Costing Chap 4.

1 Materials

Chapter 4 MATERIALS
Types of Materials

Direct Indirect
Raw Material
Component Raw Material – Very Small Value
Assemblies & Subassemblies Spares

 Functions relating to Materials

Purchase Storing Consumption

Summary of Materials Chapter

A) Accounting & Procedure
 Purchase Procedure
 Storing & Issue Procedure

B) Control
 Material Control
 Inventory Control

C) Charging
 Charging of Direct Material
 Valuation of Material Receipts
 Valuation of Material Issues
 Special Cases

ACCOUNTING & PROCEDURE

 Purchasing Procedure:
Department
Steps / Procedure / Function Relevant Documents
Concerns
1. Estimating material requirements
i) Budgeted / Expected/ Regular
Planning Dept Budget BOM (Bills of Materials list)
Requirement
ii) Special Requirement Engineering/Work Study Dept. BOM
2. Estimation of Inventory Level Store Dept Inventory Report
1. Request for materials to be
Store/User Dept PR (Purchase Requisition)
purchased
2. Inviting Quotation & Searching for
Purchase Dept Quotation / Tender Notice
Supplies
3. Evaluation & Selection of
Purchase Dept Evaluation Sheet
Suppliers
4. Placing Order Purchase Dept Purchase Order
Delivery Challan,
5. Receiving , Inspecting & Gate Keeper or Receiving Dept,
GRN (Goods Receipts Note)
Acceptance of Goods Inspection, Stores Dept.
Inspection Report
DD/ Cheque, Invoice, Payment
6. Payment Accounts Dept.
Receipt
Notes :
1. BOM [Bills of Materials]: It is a list that gives details about how much quantity of different materials are
required for manufacturing a particular quantity of a final product. It is similar to receipie book. It is prepared
by the engineering & work study department in Quadruplicate & distributed as under.
1) For Purchase Department / user Dept: to Find Out quantity to be purchased.
2) Cost Accounting Dept: for estimating Cost of the product.

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Costing Chap 4. 2 Materials
3) Planning Dept: for preparation of budget
4) For Own Records.

2. PRN [Purchase Requisition Note]: It is a formal request for purchase made by User / Store Dept to the
Purchase Dept containing details related to that under BOM except for the quantity. Prepared in triplicate &
distributed as under
1)Purchase Dept – Formal request for purchase
2) Accounts & Finance Dept – For recording details for future reference
3) Own Records.

3. GRN [Goods Receipt Note]: This document is prepared at the entry of the factory & it represents the goods
received within the factory. It is prepared by the receiving dept. or the gate keeper in Quadruplicate &
distributed as under.
1) For Purchase Dept: to check with the quantity ordered
2) Stores dept: for making Entry in Stores
3) Accounts Dept: as a proof of receipt of goods for making payment
4) Own Records.

 Storing & Consumption Procedure:

a) GRN – Entry of Goods – Stores – Receiving Material
b) MRN I (Material Requisition Note) – Issue of Goods – Purchase / User Dept
c) MRN II (Material Return Note) – Return of Goods – Purchase / User Dept
d) MTN (Material Transfer Note) – For Transfer between 2 Depts - Purchase / User Dept
BOM, MRN I, II, MTN – Prepared by the production / user dept
Distributed as under
1) Stores: for requesting or returning materials,
2) cost account dept: for accounting in stores ledger,
3) Own Records.

Stores Record
Particulars BinCard Stores Control Card Stores Ledger
Nature Loose Paper Loose Paper Bound Book
Details Quantitative Quantitative Quantitative & Value
Maintained by Stores Stores Cost accounting
Department
Entry made by Worker Stores Keeper/clerk Cost Accounting clerk

a) BINCARD
Advantages :-
a) Easy identification of material
b) Less chances of error of omission
c) Quick comparison between book stock & physical stock.

Disadvanatages :-
a) Records are widespread through out the stores
b) Entries are made by illiterate workers, hence more chances of errors of commission.
c) More chances of the record getting smeared with dirt, torn, lost, etc.

