2. MATERIALS - MASTERMINDS For CA · Purchase cost = 8,000 X(400 - 4%) 30,72,000 Ordering cost = X200 4,000 8,000 XO Q A 400 Carrying cost = X384X20% 2 4,000 XC 2 Q 1,53,600 Total

IPCC_34e_Costing _ Materials_ Assignment Solutions ___________________1

No.1 for CA/CWA & MEC/CEC MASTER MINDS

2. MATERIALS

SOLUTIONS TO ASSIGNMENT PROBLEMS

Problem No. 1

CAS2

EOQ =

A = Units consumed during year

S = Ordering cost per order

C = Inventory carrying cost per unit per annum.

1008X2

50X000,10X2EOQ =

425X50X000,10X2

EOQ = = 2,500 kg.

No. of orders to be placed in a year = EOQ

annumpermaterialsofnconsumptioTotal

= .kg500,2.kg000,10

= 4 Orders per year

Problem No. 2 a) Total Annual Cost in Existing Inventory Policy

(`) Ordering cost (6 orders @ ` 25) 150

Carrying cost of average inventory (36,000 ÷ 6) = 6,000 units per order

Average inventory = 3,000 units

Carrying cost = 20% of ` 1 × 3,000 = 3,000 × 0.20 600

Total cost A 750 b) Total Annual Cost in E.O.Q

%20X1

25X000,36X2EOQ= = 3000 units

(`) No. of orders = 36,000 ÷3,000 units = 12 orders

Ordering cost (12 × ` 25) = 300

Carrying cost of average inventory (3,000 × 0.20) ÷ 2 = 300

Total Cost B 600

Savings due to EOQ ` (750 – 600) (A – B) 150 Note: As the units purchase cost of ` 1 does not change in both the computation, the same has not been considered to arrive at total cost of inventory for the purpose of savings.

Copy Rights Reserved

To MASTER MINDS,

IPCC_34e_Costing _ Materials_ Assignment Solutions _________________2

Ph: 98851 25025/26 www.mastermindsindia.com

Problem No. 3

Quantity to be purchased at a time = 50.36of%2050X250,18X2

= 3.7000,25,18

= 000,50,2 = 500 units

Problem No. 4

a) EOQ = IXC

AO2 =

12.0X15350X)12X000,52(X2

= 15,578 units of component ‘X’ b) Extra cost incurred by the company:

Total cost (when order size is 52,000 units) = Total ordering cost + Total carrying cost

= IXCX2Q

OXQA +

= %12X15X2000,52

350`X000,52

12X000,52 +

= `4,200+`46,800 = `51,000

Total cost, when order size is 15,578 units

= %12X15X2578,15

350X578,15

12X000,52 +

= 14,020+14,020 = 28,040

∴ Extra cost incurred = `51,000- `28,040 = `22,960 c) Minimum carrying cost, the company has to incur:

= IXCX2Q

= %12X15X2578,15

= `14,020.

Problem No. 5

Given that,

Annual requirement (A) = 2,000 × 12 = 24,000 Packets

Carrying Cost (C) = 10 ×10% = Rs.1 per packet p.a

Ordering cost (S) = Re.1.20 per order.

a) Economic Order Quantity (EOQ) = C

2AS = 1

1.2024,0002 ×× = 240 Packets

b) Total of holding and carrying costs = Associated cost = 2ASC

= 1X20.1X000,24X2

= Rs.240



c) Monthly demand as given = 2,000 Packets

Consumption per day = 30

2000 = 66.67 Packets per day.

Existing stock will last for = 66.67200 = 3 days.

Conclusion: Immediately, by the time the existing stock will get exhausted a new delivery will be obtained (It takes 3 days for New delivery). Therefore, the new order is to be placed immediately.

Problem No. 6

Calculation of EOQ:-

Given,

Annual Usage (A) = 8,000 units

Ordering cost per order(S) = Rs.200

Carrying cost per unit p.a (C)= 400 X 20% = Rs. 80

CAS2

EOQ =80

200X000,8X2= = 200 units.

