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# Subject: Cost Accounting

## Topic: Direct Material Cost By: Questionscastle Academic Team

Document Code: CA/IPCC/CST/00010

Q 1.

P Ltd. uses three types of material A, B and C for production of X the final product. The relevant monthly data for the product are given below: A B C Normal Usage (units) 200 150 180 Minimum usage (units) 100 100 90 Maximum usage (units) 300 250 270 Reorder Qty (units) 750 900 720 Reorder Period (units) 2 to 3 3 to 4 2 to 3 Calculate for each component: (a) Reorder Level (b) Minimum Level (c) Maximum Level (d) Average Stock Level

Q 2.

In a manufacturing company, a material is used as follows: Maximum consumption 12,000 units per week Minimum consumption 4,000 units per week Normal Consumption 8,000 units per week Reorder Qty 48,000 units. Time required for delivery: Minimum 4 weeks Maximum 6 weeks Calculate: (a) Reorder Level (b) Minimum Level (c) Maximum Level (d) Danger Level

Q 3.

From the following data: Annual Consumption Cost per unit Ordering Cost Inventory carrying charge Normal Lead Time Safety Stock

12,000 units (360 days) `1 `12 per order 24% 15 days 30 days consumption

Calculate: (a) Economic Order Quantity (b) What should be the ideal inventory level immediately before the order material is received? Q 4. A company follows moving simple average method as the method of pricing issues. From the periodic average prices given below under falling and rising resp. Calculate 5 monthly moving simple average prices for use for the period August to December 1999. Periodic Avg prices Mar Apr May June July Aug Sept Oct Nov Dec Case I 6.30 6.10 5.90 5.80 5.70 5.60 5.50 5.40 5.30 5.20 Case II 5.20 5.30 5.40 5.50 5.60 5.70 5.80 5.90 6.10 6.30 You are required to calculate the following levels for component XYZ from the given information: (a) Re- ordering Level, (b) Maximum Level, (c) Minimum Level, (d) Danger Level The following data is to be used

Q 5.

Total cost of purchasing relating to the order Number of units to be purchased during the year Purchase price per unit including transportation Annual cost of storage of one unit Lead Times

`20 5,000 `50 `5 10 days 15 days 6 days 4 days 15 units per day 20 units per day

Average Maximum Minimum Max. for emergency purchase Rate of consumption Average Maximum Q 6.

Prepare stores ledger from the following data using (i) FIFO Method, (ii) Weighted Avg. Price Method. May 1 Balance 50 units @ 25 P per unit May 2 Issued 25 units to Dept A May 6 Received 200 units @ 30 P per unit May 7 Issued 75 units May 8 Returned to stock room 5 units from dept A May 10 Received 75 units @ 38 P per unit (PO No. 65) May 15 Issued 80 units May 18 Received 25 units @ 38 P per unit (bal of PO no. 65) May 21 Issued 30 units to Dept B May 23 Returned to supplier 10 units from PO No. 65 received on May 18 May 25 Received 50 units @ 25 P per unit (PO no. 77) May 27 Freight on PO no. 77, `12 May 29 Issued 60 units Using the following data calculate EOQ and the total relevant cost associated with policy of ordering quantities of that size: Purchase cost of annual demand `20,000 Ordering Cost `150 per order Inventory Carrying Cost 24% of avg. inventory value `1. JP ltd. manufactures of a special product, follows the policy of EOQ for one of its components. The components details are as follows: ` Purchase price per component 200 Cost of an order 100 Annual cost of carrying one unit in inventory 10% of purchase price Total carrying cost of Inventory and ordering per annum 4,000 The company has been offered a discount of 2% on the price of the component provided the lot size is 2,000 components at a time. You are required to: (a) Compute the EOQ, (b) Advise whether the quantity offer can be accepted.(Assume that the inventory carrying cost does not carry according to discount policy) (c) Would your advice differ if the company is offered 5% discount on a single order? M/s Auto Tooling has a contract from the department of defense for 1,50,000 bushings a year. Auto Tooling orders the metals for the bushings in lots of 40,000 units from a supplier. It costs `400 to place an order and an estimated carrying charge is 20% of the unit cost which is `1.50. Auto Tooling wants to know what percent their order quantity varies from optimal and what the variations is costing them, if any?

Q 7.

Q 8.

Q 9.

