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Cost Accounting-

Material : Pricing & Control

1. What is a purchase requisition ? Answer. A purchase requisition is a form used for making a formal request to the purchasing department to purchase materials. Purchase requisitions are usually initiated by (i) (ii) (iii) (iv) A store department for regular and standard items held in the stock. The production control department for special material required for specific jobs. The maintenance department for maintenance equipment and items of capital expenditure. The heads of departments for office equipment.

The aforesaid arrangement is only a matter of convenience. In some concerns distinction is made between regular indents and special indents, depending upon whether the item are needed for replacing stocks or for special orders. But both types of indents are initiated by the stores department. Irrespective of the differences regarding the procedure for initiating purchase requisition, the purchase manager should have with him a list of the persons Authorised to requisition materials. Each purchase requisition should clearly state the quantity, quality and other specifications in the appropriate column of the given specimen forms along with the purpose for which materials are required. It should also indicate the date by which such materials are needed. Depending upon the procedure to be followed appropriate number of copies of the purchase requisitions may be prepared and used accordingly. A specimen form of purchase requisition is given below : ( Check the format from Study mat ) Purchase Requisition Goods Received Note Material Requisition Method Material Transfer Note 2. Bin Cards : Bin Cards are maintained in the stores. These cards relate to materials kept in appropriate bins, racks and containers in the stores. For each kind of material a separate record is kept on a Bin Card showing details of all receipts and issues and balances. These cards are usually stated to the corresponding bins, racks and are entered up by Storekeeper in quantitative terms. Maximum, Minimum, Re-ordering levels are also indicated on the cards. This enables the storekeeper to ask for replenishment of the stock, before the minimum stock levels are reached. If code number are used for identifying the materials such code number are also indicated in the bin cards. Bin Cards play a vital role in scientific material management. Bin Card Bin No. Description Code Unit Date SRN / MRN No. Qty. MRN No. Qty. : : : : Receipt Location : Maximum Minimum Orderings Reorder Qnt. Balance Quantity : : : : Physical Verification Page 28 page 30 Page 31 Page 34

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3.

Bill of Materials : ( for proforma see Pg.33 of study mat) Bill of material is a complete schedule of parts and materials required for a particular order prepared by the Drawing Office and issued by it together with necessary blue prints of drawings. For standard products, printed copies of Bill of materials are kept with blank spaces for any special details of modifications to be filled in for a particular job/order. The schedule details everything, even to bolts and nuts, sizes and weight. The documents solves a number of useful purposes, such as (I) (ii) (iii) (iv) It provides a quantitative estimate of budget of materials required for a given job process or operation which might be used for control purposes. it substitutes material requisitions and expedite issued of materials. The store-keeper can draw up a programme of materials purchases and issues for a given period and It provides the basis for charging materials cost to the respective job/process.

Generally four copies of it are prepared, one for each of the following departments : a. b. c. d. 4. Stores department Production department Cost Accountants department Production planning department.

Bill of Materials and Stores Requisition Bill of Material is a document prepared by the drawing office or the Production Control Department in an organization detailing the material specifications, quantities, weights, etc. required for manufacturing a product or for processing a job. Material Requisition or Stores Requisition on the other hand is a document authorizing the storekeeper to issue materials to the consuming department. Bill of Materials often serves the purpose of a Stores Requisition as it shows the complete list of materials required for a particular job, Stores Requisition, however, cannot replace a Bill of materials. Presence of a Bill of Material helps in keeping a quantitative control on materials drawn through stores requisition. In a Standard Costing System, each Bill of Materials can be pre-casted for arriving at the total standard cost of the complete specification. This is not possible in case of Stores Requisition which is used only at the time of drawing material from Stores. Bill of Materials can be effectively used for purpose of quotations whereas Stores Requisitions are useful in arriving at a historical costs only.

5.