Calculation of total inventory cost p.a. at EOQ:

Particulars Amount Purchase cost = 8,000 X 400 32,00,000

Ordering cost

= 200X200000,8

XOQA

8,000

Carrying cost

= %20X400X2

200iXCX

2Q

8,000

32,16,000 Calculation of total inventory cost p.a. with quantity discount:

Particulars Amount Purchase cost = 8,000 X (400 - 4%) 30,72,000

Ordering cost

= 200X000,4000,8

XOQA

400

Carrying cost

= %20X384X2000,4

CX2Q

1,53,600

Total Rs.32,26,000 Quantity discount offered should not be accepted as it results in increase in total cost of inventory management by Rs. 10,000.

Problem No. 7

(i) Given 1kg of M requires 3 kgs of ‘X’ and quarterly demand = 8000 units of M.

∴ Annual requirement of ‘X’ = 8000 X 4 X 3kgs

= 96000 kgs of ‘X’

‘S’ ordering Cost = 1,000 per order

Carrying Cost ‘C’ = 20 X 15% = 3



⇒EOQ = 3

)96000)(1000(2= 8000 units.

Associated cost = 3X1000X)96000(2 = 24000

Raw Material Cost = 96000 X 20 per kg = 19,20,000

Total Cost = 19,44,000

(ii) If Company accepts discount then order size = orders4

96000= 24000 units

Then purchase price = 720 – 2% = 19.6 Carrying cost = 19.6 X 15% = 2.94 ∴ Ordering Cost = 4 orders X 1000 = 4000

Carrying Cost = 24000 X 21

X 2.94 = 35,280

Raw Material Cost = 96,000 kgs X 19.6 per kg = 18,81,600 Total Cost at Discount = 19,20,880 Discount should be accepted by the company as it results in savings of (19,44,000 - 19,20,880) = 23,120

Problem No. 8 A = 5,000 tonnes

S = Rs.1,200

CI = 20%

P = Rs.1,500

C = 10020

X500,1 = 300

Statement showing calculation of total cost at different order sizes:

Order size No.of orders

Ordering cost p.a

Carrying cost p.a

Materials coat p.a

Total cost(M+C.C+O.C)

p.a 400 12.5 15,000 48,000 60,00,000 60,63,000 500 10 12,000 59,000 59,00,000 59,71,000

1,000 5 6,000 1,16,000 58,00,000 59,22,000 2,000 2.5 3,000 2,28,000 57,00,000 59,31,000 3,000 1.67 2,004 3,36,000 56,00,000 59,38,000

Therefore Economical purchase level = 1,000 tonnes (least cost) Note:

a) Number of orders = EOQ

A

Ordering cost = no. of orders X cost per order

Carrying cost = 2

C.C %of X Price X size Order

Material cost = Annual demand X price per tone



b) EOQ, when price is Rs.1,500

EOQ = C

2AS

= Rs.200

Associated cost = ASC2 = Rs.60,000.

Problem No. 9 Working Notes: 1. EOQ without discount

EOQ = CAS2

= 4`

20`XUnits250X2

= 500,2 = 50 units

2. Prices with discount for different order size

5% Discount = 30 – 5% = ` 28.50

10% Discount = 30 – 10% = ` 27.00

12% Discount = 30 – 12%= ` 26.40

Statement of Computing Total cost at various order sizes

Orders size

(units)

No. of Orders in a year

Ordering Cost (`)

Carrying cost of average

inventory (`)

Purchase cost (`)

Total cost (`)

(1) (2) (3) (4) (5) (3+4+5)= (6) 50

5

Units50

Units250

100 (5 orders×`20) 100

4X

2Units50

7,125

(250 ×`28.50) 7,325

100 2.5

Units100Units250

50

(2.5 oders×`20) 200

4X

2Units100

6,750

(250 ×`27)

7,000

125 2

Units125Units250

40

(2 oders×`20) 250

4X

2Units125

6,750

(250 ×`27)

7,040

200 1.25*

Units200

Units250

25 (1.25

oders×`20) 400

4X

2Units200

6,600

(250 ×`26.4)

7,025

250 1

Units250Units250

20

(1oder×`20) 500

4X

2Units250

6,600

(250 ×`26.4)

7,120

Optimal order quantity = 100 units

Minimum total cost of inventory and purchasing cost = ` 7,000.