STORES CONTROL CARD

Advantages: -
a) Records are maintained at one place.
b) Less chances of getting smeared with dirt, torn, lost, etc.
c) Less chances of error of commission as entries are made by qualified clerks.
d) Quick comparison between book stock & physical stock not possible.
Disadvantages :-
a) Easy identification of material not possible.
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Costing Chap 4. 3 Materials
b) More chances of errors of omission.
c) No comparison between book stock & physical stock.

STORES LEDGER
Advantages: -
a) Records can be maintained centrally for stores located in different areas.
b) Provides details of value of materials, which helps in preparation of final accounts.
c) Maintained in bound form hence less chances of getting smeared with dirt, torn, lost, etc.
d) Enables distribution of work among different clerks.

Disadvantages :-
a) Costlier to maintain.
b) Requires expert staff.
c) Chances of errors of omission.

Duties of Store Keeper:

a) Initiate request for purchase when the stock falls below the required limit.
b) Issues direction for stoppage of purchase when stock exceeds the maximum level.
c) Receipt & inspection of material.
d) Reserve material for a specified job.
e) Storage of material at designated places.
f) Issue of material only against authorized MRN.
g) Safekeeping as to the quality & quantity.
h) Maintain record.
i) Check physical quantity against book stock to take necessary corrective actions.
j) Exercise ganaral control over entire stores.

Treatment of storage Losses:

Storage Loss

Normal Abnormal

Direct Indirect Charged to Costing P & L Account

Charged to Product Charged to Production Overheads

CONTROL
 MATERIALS CONTROL
Q. Reasons /Need for controlling material cost
Answer:
1. To ensure that the materials are purchased
a) In right quantity.
b) At right price
c) At the right time
d) Of the right quality
2. To ensure that the material stock is neither too less nor too high.
3. To minimise wastage in storage in terms of quantity & quality.
4. To minimise waste in processing.
5. To ensure that proper records are maintained.

Q. What are Objectives of material control?

Answer: similar to above

Q. Requirement of Material Control.

Answer:

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Costing Chap 4. 4 Materials
i. Co-ordination
ii. Preparation of budgets
iii. Determining purchase Purchase Function
iv. Proper forms
v. Storage at proper places Storage
vi. Proper issue procedure
vii. System of internal check Control
viii. Stock verification
ix. Subsidiary accounts
x. Reporting A/C

 INVENTORY CONTROL
‘ The technique of ensuring maximum output/sales with minimum investment in inventory is inventory
control. It aims at maintaining optimum stock so that neither funds are blocked in inventory nor there is interruption
in production.’

Some important techniques of inventory control are: -

a) Economic Ordering Quantity (EOQ): - It is the order size (quantity) that would minimise the total cost relating to
materials. In case the order size is large it would minimise the number of orders and hence the ordering cost but it
would require more storing facilities and hence would lead to increase in the carrying cost. Converse would happen
when the order size is small. EOQ is that order size at which both the costs viz. ordering and carrying are same and
hence the total cost is minimum.
Assumptions:
a) Annual Requirement, Cost per order & Carrying cost per unit are known and remain constant throughout
the year.
b) There is no discount.
c) Time value of money is ignored
d) Lead-time for purchases is Zero. Hence orders are placed immediately when stock becomes Zero Hence there
is no safety stock.

The different material related costs are:

Purchase Cost = Annual Requirement x Purchase price per unit

Ordering Cost: It refers to the cost incurred every time an order is placed. It includes purchase department’s expenses
+ Handling Cost + Transport Cost (i.e. Cost for bringing the material to the factory).
Ordering Cost = x Cost per Order

Carrying Cost: It refers to the cost related to storing & other associated expenses. It includes ware housing expenses
like rent, ware housekeeper salary + Normal losses associated with Storage + notional interest on funds block in the
stock. It is normally given as a % of purchase price.
Carrying cost = x Carrying Cost per unit p.a.

