After studying this chapter you should be able to:
Understand and explain direct materials and indirect materials.
Appraise the objectives of purchase department and responsibilities of purchase department.
Distinguish between centralized and decentralized purchasing.
Explain the various stages involved in purchase procedure.
Know the various documents used in purchase procedure, their specimens, their significance etc.
Ascertain direct material cost.
Understand the duties and functions of a store keeper.
Know the meaning of inventory control and apply the techniques of inventory control.
Fix various stock levels.
Understand the perpetual inventory system and the periodic inventory system and the differences between them.
Understand the significance of issue of materials.
Understand and apply the various methods used for the pricing of materials.
Account for material losses, such as scrap, waste, spoilage, defective work.
Explain the meaning of certain important terms used in this chapter.
In a manufacturing industry, material cost forms an important element of total costs. It is estimated that the investment in material constitutes up to 90% of total capital. The word ‘material’ generally represents raw material. Since material constitutes a major chunk of economic resources, a proper cost accounting system with respect to materials is indispensable for manufacturing industries. Raw material is the keystone of the cost of product. In this chapter all the aspects with respect to materials are discussed in detail.
Raw materials may be defined as goods purchased for incorporation into products for sale. Materials may be classified into (1) direct materials and (2) indirect materials.
The materials which are easily identifiable with the product are known as direct materials. Direct materials form part of finished product. Cost of direct material forms an important element of prime cost. It may be said otherwise as all such materials the costs of which can be conveniently measured and charged directly to the products. Generally, the following items are included in direct materials:
All those materials which cannot be classified under direct materials are called indirect materials. Direct materials having small values, quantities are also treated as indirect materials. Cost of indirect materials is to be treated as overhead. The segregation of materials into direct and indirect categories facilitates control. While direct materials having high value require strict control, indirect materials having low value need not require so.
Purchasing of raw material for trading and manufacturing concerns is performed by the purchasing department under an official designated as purchase manager.
The following are the objectives of the purchase department:
Following are the responsibilities of purchase department:
The management has to devote much attention to the task of purchases, failing which may lead to collapse of the entire edifice. The methods of purchasing may be broadly classified into: (1) centralized purchasing and (2) decentralized (localized) purchasing.
When purchasing department is located at only one place and the entire purchases are made by it, such purchasing is known as centralized purchasing. All purchases are made by a single unit for various manufacturing units of an organization.
Following are the advantages of centralized purchasing:
If purchase department is situated at different places and is responsible for purchasing the materials for that manufacturing unit, such purchasing is known as decentralized purchasing. Each unit makes its own purchases.
Following are the advantages of decentralized purchasing
Factors that determine the choice between centralized and decentralized purchasing are:
Each concern adopts its own procedure regarding purchase of materials. Forms and records may differ slightly but the procedure is the same which is explained as follows:
Stage I: |
Indenting for materials |
Stage II: |
Issuing tenders |
Stage III: |
Receiving quotations |
Stage IV: |
Placing order |
Stage V: |
Inspecting stores received |
Stage VI: |
Receiving the stores accepted in inspection |
Stage VII: |
Passing bills for payment |
Let us explain each stage in detail.
Actually the purchase procedure starts from the stores department. The stores department prepares indents for the purchase of materials and forwards the same to the purchase department. Indents may be classified into two categories: (1) regular indents and (2) special indents.
Regular indents: (i) These indents are meant for replenishment of stocks. (ii) Regular indents are prepared periodically. (iii) They are placed when the ordering level for various items of stocks are reached. (iv) They must be certified by the stores department.
Special indents: (i) Special indents are meant for a special job. (ii) They are prepared only when necessity arises. (iii) Special indents are based on the demands received from respective departments (planning or production). (iv) These indents are to be certified by the department from where it gets originated.
It is the duty of the purchase department to issue tenders to suppliers. In order to obtain quotations from prospective suppliers of goods and services, business organizations float tenders. Specific type of tender may be adopted for different types of tenders:
Tenders are prepared in triplicate. Two copies will be sent to the supplier. Of these two, one copy will be retained by the supplier, the other copy (usually original) will be sent by the supplier to the purchase department by stating their terms and conditions of supply of goods or services. The third one is retained by the firm (purchase department).
When quotations are received from suppliers, they have to be processed cautiously. A comparative statement is used. The prospective suppliers are to be ranked based on the prices quoted by them. Further, the following factors have to be considered while processing the tenders:
At times, purchases may be made without inviting quotations. In such cases, the cost component and the price have to be taken into consideration for such cost plus contract basis purchases.
After receiving and analysing the tenders, the purchase order is to be prepared. The purchase order is prepared in six copies. They are routed to (i) accounts department, (ii) the supplier, (iii) purchase department, (iv) receiving department, (v) originating department, and (vi) inspection department, one copy each.
In general, the order is issued to the supplier who has offered the lowest price and who has committed to supply the goods with required specification within the stipulated period.
The purchase order has legal and accounting significance. Legally, it binds both the parties in terms of contract. From the accounting point of view, it envisages the stores department to accept the goods and the accounts department to accept the bill.
After receipt of the goods, the stores department checks the goods (against the supplier’s delivery challan) with the purchase order. It is ascertained whether materials conform to the order in respect of description and quantity.
After this, materials are sent to inspection department, where an inspection note is prepared. The material inspection note is a document which depicts the material code, description, specifications, quantity received for inspection, quantity accepted, quantity rejected and reasons for rejection. An inspection note has to be prepared in four copies. One copy is sent to the stores department, one copy is sent to the supplier, one to the purchase department and one to accounts department.
After inspection is completed, goods are sent back to the stores department. At this stage, the stores department prepares a stores receipt note or goods received note. It shows the materials received from suppliers. This is a document which shows the material code, description, specifications, quantity, unit price and value of materials. After issuing stores receipt note (goods received note), the storekeeper is responsible for stocks. This is a document for the posting of receipts in bin card and stores ledger. The stores note is circulated to the production planning and control department, accounts department, inspection department and the costing department.
Bills sent by suppliers were received first by the purchase department. Then they are forwarded to stores accounting section. They check the authenticity regarding quantity and price and its arithmetical accuracy. Other special items shown in the bill like packaging and forwarding charges are verified with the purchase order. The bill is finally passed for payment.
All expenses incurred in receiving and storing the material form part of the cost of materials. When the direct material that is used in the manufacture of finished goods is translated into financial terms, the resultant is direct material cost.
Direct material cost can be easily identified with a cost unit.
Direct material cost is the price per unit paid to the supplier with respect to items purchased from the supplier. It comprises of:
Illustration 2.1
Model: Direct material cost and issue price of materials to jobs.
X Ltd purchased two kinds of raw materials for the manufacture of its product. From the following information given in the supplier’s bill, you are required to calculate (a) direct material cost and (b) issue price of materials:
|
Rs. |
Raw material X: 250 Nos of Rs. 5 each |
1,250 |
Raw material Y: 500 Nos of Rs. 2 each |
1,000 |
Insurance |
45 |
Central excise duty: Raw material X: |
80 |
Raw material Y: |
120 |
Packing, storage and delivery charges |
150 |
Sales tax |
270 |
Freight |
300 |
The purchaser paid Octroi duty at Rs. 2 per unit. During the checking of incoming materials at the buyer’s factory, it was found that 5 units of raw material X and 10 units of raw material Y were in broken condition. It was found from past experience that 20% of materials deteriorate in storage.
Solution
The following calculations will have to be made, before computing material cost.
Working *1: Insurance will have to be distributed in the ratio of material value purchased as:
Purchase price of raw materials purchased:
Insurance for raw material
*2: Packing, storage and delivery will be distributed among the raw material X and Y in the ratio of quantity raw materials.
∴ Packing, storage & delivery expenses for raw material
Packing, storage & delivery expenses for raw material : Y
*3: Freight would be distributed in the same ratio as in (2).
Freight inward for material
Freight inward for material
*4: Sales tax will be distributed in the same ratio as in (1): that is, 5:4
Sales tax for raw material
Sales tax for raw material
(a) Statement showing computation of direct material cost
Particulars | Raw Material X Rs. | Raw Material Y Rs. |
---|---|---|
Step 1 → Purchase price (excluding excise duty) |
1,250 |
1,000 |
Step 2 → ADD |
|
|
(i) Central excise duty (given) |
80 |
120 |
(ii) Packing, storage and delivery (Ref: *2) |
50 |
100 |
(iii) Insurance (Ref: *1 (value basis)) |
25 |
20 |
(iv) Freight inward (Ref: *3 (quantity basis)) |
100 |
200 |
(v) Sales tax: (Ref: *4 (Value basis)) |
150 |
120 |
(vi) Octroi (X: 250 Nos × 2; Y: 500 Nos × 2) |
500 |
1,000 |
Step 3 → Direct material cost |
2,155 |
2,560 |
(Step 1 + Step 2 (i to vi)) |
|
|
(b) Statement showing issue price of materials
Particulars | Raw Material X Rs. | Raw Material Y Rs. |
---|---|---|
|
Nos. |
Nos. |
Step 1 → Purchase of raw materials (in nos) (Given) |
250 |
500 |
Step 2 → Less: Damage in transit (Given) |
5 |
10 |
|
245 |
490 |
Step 3 → Less: Deterioration in storage − 20% (Given) |
49 |
98 |
Step 4 → Quality available for issue |
196 |
392 |
Step 5 → Direct material cost |
|
|
Rs. |
2,155 |
2,560 |
Step 6 → Issue Price per Unit |
|
|
Important note
Sometimes, supplier’s invoices contain item of materials having more than one specification. Usually they will be shown as a lot and consolidated amount is mentioned against it. In such a situation, the purchaser will ascertain the current market price of each kind of material. The consolidated amount is to be apportioned based on value, that is, in the ratio of market prices. In case market prices are not given, technical estimates serve as a basis of apportionment. Insurance charges based on the value of materials, carriage inwards based on quantity (volume or weight) should form the basis of apportionment (as explained in Illustration 2.1) for consolidated amount.
From the date of receipt of materials till the date of issue of the same, that is, during the storage period, some losses are unavoidable. Some losses occur in the stores department due to the following factors:
By inflating the material price per unit, such losses can be recovered.
Abnormal loss will be duly charged against costing profit and loss account.
Illustration 2.2
Model: Storage and issue losses
A firm purchases 1000 litres of a chemical at Rs. 75 a litre. The normal loss from issue and storage is 25%. You are required to compute the material issue price per unit.
Solution
Normal loss from issue and storage = 25%
Store keeping (stores functions) is an important function. Store keeping is the function of receiving materials, storing them and issuing them to workshops or departments. The stores department is headed by a stores manager (store keeper).
The main objectives of store keeping are:
Important functions of store keeping (stores department) are as follows:
When stores department of an organization is located at one place only, it is known as centralized stores. If the stores department is situated at different places, it is known as decentralized stores. Where there is only one stores department, it is called a central store. Where more than one stores department exists, they are called sub-stores or subsidiary stores.
Imprest stores system is based on the imprest system of petty cash. This system is introduced to overcome the disadvantages of centralized stores. A sub-store is attached to each production department. This operates with an operating stock marginally higher than the normal requirements. At the end of specified period, the exact quantity is replenished just as in the system of petty cash.
To identify materials easily and quickly and to prevent mixing of one type of materials with another, a proper system of classification and codification of materials is of vital importance to any organization.
Stores are classified either by nature or usage of stores. Similar items are classified into sub-groups and a number of such sub-groups constitute the major group.
Codification is a unique procedure of assigning codes for each item of store.
As materials constitute a major part of the total production cost of a product, they occupy an important position in manufacturing enterprises. Hence the need arises for a proper control on it. In fact, inventory control is the core of materials management. Inventory control should be planned in such a way that purchasing and storing should be done judiciously without affecting production in any manner. Funds should not get locked unnecessarily in surplus stocks. Lack of control over inventory may result in an increase in the cost of production. Inventory control is the systematic control and regulation of purchase, storage and usage of materials in such a way as to maintain the even flow of production and at the same time avoiding excessive investment in inventories.
A number of techniques and mathematical models are employed in the process of inventory control. Inventory control is exercised over raw materials and work-in-progress.
The main aim of inventory control is to maintain optimum level of inventory. For this, an organization has to determine:
The first aspect—the quantity—how much to order is associated with the determination of economic order quantity.
The second one—the time—when they should be ordered is associated with the determination of re-order level.
This method makes an attempt to resolve the issue: How much to order at a time? EOQ refers to the quantity of order which gives maximum economy in acquiring materials. It puts much thrust on standard ordering quantity. In order to understand EOQ, the costs associated with it have to be analysed first. They are (i) carrying costs, (ii) ordering costs and (iii) costs of stock-out (shortage).
The optimum ordering quantity—the quantity for which the cost of holding plus the cost of acquiring is the minimum—is referred to as “economic ordering quantity”.
The economic ordering quantity is computed by using the formula:
where E.O.Q = Economic ordering quantity
U = Units purchased (or) used in a year
P = Cost of placing an order
S = Annual cost of storage of one unit
Model: EOQ
X Ltd manufactures a product and the particulars relating to it are as follows:
Monthly demand (units): 500
Cost of placing an order: 90
Annual carrying cost per unit: 10
Normal usage (units/week): 40
You are required to calculate economic ordering quantity.
Solution
First, annual consumption has to be calculated.