Note: Theoretically it may be 2.5 orders, (250÷100), however practically 3 orders are required.

Therefore ordering cost would be ` 60 (3 × 20) and total cost ` 7,010 (60 + 200 + 6750).

(* Theoretically orders may be in fraction but in practicality orders shall be in a whole number.)


To MASTER MINDS,



Problem No. 10

Working notes:

1. Annual demand (30,000 units per quarter × 4 quarters) = 1,20,000 units

2. Raw material required for 1,20,000 units (1,20,000 units × 1.5 kg.) = 1,80,000 kg.

3. EOQ = 2

000,1X.kgs000,80,1X2

= 13,416 kgs.(appx)

4. Total cost of procurement and storage when the order size is equal to EOQ or 13,416 kg.

No. of orders (1,80,000 kg. ÷ 13,416 kg.) = 13.42 times or 14 times

Ordering cost (14 orders × `1,000) = ` 14,000

Carrying cost (½ × 13,416 kg. × ` 2) = ` 13,416

Total cost = ` 27,416

(i) Re-order point = Safety stock + Lead time consumption

= days24Xdays360

.kg000,80,1.kg000,8 +

= 8,000 kg. + 12,000 kg. = 20,000 kg.

(ii) Statement showing the total cost of procurement and storage of raw materials (after considering the discount)

Order size

No. of orders

Total cost of procurement

Average stock

Total cost of storage of raw

materials Discount Total Cost

Kg. (`) Kg. (`) (`) (`) (1) (2) (3)=(2)×`1,000 (4)=½×(1) (5)=(4)×`2 (6) (7)=[(3)+(5)– (6)]

1,80,000 1 1,000 90,000 1,80,000 32,000 1,49,000 90,000 2 2,000 45,000 90,000 20,000 72,000 45,000 4 4,000 22,500 45,000 - 49,000 30,000 6 6,000 15,000 30,000 - 36,000

(iii) Number of orders which the company should place to minimize the costs after taking EOQ also into

consideration is 14 orders. Total cost of procurement and storage in this case comes to ` 27,416 (please refer working note-4 above), which is minimum.

Problem No. 11

A = Annual usage = 1,800 x 12 = 21,600 units

S = Ordering cost per order = Rs.5

C = Carrying cost per unit per annum = 0.20 x 12m = Rs.2.40

a) E.O.Q. = CAS2

= 40.2

5x600,21x2= 300 units

b) Calculation of Reorder point:

Given lead time = 2 days

Consumption / day = days30units800,1

= 60 units / day



Lead time consumption = 2 days x 60 units = 120 units

Safety stock = 50% (120 units)

= 10050

x120 = 60 units

Reorder point = lead time consumption + safety stock

= 120 + 60 = 180 units

c) Calculation of economic purchase level

No.of Orders

Order Qty per month

O.C per month (No.of order x O.C per order)

C.C per month (1/2 x avg inventory

x C.C.P.U.P.M) Discount

Net Cost (O.C+C.C-Discount)

1 1800 1x5=5 180 20 165

2 900 2x5=10 90 15 85

3 600 3x5=15 60 10 65

4 450 4x5=20 45 6 59

5 360 5x5=25 36 - 61

6 300 6x5=30 30 - 60

7 257 7x5=35 26 - 61

Economical purchase level = 450 Units

Problem No. 12

a) EOQ = PCAO2

Where, A = annual consumption

O = ordering cost per order

PC = carrying cost per unit per annum

= )100/24(X112X000,12X2

= 24.0

288

= 000,00,12

= 1,095.4 units say 1,100 units b) When should the order be placed i.e. reordering level

