Chapter 8 (Revised)

Cost Accounting

Digitally signed by Muhammad Shahid

DN: CN = Muhammad Shahid, C = US, O =
3S Inc
Location: Sargodha
Date: 2008.05.16 07:29:35 +05'00'

2-May-08

Page 1 of 10

Chapter 8 (Revised)

Cost Accounting
EXERCISES

Exercise 8.1
Jan Production Schedue
Feb ..
March .
Desire Inv Level of March: (75% of Jan (5600))
Total To be Provided
Less:
Quantity on Hnad
On order for jan
. Feb
Total
Qty to order for march
Exercise 8.2
1 Forecast Usage
Jan
Feb
March
Add:
Desired Inv or Safety Stock
To be Provided
Less: Schedule Supply
Jan & Feb Inv
Add
On oreder for jan & Feb
Total Qty to order

Units
5,000
4,950
5,550
4,200

Units

19,700
5,600
4,100
5,100
14,800
4,900

Units
4,800
5,000
5,600

Units

15,400
4,800
20,200
6,000
8,400

(14,400)
5,800

2
Add:
Less:
(a).
Add:
Less:
(b).
Exercise 8.3
(K)

Jan Inv
On order for jan
Forecasted use for jan & Feb
March 1, Inv
To order for March
Forecasted usage for march
March 31, Inv
cc=Annual Cc(20%)*mfg Cst ($50) * Avg Annual Inv.
Production Initiation=# of runs * Cost to initiate (300)
Current Situation:
2 Production run of 3000 units per run
Avg Inv=3000/2=1500 Units
Present Cost
cc=0.20*$50*1500
Production Initiation=2*300
Proposed Situation:
Production Qty=EOQ= (2*Ar*OC/UC*CC)^.5
Avg Inv=600/2
# of run= 6000 / 600
Proposed cost
C.C.=0.20*$50*300
Production initaion cost=10*$300
Expected Annual Saving
($1560-$6000)

2-May-08

Units
6,000
8,400
14,400
(9,800)
4,600
5,800
10,400
(5,600)
4,800

15,000
600
15,600
600
300
10

Units
run

$3,000
$3,000
$9,600

Page 2 of 10

Chapter 8 (Revised)

Exercise 8.3-f
UC
$20
AR
48000
Int
10%
CC
$0.40
OC
$10
CC$=CC+INT
EOQ=
AOC=
ACC=

Cost Accounting

$2.00

633 Units
AR*OC/800
400*CC$

(UC*Int%)

$600
$960

Answers
A
B
c
d
e
f
g
h
i
j
k

11
100
300
300
500
633
2500
2000
462
49
9600

15
600

960

26
55.5

360
67.5

Exercise 8.4
Data:
Unit cost
Monthly usage
O.C
C.C
Reqd:
1 EOQ
sqrt(2*AR*OC/UC*CC)
1225
2

$3
1500
$50
40%

1560

Units

AR

18000

EOQ
(Units)
1225
15
$3
1.20
612

Given
(Units)
2000
9
2.85
1.14
1000

$
54000
735

$
51300
450

735
55470

1140
52890

Units

Order size
# of Order per year (=AR/EOQ)
Price Per Unit
CC=UC*CC%
Avg Inv
(EOQ/2)

Purchase Price ( AR*Purchase Price per Unit)

Cost of Placing Order
Carrying Cost
(avg inv*(UC*40%))
Total Cost

Company should place order of 2000 units to avail discount

because it minimizes its cost.

2-May-08

Page 3 of 10

Chapter 8 (Revised)
Exercise 8.5
Data:
Unit cost
Annual usage
O.C
C.C
Reqd:
2 EOQ
sqrt(2*AR*OC/UC*CC)
1510
3

Cost Accounting

$5
3000
$380
$1

Units
20%

1
Total Odering
cost
$2,280
AR/Q*OC

Total CC
$250
Q/2*CC

Ordering Cost
$755

Carrying Cost
$755

EOQ
(Units)
1510
2.0
$5.00
$1.00
755

Given
(Units)
3000
1.0
$4.75
$0.95
1500

$
$15,000
755

$
$14,250
380

755
16510

1425
16055

Units

Order size
# of Order per year (=AR/EOQ)
Price Per Unit
CC$
Avg Inv
(EOQ/2)

Inventory Cost (AR*UC)

Cost of Placing Order
Carrying Cost
(avg inv*(UC*CC%))
Total Cost

Company should order 3000 Units

Exercise 8.6
Saftety Stock & Order Point
Order point=opening Inv+on order=Lead Time qty (ie.Normal use*LT)+Safety Stock Qty
Order point =
I+DQ=LTQ+SSQ
Normal Usage
7200 Units
Daily Usage=
7200/240
Data:
Working days
240 days per year
30
Normal LT.
20 days
Max LT.
45 days
Solution:
Units
Daily usage
30
LTQ+SSQ=ROP
* LT (max)
45
975+X= 1530
1350
X= 375
Order Point
975
a Less: Normal LTQ
Normal LT= (Max LT-Min LT)/2
SSQ
375
32.5
Exercise 8.7
1
EOQ=
AR= 500*250
2
Less:

2-May-08

1500
125000

Units
Units

Units
600
500
100
Safety Stock(Max)=100*5

Units

Safety Stock:
Max use per day
Normal ..