Normal usage per week = 40 units
... Normal usage per year = 40 × 52 weeks
Cost of placing an order = Rs. 90 (P) Given
Annual carrying cost/unit = Rs. 10 (S) Given
Formula
Substituting the values we get,
Sometimes, stock holding cost may be given in percentage (i.e., the inventory-carrying charges). In such cases the formula differs a little, which is shown below:
where U = Annual consumptions during the year (units)
P = Cost of placing an order
H.C = Holding cost as percentage of average stock value
C = Price/unit
Depending on the figures (given in the problem), we have to choose the formula and compute EOQ.
Illustration 2.4
Model EOQ
You are provided:
Cost of placing an order = Rs. 10 (ordering cost)
Annual demand = 900 units
Price per unit = Rs. 5
Normal lead time = 10 days
Safety stock = 20 days
You are required to compute:
where U = Annual consumption during the year = 900 units
P = Cost of placing an order = Rs. 10
H.C = Stock holding cost = 15%
C = Price per unit = Rs. 5 Substituting the figures in the formula, we get
Substituting the figures in the formula, we get
Safety stock = Average usage × Period for which safety stock is kept
Illustration 2.5
A computer manufacturer purchases 800 units of a certain component from a supplier. The annual usage is 800 units. The order placing cost is Rs. 100 and the cost of carrying one unit for the year is Rs. 4. You are required to compute economic ordering quantity, number of orders and time interval between two orders in a year and to tabulate your results.
Solution
First EOQ is ascertained as follows:
Formula:
Substitute the values in the formula,
Table showing the economic ordering quantity:
Illustration 2.6
X Ltd manufactures a product which has a monthly demand of 2,500 units. The product requires a component AA1, which is purchased at Rs. 10. For every finished product, one unit of component is required. The ordering cost is Rs. 100 per order and the holding cost is 10% p.a. You are required to calculate:
where U = Annual consumption = 12 × 2,500 = 30,000 units
P = Cost of placing an order = Rs. 100
H.C = Holding cost percentage = 10%
C = Purchase cost (price) per unit = Rs. 10
Substituting the values in the formula, we get:
(i) Total cost (when order size is 5,000 units)
(ii) Total cost (when order size is 2,450 units)
In this problem, there are two order sizes, viz., 2,500 units and 5,000 units. Of these 2,500 units is the least one. As such, carrying cost will be minimum at this order size.
Minimum carrying cost
In practice, when the size of order increases, suppliers allow quantity discounts. Due to this, the price per unit comes down. But EOQ assumes that the unit purchase price is constant.
When quantity discounts are involved, the computation of EOQ will be as follows.
First ascertain the EOQ using the standard formula.
Illustration 2.7
Model: EOQ and quantity discounts
JP Ltd manufacturers of a special product, follows the policy of EOQ for one of its components. The component’s details are as follows:
|
Rs. |
Purchase price per component |
200 |
Cost of an order |
100 |
Annual cost of carrying unit in inventory |
10% of purchase price |
Total 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.
[CA. (Inter), November 1994]
Solution
STAGE I: EOQ is calculated as follows:
Step 1 → Figures given in the question have to be written one by one:
Step 2 → Total annual consumption is to be found out by using the following equation:
Substituting the figures in this equation, we get:
Formula
Substituting the values we get,
STAGE II: Decision on Discount Offer: |
Rs. |
Step 1 → When order size is 2,000, number of orders (4000/2000) = 2 |
|
Step 2 → Ordering cost (2 × cost of an order (Rs. 100)) |
200 |
Step 3 → Add: Storage cost (1,000 × Rs. 20) |
20,000 |
Step 4 → Less: Savings due to discount |
20,200 |
|
|
Step 5 → Net cost |
4,200 |
Decision: The net cost is Rs. 200 higher (Rs. 4,200 − Rs. 4,000) than the present cost.
Hence this offer should not be accepted.
STAGE III: If the discount offer is 5% on a single order: |
Rs. |
Step 1 → No. of order = 1 |
|
Step 2 → Ordering cost (1 × Rs. 100) = |
100 |
Add: Step 3 → Storage cost (2,000 × Rs. 20) = |
40,000 |
|
40,100 |
Less: Step 4 → Savings due to discount (5% × 4000 × 200) |
40,000 |
Step 5 → Net cost |
100 |
Decision: Net cost is Rs. 3,900 (Rs. 4,000 − Rs. 100) less than the present cost.
Hence, this offer must be accepted.
NOTE: To arrive at a decision, compare the net cost with the present cost.
If the net cost is higher than the present cost, such offer should not be accepted.
If the net cost is lower than the present cost, such offer SHOULD BE ACCEPTED.
Illustration 2.8
A firm is able to obtain quantity discounts on its orders of material as follows:
Price per kg |
|
Rs. |
kg |
8.00 |
less than 250 |
7.90 |
250 and less than 500 |
7.80 |
500 and less than 1,000 |
7.60 |
1,000 and less than 2,000 |
7.50 |
2,000 and above |
The annual demand for the material is 2,000 kg. Stock holding costs are 20% of material cost per annum. The delivery cost per order is Rs. 8.
You are required to calculate the best quantity to order.
[CA. (Inter). Modified]
First, EOQ is computed by using the formula:
NOTE: It is assumed that staggering the delivery in 146 kg is not possible. The best quantity to order is computed as:
Decision: Least cost is Rs. 15,976 when the order quantity is 1,000 kg.
The optimum ordering quantity = 1,000 kg.
One of the important functions of a store keeper is to replenish the stock in stores department. In fixing stock levels, the vital factors to be considered are:
The maximum level is the largest quantity of a particular material that should be kept in the store at any period. This represents the stock level beyond which stock should not be allowed. This is to avoid blocking up of capital in inventories.
The factors that should be considered to fix maximum stock level are:
Formula to determine maximum level of stock:
This is also known as “safety or buffer stock.” Stocks must not be allowed to fall below this level. This is to avoid stoppage of production for want of materials.
The factors that should be decided in determining the minimum stock level are:
Formula to determine the minimum level of stock:
This is the level of stock fixed below the minimum level of stock. When this level is reached, the purchase manager has to take speedy efforts to acquire the needed materials. The storekeeper at the same time should not issue materials to production department.
At times, the danger level is fixed above minimum level but below the re-order level.
To take corrective action, this level is fixed below the minimum level, and to take preventive action, this level is fixed above the minimum level.
Formula to determine the safety level of stock:
This is the level fixed between maximum and minimum stock levels. Further supplies should be ordered once the level of stock reaches this state. The re-order level is fixed at a level, higher than minimum stock level to protect against (i) abnormal usage and (ii) unexpected delay in supply of materials.
The factors to be determined for fixing re-order level are
Formula to determine the re-order level of stock:
Illustration 2.9
Model: Fixation of level of stock
Materials A and B are used as follows:
You are required to calculate for each material:
[I.C.W.A (Inter). Modified]
Solution
NOTE:
(1) Re-order level:
Step (i) Formula:
(2) Minimum level:
Step (i) Formula:
Step (ii) Needed figures = Re-order level (worked out in step 1)
Step (iii) Substituting the figures in the formula, we get:
For material A |
= |
750 units − (100 units × 4 weeks) |
|
= |
750 − 400 = 350 units |
For material B |
= |
1,050 units − (100 units × 6 weeks) |
|
= |
1,050 − 600 = 450 units |
(3) Maximum level:
Step (i) Formula:
|
A |
B |
Re-order level |
750 |
1,050 |
|
(Stage 1) |
(Stage 1) |
Re-order quantity |
500 |
800 |
|
(Given) |
(Given) |
Minimum consumption |
50 |
50 |
|
(Given) |
(Given) |
Minimum re-order period |
3 weeks |
5 weeks |
|
(Given) |
(Given) |
Step (iii) Substituting the figures in the formula, we get:
For material A = 750 + 500 − (50 × 3) = 1,250 − 150 = 1,100 units
For material A = 10,50 + 800 − (50 × 5) = 1,850 − 250 = 1,600 units
(4) Average-stock level.
Step (i) Formula:
Average stock level = Minimum stock level
Step (ii) Needed figures:
|
A |
B |
Minimum stock level (Ref: Stage 2 (iii)) |
350 |
450 |
Re-order level (Ref: Stage 1 (iii)) |
750 |
1,050 |
Step (iii) Substituting the figures in the formula, we get:
So far we have discussed what quantity has to be ordered at a time, the time to place an order, and the various stock levels to be maintained. Now, monitoring and control of inventories will be explained.
It is also known as “always better control”. Its origin is attributable to General Electric Company, America. This is based upon segregation of materials according to their value for control. A small percentage of inventory items account for a large percentage of usage value and vice versa. It is found that
Applying this yardstick, the first category is classified into “A”, the second category into “B” and the third category into “C”.
A category is composed of items which are relatively highly expensive or used in large quantities. Hence, tight inventory control is essential. The management has to monitor and control inventories by adopting all possible and needed devices.
Category B consists of items which are of moderate quantity and of moderate value. They are neither expensive nor cheap. This category requires moderate inventory control.
Category C consists of items which are used in small quantities. These items are comparatively inexpensive. This category requires control but not that much compared to other categories.
Example:
The ABC analysis system gives priority to usage value and ignores the criticality of items, which is not so in practice. Really there are many items which do not possess high usage value but are critical. One component may not belong to either of the groups in the ABC category, but may make matters worse.
To overcome this limitation, another technique known as VED analysis is an important device for management of materials. Under this technique, inventory items are classified and grouped in descending order of criticality. Items are grouped into three categories V, E and D, where V denotes items which are Vital, E denotes Essential and D stands for Desirable.
V category of items are vital for process of production. The production will come to a standstill, if the items of these category are not available in time. Hence, strict and proper analysis has to be carried out, stock level has to be maintained adequately and network of suppliers should be proper and reliable. Items grouped under category E are essential, but their absence would not do much harm in production. D category items will not have an immediate consequence on production.
This analysis is also known as 80:20 rule. Pareto’s rule stipulates that 20% of stock must be strictly controlled by adopting suitable policies, procedures and devices. The balance 80% of stocks will have to be analysed in established norms, procedures. Pareto analysis may be said to be a technique of selective inventory management.
FNSD F stands for Fast moving
N stands for Normal moving
S stands for Slow moving
D stands for dead/dormant stock
Under this technique, inventory is classified into four different categories for the analysis of movement of inventory. This technique is based on stock turnover ratio.
F—Fast moving items are consumed within a short period of time. Generally, stock velocity of items belonging to this category is relatively very high. Every effort should be made to ensure that no stock-outs occur.
N—Normal moving items are consumed within a year. Their stock turnover ratio may be moderate.
S—Slow moving items are consumed in a period extending over 2 years. They have very low stock turnover ratio.
D—Dormant or dead stock denotes stock which remains idle in stores. For them no present demand exists. Nor forecast can be made on future demand.
Continuous and proper monitoring is an essential and indispensable task of inventory management control.
The very name indicates the usage of two bins for maintaining stock of materials. In general, material is used from one bin only till it gets emptied. Under this system, for each item of stock, two bins or piles or bundles are used for maintaining stock of materials. The first bin stocks sufficient quantity of inventory for the specified period (period between receipt of an order and placing of next order). The second bin contains stock (safety stock—normal level) to provide service till new stocks arrive and fill the first bin. Reorder takes place when the stock in the first bin is empty. No need to wait for the re-order date. Perpetual inventory record is not in practice under this system because no bin-tag (quantity record of materials) card is in vogue, which is a great disadvantage of the two-bin system.
The terminology of CIMA defines continuous stock taking as “the process of counting and valuing selected items at different times on a rotating basis”.
Under this method, the stock-taking work is planned in such a way that all items of work are to be verified during the year. Stock-taking plan may vary from one firm to other. Some employ man hour basis, while some other firms use category basis for stock verification.
Stock as shown in company’s records is compared with stock taken physically. Differences may arise. Such differences should be checked with bin card balance. Bin card shows the actual stock in hand. So adjustments can be made in stores ledger. The balance in stores ledger and bin card must be reconciled.
Discrepancies should be analysed by causes and responsibility centres, and properly investigated. If the value is high due to surplus/deficiency, it should be reported to authorities for approval.
The terminology of CIMA defines perpetual inventory system as “the recording as they occur of receipts, issues and the resulting balances of individual items of stock in either quantity or quantity and value.”
The aim of a perpetual inventory system is to keep proper track of inventory and provide accurate information to the management timely.
Under this system, receipts, issues, returns, work-in-progress etc. of materials are recorded on a daily and continuous basis. Up-to-date records are always available. Hence, it facilitates verification of stock at any time. The important functions of perpetual inventory are:
Most important records used in this system are (1) bin card and (2) stores ledger. Let these be discussed in detail in Sections 16 and 17.
This record (document) is prepared by the stores department. It is a quantitative record of receipts, issues and balances of materials in stores. Quantity of any specified materials can be easily known from bin, at any point of time.
How does is function? Each item of material is entered in a separate bin card. It is attached to the bin or rack when the materials are stored. When a transaction takes place (issue or receipt), the bin card is posted. Only after the transaction is recorded, the items are received or issued. When materials are received, the quantity is entered in the bin card. The balance is updated. The various levels indicated in a bin card facilitate the task of store keeper in the preparation of requisition materials as and when required. Similarly all issues, return of materials are entered in bin card. Quantity on order and quantity reserved are also shown separately.
The stores ledger is a record maintained by the accounts department. All receipts and issues of materials are recorded in it. Once receipt or issue or return of goods is entered in the bin card, the same document is used for posting in stores ledger. It has a separate page or folio for each material code. It is a subsidiary ledger. It constitutes part of double-entry book-keeping.