Imprest System of Stores : In order to overcome the limitations of Centralized Storing System in large organization, the practice of Imprest System of stores is resorted to. Under this system , each sub-stores attached to production departments is given an operating stock which is little more than the normal requirement. At the end of a specified period, the exact quantity issued out is replenished in bulk.

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This system has following advantages : (I) (ii) (iii) facilitates day-to-day management through prompt issues of stores. eliminates maintenance of elaborate inventory records thus reducing handling costs of them combines the advantages of centralized stores with sub-stores without sacrificing the centralized control.

It is no wonder that this system is gaining popularity in the management parlour in present day circumstances. 6. Perpetual Inventory and Continuous Stock Taking : Perpetual Inventory is a system in which a continuous record of receipt and issue of materials is maintained by the stores department. In this system the stock control cards, bin cards and stores ledger show the receipts, issue and balance of each item at any point of times after each transaction. The stocks as per dual records namely bin card and stores ledger are reconciled on a continuous basis. The system facilitates planning and control. Continuous Stock taking is a system of physical verification of stocks of each item on continuous basis. The actual quantity in the bin card is compared with bin balances. Such a verification is conducted round the year such that all items of stocks are verified 3 to 4 times in a year. Any discrepancies are investigated and reported for corrective action. It also serves as a moral check on stores staff and acts as deterrent to dishonesty. A Perpetual Inventory System is usually supported by Continuous Stock taking. It calls for up todate writing up of stores ledger and bin cards and stock control cards. The balances as per bin cards and stores ledger are compared when every receipt or issue is posted. The physical balance on continuous stock taking is also compared with the bin card or ledger balances. Thus monthly accounts can be prepared with confidence. 7. Distinguish clearly Bin cards and Stores Ledger Bin Card Bin cards are maintained in the stores and are serving the purpose of stock register. Entries in it are posted by the issue clerk. He records the quantity about receipts, issue and closing balance along with code number of materials maximum, minimum and reordered levels. Here transactions are posted individually. Posting is done at the time of issue of materials. Stores Ledger Stores ledger is maintained accounts departments. in the cost

Here entries are posted by the stores ledger clerk. He recorded the quantities and value about receipts, issues and closing balance along with code number of materials, maximum, minimum and reorder levels. Here transaction periodically can be posted

Posting is done after the issue of materials.

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8.

Trade and Cash Discount on Purchase of Materials Trade Discount is normally offered by a supplier to a purchaser when bulk purchases are made or the supplier is pushing the product in the market, Generally , a wholesaler offers trade discount to retailer to compensate for the additional cost of storage, capital tie-up, repackaging in smaller lot etc. This should be considered as a credit item in computing materials cost thus reducing the effective purchase cost. Cash Discount, on the other hand, is offered by a supplier to encourage prompt payment and it is a managerial policy on the part of the purchaser whether to take advantage of such offer depending on the availability of funds or otherwise. As such, this being a financial item does not generally appear in Cost Accounts.

9.

What is Just in Time (JIT) purchases ? What are the advantages of such purchases ? Answer.: Just in time (JIT) purchases means the purchase of goods or materials such that delivery immediately precedes their use Main advantages of JIT purchases are as follows : 1. The suppliers of goods or materials co-operates with the company and supply requisite quantity of goods or materials for which order is placed before the start of production. 2. JIT purchases results in cost savings for example, the costs of stock out, inventory carrying materials handling and breakage are reduced. 3. Due to frequent purchases of raw materials, its issue price is likely to be very close of the replacement price. Consequently the method of pricing to be followed for valuing material issues becomes less important for companies using JIT purchasing. 4. JIT purchasing are now attempting to extend daily deliveries to as many areas as possible so that the goods spend less time in warehouses or on store shelves before they are exhausted.

10.

What is material handling cost ? How will you deal it in cost accounts ? Answer : Material handling cost : It refers to the expenses involved in receiving, storing, issuing and handling materials. To deal with this cost in cost accounts there are two prevalent approaches as under First approach suggests the inclusion of these costs as part of the cost of materials by establishing a separate material handling rate e.g. at the rate of percentage of the cost of material issued or by using a separate material handling rate which may be established on the basis of weight of materials issued. Under another approach these costs may be included along with those of manufacturing overhead and the charged over the products on the basis of direct labour or machine hours.