EOQ =

Economic Batch Quantity [EBQ]:

This is similar to EOQ. EBQ means the quantity that should be produced in 1 batch. Similar to ordering cost there is
setup which depends upon no. of times each batch is run. i.e. Setup cost will be incurred depending on no. of batches
& not quantity in each batch. Hence if entire annual production requirement is produced in 1 batch setup cost will be
incurred only once. This will however increase the carrying cost. Hence EBQ helps in finding out that quantity of
production in 1 batch which will minimize the total setup cost & carrying cost.

EBQ =

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Costing Chap 4. 5 Materials
b) Stock Level Technique: This technique requires establishment of different stocklevels & taking necessary actions as
per the stocklevel. To determine these levels one has to decide the estimated consumption & the estimated lead time.
There can be three estimates of lead time (LT) i.e. Maximum LT; Minimum LT & Average LT
There can be three estimates of Consumption (Con) i.e. Maximum Con; Minimum Con & Average Con
Formulae:
e) Re-order Level (ROL): - Maximum Con X Maximum LT
OR
Consumption during Lead Time + Safety Stock
(Average LT X Average Con) (Safety Period X Average Con)
f) Maximum Level: - ROL + ROQ/EOQ – (Minimum LT X Minimum Con)
g) Minimum Level: - ROL - (Average LT X Average Con)
h) Danger Level: - Average Con X LT for Emergency Purchases
i) Average Level: - Maximum Level + Minimum Level OR
2
Minimum Level + ½ of ROQ

c) ABC Analysis [Always Better Control]:

It is a technique of control, which requires classifying the store items into three categories according to their vale,
quantity & frequency of use. The 3 categories & the items under these categories are as follows.
Category Qty (% of total) Value (% of total) Control
A 10% - 30% 60% - 70% Maximum
B 20% - 30% 20% - 30% Medium
C 60% - 70% 10% - 20% Marginal / No Control
 Category A items should be controlled using a regular system on extensive bases. This is manageable since
this category covers the items which are less in quantity but substantial in value.

 For Category B items same degree of control as for A is not necessary.

 For Category C items there is no need for significant control.

Advantages:
1. It helps in achieving control over maximum value of Stores with minimum efforts.
2. Management’s time is saved since attention is to be given only to small number of items.
3. Much of the control function (relating to B & C category items) can be delegated to subordinate staff.
4. The technique helps in management by exception.

d) Two Bin System:

It is not a special technique of control. It is based on the stock level technique of ROL. This technique requires that the
Storage Bin is divided into 2 compartments. Quantity = ROL is stored in lower compartment & excess quantity in the
upper compartment. Usage is done firstly out of upper compartment & when it gets empty we automatically come to
know next order is to be placed this is similar to the reserve technique in vehicles.

e) Establishment of System of Budget [Budgetary Control]:

This System operates by firstly preparing budgets & then comparing with budget for the purpose of control.

f) Perpetual inventory records(PI) & continuous stock verification(CS):

PI requires that the stock records should be updated continuously on a regular basis. This helps in identifying materials
whose stock balances are either very low or very high so that proper action can be taken in time. Also it helps in
identifying those items which are slow/non moving.
CS requires that the stock be counted daily so that stock levels can be identified & corrective actions can be taken.
When both these techniques are used simultaneously besides the above stock we can identify any loss that may have
arise due to spoilage, theft or wastage.

Continuous Stock Verification v/s Periodical Stock Taking:

1. Since selected items are checked every day there is no need to stop the functions of production department
or stores department.

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Costing Chap 4. 6 Materials
2. Since the activity is carried out continuously specialized staff is appointed. Hence there is no need to take the
staff from other departments.
3. Stock discrepancies can be identified mach earlier & corrective action can be taken immediately than under
periodical stocktaking.
4. There is an element of surprise since the stores department is unaware of the items that would be checked.
This keeps a moral check on the stores department employees.
5. Final accounts are ready quickly especially if interim final accounts are to be prepared since stock figure are
available on daily basis.

g) Use of Control Ratio:

a) Input-Output Ratio:
This technique requires that a standard input output ratio is calculated & on actual consumption, it is
compared with actual ratio to find whether there is excess consumption.

b) Inventory Turnover Ratio:

Average Stock =

Turnover Period =

Inventory Turnover suggests how many times the Stock has changed during the period. A high ratio is
generally considered as a good sign as it represents that the Stock changes frequently. Hence the organization
always carries fresh Stock.