Basis of Distinction | Bin Card | Stores Ledger |
---|---|---|
1. Nature of record |
Bin card is a record of quantity. |
Stores ledger is a record of quantity and value. |
2. Maintenance of record |
It is maintained by the store keeper. |
It is maintained by the costs/accounts department. |
3. Place where it is kept |
It is kept in the stores. |
It is not kept in the stores. |
4. Time of posting |
The postings are done before the transactions take place. |
The postings are done after the transactions take place. |
5. Posting |
Each transaction is posted individually. |
Transactions are posted in total. |
6. Role |
Bin card cannot take the role of ledger and it is not a subsidiary book. |
It takes the role of ledger and it is like a subsidiary book. |
The terminology of CIMA defines periodic stock taking system as “a process whereby all stock items are physically counted and then valued”.
Physical stocktaking is conducted at the end of fixed intervals, under periodic stock taking. A “cut-off date” is selected during which no movement of stock takes place. Bin cards and stores ledgers have to be kept up-to-date and they must have been reconciled with physical stocks. Then only stock taking takes place. During the physical verification of stock, one item has to be verified at a time and the physical stock noted down in the stock sheet. Discrepancies between physical stock and stock as per records, if any, have to be reported to the top-level management. After the stock taking, the details are to be entered in pre-printed stock sheets. They are serially numbered. The main drawback of this method is that during stock taking no movement of materials is permitted and the production is stopped abruptly.
Inventory turnover ratio depicts the relationship between the cost of goods sold and average inventory. This ratio indicates the velocity of stock.
Formula:
where
Any increase in stock turnover ratio indicates that stocks consumption is high. It is a good indicator. On the other hand, any decrease in ratio will indicate negative results, to be observed cautiously and required corrective measures to be undertaken to improve this ratio.
This formula is used to calculate the number of days for which the stocks are held up in stores department.
Illustration 2.10
Model: Inventory turnover ratio
From the following data compute inventory turnover:
Material A | Material B | |
---|---|---|
|
Rs. |
Rs. |
Opening stock |
1,000 |
1,500 |
Purchases made during the year |
2,000 |
2,500 |
Closing stock |
500 |
1,000 |
Solution
(A) First, average inventory has to be calculated:
*3 Since only materials are given, they are cost of goods sold.
(B) Computation of inventory turnover ratio:
Particulars | Material A | Material B |
---|---|---|
Step 1 → Opening stock |
1,000 |
1,500 |
Step 2 → Add: Purchases |
2,000 |
2,500 |
|
3,000 |
4,000 |
Step 3 → Less: Closing stock |
500 |
1,000 |
Step 4 → Consumption of materials during the period |
2,500 |
3,000 |
Step 4 → Inventory turnover ratio= *3 |
||
|
= 3.33 |
= 2.4 |
Result: Turnover ratio for material A is 3.33 and for B is 2.4. Material A is being turned over 3.33 times. Material B is being turned over 2.4 times. Material B is being held for a longer period. Hence, the stock of material B is always high.
Decision: The management should take the needed action to manage Material B.
Bill of material and material requisition are noted above. Now we have to discuss the above records—specimen, purpose, features and advantages of each.
Material requisition may be defined as “a document which authorizes and records the issue of material for use”. This document is prepared by the production or other departments. Materials should be issued by the store keeper only on presentation of a duly authorized material requisition note. This is an instruction to the stores department to issue materials for the department which is in need of materials. A material requisition note is prepared in triplicate. One copy is sent to the stores, one copy to the costing department and the third is retained by the department that made such note.
This document is prepared by the design or engineering or production planning and control department. This document contains the quantity required by such departments. Following are the purpose underlying the preparation of bill of materials:
Four copies of bill of materials are prepared. One copy each is sent to the production, stores and cost accounting departments, and one copy is retained by the planning or engineering department.
When the materials issued to production or other departments are defective or no longer required, this document is prepared by the concerned department. The materials are returned to the stores department along with this material return note. This is prepared in duplicate, one copy will be kept by the stores and the other copy is returned to the department by the stores with proper acknowledgement.
When materials are transferred from one department to another department, the transferrer department raises a material transfer note. It is sent to the transferee department along with the materials. One copy is sent to cost accounting department, and the other copy is sent to production planning and control department.
This technique is of latest development. It can also be said that it is an improvement over loose leaf card system. Under this technique a card has to be maintained for each item of material. The cards are kept in Kardex cabinets, specially designed for this purpose.
These cards have columns both in terms of quantity and value for the materials (i) received—receipt column, (ii) issued—issue column and (iii) balance column, just similar to stock ledger sheets. Whenever transactions take place, they are to be entered in the respective columns.
Objectives of materials pricing are:
Materials are issued from stores to various processes or contracts or jobs or work orders etc. These jobs are charged with the value of materials issued to them. Here arises the difficulty regarding the price at which materials issued are to be charged. This is due to the fact that the stock of materials consists of different consignments received at different dates and at different prices. The various methods used for the pricing of materials are as follows:
Let us discuss the methods one by one:
In this method, materials are issued at the price at which they were purchased. This involves identification of each lot purchased. This method can be used when the materials have been purchased for a specific job. Materials are to be issued only against the job for which such materials are purchased. This method cannot be used when the material is meant for all jobs, that is, general use. Because of this, this method has limited applications.
Illustration 2.11
Following is the record of receipt of materials:
2 June |
Received 500 units for Job No. 15 @ Rs. 10 per unit |
8 June |
Received 400 units for Job No. 16 @ Rs. 12 per unit |
15 June |
Received 200 units for Job No. 17 @ Rs. 13 per unit |
28 June |
Received 300 units for Job No. 18 @ Rs. 15 per unit |
During the same month, following issues of materials are made:
9 June |
Issued 250 units for Job No. 15 |
17 June |
Issued 200 units for Job No. 16 |
18 June |
Issued 250 units for Job No. 15 |
20 June |
Issued 200 units for Job No. 17 |
22 June |
Issued 100 units for Job No. 16 |
29 June |
Issued 150 units for Job No. 18 |
You are required to show how these transactions will appear in the stores ledger.
Note that job numbers are given. This implies that materials have been purchased for specific jobs. When they are issued for the particular job, they are priced at the respective prices only. For example, materials were received on 2 June, for job no. 15 @ Rs. 10 per unit. Whenever materials are issued for job no. 15, they are to be priced at Rs. 10 per unit. (9 June and 18 June). The same principle has to be applied, in a similar manner, to other job orders and tabulated as follows in the stores ledger:
*2 This balance amount consists of: |
Rs. |
100 units for job no 16 @ Rs. 12/unit: |
1,200 |
150 units for job no 18 @ Rs. 15/unit: |
2,250 |
*1 250 units |
3,450 |
Under this method, it is assumed that the materials first received are the first to be issued. This method seeks to price issues based on the order in which they are received. Units issued are priced at the oldest cost price listed on the stock ledger.
Illustration 2.12
Model: FIFO method
A firm maintains its stores ledger on the FIFO method. During the month of June 2009, the following receipts and issues of materials were made. You are required to record these transactions in the stores ledger.
Receipts:
1 June |
Balance 100 units @ Rs. 5 per unit |
4 June |
Purchase Order No. 101, 80 units @ Rs. 4/unit |
8 June |
Purchase Order No. 103, 60 units @ Rs. 5/unit |
15 June |
Purchase Order No. 102, 40 units @ Rs. 3/unit |
25 June |
Purchase Order No. 104, 80 units @ Rs. 6/unit |
Issues:
11 June |
Material Requisition No. 21, 120 units |
14 June |
Material Requisition No. 22, 50 units |
16 June |
Material Requisition No. 23, 40 units |
20 June |
Material Requisition No. 24, 20 units |
27 June |
Material Requisition No. 25, 30 units |
Solution
Under FIFO method, materials purchased first are to be issued first.
In this problem, “Balance—100 units—price Rs. 5/unit” is to be taken as first received. This price has to be charged for the materials that are issued first, that is, on 11 June—first issue takes place. Those issues must be charged @ Rs. 5/unit. Units issued are 120 units. 100 units are to be charged @ Rs. 5/unit. There are 20 units more. These units have to be charged on the next in order, that is, 4 June level of price @ Rs. 4/unit. This method of pricing is to be carried out for other issues which are shown in the stores ledger as follows:
*1 Stock consists of 20 units purchased on June 15 @ Rs. 3 |
= Rs. 60 |
80 units purchased on June 25 @ Rs. 6 |
= Rs. 480 |
100 units |
Rs. 540 *2 |
Under this method, materials which had been received last are issued first. This is also called the replacement cost method, as the current cost of materials is applied to the cost of units. The purchase price of the latest batch of materials (received from suppliers) is used for pricing the issue of materials. Once this gets exhausted, then the next latest consignment pricing is used and so on.
This method may be explained by the following illustration:
Illustration 2.13
Model: LIFO method
A firm maintains the stores ledger on the LIFO method. During the month of July 2009, the following receipts and issues of materials were made. You are required to record these transactions in the stores ledger:
Receipts:
1 July |
Balance 100 units @ Rs. 10 per unit |
5 July |
Purchase Order No. 15, 80 units @ Rs. 8/unit |
8 July |
Purchase Order No. 16, 60 units @ Rs. 9/unit |
15 July |
Purchase Order No. 17, 40 units @ Rs. 10/unit |
28 July |
Purchase Order No. 18, 80 units @ Rs. 6/unit |
Issues:
10 July |
Materials Requisition No. 11, 140 units |
12 July |
Materials Requisition No. 12, 20 units |
20 July |
Materials Requisition No. 13, 40 units |
25 July |
Materials Requisition No. 14, 20 units |
31July |
Shortage 10 units |
Solution
Under this method, the purchase price of the latest batch of materials is used for pricing the issue of materials.
In this question the issue on 10 July is priced @ Rs. 9/unit, being the latest purchase, that is, on 8 July. Materials issued are 140 units, whereas the lot on 8 July consists of 60 units only so the remaining units are to be priced at the next latest purchase, that is, on 5 July @ Rs. 8/unit and so on. All the other issues are priced in the same way and the results are tabulated in the stores ledger as follows:
*1 This balance consists of: |
Rs. |
60 units of balance on July 1 @ Rs. 10 = |
600 |
70 units of balance on July 28 @ Rs. 6 = |
420 |
130 units |
1,020*2 |
Under this method, materials having highest prices are issued first. This is based on the assumption that the inventory should be valued at the lowest possible price. Costliest materials are issued first, irrespective of the date of purchase. The main factor underlying this method is that when market prices of materials are fluctuating, the product will be able to absorb the cost of materials and provide product costs. This method is widely used for monopoly products, cost plus contracts and the like. A secret reserve has to be created when stocks are undervalued.
Illustration 2.14
Based on the same information provided in Illustration 2.13, you are required to prepare a stores ledger account under HIFO method.
Solution
Under this method, while issues are to priced, look at the prices of purchase and use the maximum or highest price first and then follow in the descending order of prices. Ignore the date of purchase. The results are tabulated in the stores ledger account as follows:
*1 This consists of: |
Rs. |
80 units purchased on July 28 @Rs. 6 = |
480 |
50 units purchased on July 5 @Rs. 8 = |
400 |
|
130 |
|
880 *2 |
A specified quantity of materials is always held in stock by all organizations. This quantity of stock is known as base stock. The base stock is deemed to have been created out of the first lot purchased. Hence, it is always valued at this price and it is carried forward as a fixed asset. It is important to observe here that any quantity over and above the base stock is valued in accordance with any other method (FIFO or LIFO methods).
Under this method, the issues are to be valued at the next price. The next price denotes the price of materials which have been ordered but not yet received. In other words, the issues are priced at an actual price which is approximately equal to the market price. The policy is to keep the price at the level of the market price.
Under this method, materials will be issued at a price at which a new order is placed. Till the next order is placed, the same price will be applicable to issue of materials.
To illustrate, on May 10, 1000 kg of material are lying in the stores purchased at the cost of Rs. 25 per kg. On May 15, another order is placed to procure 500 kg @Rs. 30 per kg, on the same day. A requisition is received from the department for 300 kg, then it will be priced at Rs. 30 per kg, eventhough the materials are yet to be received.
As it is difficult to follow the procedure, this method is not in use anymore.
Illustration 2.15
With the information provided in Illustration 2.13, you are required to prepare a stores ledger account showing the receipts and issues of materials which would be recorded under LIFO method taking base stock as 80 units.
Solution
First issue took place on 10 July—no. of units to be issued is 160.
80 units are to be treated as base stock unit (Given) at Rs. 8/unit (Given). Remaining 60 units are to be priced @ Rs. 9/unit (under LIFO). The remaining issues are to be priced similarly and tabulated in the stores ledger as follows:
* Important note: Materials are to be issued on 28 July, in the place of 25 July because on that day stock available is only 80 units–which is equal to “base stock.” Only over and above the “base stock” level materials will be issued. As such it is issued only on 28 instead of 25.
|
Rs. |
**1 This consists of : |
|
80 units @ Rs. 10 per unit = |
800 |
50 units @ Rs. 6 per unit = |
300 |
|
1,100 *2 |
Under the method the price is calculated by dividing the total rates of materials by the number of rates of prices. It ignores the quantity of materials purchased. Every time an issue is made, a new average is computed. Unit prices of latest consignments are taken into account.
Illustration 2.16
Based on the same information provided in Illustration 2.13, you are required to prepare a stores ledger account showing the receipts and issues of materials by using simple average price method.