Reordering level = Safety stock + Normal lead time consumption

Reordering level =

+

15X

360000,12

30X360

000,12

= 1,000 + 500 = 1,500 units c) What should be the inventory level immediately before the material ordered is received i.e.

safety stock

Safety stock =

30X

360000,12 = 1,000 units


To MASTER MINDS,



Problem No. 13

Given

A B

Max usage (weekly) 75 75

Average Usage 50 50

Minimum Usage 25 25

R.O.Q 300 500

Lead time Maximum Minimum Average

+2MaximumMinimum

A B

6 4

4 2

5 3

a) R.O.L = Maximum usage X Maximum Lead time

(A) = 75 X 6 = 450 (B) = 75 X 4 = 300

b) Minimum Stock level = R.O.L – (Average Usage X Average Lead Time)

(A) = 450 – (50 X 5) = 200 (B) = 300 – (50 X 3) = 150

c) Maximum Stock Level = R.O.L + R.O.Q – (Minimum Usage X Minimum L.T) (A) = 450 + 300 – (25 X 4) = 650 (B) = 300 + 500 – (25 X 2) = 750

d) Average Stock level = 2

LevelStockMaximumLevelStockMinimum +

(A) = 2

650200 += 425

(B) = 2

750150 += 450

Problem No. 14

(i) Economic Order Quantity (E.O.Q)

= annumperunitpertcoscarryingAnnual

orderpertcosorderingXxRe'oftrequiremenAnnualX2

= %15X10

800Xunits000,60X2

= 5.1000,60,9

= 8,000 units

(ii) Re-order Level = Safety Stock + (Normal daily Usage × Re-order period)

=

+ days10X

days300units000,60

600

= 600 + 2,000 = 2,600 units (iii) Maximum Stock Level = E.O.Q (Re-order Quantity) + Safety Stock

= 8,000 units + 600 units

= 8,600 units



(iv) Average Stock Level = QuantityorderRe21

levelstockMinimum −+

= units000,821

*600 +

= 4,600 units

Average Stock Level = 2

levelstockMinimumlevelstockMaximum +

= 2

units600units600,8 +

= 4,600 units

* Minimum Stock Level = Re-order level – (Normal daily usage × Re-order period)

=

− days10X

days300units000,60

600,2

= 2,600 – 2,000 = 600 units

OR

Minimum Stock Level = Safety Stock level = 600 units

Problem No. 15

a) Re-order Quantity = Economic order Quantity -200kgs

= 1200kg -200kg

= 1000kg

Economic order Quantity (EOQ) =CAS2

=%.X

kgXX7613125

720172002

=1200 kg

A= Annual consumption /purchase

S = Ordering Cost per order

C = Carrying cost per unit per annum

No. of units to be sold 10,000units

(+) closing stock of Finished Goods Nil

(-) o/p stock of Finished Goods 900 units

Production 9100 units

Annual consumption 18200kg (9100x2kg)

(+) Closing stock of RM Nil

(-) o/ping stock of RM 1000kg

Annual Demand/purchase 17200 kg

b) Maximum stock level :

= Reorder level + Reorder Quantity – (Min consumption per day x min lead time)

= 560kg +1000kg - (30kg x 4 days)

=1560kg-120kg = 1440kg



Re order level = Maximum Consumption per day x maximum lead time

=

+ Kg

daysof.NonconsumptioAnnual

20 x 8days

= days8xkg20364

kg18200

+

= 560kgs Max consumption per day = 50 kg + 20kg =70 kg

Average Consumption = Min consumption + Max. consumption

2

50kg = Min consumption +70 kg

2

Min. consumption = 100-70 = 30kg

c) Minimum stock level:

= Reorder level – (Average consumption per day x Average lead time)

= 560 kg – (50kg x 6 days) = 260kg d) Impact on the Profitability of the company by not ordering the EOQ

Particulars When purchasing the ROQ when purchasing the EOQ

Order Quantity 1000kg 1200kg

No of orders a year

EOQ/ROQA

18 orders

100017200

15 orders

120017200

Ordering cost (No of orders x s) 12960

10800

Carrying cost

CX21

X)EOQ/ROQ(=

8600

2.17X

21

X1000

10320

217

21200

.X

Associated cost (O.C+C.C) 21560 21120

Extra cost incurred due to not ordering EOQ = 21560-21120 = 440.