Q 10. A company uses annual 48,000 units of raw material costing `1.20 per unit. Placing each order costs `45 and inventory carrying costs are 15% per year of the inventory values: (a) Find EOQ, (b) Suppose that the company follows the EOQ policy and it operates for 300 days a year that the procurement time is 12 operating days and the safety stock is 500 units, find 1. Re ordering level

2. Maximum Level 3. Minimum Level 4. Average Inventory Q 11. A Ltd. Furnishes the following store data for June 2008: 1 Jun Opening Bal 25 Units `162.50 4 Jun Issues 8 Units 6 Jun Receipts from B Ltd. GRN No. 30 50 Units @ `5.75 per unit 8 Jun Issues 12 Units 10 Jun Returns to B Ltd. 10 Units 11 Jun Issues 15 Units 13 Jun Issues 25 Units 15 Jun Receipts GRN No. 35 25 Units @ `6.10 per unit 17 Jun Issues 10 Units 19 Jun Received replacement from B Ltd. GRN No. 40 10 Units 20 Jun Returned from Deptt. Material of GRN No. 35 5 Units 22 Jun Transfer from Job 182 to Job 187 in the dept. M (TR 6) 5 Units 26 Jun Issues 10 Units 29 Jun Transfer from Dept A to Dept B MIR 10 5 Units 30 Jun Shortage in Stock Taking 2 Units Write up the priced store ledger on FIFO basis and discuss how shortage in stock taking is to be treated. Q 12. The complete gardener is deciding on the economic order quantity for two brands of lawn fertilizerSuper Grow and Nature Grow. The following information is collected: Fertilizer Super Grow Nature Grow Annual Demand 2,000 bags 1,280 bags Relevant ordering cost per purchase order `1,200 `1,400 Annual relevant carrying cost per bag `480 `560 Required: (i). Compute EOQ for super grow and nature grow. (ii). For the EOQ, what is the sum of the total annual relevant ordering cost and total annual relevant carrying cost for Super Grow and Nature Grow? (iii). For the EOQ compute the number of deliveries per year for super grow and nature grow. Q 13. A company, for one of the A-class items placed 6 orders each of size 200 in a year. Given ordering cost=`600, holding cost = 40%, cost per unit = `40, find out the loss to the company in not operating scientific inventory policy? What are your recommendations for the future? Q 14. The following data are available in respect of material X for the year ended 31st Dec 2006: Opening Stock `90,000 Purchases during the year `2,70,000 Closing Stock `1,10,000 Calculate: (i). Inventory Turnover Ratio (ii). Inventory conversion Period Q 15. A manufacturer of Ahmedabad purchased three chemicals A, B and C from Bombay. The invoice gave the following information: Chemical A 3000 kg @ `4.20 per kg 12,600 Chemical B 5000 kg @ `3.80 per kg 19,000 Chemical C 2000 kg @ `4.75 per kg 9,500 Sales Tax 2,055 Railway Freight 1,000 Total Cost 44,155 A shortage of 200 kg in chemical A, of 280 kg in chemical B and of 100 kg in chemical C was noticed due to breakages. At Ahmedabad, the manufacturer paid octroi of `0.10 per kg. He also paid cartage of `63.12 for chemical B and of `31.80 for chemical C. Calculate the stock rate that you would suggest for pricing issue of chemicals assuming a provision of 5% towards further deterioration.