CHARGING
1. Valuation of Material Receipt
Price per unit = Landed Cost of Materials Material Normal Units Received

Landed Cost of Material =

Purchase price + Duties & Taxes + Packing & Packaging Cost + Transportation Cost + Loading Unloading
charges – Discounts – Tax Credits – Cost of Material returns – Value of Containers return – Scrap Value of
normal Loss.

Material Normal Units Received = Total units ordered – Normal loss during transportation.

2. Valuation of Material Issues

A] Cost Based Methods
a)Base Stock Price Method:
Under this method the minimum stock (Safety stock) is to be valued at the price at which first lot was purchased.
However there is no mention about how to value issues made. Hence this method is mainly a method of valuing
inventory.

b) Specific Price Method:

Under this method issues are valued taking the price of that lot from which the material is actually used. However,
using this method is practically difficult. Since material purchased at different prices are to be stored separately in
different bins.

c) FIFO: Under this method, issues are made by using the price of the earlier lots.
d) LIFO: Issues are made by using the price of the latest lots.
Impact of Using FIFO & LIFO:
Impact of these methods under inflationary conditions
Particulars FIFO LIFO

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Costing Chap 4. 7 Materials
a) On cost of Product ↓ ↑
b) On inventory value ↑ ↓
c) On profit ↑ ↓
d) On Tax ↑ ↓
e) Acceptability by Tax authorities & ACC Standards X
f) On FM & Liquidity Less Liquidity More Liquidity

e) HIFO [Highest In First Out]:

Under this method, the highest lot price is first used for charging issues.

B] Average Method
f) Simple Average Method:
Issues are made by taking average of prices of lots available in STC on the date of issue.

g) Weighted Average = Total Value of Materials

Total Quantity
Under this method, the average is calculated for the lots available in Stock on the date of issue.

h) Simple Periodic Average:

Average is taken of prices of all lots purchased during that period.

i) Weighted Periodic Average

j) Simple Moving Average:

Average is taken of prices of some no. of months (e.g. 4 months). e.g. for Jan the average is taken of Oct to Jan for
Feb the average will be for Nov to Feb and so on. Hence under these methods the months go on moving hence it be
called as moving average.

k) Weighted Moving Average:

C] Market price Method

l) Replacement Price Method:
This is the price at which material can be purchased currently .

m) Realizable Price:
This is the price at which the Stock can be sold in the market.

n) NIFO (Next In First Out):

Under this method issues are made at the price at which the next lot will be purchased.
D] Notional Price Method
o) Standard Price Method:
Under this method the price is fixed at the beginning of the year called as the Standard Price. All issues are made at
this Standard price throughout the year irrespective of the actual price.

p) Re-use Price Method:

Under this method the materials are priced at a rate different from their original price (e.g. they may be priced at
the price of their substitutes & not their own price).

q) Inflated Price Method:

Where the material is subject to some loss during storage due to normal factors like nature or climatic changes, the
cost of such loss is included in the issue price by inflating such price.
Inflated price p.u. = Total Cost of Material Stored
Material Quantity Stored – Normal Loss

Special Case

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Costing Chap 4. 8 Materials
Particulars Waste Scrap Defective Spoilage
Loss of Raw-material Raw-material Finished Goods Finished Goods
Nature Intangible Tangible Tangible Tangible
Realisable value No Yes Yes Yes
Type of Goods NA NA Sub Standard goods Loss Goods
Disposal NA NA Can be converted in Not Possible
Standard goods
Not required. Can be Can be dismantled and
sold as seconds. material obtained