Problem No. 16 Given that,

Reorder Level (ROL) = 64,000 units

Reorder Quantity (ROQ) = 40,000 units

Minimum Stock = 34,000 units

Maximum Stock = 94,000 units

Average lead time = 2.5 days

⇒ Average lead time = 2.5 days

⇒

2TimeLeadMin.TimeLeadMax. +

= 2.5 days


To MASTER MINDS,



⇒ Maximum + Minimum = 5 days

Maximum – Minimum = 3 days (Given in the problem)

2 Maximum = 8 days

∴ Maximum lead time = 4 days; Minimum lead time = 1 day Maximum Usage:

⇒ Reorder level = Maximum usage × Maximum lead time

⇒ 64,000 = Maximum usage × 4;

∴ Maximum usage = 4

64,000 = 16,000 units

Minimum Usage:

⇒ Maximum level = Reorder level + Reorder quantity – (Minimum usage × Minimum lead time)

⇒ 94,000 = 64,000 + 40,000 – (minimum usage × 1)

∴ Minimum usage = 1,04,000 – 94,000 = 10,000 units

Problem No. 17 Given that,

Minimum Stock Level of A = 4,000 units.

Average Stock Level of A = 9,000 units.

Average level = Minimum level + 21

ROQ

⇒ 9,000 = 4,000 + 21

ROQ ⇒ 21

ROQ = 5,000

∴ Reorder Quantity = 10,000 units

Problem No. 18

i) Economic order Quantity(EOQ) =CAS2

=5.17

000,35X000,36X2

= 12000 Litres ii) 10% of risk of being out of stock indicates 90% of having stock. which will take 14days lead time

Safety stock = daysA

360x (14 days-12 days)

= daysx,

236000036

= 200litres

Reorder point = Minimum stock level + (Average lead time x Average consumption)

= 200 + (12x100)

= 1400 litres

iii) At 5% risk of being out stock represent 95% chance of having stock

Safety stock days = 15 days -12 days

= 3 days


To MASTER MINDS,



Total ordering cost = No of orders sxEOQ

A

= 3500012000

00036X

,

= Rs1,05,000

Total carrying cost of inventory = (safety stock + Average inventory x carrying cost/pu/p.a)

=

+ )21

x12000(days3x360

36000 x 990* x1.7676%

= (300+6000) x 990x 1.7676%

= Rs. 110245.212 x 900+10% = 990

Problem No. 19

Material Turnover Ratio (In times) = stock Averageconsumed material Cost (In days) =

times No.ofdays 365

Particulars Material A Material B Material Consumed

(Opening Stock + Purchases – Closing Stock)

10,000 + 52,000 – 6,000 = 56,000 units

9,000 + 27,000 – 11,000 = 25,000 units

Material Turnover Ratio (In times)

8,000

56,000 = 7 times

10,00025,000

= 2.5 times

Material Turnover Ratio (In days)

7

365 = 52 days

2.5365

= 146 days

Conclusion: Material A is fast moving item compared to Material B.