11.

Cost of receiving and handling materials Apart from the invoice cost of materials, costs are incurred for receiving, inspecting, handling and storing the materials in the form of freight, insurance, receiving, testing, etc. For such elements of costs other than the invoiced or contracted prices payable to the supplier, it is advisable to use an applied or predetermined rate. Based on annual forecast of raw materials requirements which again is dependent on the sales forecast, the estimates of freight, insurance, storage, handling etc., can be worked out. The total

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of these estimated expenses is generally expressed as a percentage of total material cost and generally is the basis of recovery of the relevant expenditure. The actual amount may be collected against vouchers and the difference between applied expenditure and actual expenditure should be charged off to material control amount at periodic intervals. Alternatively, the total difference, may be booked in a variance account ultimately to be charged off, to the cost/profit/service centers for which the materials are used. 12. Storage Loss There may be losses during storage of materials and such losses may be attributable to a variety of causes. The losses may be broadly classified as avoidable and unavoidable. Avoidable losses are those which can be controlled through proper management , e.g. breakage and carelessness in handling, human error in posting, calculation, pilferage etc. Unavoidable losses can be subdivided into normal and abnormal. Normal unavoidable losses are inherent in the basic type of materials and are of unavoidable nature, e.g. evaporation, climatic conditions leading to shrinkage, deterioration etc. Abnormal unavoidable losses occur due to causes beyond the control of management, e.g. losses due to flood, earthquake etc. Losses due to avoidable causes should be adjusted in the cost of materials consumed or included in stores overheads. In case of normal avoidable losses, a reasonable amount may be provided on a standard rate fixed based on past experience/technical estimate, the excess loss should be charged to Costing Profit/Loss Account. Surpluses on deficiencies due to abnormal causes should be adjusted in Costing Profit/Loss Account. 13. Gain or loss through atmospheric variation : Many items of raw materials are amenable to temperature changes, which may increase or decrease the apparent volume from that originally recorded at the time of entry into stores. Again there are also items for which wastage in stores may be inevitable due to evaporation. While a conservative approach demands the gain in material due to atmospheric changes need not be considered in cost, any unusual gain may be credited to costing profit and loss account. On the other hand adjustments for normal storage loss due to evaporation/atmospheric changes should be made in the original price. Abnormal losses are to be collected through a separate account and charged directly to profit and loss account. 14. Cost of Containers relating to materials purchased : Usually the cost of the containers containing the materials purchased are included in the cost of materials and therefore is automatically form a part of material cost. The containers may be returnable or non returnable. The cost of the non returnable containers should be charges as a part of the material cost and ultimately would go into the Prime Cost or Factory overhead depending upon the usage of the materials as direct or indirect. In the case of returnable containers the cost of them should not be included either in cost of materials or in any other head because when they are returned to the supplier, full credit would be received. if, however, certain containers become damaged, the cost of those less any scrap value should be added to the cost of the materials. Where on return of the containers, credit is given at a reduced value i.e., less than its cost price, the difference between cost and credit rate should be charged to the materials cost.

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15.

How do you treat Carriage and Cartage Expenses in Cost Accounting : Carriage and Cartage expenses are incurred in the course of the movement of materials or goods. Materials may mean direct materials or indirect materials. The treatment of the Carriage and Cartage expenses differs with the kind of materials goods transported. The Carriage and Cartage expenses relating to raw materials are treated as a part of direct materials cost and those relating to indirect materials are treated as factory overhead and those relating to distribution of materials or finished goods are treated as distribution overhead. In case where the Carriage and Cartage are abnormal due to any reason the same is charged off to the Costing Profit and Loss Account.

16.