Solution
First issue takes place on 10 July. There are three receipts prior to this date of issue. On 1 July—price is Rs. 10, on 5 July price is Rs. 8 and on 8 July the price is Rs. 9.
Hence, the issue price of materials on 10 July is Rs. 9/unit. Similarly, for other issues simple average price is calculated and the results are tabulated as follows:
The stock on 31 July shows 130 units and its value is Rs. 996.67.
If simple average is applied 130 units × 8.33 = Rs. 1,082.90. But the stock appears at Rs. 996.67 only. This reveals that the production is overcharged by Rs. 86.23 (Rs. 1082.90 − Rs. 996.67).
Under this method, average price is calculated periodically (weekly or monthly). It is not calculated at the time of each issue of materials as done in the previous method. The average price is to be calculated by adding all the prices (excluding the prices of opening stock—balance) during the period (say month) and dividing the sum of these prices by the number of prices.
Illustration 2.17
Based on the same information given in Illustration 2.13 you are required to prepare a stores ledger account showing the receipts and issue of materials by periodic simple average method.
Solution
No need of calculation for each issue of materials separately Periodic simple average rate is calculated as follows:
Take all prices of receipts (excluding opening balance):
i.e., Rs. 8 + Rs. 9 + Rs. 10 + Rs. 6.
Divide this by the number of prices, i.e., 4
Each issue of materials made during the month of July 2009 has to be valued at Rs. 8.25. The results are tabulated as follows:
The table shows that the book value of stocks is Rs. 1162.50.
But the average rate is 130 units × Rs. 8.25 = Rs. 1072.50.
This discrepancy arises because actual quantities are not taken into account, while computing the average rate.
Under this method, the issue price is computed every time a receipt of materials occurs. The average price is computed based on both the quantities received and their cost. This method operates as follows: Average price is calculated after every purchase by adding the quantity received to the stock in hand and the cost of this purchase to the cost of stock in hand. Total cost is to be divided by the total quantity. The result is the average price computed under weighted average price method. A new average should be found out after each and every receipt of materials.
Illustration 2.18
Based on the information given in Illustration 2.13, you are required to prepare a stores ledger account assuming that issues of materials are to be valued using weighted average price method.
Solution
For every receipt of materials, average price has to be calculated as follows:
On 5 July, As per P.O. No. 15, a new receipt takes place with 80 units @ Rs. 8 per unit.
Add these 80 units with the previous receipt of 100 units.
Similarly, on 8 July = 60 units @ Rs. 9 = Rs. 540.
Total units on 8 July = 100 + 80 + 60 = 240 units
Total value on 8 July = Rs. 1640 + Rs. 540 = Rs. 2,180
Results are tabulated for other receipts as follows:
Under this method, average price is computed periodically and not on each new receipt of materials. The average price is calculated by dividing the total value of materials purchased during a period by the total quantity purchased during the same period. Opening stock (value and quantity) is not to be included in this computation. It is to be calculated at the end of the period only.
Illustration 2.19
Based on the information given in Illustration 2.13 you are required to prepare stores ledger account for pricing issue of materials as per periodic weighted average price method.
Solution
Average rate will be calculated at the end of period, that is, end of July.
Hence, till we arrive at the figure of this average rate, Issue column—Rate and amount will not be filled up and only after ascertaining the rate, it will be filled up.
Tabulation will be as follows:
This rate has to be filled up for all issues.
The moving simple average price is the average of the simple average prices for a specified number of periods. The period chosen should cover the period in which the material is issued. The moving average is computed by dividing periodic average prices by the number of periods. To put in other words, we can say that periodic simple average prices are further averaged.
Illustration 2.20
You are required to compute the simple moving average rates in a chocolate company purchasing raw materials at different monthly rates as shown below. Six months moving average is to be shown from September 2009. How shall the material issued in the months of September, October and November 2009 be priced according to Moving simple average price method?
|
|
Price per kg |
|
Month |
(Rs.) |
|
April |
12.00 |
|
May |
11.50 |
|
June |
12.50 |
|
July |
12.00 |
|
August |
11.50 |
|
September |
12.50 |
|
October |
11.00 |
|
November |
12.00 |
Solution
Moving average price is calculated by dividing periodic average prices by the number of periods given.
In this problem, the number of periods given is 6 months. Hence from April to September prices have to be added and divided by 6. Hence the unit price will be 72 ÷ 6 = Rs. 12 for September. For October, add from May to October and divide by 6 and so on. Results are tabulated as follows:
Under this method, the issue price of materials will be calculated by dividing the total of the periodic weighted average prices for a number of periods by the total number of such periods. This method is not widely used. This method has the same advantages and disadvantages as those of periodic weighted average method.
Under this method, the price of issues for each item is predetermined. This predetermined price is known as standard price. The standard price is predetermined by taking into account the important factors that affect price such as market trends, freight and warehousing expenses. All issues and inventory should be kept at standard price. This can be revised.
Illustration 2.21
Based on the information given in Illustration 2.13, you are required to prepare the stores ledger account according to standard price method, assuming that standard price per unit is Rs. 8.
Solution
All issues of materials are priced at standard price. The results are tabulated as follows:
Result: The value of stock at standard price is 130 × Rs. 8 = Rs. 1,040. The discrepancy occurred due to the use of this account. This difference Rs. 180 is to be transferred to purchase price variance account.
NOTE: Cost accountants may advise the firm to fix the standard price at a price higher than Rs. 8 per unit as loss of Rs. 180 occurred.
This method is used in certain types of materials in which losses or wastage cannot be avoided due to their inherent nature. This inflated price includes carrying costs, losses due to evaporation, deterioration due to natural calamities and seasonal character. For such materials, the production will be charged at an inflated price. Its aim is to recover full costs of materials purchased.
There are three different methods under this category:
We have discussed various methods of pricing issue of materials. Their advantages and disadvantages have been explained. Each method is unique. The choice of a method depends on many factors which are as below:
Among these methods, the method which has the least disadvantages is periodic weighted average price method. But the decision of management and cost accountant will prevail over the choice of the method.
Sometimes, the firms will return materials back to the vendor (supplier). Materials returned are valued at the price at which they were purchased in financial books. But the procedure varies in cost books. Usually, the following procedure will be adopted.
Situation 1: If the materials to be returned are still in stock in stores ledger at the price at which they are received from the vendor, the returned materials will be priced at the value at which they appear in the books (both financial and costing).
Situation 2: If the materials to be returned are not in stock in stores ledger, the returned materials will be priced at the value at which ordinarily issues of materials to production department should have been priced accounting to the method of valuation of stores issues followed by the firms.
But even in this situation, if the defective materials are to be returned to the vendor, they will have to be valued at the price at which they were received.
However, whatever may be the situation, the quantity and value of materials returned to the vendor will be shown DISTINCTLY in the receipts column of stores ledger. Alternatively they may be shown in issues column.
Sometimes, materials are returned by the requisitioning departments (departments which received the materials on requisition) to the stock room (stores room) for credit. The following procedure has to be adopted while valuing materials:
Situation 1: If the firms adopt FIFO or LIFO or HIFO methods, the returned materials will be valued at the price at which they were originally issued. These units should be issued at the old price on the next requisition received.
Situation 2: In case average price method is adopted by the firm, the returned materials should be recorded at the price issued originally. A new average cost would be calculated as if the goods returned were a new purchase, that is, they have to be treated as new receipt.
The quantity and value of materials returned to the stock room will be shown DISTINCTIVELY in the issue column. Again it may be shown in receipts column.
Illustration 2.22
X Ltd takes a periodic inventory of the stocks of material AA’ at the end of each month. The physical inventory taken on 31 December shows a balance of 2000 kg of material AA’ in hand @ Rs. 5.50 per kg.
The following purchases were made during January:
2 January |
28,000 kg @ Rs. 5.75 |
9 January |
25,000 kg @ Rs. 5.80 |
16 January |
35,000 kg @ Rs. 5.85 |
23 January |
10,000 kg @ Rs. 5.90 |
A physical inventory on 31 January discloses that there is a stock of 15,000 kg.
You are required to compute the inventory value on 31 January, by each of the following methods alternatively:
Solution
|
|
|
Rs. |
(a) |
23 January |
10,000 kg @ Rs. 5.90 |
59,000 |
|
16 January |
5,000 kg @ 5.85 |
29,250 |
(b) |
31 December |
2000 kg @ 5.50 |
11,000 |
|
2 January |
13000 kg @ 5.75 |
74,750 |
(c) |
31 December |
2,000 kg @ 5.50 = |
11,000 |
|
2 January |
28,000 kg @ 5.75 = |
1,61,000 |
|
9 January |
25,000 kg @ 5.80 = |
1,45,000 |
|
16 January |
35,000 kg @ 5.85 = |
2,04,750 |
|
23 January |
10,000 kg @ 5.90 = |
59,000 |
|
Total |
1,00,000 kg |
5,80,750 |
|
Average cost per kg |
Rs. 5.8075 |
|
|
Value of inventory on 31 January 15,000 kg × Rs. 5.8075 |
||
|
|
= Rs. 87,112.50 |
|
Generally, difference exists between the input of material in production process and the output. Such difference arises due to loss of materials in a process, which are in the form of scrap, waste, spoilage or defectives.
Scrap may be defined as “the incidental residue from certain types of manufacture usually of small amount and low value recoverable without further processing”.
Scrap may be in the form of off-cuts in leather industry, saw-dust in timber industry, turnings, borings or filings in metal industry.
For effective control of scrap, scrap is classified into different types:
Type 1 Administrative scrap: This type of scrap stems from administrative decisions taken by the firm’s management. Example: Withdrawal from sale, changes in design.
Type 2 Legitimate scrap: Anticipation or predetermination of scrap belongs to this type. Example: Foundry sprue, mill turnings etc.
Type 3 Defective scrap: This type of scrap is not planned. It results from avoidable causes. Example: Sub-standard raw materials, poor handling of plant and machinery control of scrap may be carried on in the following ways:
Waste is defined as that portion of a basic raw material lost during processing or storage having no recovery value. Waste arises due to evaporation and shrinkage. Waste may be classified into two categories:
Waste may also be classified in another way: (1) visible and (2) invisible loss. Visible waste can be seen, while invisible loss cannot be seen.
Control over waste may be exercised as follows:
At times, a waste may be used as a substitute raw material. In such a case, the selling price should be suitably fixed based on the market value of raw material substituted.
Spoiled work may be defined as “Work that cannot be reconditioned or brought up to standard and the units must be sold either as scrap or as second or third grade products”.
During manufacturing process, some are so damaged that they cannot be rectified or repaired. These units have to be sold without further processing. Such units are referred to as spoiled work or spoilage. These do not comply with the standards laid down by the management, as they are damaged in course of manufacturing process. This occurs on account of some defects in operations. Generally, they are incapable of economical rectification.
Spoiled work may be either normal or abnormal. If it is within limits, it is normal; if it exceeds the limit, it is said to be abnormal spoilage.
Control over spoilage may be carried out in the following ways:
This can be explained with the help of an example as follows:
Total input: 10,000 units
Normal spoilage: 5% of output
Total spoiled units: 1,000 units
Total cost: Rs. 50,000
Sale value of spoilage: Re 1 per unit
Standard output: Input − 5%
: 10,000 − 500 = 9,500 units
Cost of abnormal spoilage =
Net cost of abnormal spoilage = Rs. 2,368.42 − (500 × Re 1)
= Rs. 2,368.42 − 500
= Rs. 1,868.42
The cost of abnormal spoilage is charged to costing profit and loss account, and sale value is credited to costing profit and loss account.
There may be some imperfections in the work that can be rectified by use of additional material or processing. The defective work may be classified as follows:
The reasons for defective work are:
Illustration 2.23
1000 kg of art board valued at Rs. 5,000 were issued for the manufacture of medium-sized cartons. The details are as follows:
You are required to calculate the cost of one medium-sized carton, assuming that there are no opening and closing stocks.
Solution
Input—both quantity and value to be taken as base. With this, off-cuts, value of scrap sold, waste in process (to be calculated) are to be deducted. Cost of rectification to be added. Finally cost per carton has to be computed.
(a) Calculation of waste in process:
(b)
Quantity Kg | Value Rs. | |
---|---|---|
Step 1 Input (Given): |
1,000 |
5,000 |
Step 2 Less: off-cuts (transferred to small-sized cartons) (Given): |
250 |
500 |
|
750 |
4,500 |
Step 3 Less: Value of scrap sold (Given) |
50 |
10 |
|
700 |
4,490 |
Step 4 Add: Cost of rectification (Given): |
— |
100 |
|
700 |
4,590 |
*Step 5 Less: Waste in process |
125 |
— |
|
575 |
4,590 |
Step 6 Cost of 1,150 medium-sized cartons = |
Rs. 4,590 |
|
|
|
|
Illustration 2.24
Model: Professional course students (Materials returned to store and shortage)
The following is the summary of the receipts and issues of materials in a factory during a month:
Date:
1. |
Opening balance |
300 units @ Rs. 20/unit |
3. |
Issue |
50 units |
5. |
Issue |
150 units |
7. |
Received |
100 units @ Rs. 19/unit |
9. |
Returned to stores |
10 units @ 19.50 per unit |
11. |
Issue |
100 units |
13. |
Received |
200 units @ Rs. 19.25 per unit |
15. |
Issue |
105 units |
17. |
Returned to store |
15 units @ 19/unit |
20. |
Issue |
100 units |
It was revealed that on 10th, there was a shortage of 5 units and on 21st of 6 units. You are required to work out based on FIFO.