Problem No. 20 i) Calculation of purchase cost per kg of each Raw materials

Particulars Mustard Soya bean olive Whole sale market: Purchase Price 15 11 36 (+) CST 0.3 - - (+) Import Duty - - - (+) Loading cost

0.20

kg5010

0.20 0.20

0.04

kg50Rs2

0.04 0.04 (+) un loading cost

15.54 11.24 36.24 Farmers: Purchase Price 12.50 9 28 (+) CST - - - (+) Import Duty - - 2.8 (+) loading cost

0.10

kg505

0.06 0.50

(+) un loading cost 0.04

kg502

0.04 0.04

12.64 9.10 31.34



ii) Statement showing EOQ of each material under Each option:

Particulars Mustard Soyabean Olive

Annual Requirement (A) 27,00,000kg (45000x5kgx12Months)

1080,000kg 162000kg

Whole Sale Market:

Transportation cost 6000 9000

3000

Sorting / piling cost - -

1800

Order cost /order (S) 6000 9000 4800

Interest on cash credit

1.9425(15.54x12.5%) 1.4050 4.5300

Warehouse rent 1 1 1

Caring cost/p.u/p.a 2.9425 2.4050 5.5300

EOQ

CAS2

104933.539425.2

6000x2700000x2 89906.40 16769.90

Farmers:

Transportation cost 15,000 12,000 11,000

Sorting / piling cost 1,200 800 -

Order cost /order (S) 16,200 12,800 11,000

Interest on cash credit 1.58(12.64x12.5%) 1.1375 3.9175

Warehouse rent 1

Kg100Rs100

1 1

Carrying cost/p.u/p.a (c) 2.5800 2.1375

4.9175

EOQ CAS2

184138.47

9425,26000X000,2700X2

113730.98 26921.34

iii) Statement showing Annul cost of R.M (Olive)

Particulars Whole sale Market Farmers

Annul Requirement(A) 162000Kg 162000kg

Order Quantity (Q) 16769.90 16200

No. of orders (QA

) 9.66 @ 10 1

a. Total Ordering cost (No of orders x s) 48000 11000

b. Total carrying cost (order Quantityx1/2 xc) 46368.77 398375

c. purchase cost 5870880 5077080

Total Cost (a+b+c) 5965248.77 5486397.50

Decision: It is best to purchase the olive from famer because of its lower cost



Problem No. 21

A B

Particulars Quantity Price Quantity Price

Raw Material Price 10,000 @ 10 per kg

1,00,000 8,000 @ 13 kg 1,04,000

Add: C.S.T @ 10% - 10,000 - 10,400 - 1,10,000 - 1,14,400

Less: Normal Loss units

500 - 320 -

9,500 1,10,000 7,680 1,14,400 Add: Railway freight (W.N.1)

- 2,133 - 1,707

9,500 1,12,133 7,680 1,16,107 Less: 2% further

deterioration 190 - 154 -

9,310 1,12,133 7,526 1,16,107 W.N.1: Railway freight Expenditure is divided on the basis of quantity of Chemical A and B.

i.e. in the Ratio of 10:8 = 2133 and 1707

∴ Cost per kg of chemical A & B

QuantityCost

= 9310

133,12,1and

7526107,16,1

= 12.04 and 15.43

Problem No. 22

Statement showing Stores Ledger (F1FO)

Receipts Issues Balance Date Particulars

Qty R.P.U Amt Qty R.P.U Amt Qty R.P.U Amt 1-9-01 Opening Stock - - - - - - 25 20 500 4-9-01 Issues - - - 8 20 160 17 20 340

6-9-01 Receipts from B &.Co.

20

18

360

-

-

-

17 20

20 18

340 360

10-9-01 Returns to B &.Co.

-

-

-

10

18

180

17 10

20 18

340 180

13-9-01 Issues - - - 15 20 300 2 10

20 18

40 180

15-9-01 Receipts from M&.Co.

20

19

380 - - -

2 10 20

20 18 19

40 80

380

17-9-01 Issues - - - 2 8

20 18

40 144

2 20

18 19

36 380

20-9-01 Returns from M & Co. 5 19 95 - - -

2 25

18 19

36 475

30-9-01 Shortages - - - 2 18 36 25 19 475 45 860

Value of closing stock under FIFO Method (25 units) = Rs. 475.

Value of Raw material consumed under FIFO Method (45units) = Rs. 860.