What do you understand by ABC analysis of inventory control ? Answers : It is a system of selective inventory control whereby the measure of control over an item of inventory various with its usage value. It exercises discriminatory control over different items of stores grouped on the basis of the investment involved. Usually the items of material are grouped into three categories viz. A, B and C according to their use value during a period. In other words, the high use value items are controlled more closely that the items of low use value. i. A Category of items consists of only a small percentage i.e., about 10% of the total items of material handled by the stores but require heavy investment i.e., about 70% of inventory value because of their high prices and heavy requirement. ii. B Category of items comprises of about 20% of the total items of material handled by stores. The percentage of investment required is about 20% of the total investment in inventories. iii. C category of items do not require much investment. It may be about 10% of total inventory value but they are nearly 70% of the total items handled by stores. A category of items can be controlled effectively by using a regular system which ensures neither over-stoking nor shortage of materials for production. The stocks of materials are controlled by fixing certain levels like maximum level, minimum level and re-order level. A reduction in inventory management costs is achieved by determining economic order quantities. To avoid shortages and to minimise heavy investment of funds in inventories, the techniques of value analysis, variety reduction, standardisation etc. are used along with aforesaid techniques. In the case of B category of items, as the sum involved is moderate, therefore the same degree of control as applied in A category of items is not warranted. The orders for the items, belonging to this category may be placed after reviewing their situation periodically. This category of items can be controlled by routine control measured. For C category of items, there is no need of exercising constant control. Orders for items in this group, may be places either after six months or once in a year, after ascertaining consumption requirements.

17.

To be able to calculate a basic EOQ certain assumptions are necessary. List down these assumptions. Answer.: The computation of economic order quantity is subject to the following assumptions :i. ii. iii. Ordering cost (per order) and carrying cost (per unit/annum) are known and constant. Anticipated usage (in unit) of material for a period is uniform and known. Cost per unit of the material (to be purchased) is known and it is constant.

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Rules & formulae on Materials

1. 2. Minimum level of inventory = Re order level + (Average rate of consumption average time of inventory delivery) Maximum level of inventory = Re-order level + Re-order quantity (Minimum consumption Minimum re-order period) Re-order level = Maximum re-order period Maximum Usage (or) (pessimistic) = Minimum level + (Average rate of consumption Average time to obtain fresh supplies). Average inventory level = Minimum + Re- order quantity (or) ( Maximum level + Minimum level ) 2

3.

4.

5.

Danger level = Average consumption Lead time for emergency purchases 2 Annul consumption ordering cost per order Carrying cost per unit per annum

6. 7.

EOQ =

Total ordering & carrying cost = 2 Annul consumption ordering cost per order carrying cost per unit p.a.

8.

Stock Out Cost: Select that level where total of annual carrying cost & stock out cost is minimum.

E.O.Q. model 1. A company manufactures a product from a raw materials, 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 incremental carrying cost of inventory of raw materials is Re 0.50 per kg. per month. In additional the cost of working capital finance on the investment in inventory of raw materials is Rs. 9 per kg. per annum. The annual production of the product is 1,00,0000 units and 2.5 units are obtained from one kg of raw materials. Required : a. Calculate the economic order quantity of raw materials. b. Advise, how frequently should orders for procurement be placed. c. If the company proposes to rationalise placement of orders on quarterly basis, what percentage of discount in the price of raw materials should be negotiated ? 2. Your factory buys and uses a component for production at Rs. 10 per piece. Annual requirement is 2,000 pieces. Carrying cost of inventory is 10% per annum and ordering cost is Rs. 40 per order. The Purchase Manager agrees that as the ordering cost is very high, it is advantageous to place a single order for the entire annual requirement. He also says that, if we order 2,000 pieces at a time, we can get a 3% discount from the supplier. Evaluate this proposal and make your recommendation. Calculate the amount of discount required to be earned to have a savings of Rs.1,200 in favour of the proposal?

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3.