Treatment: Normal Loss – Charged to Normal Loss – Charged to Product

Product Abnormal Loss – Charged to Costing P & L
Abnormal Loss – Charged to Cost of Rework – Production Overheads
Cost P & L Cost of Dismantling – Production Overheads
Control: a. Set a Standard
b. Compare actual losses with Standard loss and take action wherever actual >
Standard

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Costing Chap 4. 9 Materials
INVENTORY CONTROL
Economic Order Quantity.
Basics
1] The average annual consumption of a material is 2,00,000kg. At a price of Rs 20/kg. The storage cost is 16%
on a average inventory and the cost of placing one order is Rs50. How much is to be purchased at a time?
2] A manufacturer uses 200 units of a component every month and buys them entirely from an outside supplier.
The order placing and receiving cost is Rs 100 and annual carrying cost is Rs12. From this set of data, calculate
the EOQ.
3] From the following particulars, compute Economic Order Quantity
Annual consumption = 8,10,000 units
Order placing and receiving costs: Rs10 per order
Annual stock holding stock: 20% of price
Price Rs10 per unit
4] A manufacturer purchases 800 units of a certain component p.a. @ Rs30 per unit from outside supplier.
The annual usage is 800 units, order placing and receiving cost is Rs100 per order and cost of holding one
unit of the component for one year is Rs4. Calculate the Economic Order Quantity. Also calculate the
number of orders to be placed per year.
5] The Complete Gardener is deciding on the economic order quantity for two brands of lawn fertilizer: Super
Grow and Nature's Own. The following information is collected:
Super Grow Nature's Own
Annual Demand 2,000 bags 1,2 80 bags
Relevant ordering cost per purchase order Rs 1,200 Rs 1,400
Annual relevant carrying cost per bag Rs 480 Rs 560
Required:
(i) Compute EOQ for Super Grow and Nature's Own.
(ii) For the EOQ, what is the sum of the total annual relevant ordering costs and total annual relevant carrying
costs for Super Grow and Nature's Own?
(iii) For the EOQ, Compute the number of deliveries per year for Super Grow and Nature's Own.

EOQ Comparison
6] G Ltd. products, which has a monthly demand of 4,000 units. The product required a component X which is
purchased at Rs20. For every finished product, one unit component is required. The ordering cost is
Rs.120/order and the holding cost is 10%p.a.
You are required to calculate:
1. Economic order quantity.
2. If the minimum lot size to be supplied is 100 or 500 or 1500 or 2000 or 4,000 or 10,000 or 24,000 or
36,000 or 48,000 units.What is the extra cost the company has to incur?

7] ABC Company buys in lots of 125 boxes which is a three months’ supply. The cost per box is Rs125 and the
ordering cost is Rs250/order. The inventory carrying cost is estimated at 20% of unit value p.a. You are
required to ascertain:
1. What is the total annual cost of existing inventory policy?
2. How much money would be saved by employing the economic order quantity (EOQ)?

8] Anil and company buys its annual requirements of 36,000 units in 6 installments. Each unit costs Rs1 and the
ordering cost is Rs25 .The inventory carrying cost is estimated at 20% of the unit value. Find the total annual
cost of the existing inventory policy. How much money can be saved by EOQ?

9] A Firm produces a product, which has a monthly demand of 2,500 units. The product requires a special
component, which is purchased at Rs2 per unit. For every finished product, one unit of special component is
required. The ordering cost is Rs15 per order and the holding cost is 20% per annum.
The firm at present orders its inventory requirement in quantities equivalent to 3 months' consumption. The
firm has been advised to change its present system to one based on economic order quantity. You are required
to calculate (a) Economic Order Quantity (b) the savings arising from switching over to the EOQ system.

