stock remains the same no matter which
method of pricing of material issues is used, Do you agree? Why or why not? Detailed stores
ledgers are not required.
b) When and why would you recommend the LIFO method of pricing material issues?
(0) (NEW Sw) (ANS. CHIEF ACCOUNTANT ARGUES IS CORRECT)
MODEL 4: ABC ANALYSIS:
PROBLEM 3: (PRINTED SOLUTION AVAILABLE) M/s Tyro tubes trades in four wheeler tires and
tubes. It stocks sufficient quantity of tyres of almost every vehicle. In year end 2011-12, the report of
sales manager revealed that M/s Tyro tubes experienced stock-out of tyres. The stock-out data is as
follows:
Stock-out of Tyres™ No. of times
100 2
80 5
50 10
20 20
10 al 30
0 33
Mis Tyro tubes loses Rs.150 per unit due to seQsut and spends Rs. 50 per unit on carrying of
Inventory. gS
Determine optimum safest stock level.