JP Limited, manufacturers of a special product, follows the policy of EOQ (Economic Order Quantity) for one of its components. The components details are as follows : Purchase Price per Component Cost of an Order Annual Cost of Carrying one Unit in Inventory Total Cost of Inventory and Ordering Per Annum Rs. 200 100 10% of Purchase Price 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. Assume that the inventory carrying cost does not vary according to discount policy You are required to: Compute the EOQ & advise whether the quantity discount offer can be accepted. Would your advise if the company is offered 5% discount on a single order ? 4. EXE Limited has received on offer of quantity discounts on its order of materials as under :Price per tonne(Rs.) 1,200 1,180 1,160 1,140 1,120 Tonnes ( Nos.) Less than 500 500 and less than 1,000 1,000 and less than 2,000 2,000 and less than 3,000 3,000 and above.

The annual requirement for the material is 5,000 tonnes. The ordering cost per order is Rs. 1,200 and the stock holding cost is estimated at 20% of material cost per annum. You are required to compute the most economical purchase level. 5. Wholesaler supplies 30 stuffed dolls each week day to various shops. Dolls are purchased from the manufacturer in lots of 120 each of Rs. 1200 per lot. Every order incurs a handling charge of Rs. 60 plus a freight charge of Rs. 2.50 per lot. Multiple and fractional lots also can be ordered and all orders are filled the next day. The incremental cost is Re. 0.60 per year to store a doll in inventory. The wholesaler finances inventory investment by paying its holding company 2% monthly for borrowed funds. How much dolls should be ordered at a time in order to minimise the total annual inventory cost? Assume that there are 250 week days in a year. How frequently should be order ? The EOQ of material X in 250 units. At EOQ total ordering cost in equal to Rs. 5000, the management places 4 orders during the year. One supplier gives an offer of a discount of Rs. 1000 if the number of orders placed in 2. Comment with supporting calculation for the acceptability of the offer. The quarterly production of a companys product which has a steady market is 20,000 units. Each unit of a product requires 0.5kg of raw materials. The cost of placing one order for raw materials is Rs. 100 and the inventory carrying cost is Rs. 2 per annum. The lead time for procurement of raw material is 36 days and a safety stock of 1,000 kg. of raw material is maintained by the company. The company has been able to negotiate the following discount structure with the raw material supplier : Order quantity (kg) Up to 6,000 6,000 8,000 8,000 16,000 16,000 30,000 30,000 45,000 Discount ( Rs.) Nil 400 2,000 3,200 4,000

6.

7.

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You are required to : a. Calculate the re-order point taking 30 days in a month. b. Prepare a statement showing the total cost of procurement and storage of raw materials after considering the discount if the company elects to place one, two or six order in the year. c. State the number of order which the company should placed to minimize the costs after taking EOQ also Into consideration. d. Find the EOQ for a demand of Rs.4,00,000 for an ordering cost per order of Rs. 200 per order & 10% carrying cost 8. The Heavy Nitro Company is considering the optimal batch size for re-order of concentrated sulfuric acid. The Management Accountant has supplied the following information : The purchase price of H2SO4 is Rs. 2 pr gallon. The clerical and data processing costs are Rs. 10.6 per order. All the transport is done by rail. A charge of Rs. 40 is made each time the special line to the factory is opened. A charge of 20 p. per gallon is also made. The company uses 40,000 gallon per year. Maintenance costs of stock are Rs. 4 per gallon per year. Find the optimal batch size. Stock levels 9. From the details given below, calculate : (i) Re-ordering level (ii) (iii) Minimum level (iii) Maximum level Danger level.