Treatment of shortage: Assuming it as a normal loss, treated as issues. Note 1: Returns to B & Co. is to be recorded at the price at which the material was purchased. Note 2: Returns to supplier – Issues (purchase price) Returns from production Dept. to stores Dept. – Receipts (Issue price) Note 3: Returns from production Dept. – 20-09-01 Note 4: Transfer from one job to another job – to be ignored as it is a transaction taken place only in production department. Note 5: Transfer from Dept. A to Dept. B – is to be ignored.

Assumptions:

1. Returns were made out of the issues in the month of August.

2. The purchase price of materials from M & Co. is Rs.19 per unit.

Problem No. 23

Stores Ledger of AT Ltd. for the month of September, 2011 (FIFO Method)

RECEIPT ISSUE BALANCE Date GRN

No. MRR No.

Qty. Units

Rate (`)

Amount (`)

Requisition No.

Qty. Units

Rate (`)

Amount (`)

Qty. Units

Rate (`)

Amount (`)

1-9-11 — — — — — — — — 25 6.50 162.50 4-9-11 — — — — 85 8 6.50 52 17 6.50 110.50 6-9-11 26 50 5.75 287.50 — — — — 17 6.50 50 5.75 398.00 7-9-11 — — — — 97 12 6.50 78 5 6.50 50 5.75 320.00 10-9-11 — — — — Nil 10 5.75 57.50 5 6.50 40 5.75 262.00 12-9-11 — — — — 108 5 6.50 10 5.75 90 30 5.75 172.50 13-9-11 — — — — 110 20 5.75 115 10 5.75 57.50 15-9-11 33 25 6.10 152.50 — — — — 10 5.75 25 6.10 210.00 17-9-11 — — — — 121 10 5.75 57.50 25 6.10 152.50 19-9-11 38 10 5.75 57.50 — — — — 25 6.10 10 5.75 210.00 5 5.75 20-9-11 4 5 5.75 28.75 — — — — 25 6.10 10 7.75 258.75 26-9-11 — — — — 146 5 5.75 20 6.10 5 6.10 59.25 10 5.75 179.50 30-9-11 — — — — Shorta

ge 2 6.10 12.20 18 6.10

10 5.75 167.30 Working Notes:

1. The material received as replacement from vendor is treated as fresh supply.


To MASTER MINDS,



2. In the absence of information the price of the material received from within on 20-9-11 has been

taken as the price of the earlier issue made on 17-9-11. In FIFO method physical flow of the material is irrelevant for pricing the issues.

3. The issue of material on 26-9-11 is made out of the material received from within.

4. The entries for transfer of material from one job and department to other on 22-9-11 and 29-9-11 are book entries for adjusting the cost of respective jobs and as such they have not been shown in the stores ledger account.

5. The material found short as a result of stock taking has been written off.

Problem No. 24

Stores ledger [FIFO]

Receipts Issues Balance Date Particulars Units Rate Amount Units Rate Amount Units Rate Amount

Jan 1. Purchase 100 1 100 - - - 100

1

100

Jan 20 Purchase 100 2 200 - - - 100 100

1 2

100 200

Jan 22 Issue (Job w/16)

- - - 60 1 60 40 100

1 2

40 200

Jan 23 Issue (JobW17) - - - 40 20

1 2

40 40

80 2 160

Stores ledger [LIFO]


Jan 1. Purchase 100 1 100 - - - 100

1

100

Jan 20 Purchase 100 2 200 - - - 100 100

1 2

100 200

Jan 22 Issue (Job W16) - - - 60 2 120 100

40 1 2

100 80

Jan 23 Issue (JobW17) - - - 40 20

2 1

80 20

80 1 80

Stores ledger [Weighted average Method]