500

Page 4 of 10

Chapter 8 (Revised)

Cost Accounting

Order Point =(Normal Use * Lead Time)+Safety Stock

(500 * 5) + 500
3000 Units

Normal Max Inv

Order Point
Normal Use During L.T (500*5)
On Hand @ the ime of order
Qty Ordered (EOQ)
Normal Max Inv.

Absolute Max Inv.

Order Point
Min Use During L.T (500*5)
On Hand @ the ime of order
Qty Ordered (EOQ)
Absolute Max Inv.

Units
3,000
(2,500)
500
1,500
2,000

3,000
(500)
2,500
1,500
4,000

Avg Inv= EOQ / 2 +Safety stock

= 1500/2+500
=
1250 Units

Exercise 8.8
SSQ
10
20
40
80

Annual #
of Orders

Probabilty
of Stock
out

Expected
Annual
Stock out

5 *
0.4
=
2
5 *
0.2
=
1
5 *
0.1
=
0.5
5 *
0.05
=
0.25
Recommeded Level of Safety Stock is 40

Cost Per
Stck out ($)

*
*
*
*

75
75
75
75

Annual
Stock out
Cost

=
=
=
=

150
75
37.5
18.75

Annual
Stock out
Ordering
Cost

Annual
Combined
Cost

+
+
+
+

10
20
40
80

=
=
=
=

160
95
77.5
98.75

Exercise 8.9
Data
n
=
df=n-1
(X-X')2 =
(X-X') =
LT
=

9
8
2888
0
1

Solution
=[(X-X')2 -((X-X'))2/n]/(n-1)
=
SSQ=
=
=
Order Point=LTQ+SSQ
=
=

19

(df * *L)-((X-X')2 *L/n)

(2.306*19*1)-(0*1/9)
43.814
Units
262+44
306

Units

Exercise 8.10
ABC PLAN
2-May-08

Page 5 of 10

2-May-08

% of Total
Cost
21.44
14.58
10.94
10.52
7.49
6.89
6.78
5.47
5.46
4.99
3.59
1.86
100.00

57.48

Total
Cost ($)
58,800
40,000
30,000
28,860
20,550
18,900
18,600
15,000
14,970
13,680
9,840
5,100
274,300

32.09

Unit
cost ($)
10.50
20.00
30.00
3.25
2.50
2.50
1.00
0.50
1.50
2.00
2.00
0.25

10.43

% of
total
Usage
4.52
1.61
0.81
7.16
6.63
6.10
15.00
24.19
8.05
5.52
3.97
16.45
100.00

59.97

Quarterly
Usage (Units)
5,600
2,000
1,000
8,880
8,220
7,560
18,600
30,000
9,980
6,840
4,920
20,400
124,000

25.94

Material
Stock #
26
24
27
30
35
29
28
33
34
32
31
25
Total

Cost Accounting

14.10

Chapter 8 (Revised)

Page 6 of 10

Chapter 8 (Revised)

Cost Accounting
PROBLEMS

Problem 8-1
AR
OC
CC
1
QTY
5000
2500
1250
800
500
250
100
EOQ

$5,000
$250
$4
OC
$250
$250
$250
$250
$250
$250
$250

SQRT(2*AR*OC/CC)

Problem 8-2
UC
Avg Use
Lead Time
OC
CC
1
2

$12
100
1
$50
25%

791

Annual OC
$250
$500
$1,000
$1,563
$2,500
$5,000
$12,500

Annual CC
$20,000
$10,000
$5,000
$3,200
$2,000
$1,000
$400

Total
$20,250
$10,500
$6,000
$4,763
$4,500
$6,000
$12,900

Units

per order
units per month
month
of avg inv

EOQ=
SQRT(2*AR*OC/CC)
200 units
Order Point=Average use during Lead Time
1200*1
1200
Units or 100 units per month

Problem 8-3
AR
480,000
1 case contains 24 cans
UC
$4.80
INT Rate
10%
OC
$15.00
CC
$0.08
1

Units
per order
per unit per order
CC
# of Order
$4
1
$4
2
$4
4
$4
6
$4
10
$4
20
$4
50

EOQ =

20,000

per case

$0.20

per can

40%

cases
Per Can

Units

Order size
# of Order per year (=AR/EOQ)
Price Per Unit
CC$
UC*CC%
Add Int
UC*INT%
(EOQ/2)

Inventory Cost (AR*UC)

Cost of Placing
Carrying Cost
Total Cost

2-May-08

SQRT(2*480000*15/.08+.1*4.80/24)
or 500 Cases
12000 cans
12000

Avg Inv

cans

$0.08
$0.02

EOQ
(cans)

Given
(Cans)