Re-ordering quantity is to be calculated on the basis of following information : Cost of placing a purchase order is Rs.20 Number of units to be purchased during the year is 5,000. Purchase price per unit inclusive of transportation cost is Rs.50. Annual cost of storage per unit is Rs.5 Details of lead time : Average 10 days, maximum 15 days, Minimum 6 days. For emergency purchases 4 days. Rate of consumption :Average : 15 units per day, Maximum : 20 units. 10. M/s. Tubes Ltd. are the manufacturers of picture tubes for T.V. The following are the details of their operation during 2003 : Average monthly market demand 2,000 Tubes Ordering cost Rs.100 per order. Inventory carrying cost 20% p.a. Cost of tubes Rs.500 per tube Normal usage 100 tubes per week Maximum usage 200 tubes per week Minimum usage 50 tubes per week Lead time to supply 6 8 weeks Compute from the above : Economic Order Quantity. If the supplier is willing to supply quarterly 1,500 units at a discount of 5%, is it worth accepting ? Maximum level of stock , Minimum level of stock , Record level.

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Pricing of material: 11. A timber merchant purchased 1000 c.ft. of timber logs on 1 st April, 2004 @ Rs. 400 per c.ft. and stored them in his timer yard for six months for seasoning. The following expenses were incurred during the period of seasoning : Rent.. Rs. 4,250 p.m. Salaries of 4 guards @ Rs. 2,500 p.m. each Incidental expenditure for maintenance, power, lighting etc. ... Rs. 7,50,000. Annual share of Administration overheads ..Rs. 12,10,000. 50% of the floor area of the Godown and other connected operations were incurred for stocking the seasoned timber. Loss in volume of the logs due to seasoning should be taken at 10%. Profit margin on cost was 15%. Calculate the selling price of the seasoned timber per c.ft. on 1st October 12. Following costs were incurred in producing 800 M. T. of M. S. Rods : Rs. Materials 2,80,000 Labour 1,00,000 Processing Charges 1,00,000 Total Cost 4,80,000 Of the total output, 10% was defective and had to be sold after a discount of 10% off the normal price. The scrap arising out of the production realised a sum of Rs. 8,760. The sale price in calculated to yield 15% profit on sales. You are requested to find out the normal price as well as the discounted price of per M. T. of M. S. Rods. 13. A manufacturing organization has imported four types of materials. The invoice reveals the following data. Quantity(kg) Rate ( US $ per kg.) Materials A 1000 1.50 B 2000 1.25 C 1500 2.00 D 3000 1.00 Import duty. 23% of invoice value, Insurance..2% of invoice value. Freight and Clearing Rs. 30,000, Exchange Rte US $ = Rs. 46.00. 50% of the materials imported are issued to production centers. While determining the value of closing stock 5% allowance is provided to cover up storage loss. Determine the value of closing stock of each type of materials. Inventory Control 14. In a factory, stock verification costs work out to about 3% on inventory values and the discrepancies revealed are about 0.6 per cent on an average, The following table shows a breakdown of the inventory : No. of items Value Rs./lakhs Unit cost over Rs. 5 1,300 18.00 Unit cost between Rs. 5 & Re.1 4,000 8.00 Unit cost Re. 1 & less 6,700 2.00 12,000 28.00 The management feels that verification costs are excessive. Give your opinion regarding the proposed verification.

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15.

The following information is known about a group of items. Classify the material in A, B and C classification. Model No 501 502 503 504 505 506 507 508 509 510 511 512 Annual consumption in pieces 30,000 2,80,000 3,000 1,10,000 4,000 2,20,000 15,000 80,000 60,000 8,000 1,20.000 80,000 Unit price in Rs. 10 15 10 5 5 10 5 5 15 10 12 9

16.

A factory uses 4,000 varieties of inventory. In terms of inventory holding and inventory usage, the following information is completed : No. of varieties of inventory 3,875 110 15 4,000 % 96.875 2.750 0.375 100.000 % value of inventory holding (average) 20 30 50 100 % of inventory usage (in end-product) 5 10 85 100

Classify the terms of inventory as per ABC analysis with reasons. 17. You are supplied with the following information extracted from the budget estimates of a Company : Rs. Rs. Net purchases -2,00,000 Freight and insurance 10,000 Buying expenses 5,000 Receiving expenses 4,000 Inspection expenses 2,000 Storage expenses 3,000 24,000 The company made the following purchases during the budget period : 1 2 3 Actual cost during the period were : Freight and insurance Buying expenses Receiving expenses Inspection expenses Storage expenses Consignment No. 30,000 50,000 70,000

6,000 4,000 3,000 1,500 1,000 15,500 Compute the applied material receiving and handling rate for the period and determine the amount of receiving and handling cost chargeable to purchases. Also state whether there is any under/or over absorption.