Jan 1. Purchase 100 1 100 - - - 100

1

100

Jan 20 Purchase 100 2 200 - - - 200 1.5 300 Jan 22 Issue

(Job W16) - - - 60 1.5 90 140 1.5 210

Jan 23 Issue (JobW17) - - - 60 1.5 90 80 1.5 120

Statement showing value of job W 16, 17 & closing stock

Particulars FIFO LIFO Weighted average 60 80 160

120 100 80

90 90 120

Material for job 16 Job 17 Closing sheet 300 300 300

Conclusion:

a) In case of Rising Prices use of FIFO give rise to high profits & LIFO Method will give low Profits



b) In case of weighted average there is no significant adverse (or) favorable effect on the cost material as well as an profits

c) Hence weighted Average method is Preferred over FIFO & LIFO Methods

Problem No. 25

Store Ledger of Aditya Ltd. (Weighted Average Method)

Date Receipts Issues Balance of Stock

Feb.

Qty (kg.)

Rate (`)

Amount (`)

Qty (kg.)

Rate (`)

Amount (`)

Qty (kg.)

Rate (`)

Amount (`)

1 - - - - - - 1,200 475.00 5,70,000

5 - - - 975 475.00 4,63,125 225 475.00 1,06,875

6 3,500 460.00 16,10,000 - - - 3,725 460.91 17,16,875

7 - - - 2,400 460.91 11,06,175 1,325 460.91 6,10,700

9 475 460.91 2,18,932 - - - 1,800 460.91 8,29,632

15 1,800 480.00 8,64,000 - - - 3,600 470.45 16,93,632

17 - - - 140 480.00 67,200 3,460 470.07 16,26,432

20 - - - 1,900 470.07 8,93,133 1,560 470.06 7,33,299

28 - - - 180* 470.06 84,611 1,380 470.06 6,48,688

* 180 kgs. is abnormal loss, hence it will be transferred to Costing Profit & Loss A/c.

Problem No. 26 a) Total purchases over a fen rod of 6 months =2500 units (Jan to June)

Total issues over a period of 6 month = 2300 units

Closing stock in June month (2500-2300) = 200 units

Last month (June) period of 600units & issue in the same month is 400units. It means entire closing stocks on June month (200 units) are out of June month purchase. It means that there is no opening stock a June month

i) Hence No Matter which method of pricing issue is used, will result the same value of closing stock.

ii) Therefore argument of chief Accountant is tenable b) LIFO Method:

i) Under this method, the cost of materials issued will be either nearer (or) will reflect the current market price.

ii) The use of the method during the period of rising prices does not reflect undue high profit in the income statement, as it was under the FIFO (OR) Average method.

iii) In the case of falling prices, profit tends to rise due to lower material cost, yet the finished goods appear to be more competitive and are at market price.

iv) During the period of Inflation, LIFO will tend to show the correct profit & thus, avoid paying undue Taxes to some extent.


To MASTER MINDS,



Problem No. 27

Classification of the items of inventory as per ABC analysis

1. 15 number of varieties of inventory items should be classified as ‘A’ category items because of the following reasons:

a) Constitute 0.375% of total number of varieties of inventory handled by stores of factory, which is minimum as per given classification in the table.

b) 50% of total use value of inventory holding (average) which is maximum according to the given table.

c) Highest in consumption about 85% of inventory usage (in end-product). 2. 110 number of varieties of inventory items should be classified as ‘B’ category items because of the

following reasons :

a) Constitute 2.750% of total number of varieties of inventory items handled by stores of factory.

b) Requires moderate investment of about 30% of total use value of inventory holding (average).

c) Moderate in consumption about 10% of inventory usage (in end–product). 3. 3,875 number of varieties of inventory items should be classified as ‘C’ category items because of

the following reasons:

a) Constitute 96.875% of total varieties of inventory items handled by stores of factory.

b) Requires about 20% of total use value of inventory holding (average).

c) Minimum inventory consumption i.e. about 5% of inventory usage (in end-product).

THE END


To MASTER MINDS,

2. MATERIALS - MASTERMINDS For CA · Purchase cost = 8,000 X(400 - 4%) 30,72,000 Ordering cost = X200 4,000 8,000 XO Q A 400 Carrying cost = X384X20% 2 4,000 XC 2 Q 1,53,600 Total

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