Solution
Stores ledger account is prepared as follows:
Illustration 2.25
Model: Standard cost
Stocks are issued at standard price and the following transactions occurred in a month with respect to a specific material:
Date
1. |
Stock |
25 Tons |
@ Rs. 298 per tonne |
3. |
Purchased |
5 Tons |
@ Rs. 310 per tonne |
5. |
Issued |
5 Tons |
|
9. |
Issued |
10 Tons |
|
12. |
Purchased |
3 Tons |
@ Rs. 320 per tonne |
15. |
Issued |
8 Tons |
|
20. |
Issued |
7 Tons |
|
25. |
Purchased |
4 Tons |
@ Rs. 350 per tonne |
27. |
Issued |
2 Tons |
|
The debit balance of price variation on 1st of this month was Rs. 50. You are required to show that the stock account was Rs. 50. You are required to show the stock account for the material for this month. How would you deal with the difference in material price variance while preparing profit and loss account for this month?
[C.S. (Inter). Modified]
Solution
First, standard price has to be calculated as follows:
∴ Standard price per tonne =
Hence, each issue of material is to be priced at Rs. 300 per tonne.
Stores ledger account is prepared as follows:
|
|
Rs. |
Closing stock 5 tonne value |
|
1,760 |
Closing stock 5 tonne × standard price |
|
1,500 |
Difference |
|
260 (Profit—favourable) |
Material control A/C |
Dr |
9,600 |
Material price variance |
Dr |
260 |
To cost ledger |
|
9,860 |
Pumpkin Pump Co. uses about 1,50,000 valves per year and the usage is fairly constant at 12,500 valves per month. The valves cost about Rs. 3 per unit when bought in quantities and the carrying cost is estimated to be 20% of average inventory investment on annual basis. The cost to place an order and process the delivery is Rs. 36. It takes 45 days to receive delivery from the date of an order and a safety stock of 6,400 valves is desired.
You are required to determine:
[C.S. (Inter). Modified]
Solution
(a) Computation of EOQ:
Step (1) → First, write the formula:
where U = Annual consumption during the year = 1,50,000 (given) valves
P = Cost of placing an order = Rs. 3
H.C = Stock holding cost (%) = 20%
C = Cost/price per unit = Rs. 36
Step (2) → Substituting the values in the equation we get:
Step (3) → The most economical order quantity = 4,242 units
(b) Computation of frequency of an order:
Step (1) → Write the formula for the number of orders to be placed in a year. (First, we have to compute this figure.)
No. of orders to be placed in a year =
Step (2) → Substituting the values in the formula we get,
Step (3) → Now, write the formula for computing the frequency of order:
After every 10 days, an order has to be placed.
(c) Computation of re-order level:
Step 1 → Write the formula:
Step 2 → Substituting the values in the formula, we get:
Illustration 2.27
A publishing house purchases 2,000 units of a particular item per annum at a unit cost of Rs. 20. The ordering cost per order is Rs. 50 and the inventory-carrying cost is 25%.
(a) Find the optimal order quantity and the minimum total cost including purchased cost. (b) If 3% discount is offered by the supplier for the purchase in lots of 1000 units or more, should the publishing house accept the offer?
[C.S. (Inter)]
Solution
(a) Computation of EOQ
Step 1 → Write the formula
Step 2 → Substitute the values in the formula
(b) The acceptance of offer depends on total cost incurred under the following two situations:
Hence, total costs have to be prepared under both situations as follows:
Formula:
Statement showing total costs incurred in purchase under both situations:
Result: Total cost of purchase with 3% discount offer is higher.
Decision: The publishing house should not accept the offer, as its total cost is Rs. 325 higher.
Illustration 2.28
From the following data for the year ended 31 December 2009, calculate the inventory turnover ratio of two items, and put forward your comments on them:
Material X | Material Y | |
---|---|---|
Opening stock (1 January 2009) |
20,000 |
18,000 |
Purchasing during the year |
1,04,000 |
54,000 |
Closing stock (31 December 2009) |
12,000 |
22,000 |
[I.C.W.A. Modified]
Solution
Computation of inventory turnover ratio of X and Y
Result: Inventory turnover is high with respect to material X when compared to that of material Y.
Decision: The management should concentrate on material Y, for which turnover ratio is only 2.5. It has to analyse the causes and take remedial measures immediately as the material Y lies idle for longer period in stores.
For a fixed order quantity system, find out the various perimeters for an item with the following data. Annual consumption, 5,000 units; cost of one unit, Rs. 2; set-up cost, Rs. 24 per production run; the inventory-carrying cost, Re 0.48 per unit; past lead time, 12 days, 20 days, 15 days, 13 days, 25 days, 11 days.
[I.C.W.A. (Modified)]
(a) First, EOQ is calculated:
Step 1→ Write the formula:
where U = Annual demand = 5,000 units
P = Cost of placing an order = Rs. 24
H.C = Stockholding cost = 0.48
C = Price per unit = 2
Step 2→ Substituting the figures in the formula, we get:
(b) Safety stock is computed:
Step 1 → Write down the formula:
Safety stock = Rate of demand (Maximum lead time Average lead time)
In order to find out safety stock, we have to get the necessary figures:
Step 2 → Computation of rate of demand
Formula:
Step 3 → Averge lead time
Step 4→ Safety stock = 13.89 units × (25 days − 16 days)
= 13.89 × 9
=125 units
(c) Re—order level:
Formula:
Substituting the values in the formula, we get:
= 13.89 × 16 + 125 units
= 222.24 + 125 = 347.24 units
(d) Average stock level:
Formula:
Substituting the values, we get:
Illustration 2.30
A factory uses 8,000 varieties of inventory. In terms of inventory holding and inventory usage, the following information is compiled:
You are required to classify the items of inventory as per ABC analysis with reasons.
[C.A. (Inter). Modified]
Solution
As per ABC analysis, items are to be classified into three categories: A, B and C.
Category A:
Those 30 items (shown in table—column representing number of varieties of inventory) are grouped under this A category. Reasons for the inclusion of 30 varieties of inventory items in A category are as follows:
Category B:
220 varieties of inventory items are grouped under B category. Reasons for inclusion in category B are:
This category constitutes 7,750 varieties of inventory items. Reasons for including them in category C are:
Illustration 2.31
A manufacturing company used raw material AA’ as the basic material. The cost of the material is Rs.50 per kg and the input—output ratio is 110%. Due to a sudden shortage in the market the material becomes non-available, and the unit is considering the use of one of the following substitutes available:
Material |
IO Ratio |
Rs. per kg. |
BB’ |
130% |
60. |
CC’ |
105% |
65. |
You are required to recommend which of the above substitutes is to be used. Also indicate additional cost to be incurred.
[I.C.W.A. (Inter). Modified]
Solution
[I.O. ratio: Input—output ratio needs some explanation here. It is used in the measurement of productivity of material, labour etc. This chapter deals with only materials. This implies a relationship between the quantity of material issued to production and the quantity of material got in finished product. This is useful in controlling the cost of materials. The ratio is computed by using the formula:
This is expressed in percentage. The higher the ratio, the lower will be the productivity and vice versa.]
Substituting the figures in the formula, we get:
Direct Materials: The materials that are easily identifiable with the product are called direct materials.
Indirect Materials: Those materials which can not be classified are called indirect materials.
Purchasing Function: a) Objectives of purchase department Methods of purchasing—Centralised and decentralised purchasing—advantages and disadvantages—explained.
Purchase Procedure: The important stages: in tending for materials, issuing tenders, receiving quotations, placing order, inspecting stores received, receiving the stores accepted in inspection and passing bills for payment all are explained with documents used in each stage and specimen of all those documents (Ref: 3–1 to 3–7) Ascertainment of direct materials cost, and issue price of materials to jobs (Ref: 2–1). Accounting Treatment of storage and issue losses (Ref: 2–2).
Stores Functions: Main objectives of store keeping are: To protect stores against losses, to keep materials ready for issue, to avoid overstocking and understocking, and to facilitate perpetual inventory. Important functions of store keeping are: receipt of materials, maintenance of materials, record keeping, storage, issuing stores, periodical checkup, co-ordination, maintaining desired level of stock, periodical review and protection of stores. Advantages and disadvantages of centralised stores (Ref: 5–3) Classification and codifications of materials—Important methods of codification of materials are: alphabetical method, numerical method, alpha numerical method, and decimal method.
Inventory control should be planned in such a way that purchasing and storing should be done judiciously without affecting production. Techniques of inventory control:
Determination of EOQ—(Ref: illustrations 2–3 to 2–8).
Fixation of Stock Levels: Maximum level, minimum level, Re-order level and danger level—(Ref: illustrations: 2–9)
Paerto analysis, FSND analysis are also employed for control and analysis of movement of inventory.
Stock Taking: Periodical stock taking and perpetual stock taking systems prevail for stock taking. Special features and advantages of each system are explained in the text (Ref: sec 14 & 15 and 18).
Issue of Materials: Factors to be considered on issue of materials are: Planning, requisition of materials, Audit of issues, wastage control and sundry items—Material Requisition Note, Bill of Materials, Materials Return Note Transfer Note—Purpose, features, advantages and specimen of these records are discussed in detail Ref: Text sec 20.2 to 20.6.
Pricing of Material Issues: The various methods used for the pricing of materials are discussed in detail with illustration Ref: the text Ref: Sec 21.1 to 21.15 Pricing of materials returned to vendor and stock room are described in section 22 of this chapter.
Accounting treatment of scrap, waste, spoiled work, defective work are discussed in section 23.
Bill of Material: A document that contains the estimated quantity of materials required for a particular job, contract or work.
Goods Received Note: A document which shows the material code, description, specification, quantity, unit price and value of materials
Bin Card: A document that shows the quantity of specified materials available in the bin at any time
Stores Ledger: A record that keeps track of movement of material from and into stores department.
Inventory: The term generally refers to raw materials and work–in–progress. It may also be referred to as “stock”, that is, stock of raw materials, work–in–progress and even some occasions finished goods that are unsold. It is a tangible property.
Economic Order Quantity (EOQ): The reorder quantity, that is, the quantity to be purchased each time an order is placed. “Decision model that calculates the optical quantity of inventory to order under a set of assumptions.”
Lead Time: The time lag between the placing of an order and replenishment of inventory.
ABC Analysis: An analytical tool to monitor and control inventories.
VED Analysis: An important technique for materials management.
Perpetual Inventory: A system of recording “as they occur of receipts, issue, and the resulting balances of individual item of stock in either quantity or quantity and value”.
Periodic Stock–Taking System: “A process whereby all stock items are physically counted and then valued”.
LIFO: A method for pricing the issue of materials in which materials that have been received last are issued first.
FIFO: First in first out; another method of pricing the issue of materials by which the materials that are received first are issued first.
Scrap: The incidental residue from certain types of manufacture usually of small amount and low value recoverable without further processing.
Waste: A Portion of basic raw material lost during manufacturing operation or storage, having no recovery value.
Defective Work: Represents work in which there are imperfections which can be rectified by use of additional process.
Spoilage: Goods damaged beyond rectification that are sold without further processing.
I: State whether the following statements are true or false
Answers:
1. True |
2. False |
3. True |
4. True |
5. True |
6. False |
7. False |
8. True |
9. False |
10. True |
11. True |
12. True |
13. False |
14. False |
15. True |
16. False |
17. False |
18. True |
19. False |
20. True |
21. False |
22. True |
23. True |
24. True |
25. True |
|
|
|
II: Fill in the blanks with apt word(s)
Answers:
1. direct |
2. purchasing |
3. tenders |
4. “Incorporation into products” |
5. direct material |
6. order, job or process |
7. control |
8. material issue price |
9. petty cash |
10. Bin card |
11. good received note |
12. costing |
|
14. |
15. Maximum usage |
16. Reorder level |
17. Normal average usage |
18. inventory control |
19. 80:20 |
20. periodic stock system |
21. Perpetual inventory system |
22. quantity and financial |
23. debited; credited |
24. average inventory |
25. carrying cost |
26. AS (2) |
27. LIFO |
28. LIFO |
29. credited; debited |
30. general overheads |
III: Multiple choice questions
Answers:
1. (a) |
2. (b) |
3. (a) |
4. (c) |
5. (d) |
6. (a) |
7. (c) |
8. (d) |
9. (a) |
10. (c) |
11. (b) |
12. (b) |
13. (c) |
14. (c) |
15. (d) |
16. (a) |
17. (b) |
18. (c) |
19. (d) |
20. (a) |
[Model: Purchase price consideration]
1. A supplier quotes for material A as follows:
Lot price 100 units Rs. 10 each
Lot price 500 units Rs. 9 each
Lot price 1,000 units Rs. 8 each
Trade discount 20%; cash discount 2.5% for payment in seven days. Containers charged at Rs. 20 each Rs. 14 credited or return. The Purchaser decides to buy 600 units. Transport charges amounting to Rs. 20 and storage Rs. 4 were charged by the supplier.
Calculate the purchase price of Material ‘A’
[Madras University]
[Ans: Purchase price per unit: Rs. 7.30]
[Model: Material loss—Rate per unit]
2. One parcel containing two vital components was received by a factory and the invoice relating to the same discloses the following:
|
Rs. - Paise |
|
I |
Material 500 kg at Rs. 2 per kg |
1,000 - 00 |
II |
Material 600 kg at Rs. 1.60 per kg |
960 - 00 |
|
Insurance |
39 - 20 |
|
Sales tax |
98 - 00 |
|
Freight etc. |
55 - 00 |
Transit loss of 10 units of material I and 6 units of material II was noted. However, no insurance claim could be made. Find the issue rate per unit of each material. If a provision for obsolescence of 10% is to be made, find the revised issue rates.