12,000
40.0
$0.20

72,000
7
$0.18

$0.10

$0.09

6,000
$
96,000
600
600
97,200

0.072
0.018

36,000
$
86,400
100
3,240
89,740

Page 7 of 10

Chapter 8 (Revised)

Cost Accounting

Problem 8-4

1
2

per
UC
$12 carton
AR
15000 cartons
Cash Disct
5% in excess of 1000 cartons
OC
$64.80
CC
20% of avg inv
EOQ (without considering disct)
EOQ=
SQRT(2*AR*OC/CC)
900 cartons
900
Units
EOQ
Given
(CARTONS (CARTONS
)
)
Order size
900
5000
# of Order per year (=AR/EOQ)
17
3
Purchase Price Per Unit
$12.00
$11.40
CC$=UC*CC%
$2.40
$2.28
Avg Inv
(EOQ/2)
450
2500
$
Inventory Cost (AR*UC)
Cost of Placing Order: (# of ord
Carrying Cost=(Avg Inv*CC)
Total Cost

180,000
1,080
1,080
182,160

* OC)

172,800
194
5,760
178,754

3000*12+12000*11.4
0
500*2.40+2000*2.28

Problem 8-5
AR
15000 units or 1000 Lots
OC
$20 per order
CC
25%
UC
$5 per unit
1 Annual OC=AR*OC/EOQ
$300
Annual CC= UC*CC*EOQ/2
$625
SQRT(2*AR*OC/CC)
3 EOQ=
693 units

Ord.Size
250
500
750
1000
1250
1500

4
Order size
Price Per Unit

Inventory Cost
2-May-08

AR
15000
15000
15000
15000
15000
15000

# of
Order
60
30
20
15
12
10

annual
OC
1200
600
400
300
240
200

Annual
CC
156
313
469
625
781
938

EOQ

Given

693
$5.00

3000
$4.75

75,000

71,250

Total
1356
913
869
925
1021
1138

EOQ

Page 8 of 10

Chapter 8 (Revised)

Cost Accounting

Cost of Placing Order

433

100

Carrying Cost

433

1,781

75,866

73,131

Problem 8-6
1 # of Production Run=100,000/X
AC=$144(100,000/X)+(.20/2)X
AC=144(100,000)X-1+.01X
Taking Derivative
d(AC)/dx=d/dx (144*100000X-1+0.10X)
d/dX (AC)=
-144*100000X-2+0.1
where
2

Total CC=

Optimum Qty
-144(100,000x-2)+0.10=0
144(100,000x-2)=0.10
1/x2 =14400000/.10
x2 =
12000

0.20X/2

Total OC=

144(100,000/X)

Units

Problem 8-7
1 EOQ=sqrt(2*24000*$1.20/(10*.1))
240
2 # of Orders=AR/EOQ
24000/240
100
3 Annual OC=
100*$1.20=
$120
Annual CC=
10*0.1*240/2
$120
Total Cost=
120+120
$240
4 # days for order=
360/no of order
360/100
3.6 days
No days supply left=
units in inv*no of days in each order/EOQ
200/240*3.6
3 days left
Days before next order should place=
supply days left-LT
3days -3 days
0 days
5 Inv usage does not remain constant which is the base of EOQ.
EOQ requires estimation of AR, OC,UC, CC which is very difficult to estimate

Problem 8-8
AR
400*250
OC
$20
1.
EOQ 4000
2.

2-May-08

Units
Orders

100,000

ROP=Max Usage during LT

600*8
4800
ROP=LTQ+SSQ
=Normal Usage During LT+SSQ
SSQ=ROP-LTQ
=4800-(400*8)
=1600
OR
Max Usage 600
Normal Usage 400
Page 9 of 10

Chapter 8 (Revised)

* SS (Max)
SSQ
3.

Cost Accounting
200
8 .
1600

ROP=d*L+SSQ.
400*8+1600
4800
Order Point
Less: Normal usage during LT
(400*8)

4.

Add: Order Size

5.

4800
-3200
1600
4000
5600

Order Point
Less: Minimum Usage During LT
(100*8)

4800

- 800
4000
Add: Order Size
4000
8400
Avg Normal Inventory=EOQ/2+SSQ=4000/2+1600 =

3600

Problem 8-9
SSQ
(a)

10
20
30
40
50
55

# of
Order
(b)

Probability

5
5
5
5
5
5

0.5
0.4
0.3
0.2
0.1
0.05

Equvalent
Stockout
(d=b*c)
2.5
2
1.5
37.5
0.5
0.25

Stockout
cost Per
Unit
(e)
80
80
80
80
80
80

Total
Stockout
cost
(f=d*e)
200
160
120
3000
40
20

Inv Cost
(g)

20
40
60
80
100
110

Total
Cost
(h=f+g)
220
200
180
3080
140
130

Digitally signed by Muhammad Shahid

DN: CN = Muhammad Shahid, C = US, O = 3S
Inc
Location: Sargodha
Date: 2008.05.16 07:31:34 +05'00'
2-May-08

Page 10 of 10