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 Costing Chap 4. 10 Materials
EOQ with Discount
A] % Discount
10] A company requires 20,000 units of raw-material annually for production. Purchase price being Rs20 p.u.. The
cost of placing an order is Rs50 & the carrying cost p.u.p.a. is 10 %. Presently purchases are made quarterly in
equal instalments.Find out
a) EOQ.
b) Total Material Cost @ EOQ.
c) Total Material Cost of Present Policy.
d) Total Material Cost if supplier is ready to offer 1% discount on present purchasing policy.
e) Total Material Cost if supplier is ready to offer 2% discount on order size of 10,000 units.
f) Total Material Cost if supplier is ready to offer 2.5 % discount on order size of 20,000 units.
g) Total Material Cost if supplier is ready to offer 5% discount on order size of 20,000 units.
(Assume that discount does not affect the carrying cost)

10 A ] What would be your answer in d), e), f) & g) above if it is assumed that discount affects Carrying cost.

Special
11] JP Limited, manufacturer of a special products, follows the policy of EOQ for one of its components, the
components details are as follows.
Purchase price per component Rs 200
Cost of an order Rs100
Annual cost of carrying one unit in Inventory 10% of purchase price
Total cost of Inventory and ordering p.a. Rs 4,000
The company has been offered a discount of 2% on the price of a component provided the lot size is 2,000
components at a time. (Assume that the inventory carrying cost does not vary according to the discount
policy)
You are required to:
(a) Compute the EOQ
(b) Advise whether the quantity discount offer can be accepted
(c) Would your advice differ if the company were offered 5% discount on a single order?
(d) At what discount level the company will buy switch from EOQ quantity to buying 2000 components at a
time

12] A Company uses a purchased component in an assembly. It follows a policy of economic order quantity for
procurement of the component. The purchase price of the component is Rs800 each and the cost of carrying
one unit is 15% per annum. The cost of placing an order is Rs150. The Company has estimated the total cost of
carrying and order placement at Rs36,000. The supplier has offered a discount of 3% on the purchase price if
the entire requirement of the component is covered in two purchase orders in a year. Assume that the
inventory carrying cost does not vary according to discount policy.
1. Find the Economic Order Quantity.
2. Calculate the Total Cost of the component procurement and the storage if the discount offer is accepted.
Compare this cost with the total cost of the EOQ.
3. What further discount if any, should be negotiated for minimizing the cost?

13] A company manufactures a product from a raw material, which is purchased at Rs 60 per kg. The company
incurs a handling cost of Rs360 plus freight of Rs390 per order. The incremental carrying cost of inventory
of raw material is Rs0.50 per kg. per month. In addition, the cost of working capital finance on the investment
in inventory of raw material is Rs9 per kg. per annum. The annual production of the product is 1,00,000 units
and 2.5 units are obtained from one kg. of raw material.
Required:
(i) Calculate the economic order quantity of raw materials,
(ii) Advise, how frequently should orders for procurement be placed.
(iii) If the company proposes to rationalise placement of orders on quarterly basis, what percentage of
discount in the price of raw materials should be negotiated?

B] Level wise Discount

14] RST Limited has received an offer of quantity discount on its order of materials as under:
Price per tonne Tonnes number

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Costing Chap 4. 11 Materials
Rs9,600 Less than 50
Rs 9,360 50 and less than 100
Rs 9,120 100 and less than 200
Rs8,880 200 and less than 300
Rs 8,640 300 and above
The annual requirement for the material is 500 tonnes. The ordering cost per order is Rs12,500 and the stock
holding cost is estimated at 25% of the material cost per annum.
Required:
(i) Compute the most economical purchase level,
(ii) Compute EOQ if there are no quantity discounts and the price per tonne is Rs10,500.

15] From the following particulars in respect of a material, compute the Economic Ordering Quantity by
preparing a table.
Ordering Quantities Price Per Kg. [Rs]
Less than 250 6.00
250 and less than 800 5.90
800 and less than 2000 5.80
2000 and less than 4000 5.70
4000 and above 5.60
The annual demand for the material is 4000 kg. Stock holding costs are 20% of the material cost per
annum. The ordering and receiving costs are Rs10 per order.

16] A company uses a special bracket in the manufacture of its product, which it orders from outside suppliers.
The appropriate data are:
Demand= 2,000 p.a.
Ordering cost= Rs20/order
Carrying cost= 20% of items price
Basic items price= Rs 10/bracket
The company is offered the following discounts on the basic price
For order quantities 400-799 less 2%
800-1,599 less 4%
1,600 and over less 5%
It is required to establish the most economical quantity to order.