[Madras University]
[Ans: Issue rate per unit of material I : Rs. 2.483
Issue rate per unit of material II : Rs. 1.978
Total cost : Material I : Rs. 1,095
Total cost : Material II: Rs. 1,057.20]
[Model: Purchase cost—Mixed lots]
3. A lorry-load of materials of mixed goods were purchased for Rs. 90,000. These were sorted into the following grades whose market rate is shown against each:
Grade A 5,000 units selling rage @ Rs. 12
Grade B 3,000 units selling rage @ Rs. 10
Grade C 2,000 units selling rage @ Rs. 5
Find the purchase rate per unit on each grade of the material assuming that all grades yield same rate of profit.
[Madurai Kamaraj University]
[Ans: Grade A: Rs. 10.80
Grade B: Rs. 9
Grade C: Rs. 4.50]
[Model: Selection of a supplier]
4. After inviting tenders, two quotations were received as follows:
Supplier A : Rs. 2.20 per unit
Supplier B : Rs. 2.10 per unit plus Rs. 2,000 fixed charges irrespective of units ordered.
[Kerala University 1990 & Madras University 2003]
[Ans: |
(1) 20,000 units |
|
(2) Supplier A would be selected as it would cost Rs. 500 less] |
[Model: Purchase price per unit—Mixed lots]
5. A lorry–load of materials of difference grades were purchased for Rs. 3,00,000. Materials are sorted into the following grades whose market rate is shown against each of them:
|
|
selling price per unit |
|
units |
Rs. |
Grade A |
20,000 |
6 |
Grade B |
15,000 |
5 |
Grade C |
10,000 |
3 |
Find out the purchase price per unit of each grade of the material assuming that all the grades yield the same rate of profit.
[Ans: Purchase price per unit: A, Rs. 8; B, Rs. 6.67: C, Rs. 6]
[Model: Economic order quantity Questions 6 to 20]
6. A manufacturer buys certain equipment from outside suppliers at Rs. 30 per unit. Total annual needs are 80,000 units. The following further data are available:
Annual return on investment |
10% |
Rent, insurance, taxes per unit per year |
Rs. 13 |
Cost of placing an order |
Rs. 100 |
Determine the EOQ |
|
[Bharathidasan University]
[Ans: 1,000 units]
7. Calculate the economic order quantity:
Annual consumption |
600 units |
Order cost |
Rs. 12 per order |
Cost price per unit |
Rs. 20 |
Selling and carrying cost |
20% |
[Madras University 2003 & 2005; Periyar University 2005]
[Ans: 60 units]
8. Calculate the EOQ from the following data:
Annual requirement 1600 units
Cost of material per unit Rs. 40
Cost of placing and receiving one order Rs. 50
Annual carrying cost of inventory 10% of inventory value
[Madras University]
[Ans: 200 units]
9. A manufacturer uses 75,000 units of a particular material per year. The material cost is 1.50 per unit and the carrying cost is estimated to be 25% p.a. of average inventory cost. The cost of placing an order is Rs. 18. You are required to determine EOQ and the frequency of order p.a.
[Ans: EOQ = 2,691 units;
Frequency of orders: 28 p.a.]
10. Compose the economic order quantity from the following data:
Monthly usage |
150 units |
Buying cost |
Rs. 2 per order |
Cost per unit |
Re. 0.32 |
Storage cost |
25% p.a. |
[Osmania University]
[Ans: 300 units]
11. Find the economic order quantity when the annual consumption is 6,000 kg; ordering cost is Rs. 120 per order; price per kg is Rs. 20; and carrying cost is 20%. Also ascertain the frequency of placing orders.
[Bharathidasan University]
[Ans: EOQ = 600 kg; No. of orders 10 p.a; frequency one order per 1.2 months]
12. Calculate economic order quantity. Also state the number of orders to be placed in a year.
Consumption of material per annum |
10,000 kg |
Cost of material per kg |
Rs. 2 |
Order placing costs per order |
Rs. 50 |
Storage costs 8% on average inventory |
|
[Madras University 2008]
[Ans: |
EOQ : 2,500 kg |
|
No. of orders to be placed = 4 p.a] |
13. Find out the economic ordering quantity from the following particulars:
Annual usage: Rs. 1,20,000
Cost of placing and receiving one order: Rs. 60
Annual carrying cost: 10% of inventory value
[Delhi University B.Com (pass)]
[Ans: EOQ = Rs. 12,000]
(Hint = Material usage is given in Rupees)
14. An engineering company consumes 50,000 units of a component per year. The ordering, receiving and handling costs are Rs. 3 per order, while the trucking costs are Rs. 12 per order. Further details are as follows:
Interest: Rs. 0.60 per unit per year
Deterioration cost: Rs. 0.004 per unit per annum
Storage cost: Rs. 1,000 per annum for 5,000 units
Calculate the EOQ.
[Madras University B.A. (Corp.)]
[Ans: 2,384 units]
15. The following details are available in respect of a firm:
Inventory required per year: 6,000 units
Carrying costs per item for one year: Re 1
Cost of placing each order: Rs. 60
Alternative order sizes (units): 6,000; 3,000; 2,000; 1200; 1,000; 600.
Determine EOQ.
[Madras University 2006]
[Ans: EOQ = 849 units
Nearest order size is 1,000 units]
16. Find out the EOQ and order schedule for raw materials and packing materials units using the following data given to you:
(1) Cost of ordering: |
|
Raw materials: |
Rs. 1,000 per order |
Packing materials: |
Rs. 5,000 per order |
(2) Cost of holding inventory: |
|
Raw materials: |
1 ps. per unit per month |
Packing materials: |
5 ps. per unit per month |
(3) Production rate: |
2,00,000 units per month |
[Ans: Raw materials: 2,00,000 units; one order p.m Packing materials : 2,00,000 units; one order p.m]
17. The Jambawan Ltd uses about 75,000 valves per year and usage is at 6,250 values per month. The cost of the valve is Rs. 1.50 per unit, when bought in quantities and the carrying cost is estimated to be 20% of average inventory investment on the annual basis. The cost to place an order and to process the delivery is Rs. 18. It takes 45 days to receive delivery from the date of an order, and the safety stock of 3,250 valve is desired. You are required to determine:
[Ans: (a) 3,000 values; (b) 12,625 values]
18. From the following particulars, calculate the number of orders to be placed and the total cost of EOQ:
[Ans: EOQ: 6,000 units; No. of orders : 10;
Total cost of EOQ : Rs. 12,000]
19. A manufacturer has to supply to his customer 600 units of his product per year. Storage is not allowed and the inventory–carrying costs amount to Rs. 0.60 per unit per year. The setup cost per run is Rs. 80. Find:
[Ans: (i) 400 units; (ii) Rs. 280; (iii) 2; (iv) 8 months]
20. Following is the information relating to a type of material:
Annual demand |
2,400 units |
Unit price |
Rs. 2.40 |
Ordering cost per order |
Rs. 4.00 |
Storage cost |
2% p.a. |
Interest rate |
10% p.a. |
Lead time |
Half month |
Calculate EOQ and total annual inventory cost
[Ans: EOQ : 258 units; Total inventory cost : Rs. 5837]
Model: Stores ledger account pricing of material issues Questions 21 to 49
[Model: FIFO Method]
21. The following information is extracted from the stores ledger of Anu Ltd:
September 1. |
Opening balance |
500 units at Rs. 10 |
6. |
Purchases |
100 units at Rs. 11 |
20. |
Purchases |
700 units at Rs. 12 |
27. |
Purchases |
400 units at Rs. 13 |
October 13. |
Purchases |
1,000 units at Rs. 14 |
20. |
Purchases |
500 units at Rs. 15 |
November 17. |
Purchases |
400 units at Rs. 16 |
Issue of materials:
September |
9 |
500 units |
|
22 |
500 units |
|
30 |
500 units |
October |
15 |
500 units |
|
22 |
500 units |
November |
11 |
500 units |
Issues are to be priced on the principle of FIFO. Write the stores ledger account.
[Madras University 2008]
[Ans: Closing stock 600 units at Rs. 9,400]
22. The following is the record of receipts and issues of a certain material for the month of December:
December 3. |
Opening balance 200 kg at Rs. 20 per kg |
4. |
Issue 100 kg |
10. |
Issue 50 kg |
18. |
Purchases 300 kg at Rs. 18 per kg |
19. |
Issue 300 kg |
28. |
Purchases 50 kg at Rs. 15 per kg |
30. |
Issue 100 kg |
30. |
Received back from completed job 5 kg |
|
(previously issued at Rs. 20 per kg) |
Prepare a stores ledger account based on FIFO Method.
[Mysore University]
[Ans: Closing stock: 5 kg at Rs. 100]
23. The following information is extracted from the stores ledger:
January 1. |
Opening balance 500 units at Rs. 4 |
5. |
Purchases 200 units at Rs. 4.25 |
12. |
Purchases 150 units at Rs. 4.10 |
20. |
Purchases 300 units at Rs. 4.50 |
25. |
Purchases 400 units at Rs. 4 |
Issue of materials were as follows:
January 4. |
200 units |
10. |
400 units |
15. |
100 units |
19. |
100 units |
26. |
200 units |
30. |
250 units |
Issue are to be priced on the principle of FIFO method. Write up the stores ledger account.
[Madras University 2007; Periyar University 2005; Dr B. R. Ambedkar Open University]
[Ans: Closing stock: 300 units at Rs. 1,200]
24. Prepare a stores ledger account from the following information adopting FIFO method of pricing of issues of materials:
[Madras University]
[Ans: Closing stock: 565 tonne at Rs. 1,12,275]
25. The records of receipts and issues of carbon chemicals of Hexa factory during December 2008 are as follows:
December 4. Opening balance 100 tonne @ Rs. 200
8. Issued 50 tonne
14. Received from supplier 40 tonne @ Rs. 190
17. Issued 36 tonne
21. Received from supplier 48 tonne @ Rs. 180
24. Issued 60 tonne
25. Returned to suppliers 10 tonne out of goods received on 21 December.
26. Received from supplier 64 tonne @ Rs. 190
29. Issued 40 tonne
30. Returned from department 6 tonne @ Rs. 190
While verifying stock, a shortage of 2 tonne on 23 December was noticed and left a note accordingly. Prepare stores ledger account under FIFO Method.
[Ans: Closing stock: 60 tonne at Rs. 11,400]
26. The Hindustan Heavy Electrical closes its account at the end of each month. The following information is available for the month of April:
|
Rs. |
Sales |
5,00,000 |
Administrative expenses |
40,000 |
Inventory (1 April) :
100 tonne at Rs. 1,000 per tonne 1,00,000
Purchases:
10 April 200 tonne at Rs. 900 per tonne : 1,80,000
20 April 200 tonne at Rs. 800 per tonne : 1,60,000
Inventory (30 April): 100 tonne
Compute the following under FIFO method.
[Ans: |
(a) Rs. 80,000 (100 tonne × Rs. 800) |
|
(b) Rs. 3,60,00 |
|
(c) Profit Rs. 1,00,000] |
27. From the following particulars, prepare the stores ledger under LIFO method:
January 1. Purchased 200 Units @ Rs. 5 per unit
5. Purchased 500 Units @ Rs. 6.50 per unit
7. Issued 350 units
14. Purchased 450 units @ Rs. 7.10 per unit
19. Issued 600 units
[Ans: Closing stock: 200 units at Rs. 1,000]
28. From the following information, show the stores ledger account on LIFO method:
June 1. Opening stock 800 kg @ Rs. 10 each
4. Purchased 250 kg @ Rs. 9 each
12. Purchased 400 kg @ Rs. 10 each
16. Purchased 600 kg @ Rs. 10.50 each
23. Purchased 300 kg @ Rs. 11. each
Issued to manufacturing department as follows:
On 15 June stock verification received a shortage of 8kg. The maximum level is 1,400 kg. Minimum level is 650 kg. At the end of the month, stock verification revealed that there is a surplus of 2 kg.
[Mysore University. Modified]
[Ans: 524 kg valued at Rs. 5,200]
29. The following information is provided by Sunrise industries for the fortnight of April: Material stock on 1 April 100 units @ Rs. 5 per unit.
Material stock on 1 April 100 units @ Rs. 5 per unit.
April |
5. Purchases |
300 units at Rs. 6 |
|
6. Issues |
250 units 8. Purchases |
|
|
500 units at Rs. 7 |
|
10. Issues |
400 units |
|
12. Purchases |
600 units at Rs. 8 |
|
14. Issues |
500 units |
Required:
Calculate using LIFO methods of pricing issues:
[Madras University]
[Ans: |
(a) Value of materials consumed: Rs. 8,300 |
|
(b) Closing stock: 350 units at Rs. 2,300] |
[Model: FIFO and LIFO methods]
30. X company has purchased and issued materials as follows:
June 1. Stock of materials |
200 units at Rs. 2.50 per unit |
3. Purchased |
300 units at Rs. 3 per unit |
7. Purchased |
500 units at Rs. 4 per unit |
10. Issued |
600 units |
12. Purchased |
400 units at Rs. 4 per unit |
500 units |
|
24. Purchased |
400 units at Rs. 5 per unit |
28. Issued |
200 units |
Prepare the stores ledger account under FIFO method and LIFO method.