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18.

State whether the following statements are correct. Give reasons: a. Safety stock increases as demand increases. b. In ABC analysis high cost items are most likely to fall in category A, and least cost items are likely to fall in category C. c. To protect against stock outs, a large batch size is a must. d. E. O. Q. is based on a balancing between inventory carrying costs and shortage costs. e. Lead time is the time interval elapsing between the placement of a replenishment order and the receipt of last installment of goods against the order. XYZ Companys experience of being out of stock in respect of a key item is as below : Stock-out (number of units) 2,000 1,600 1,000 400 200 0 Number of times 4 (1) 8 (2) 12 (3) 16 (4) 40 (10) 320 (80)

19.

Figures in brackets represent percentage of times the item was out of stock. Assume that the Stock-out costs are Rs. 100 pr unit. The carrying cost of inventory is Rs. 50 per unit. Determine the optima level of Stock out inventory . 20. The consumption pattern of a component used in an assemble is as under : Two monthly Consumption units 500 600 700 800 900 Probability 0.15 0.20 0.30 0.20 0.15

The stock out cost is Rs.18 per unit and the two monthly holding cost is also Rs.18 per unit. Determine the optimal safety stock.

21.

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 casting are used evenly throughout the year in the production process on a 360 day 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 form 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: a. b. Compute the economic order quantity (EOQ) Assume the company is will to assume a 15% risk of being out of stock. What would be the safety stock? The re order point? : 6 : 75 7 10 8 5 9 5 10 5

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c. d. e.

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? 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. (a) (b) compute the new EOQ. How frequently would the company be placing an order, as compared to the old purchasing policy?

22.

At the time of physical stock taking, it was found that actual stock level was different from the clerical or computer records. What can be possible reasons for such differences ? How will you deal with such differences ? Answer: Possible reasons for differences arising at the time of physical stock taking may be as follows when it was found that actual stock level was different from that of the clerical or computer records : i. ii. iii. iv. Wrong entry might have been made in stores ledger account or bin card. The items of materials might have been placed in the wrong physical location in the store. Arithmetical errors might have been while calculating the stores balances on the bin cards or store ledger when a manual system is operated. Theft of stock.

When a discrepancy is found at the time of stock taking, the individual stores ledger account and the bin card must be adjusted so that they are in agreement with the actual stock. For example, if the actual stock is less than the clerical or computer record the quantity and value of the appropriate store ledger account and bin card (quantity only) must be reduced and the difference in cost be charged to a factory overhead account for stores losses. 23. In the course of physical verification of stores as on 31st March, 2003, following differences are revealed in case of AB Ltd. Pass the necessary Journal Entries Material A B C D E F Unit Nos. litres Nos. Kgs. Nos. meters Balance Unit(Rs.) Physical 7.00 12.00 6.00 22.00 15.00 10.00 600 1100 350 900 1475 291 Ledger 680 1155 400 930 1325 291 Remarks Wrong counting Normal evaporation loss. Material Issues not accounted for Shortage due to pilferage & theft 150 nos. received but not entered in ledger. Obsolete materials. Realised sale value Rs. 1650, awaiting dispatch

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Batch costing : 25. A Ltd. is committed to supply 24,000 bearings p.a. to b Ltd. on a steady basis. It is estimated that it costs 10 paise as inventory holding cost per bearing per month and that the set-up cost per run of bearing manufacture is Rs.324. What should be the optimum run size for bearing manufacture ? What would be the interval between two consecutive optimum runs ? Find out the minimum inventory cost per annum.