17] The quarterly production of a company's product which has a steady market is 20,000 units. Each unit of a
product requires 0.5 kg. of raw material. The cost of placing one order for raw material is Rs100 and the
inventory carrying cost is Rs2 per annum.The company has been able to negotiate the following discount
structure with the raw material supplier:
Order Quantity Kgs. Discount Rs
Upto 6,000 Nil
6,000 — 8,000 400
8,000—16,000 2,000
16,000 — 30,000 3,200
30,000 — 45,000 4,000
You are required to :
(i) Prepare a statement showing the total cost of procurement and storage of raw materials after considering
the discount if the company elects to place one, two, four or six orders in the year.
(ii)State the number of orders which the company should place to minimise the costs after taking EOQ also into
consideration.

EOQ with ROL

18] About 50 items are required every day for a machine .A fixed cost of Rs50 per order is incurred for placing an
order . The inventory carrying cost per item amounts to Rs0.02 per day. The lead period is 32 days. Compute:
(1) Economic Order Quantity; (2) Reorder Level; (3) Number of orders per year (4) Time lag between two
purchases and (5) Associated Cost.

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Costing Chap 4. 12 Materials
19] SK Enterprise manufactures a special product "ZE". The following particulars were collected for the year
2021:
Annual Consumption 12,000 Units (360 Days) Inventory Carrying Cost 24%
Cost per unit Rs1 Normal Lead 15 days
Ordering Cost Rs12 per order Time Safety Stock 30 days consumption
Required:
(i) Re-order quantity
(ii) Re-order level
(iii) A supplier offers to supply 4,000 units in one lot with 3 % discount on purchase price, should his offer
be accepted.
(iv) What should be the inventory level (ideally) immediately before the material order is received?

20] Charlie Pump Company uses about 75,000 valves per year and the usage is fairly constant at 6,250/month.
The valves cost Rs1.50 each when purchased in large quantities and carrying cost is estimated to be 20% of
average inventory investment on an annual basic. The cost to place the order and to process the delivery is
Rs18. It takes 45 days to receive delivery from the date of an order and a safety stock of 3,250 valves is
desired. You are required to determine:
1. The most economical order quantity and frequency of order;
2. The re-order level; and
3. The most economical order quantity if valves cost Rs4.50 each instead of Rs1.50 each.

21] Nathu Sweets supplies a number of products of bakers and confectioners. One of their popular products is
“Cake decoration”. The cake decoration are sold in packets of 12 decorations for Rs20/ packet. The demand
for cake decoration is constant for a long period of time at a rate of 2,000 packets /month. Each packet cost
Nathu Sweets Rs10 from the manufacturer and a lead-time of 3 days is involved in it. Ordering cost is
Rs1.20/order and the holding cost is 10%p.a.
Calculate:
(a) (i) The economic order quantity
(ii) Total cost of ordering and carrying cake decoration p.a.
(b)Assume that the present stock level is 200 packets and that no buffer stocks are kept, when should the
next order be placed? Assume 360 days in a year.
(c) Assume that the present stock level is 600 packets and that no buffer stocks are kept, when should the
next order be placed? Assume 360 days in a year.

EBQ: Economic Batch Quantity

22] A Ltd. is committed to supply 24,000 bearings per annum to B Ltd. on a steady basis. It is estimated that it
costs 10 paise as inventory holding cost per bearing per month and that the set-up cost per run of bearing
manufacture is Rs324.
(i) What should be the optimum run size for bearing manufacture?
(ii) What would be the interval between two consecutive optimum runs?
(iii) Find out the optimum inventory cost per annum.