[Madras University]
[Ans: Closing stock: FIFO: 500 units at Rs.2,400 LIFO: 500 units at Rs.1,800]
[Model: FIFO and LIFO Excess stock (surplus) scrap]
31. Prepare stores ledger accounts for the month of August, pricing the materials issued based on FIFO and LIFO:
January 1. Opening stock: |
200 tonne @ Rs. 460 |
2. Issued to Job No. 1: |
140 tonne |
5. Purchased: |
350 tonne @ Rs. 450 |
6. Condemned due to deterioration in quality and thus scrapped: |
30 tonne |
10. Issued to Job No. 10: |
80 tonne |
11. Issued to Job No. 29: |
210 tonne |
15. Purchased: |
200 tonne @ Rs.480 |
21. Issued to Job No. 39: |
120 tonne |
24. Purchased: |
180 tonne @ Rs.470 |
29. Issued to Job No. 45: |
280 tonne |
31. Stock verification reveals excess stock of 10 tonne |
[Ans: |
Closing stock: FIFO: |
80 tonne at Rs. 37,700 |
|
LIFO: |
80 tonne at Rs. 36,900 ] |
[Model: FIFO and LIFO—Returns]
32. Enter the following transactions in the stores ledger of Y material using (i) FIFO and (ii) LIFO methods:
May 1. |
Balance: |
250 units at Rs.1 per unit |
|
3. |
Issued: |
50 units on material requisition No. 61. |
|
6. |
Received: |
800 units vide Goods Received Note No. 13 at Rs.1.10 per unit |
|
7. |
Issued: No. 63 |
300 units on Material Requisition |
|
8. |
Returned to stores: |
20 units issued on Material Requisition No. 61. |
|
12. |
Received: |
300 units as per GRN No.15 at Rs. 1.20 per unit |
|
15. |
Issued: |
320 units [M.R. No. 83] 18. Received: 100 units (GRN No.77) at Rs. 1.20 per unit |
|
20. |
Issued: |
80 units (M. R. No. 102) |
|
23. |
Returned to vendors 20 units from goods received Note No. 77 received on 18 May |
|
|
27. |
Received: |
200 units on GRN No. 96 at Rs. 1 per unit |
|
28. |
Freight paid on purchase (GRN No. 96): Rs. 50 | ||
30. |
Issued: 250 units on M.R. No. 113 |
[Madras University]
[Ans: Closing stock: |
1. FIFO: 650 units at Rs. 781 |
|
2. LIFO: 650 units at Rs. 695] |
[Model: FIFO and LIFO—Shortage]
33. From the following transactions, prepare separately the stores ledger account using (1) FIFO and (2) LIFO.
January |
1. Opening balance |
100 units @ Rs. 5 each |
|
5. Received |
500 units @ Rs. 6 each |
|
20. Issued |
300 units |
February |
5 Issued |
200 units |
February |
6 Received back from Work order issued on 5 Feb |
10 units |
|
7. Received |
600 units @ Rs. 5 each |
|
20. Issued |
300 units |
|
25. Returned to supplier |
50 units purchased on 7 February |
|
26. Issued |
200 units |
March |
10. Received |
500 units at Rs. 7 per unit |
|
15. Issued |
300 units |
Stock verification on 15 March revealed a shortage of 10 units.
[Ans: Closing stock: |
FIFO: 350 units at Rs. 2,450 |
|
LIFO: 350 units at Rs. 2,140] |
[Model: Specific Price and FIFO]
34. From the following information, prepare a stores ledger account under specific pricing with FIFO:
April 1. |
Opening balance |
50 kg @ Rs. 10 |
2. |
Issued |
30 kg |
4. |
Purchased |
60 kg @ Rs. 11 |
5. |
Purchased |
50 kg @ Rs. 12 |
|
|
for a specific job to be issued on 15 April |
6. |
Issued |
25 kg |
10. |
Purchased |
50 kg @ Rs. 10 |
16. |
Issued |
60 kg |
25. |
Purchased |
25 kg @ Rs. 12 |
30. |
Issued |
35 kg |
[Madras University]
[Ans: Closing stock: 35 kg at Rs. 400]
[Model: Specific price and LIFO]
35. Prepare a stores ledger account for material X for March, pricing the material based on
LIFO with specific pricing:
[Ans: Closing stock: at Rs. 2,900 for 150 units]
[Model: FIFO and LIFO—Refund and shortage]
36. The following transactions took place in the month of February:
February 1. Opening Balance |
500 quintals @ Rs. 25. |
3. Issue |
70 quintals |
4. Issue |
100 quintals |
8. Issue |
80 quintals |
13. Received from vendor |
200 quintals |
14. Refund of surplus from a work order |
15 quintals @ Rs. 24.50 |
16. Issue |
180 quintals |
20. Received from vendor |
240 quintals @ Rs. 24.37 |
24. Issue |
340 quintals |
25. Received from vendor |
320 quintals @ Rs. 24.31 |
26. Issue |
112 quintals |
27. Refund of surplus from a work order |
12 quintals @ Rs. 24.50 |
28. Received from vendor |
100 quintals @ Rs. 25 |
The store verifier of the factory noticed that on 15 February he had found a shortage of 5 quintals and on 27February another shortage of 8 quintals.
Write up the complete stores ledger account in respect of materials using (a) FIFO and (b) LIFO methods.
[Ans: Closing stock: |
FIFO: 528 quintals at Rs. 12,194 |
|
LIFO: 528 quintals at Rs. 13,056] |
[Model: HIFO Method]
37. Lords Co. Ltd has purchased and issued material Z as follows:
April |
1. Opening stock |
3,000 units at Rs. 6 per unit |
|
3. Purchased |
750 units at Rs. 7 per unit |
|
6. Purchased |
1,050 units at Rs. 7.50 per unit |
|
9. Issued |
1,100 units |
|
12. Purchased |
450 units at Rs. 9 per unit |
|
14. Purchased |
300 units at Rs. 8 per unit |
|
15. Issued |
500 units |
|
17. Purchased |
300 units at Rs. 10 per unit |
|
25. Purchased |
250 units at Rs. 9.50 per unit |
|
30. Issued |
300 units |
Ascertain the value of closing stock under HIFO method of pricing issues.
[Ans: Closing stock: 4,200 units @ Rs. 27,275]
[Model: Base stock method with FIFO]
38. From the following particulars, write up the stores ledger card:
January |
1. Opening stock |
2,000 units at Rs. 5 each |
|
5. Purchased |
1,800 units at Rs. 6 each |
|
10. Issued |
2,400 units |
|
12. Purchased |
1,600 units at Rs. 6.20 each |
|
15. Purchased |
600 units at Rs. 6.40 each |
|
19. Issued |
800 units |
|
22. Issued |
1,200 units |
|
27. Purchased |
400 units at Rs. 6.50 each |
|
31. Issued |
1,200 units |
Adopt base stock method with FIFO. Base stock is 500 units out of opening stock.
[Ans: Closing stock: 800 units at Rs. 4,450]
[Model: Base stock with LIFO]
39. From the following particulars write up the stores ledger card:
January |
1. Purchased |
500 units at Rs. 2 per unit |
|
10. Purchased |
300 units at Rs. 2.10 per unit |
|
13. Issued |
500 units |
|
20. Purchased |
400 units at Rs. 2.20 per unit |
|
25. Issued |
300 units |
|
27. Purchased |
500 units at Rs. 2.10 per unit |
|
31. Issued |
200 units |
Adopt base stock method with LIFO. Base stock is 200 units of January 1 purchase.
[Ans: Closing stock: 700 units (200 + 500) at Rs. 1,450 (Rs. 400 + 1,050)]
[Model: Base stock with FIFO]
40. The stock of materials as on 1 January was 750 units @ Rs.1.50 per unit. Following purchases and issues of this item were made subsequently:
Prepare stores ledger account assuming that the issues are made under base stock method in conjunction with FIFO method. Base Stock Units: 400
[Bangalore University]
[Ans: Closing stock: (400 + 50 Units) at Rs. 697.50 400 × Rs1.50 + 50 × Rs. 1.95]
[Model: Simple average method]
41. From the following transactions, prepare stores ledger account using simple average price method:
January |
1. Opening balance 100 units at Rs. 5 each |
|
5. Received 500 units at Rs. 6 each |
|
20. Issued 300 units |
February |
5. Issued 200 units |
|
6. Received 500 units at Rs. 5 each |
March |
10. Issued 300 units |
|
12. Issued 250 units |
[Nagarjuna University]
[Ans: Closing stock: 50 units at Rs. 275]
42. From the following details, write up stores ledger account using simple average method:
December |
1. Opening balance |
100 kg @ 5.00 |
|
Received |
50 kg @ 5.20 |
|
8. Issued |
120 kg |
|
10. Issued |
10 kg |
|
15. Received |
80 kg @ Rs. 5.40 |
|
18. Issued |
50 kg |
|
20. Received |
100 kg @ Rs. 5.60 |
|
25. Issued |
40 kg |
|
29. Issued |
60 kg |
The stock verifier found a shortage of 10 kg on 16 December and another shortage of 10 kg on 26 December.
[Calcutta University, B.com]
[Ans: Closing stock: 30 kg at Rs.158]
[Model: Weighted average method]
43. Prepare the stores ledger account based on the weighted average method of pricing issues:
September |
24,000 kg @ Rs. 7,500 per tonne |
1. Opening balance |
|
1. Purchased |
44,000 kg @ 7,600 per tonne |
1. Issued |
10,000 kg |
5. Issued |
16,000 kg |
12. Issued |
24,000 kg |
13. Purchased |
10,000 kg @ 7,800 per tonne |
18. Issued |
20,000 kg |
22. Purchases |
50,000 kg @ 8,000 per tonne |
28. Issued |
30,000 kg |
30.Issued |
22,000 kg |
[Sri Venkateswara University, Tirupathi, A.P.]
[Ans: Closing stock: 6,000 kg at Rs. 47,686]
44. Prepare a stores ledger account by adopting the weighted average method of pricing:
September |
1. Opening balance |
50 units @ Rs. 3 per unit |
|
4. Issued |
2 units |
|
8. Purchased |
48 units @ Rs. 4 per unit |
|
9. Issued |
20 units |
|
15. Purchased |
76 units @ Rs. 3 per unit |
|
22. Received back into stores |
19 units out of 20 units issued on 9 September |
|
30. Issued to production: |
10 units |
[Madurai Kamaraj University; Madras University and Bangalore University]
[Ans: Closing stock: 161 Units at Rs. 527.72]
45. From the following transactions, prepare a priced ledger sheet, pricing the issues at weighted average rate:
[Madras University 2002 & 2007; Bharathiar University 2007]
[Ans: Closing stock 300 units at Rs. 726]
[Model: Simple average and weighted average]
46. The following transactions took place in respect of a material:
Prepare stores ledger account showing the pricing of materials issued under
[Ans: Closing stock: (a) 1,000 units at Rs. 6,400 (b) 1,000 units at Rs. 6,528]
47. The following receipts and issues were made of material during the month of May. Prepare stores ledger account on the basis of
Receipts: |
|
|
May 1. |
Opening balance of stock |
300 units at Rs. 4.50 per unit |
7. |
Purchases |
400 units at Rs. 5.00 per unit |
15. |
Purchases |
1,000 units at Rs. 5.50 per unit |
23. |
Purchases |
700 units at Rs. 4.80 per unit |
Issues: |
|
|
May 3. |
Issues |
300 units |
8. |
Issues |
100 units |
17. |
Issues |
700 units |
26. |
Issues |
700 units |
[Madras University]
[Ans: |
(a): 600 units at Rs. 3,080 |
|
(b): 600 units at Rs. 3,042] |
[Model: Combination of any two or more methods LIFO and weighted average]
48. The following particulars relate to the receipts and issues of a material during the month of March:
March 4. |
Received |
500 units at Rs. 2.00 each |
18. |
Received |
350 units at Rs. 2.10 each |
19. |
Issued |
600 units |
24. |
Received |
600 units at Rs. 2.20 each |
25. |
Issued |
450 units |
26. |
Received |
500 units @ Rs. 2.30 each |
28. |
Issued |
510 units |
30. |
Issued |
100 units |
Prepare stores ledger account using (a) LIFO and (b) weighted average method.
[Nagarjuna University]
[Ans: |
(a) LIFO: 290 units at Rs. 588 |
|
(b) Weighted average: 290 units at Rs. 647] |
[Model: FIFO, LIFO and weighted average method]
49. The following information is extracted from the stores ledger:
Purchases: |
|
|
January |
1. |
100 units at Rs. 1 per unit |
|
20. |
100 units at Rs. 2 per unit |
Issues: |
|
|
January |
22. |
60 units for Job W16 |
|
23. |
60 units for Job W17 |
Complete the receipts and issues by adopting the (1) FIFO (2) LIFO and (3) weighted average methods.