Q 16. A firm is using an EOQ system of inventory replenishment for one of its purchased items, which has a known annual demand of 48,000 units with a near uniform rate of consumption. The cost of placing an order is `250,. The cost of the item is `5 per unit. The firm uses an inventory carrying rate of 30% p.a. 1. Find the optimum order qty, the number of orders per year, and the systems cost. 2. If the lead time is 10 days no safety stock is kept and the year is taken as 300 days, find the reorder point. 3. If for administrative reasons the firm wishes to place orders only once in three months, how much extra cost will the firm incur on this policy? Q 17. X Ltd. is committed to supply 24000 bearings p.a. to Y Ltd. on steady basis. It is estimated that it costs10 paise as inventory holding cost per bearing per month and that the setup cost per run of bearing manufacture is `324. 1. What would be the optimum run size for bearing manufacture? 2. Assuming that the firm has a policy of manufacturing 6000 bearings per run, how much extra cost the company would be incurring as compared to the optimum run suggested in (1) above? 3. What is minimum inventory holding cost? Q 18. Given the following annual demand, monthly carrying cost, back order cost and cost per order, compute the economic order quantity, the total annual relevant cost and length of the inventory cycle: Annual Demand 1,15,000 units Ordering Cost `2,100 per order Carrying cost `0.25 per unit per month Back order cost `1.25 per unit per month Q 19. PQR Ltd. purchase a product which has a monthly demand of 52,000 units. The product requires a component X which is purchased at `15 per unit. For every finished product, 2 units of component X are required. The ordering cost is `350 per order and carrying cost is 12% p.a. Required: 1. Calculate the economic order quantity for component X. 2. If the minimum lot size to be supplied is 52,000 units, what is the extra cost, the company has to incur? 3. What is the minimum carrying cost, the company has to incur? Q 20. The quarterly production of a companys product which has a steady market is 20,000 units. Each unit of a product requires 0.5 kg of raw material. The cost of placing one order for raw material is `100 and inventory carrying cost is `2 per annum. The lead time for procurement of raw material is 36 days and a safety stock of 1000 kg of raw materials is maintained by the company. The company has been able to negotiate the following discount structure with raw material supplier: Order Quantity (Kgs) Discount (`) Up to 6000 Nil 6000-8000 400 8000-16000 2000 16000-30000 3200 30000-45000 4000 You are required to: 1. Calculate the reorder point taking 30 days in a month. 2. Prepare a statement showing the total cost of procurement and storage of raw material after considering the discount if the company elects to place one, two, four or six orders in a year. 3. State the number of orders which the company should place to minimize the cost after taking EOQ also in to consideration. Q 21. The consumption factor of a component used in an assembly is as under: Two monthly consumption unit Probability 500 0.15 600 0.20 700 0.30 800 0.20

900 0.15 The stock out cost is `108 per unit and the holding cost is also `18 per unit per two months. Number of orders per annum is six. Determine the optimal safety stock level. Q 22. The following transactions occurs in the purchase and issue of a material: 2 Jan Purchased 4000 units @ `4.00 per unit 20 Jan Purchased 500 units @ `5.00 per unit 5 Feb Issued 2000 units 10 Feb Purchased 6000 units @ `6.00 per unit 12 Feb Issued 4000 units 2 Mar Issued 1000 units 5 Mar Issued 2000 units 15 Mar Purchased 4500 units @ `5.50 per unit 20 Mar Issued 3000 units From the above data, prepare the stores ledger account by (1) FIFO Method, (2) LIFO Method, (3) Weighted Average Cost Method. What should be the value of stock at the end of period in each of the three methods? Q 23. A whole seller supplies 30 stuffed dolls each week day to various shops. Dolls are purchased from the manufacturer in lots of 120 each of `1200 per lot. Every order incurs a handling charge of `60 plus a freight charge of `250. Multiple and fractional lots can also be ordered and all orders are filed the next day. The incremental cost is `0.60 per year to store a doll in inventory. The whole seller finances inventory investment by paying its holding company 2% monthly for borrowed funds. Assume that there are 250 week days in a year. 1. How much dolls should be ordered at a time in order to minimize the total inventory cost? 2. How frequently should he order? Q 24. A factory uses 4000 varieties of inventory. In terms of inventory holding and inventory usage, the following information is made available: No. of varieties of % % value of inventory % of inventory usage(in inventory holding(avg) end product) 3,875 96.875 20 5 110 2.750 30 10 15 0.375 50 85 4,000 100.000 100 100 Classify the items of inventory as per ABC analysis with reasons. Q 25. The purchase deptt. of your organization has received an offer of quantity discount on its orders of material as under: Price per tone Tonnes `1,400 Less than 500 `1,380 500 and less than 1,000 `1,360 1,000 and less than 2,000 `1,340 2,000 and less than 3,000 `1,320 3,000 and above The annual requirement for the material is 5,000 tonnes. The delivery cost per order is `1,200 and annual stock holding cost is estimated to be 20% of material. The purchase department wants you to consider the given purchase options and advise among them which will be most economical ordering qty., presenting the relevant information in a tabular form. The purchase qty options are 400 tonnes, 500 tonnes, 1,000 tonnes, 2,000 tonnes and 3,000 tonnes.