[Madras University]
[Ans: Value of closing stock:
[Model: Material—stock levels, Questions 50 to 56]
50. Find out re-order level:
Maximum usage |
300 units |
Minimum usage |
200 units |
Re—order period |
8 to 10 days |
[Bharathidasan University]
[Ans: 3,000 units]
51. From the following information, calculate maximum, minimum and average stock levels.
Normal consumption |
500 kg |
Minimum consumption per day |
200 kg |
Maximum consumption per day |
800 kg |
Lead time |
10 to 16 days |
Reorder quantity |
3,000 kg |
[Madras University]
[Ans: |
Maximum stock level: 13,800 kg |
|
Minimum stock level: 6,300 kg |
|
Average stock level: 7,800 kg (or) 10,050 kg] |
52. Find out (a) the reorder level (b) the minimum level and (c) the maximum level:
Normal usage |
100 units per day |
Minimum usage |
60 units per day |
Maximum usage |
130 units |
EOQ |
5,000 units |
Reorder period |
25 to 30 days |
[Dr. Ambedkar Open University]
[Ans: (a) 3,900 units (b) 1,150 units and (c) 7,400 units]
53. In manufacturing its products, a company uses three raw materials A, B and C in respect of which the following apply:
Weekly production varies from 175 to 225 units, averaging 200. What would you expect the quantities of the following to be:
[Poona B.Com. Modified]
[Ans: (a) 4,000 kg (b) 7,650 kg (c) 5,400 kg (d) 9,000 kg]
54. In a factory three components P, Q and R are used as follows:
Normal usage: 900 units per week each
Maximum usage: 1,350 units per week each
Minimum usage: 450 units per week each
Re-order quantity: |
P – 7,200 units |
|
Q – 9,000 units |
|
R – 10,800 units |
Re-order Period |
P – 2 to 4 weeks |
|
Q – 4 to 6 weeks |
|
R – 3 to 5 weeks |
Compute for each component (i) reorder level, (ii) maximum level, (iii) minimum level and (iv) average stock level.
[Nagarjuna University]
55. Two materials A and B are used as follows:
Normal consumption: 50 units per week each
Minimum consumption: 25 units per week each
Maximum consumption: 75 units per week each
Re-order quantity: |
A – 300 Units |
|
B – 500 Units |
Re-order period: |
A – 4 to 6 weeks |
|
B – 2 to 4 weeks |
Calculate (a) reorder level, (b) minimum level, (c) maximum level and (d) average stock level.
[Madras University and Periyar University—15 times—most frequently asked question]
[Ans: |
(a) Re-order level: A, 450 units; B, 300 units |
|
(b) Minimum level: A, 200 units; B, 150 units |
|
(c) Maximum level: A, 650 units; B, 750 units |
|
(d) Average stock level: A, 425 units or 350 units; B, 450 units or 400 units] |
56. The following information pertaining to a firm is available:
Annual consumption |
12,000 units (360 days) |
Cost per unit |
Rs. 1 |
Cost per order |
Rs. 12 |
Inventory–carrying cost |
20% p.a. |
Lead time: |
|
Maximum |
30 days |
Normal |
15 days |
Minimum |
5 days |
Daily consumption: |
|
Maximum |
45 units |
Normal |
33 units |
Minimum |
15 units |
Calculate inventory levels |
|
[Madras University]
Ans: |
Re-order level : 1,350 units |
|
EOQ : 1,200 units |
|
Maxim um level : 2,475 units |
|
Minimum level : 855 units] |
[Model: Inventory turnover ratio]
57. Calculate the material turnover ratio for year 2009 from the following details:
Material A Rs. | Material B Rs. | |
---|---|---|
Opening stock |
25,000 |
87,500 |
Closing stock |
15,000 |
62,500 |
Purchases |
1,90,000 |
1,25,000 |
Calculate:
[Ans: Material turnover ratio: A, 10 times; B, 2 times Fast-moving material is A because of its higher turnover]
58. From the following information, calculate
Material X (units) | Material Y (units) | |
---|---|---|
Opening stock |
75,000 |
25,000 |
Purchases |
2,00,000 |
4,00,000 |
Closing stock |
25,000 |
50,000 |
[Ans: |
(a) Material turnover ratio: X, 5 times; Y, 10 times |
|
(b) Material turnover period: X, 73 days or 2.4 months; Y, 36.5 days or 1.2 months |
|
(c) Faster moving material is Y because it has higher material turnover ratio] |
Exercises for professional course students and postgraduate course students (C.S., C.A., I.C.W.A., B.Com (Hons) and M.Com)
59. G Ltd produces a product which has a monthly demand of 4,000 units. The product requires a component × which is purchased at Rs. 20. For every finished product, one unit of component is required. The ordering cost is Rs. 120 per order and the holding cost is 10% p.a. You are required to calculate:
[C.A. (Inter); C.S. (Inter)]
[Ans: (i) 2,400 units, (ii) Rs. 640, (iii) Rs. 2,400]
60. The following relates to inventory costs for ABC Ltd
Calculate:
[I.C.W.A. (Final)]
[Ans: (a) 5,000 units, (b) 80 orders, (c) 25,333 units]
61. Following information relating to a type of raw material is available:
Annual demand |
2,400 units |
Unit Price |
Rs. 2.40 |
Ordering cost |
Rs. 4 per order |
Storage cost |
2% p.a. |
Interest rate |
10% |
Lead time |
Half month |
Calculate EOQ and total inventory cost in respect of the particular material.
[I.C.W.A. (Inter)]
[Ans: EOQ, 258 units; Total inventory cost, Rs. 5,837.15]
62. A firm is able to obtain quantity discount on its order of material as follows:
Price per tonne |
tonne |
Rs. 6.00 |
Less than 250 |
Rs. 5.90 |
more than 250 and less than 800 |
Rs. 5.80 |
more than 800 and less than 2,000 |
Rs. 5.70 |
more than 2,000 and less than 4,000 |
Rs. 5.60 |
4,000 and over |
The annual demand for the material is 4,000 tonne. Stock holding costs are 20% of material cost per annum. The delivery cost per order is Rs. 6. You are required to calculate the best quantity to order.
[C.A. (Inter)]
[Ans: EOQ, 207 tonne; Optimum ordering quantity is 800 units because of its least cost Rs. 23,694]
63. A purchase manager has decided to place orders for minimum quantity of 500 numbers of a particular item in order to get a discount of 10%. From the records it was found that in the last year, 8 orders each of size 200 numbers had been placed. Given: ordering cost is Rs. 500 per order, inventory–carrying cost is 40% of the inventory value and the cost per unit is Rs. 400.
[C.A. (Final)]
[Ans: EOQ, 100 units; order, 16.
Effect: Total inventory cost at EOQ level: Rs. 65,600
Total inventory cost of last year: Rs. 6,60,000
Total inventory cost due to manager’s decision: Rs. 6,14,000
∴ Savings incurred = Rs. 6,60,000 – Rs. 6,14,000
= Rs. 46,000.
Hence purchase manager’s decision is justified.]
64. The purchase department of your organization has received an offer of quantity discounts on its order of materials as under:
Price per tonne |
|
Rs. |
tonne |
1,400 |
Less than 500 |
1,380 |
more than 500 and less than 1,000 |
1,360 |
more than 1,000 and less than 2,000 |
1,340 |
more than 2,000 and less than 3,000 |
1,320 |
3,000 and above |
The annual requirement of the material is 5,000 tonne. The delivery cost per order is Rs. 1,200 and the annual stock holding cost is estimated at 20% of the average inventory.
The purchase department wants you to consider the following purchase options and advise which among them will be the most economical ordering quantity, presenting the relevant information in a tabular form.
The purchase quantity orders to be considered are 400, 500, 1,000, 2,000 and 3,000 tonne.
[C.A. (Inter)]
[Ans: 1,000 tonne]
65. X Ltd is committed to supply 24,000 bearings per annum to Y Ltd on a steady basis. It is estimated that it costs 10 paise as inventory–holding cost per bearing per month and that the setup cost per run of bearing manufacture is Rs. 324.
[C.A. (Inter)]
[Ans: (a) 3,600 bearings, (b) Extra cost incurred, Rs. 576 and (c) Rs. 2,160]
66. The following details are available in respect of a consignment of 1,250 kg of material X:
(a) Invoice Price Rs. 20 per kg |
|
(b) Excise duty |
25% on invoice price |
(c) Sales tax |
8% on invoice price including excise duty |
(d) Trade discount |
10% on invoice price |
(e) Insurance |
1% of aggregate net price |
(f) Delivery charges |
Rs. 250 |
(g) Cost of containers @ Rs. 60 per container for 50 kg of material. Rebate is allowed at Rs. 40 per container if returned within six weeks, which is a normal feature. |
|
(h) One container load of material was rejected on inspection and not accepted. |
|
(i) Cost of unloading and handling @ 0.25% of the cost of materials ultimately accepted. |
[I.C.W.A. (Inter)]
[Ans: Rs. 25.92]
67. The complete Gardener is deciding on the economic order quantity for two brands of lawn fertilizer: “Super–Grow” and “Natives Own”. The following information is collected:
|
Fertilizer |
|
|
Super–Grow |
Natives Own |
Annual demand |
2,000 bags |
1,280 bags |
Relevant ordering cost per purchase order |
Rs. 1,200 |
Rs. 1,400 |
Annual relevant carrying cost per bag |
Rs. 480 |
Rs. 560 |
Required:
[C.A. (Inter)]
[Ans: |
Super Grow |
Natives Own |
|
(i) 100 bags |
80 bags |
|
(ii) Rs. 48 ers |
16 orders] |
68. A publishing house purchases 2,000 units of a particular item per annum at a unit cost of Rs. 20. The ordering cost per order is Rs. 50 and the inventory carrying cost is 25%.
[C.S. (Inter)]
[Ans: (a) 200 units and (b) Offer should be rejected. The total cost of purchase is Rs. 325 higher.]
69. From the following data, for the year ended 31 December 2009, calculate the inventory turnover ratio of the two items, and put forward your comments on them.
Material A Rs. | Material B Rs. | |
---|---|---|
Opening stock (1 January2009) | 10,000 | 9,000 |
Purchases during the year | 52,000 | 27,000 |
Closing stock (31 December 2009) | 6,000 | 11,000 |
[I.C.W.A. Modified]
[Ans: Inventory turnover ratio: A, 7 times; B, 2.5 times]
70. The following data are available in respect of material X for a year.
|
Rs. |
Opening stock |
90,000 |
Purchases during the year |
2,70,000 |
Closing stock |
1,10,000 |
[C.A. (Inter)]
[Ans: (i) 2.5, (ii) 146 days]
71. ZEE is a manufacturer of a product out of three raw materials M, N and Q. Each unit of Zee product requires 10, 8 and 6 kg of M, N and Q respectively. The reorder levels of M and N are 15,000 and 10,000 kg respectively, while the minimum level of Q is 2,500 kg. The weekly production of ZEE varies from 300 to 500 units, while the weekly average production is 400 units. You are required to compute:
The following additional data are given to you:
[I. C. W A. (Inter)]
[Ans: (a) 3,000 kg, (b) 15,400 kg, (c) 15,000 kg]
72. M/S Tubes Ltd is the manufactures of picture tubes for T.V. The following are the details of their operations:
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 to 8 weeks |
Compute from the above
[C.A. (Inter)]
[Ans: |
(1) 102 tubes; The offer can be accepted. |
|
(2) Maximum Level, 1,402 units; (3) Minimum Level, 900 units; (4) Reorder level, 1,600 units] |
73. From the details given below, calculate:
Reordering quantity is to be calculated based on 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 |
4 days |
Rate of consumption average |
15 units per day |
Maximum: 20 units |
|
[C.A. (Inter)]
[Ans: (i): 300 units, (ii) 440 units, (iii) 150 units, (iv) 60 units]
74. The following information is available in respect of component 20:
Maximum stock level |
8000 units |
Budget consumption |
Maximum: 1500 units per month |
|
Minimum: 800 units per month |
Estimated delivery period: |
Maximum = 4 months |
|
Minimum = 2 months |
You are required to calculate:
(a) Re–order level (b) Reorder quantity
[I.C.W.A. (Inter)]
[Ans: (a) 6,000 units, (b) 3,600 units]
75. In the course of physical verification of stores on 31 March year the following discrepancies are revealed in the case of AB Ltd:
Prepare journal entries in the cost ledger to give effect to the above adjustment as called for.
[I.C.W.A. (Inter)]
76. You are presented with the following information relating to the first week of a month. The transactions in connection with the materials are as follows:
1st day |
Purchased 40 units @ Rs. 15 per unit |
2nd day |
Purchased 20 units @ Rs. 16.50 per unit |
3rd day |
Issued 30 units |
4th day |
Purchased 50 units @ Rs. 17.10 per unit |
5th day |
Issued 20 units |
6th day |
Issued 40 units |
Calculate the cost of materials under (1) FIFO (2) LIFO and (3) Weighted average method of issue of material and the value of closing stock under the aforesaid materials
[C.S. (Inter)]
[Ans: Value of closing stock:
77. Show the stores ledger entries as they would appear when using (a) LIFO method and (b) weighted average method of pricing issues, in connection with the following transaction:
In a period of rising prices such as above, what are the effects of each method?
[I.C.W.A. (Inter)]
[Ans: |
(a) 150 units at Rs. 300 |
|
(b) 150 units at Rs. 342] |
[In periods of rising prices, the average price is less than the current price.
In LIFO the product cost reflects current market prices whereas the stock is valued at old price which is outdated.
Hence in periods of rising prices, the weighted average method may be recommended.]
78. A consignment consisted of two chemicals A and B. The invoices gave the following data:
Chemical A – 4,000 kg @ Rs. 2.50 per kg Rs. 10,000
Chemical B – 3,200 kg @ Rs. 3.25 per kg Rs. 10,400
Sales tax |
Rs. 816 |
Railway freight |
Rs. 384 |
Total cost |
Rs. 21,600 |
A shortage of 200 kg in A and 128 kg in B was noticed due to breakage. What stock rate would you adopt for pricing issues assuming a provision of 5% towards further deterioration?
[C.A. (Inter). Modified]
[Ans: Chemical A, Rs. 2.93; Chemical B, Rs. 3.76]
3.15.4.251