23] Super Specialities Ltd has to supply 240000 units of a component "Wizzo" annually for its valued customer
Goenka. The Company has been producing 20000 units per month by having 12 runs per annum. Its new
Finance Manager Arun says that the production should be brought down to 5000 units per batch and 48
batches should be run per annum. You are required to advise the Company on the following issues given that
the Set up cost per batch is Rs75 per batch and carrying cost per unit is Rs1 per annum.
• What is the Economic Batch Size?
• Should the Company continue producing 20000 units per batch or should it adopt Arun's suggestion?
• For least cost, how many batches should be run in a year?
• What will be the total associated cost i.e. Set up Costs and Carrying Costs per annum, if EBQ is adopted?

Safety Stock And Re-Order Levels

24] From the details given below, calculate:
1. Maximum level
2. Minimum level
3. Re-order level.

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Costing Chap 4. 13 Materials
4. Danger level
Re-ordering quantity is to be calculated on the basic of following information:
Cost of placing a purchase order is Rs 20
Number of units to be purchased during the year is 5,000.
Purchased price per unit inclusive of transportation cost is Rs50.
Annual cost of storage per unit is Rs 5.
Details of lead-time: Average 10 days; Maximum 15 days; Minimum 6 days.
For Emergency purchase: 4days
Rate of consumption: Average: 15 units/day. Maximum: 20 units/day.

25] From the following figures relating to two components X and Y, compute Reorder Level, Minimum
Level, Maximum Level and Average Stock Level.
Particulars Component X Component Y
Maximum consumption per week 75 units 75 units
Average consumption per week 50 units 50 units
Minimum consumption per week 25 units 25 units
Reorder period 4 to 6 weeks 2 to 4 weeks
Reorder quantity 400 units 600 units

26] Zee is product manufactured out of three raw materials ’M’ ‘N’ and ‘Q’. Each units of Zee required 10 kg. 8 kg,
& 6 kg respectively. The weekly production of Zee varies from 300 to 500 units, while the weekly average
production is 400 units. You are required to compute stock levels:
The following additional data is given:
M N Q
Reorder quantity (in kg) 20,000 15,000 20,000
Delivery(in weeks)
Minimum 2 4 3
Average 3 5 4
Maximum 4 6 5

27] P. Ltd uses three types of materials A,B,C For the production of ‘X’ the final product. The relevant monthly data
for the components are as given below:
A B C
Normal usage (units) 200 150 180
Minimum usage (units) 100 100 90
Maximum usage (units) 300 250 270
Reorder quantity (units) 750 900 720
Reorder period (months) 2 to 3 3 to 4 2 to 3
Calculate for each component:
1. Maximum stock level
2. Minimum stock level
3. Re-order level
4. Average stock level

28] A company manufactures 5000 units of a product per month. The cost of placing an order is Rs 100. The
purchase price of the raw material is Rs 10 per kg. The re-order period is 4 to 8 weeks. The consumption of
raw materials varies from 100 kg to 450 kg per week, the average consumption being 275 kg. The carrying
cost of inventory is 20% per annum. You are required to calculate: (i) Re-order quantity (ii)Re-order level
(iii) Maximum level (iv) Minimum level (v)Average stock level.

29] M/s. Tubes Ltd. are the manufacturers of picture tubes for T.V. The following are the details of their operation
during 2021:
Average monthly market demand 2,000 Tubes
Ordering cost Rs. 100 per order.
Inventory carrying cost 20% per annum

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Costing Chap 4. 14 Materials
Cost of tubes Rs 500 per tube
Normal usage 100 tubes per week
Minimum usage 50 tubes per week
Maximum usage 200 tubes per week
Lead time to supply 6-8 weeks
Compute from the above:
(1) Economic Order Quantity. If the supplier is willing to supply quarterly 1,500 units at a discount of 5%, is it
worth accepting?
(2) Maximum level of stock.
(3) Minimum level of stock.
(4) Reorder level.

30] P Ltd uses three types of materials A, B and C for production of Product X. The relevant monthly data for
consumption of materials are given below. Calculate for each material - (i) Re-Order Level, (ii) Minimum
Level, (iii) Maximum Level and (iv) Average Level.
Particulars A B C
Normal Usage 350 units 250 units 280 units
Minimum Usage 200 units 150 units 120 units
Maximum Usage 500 units 450 units 480 units
Re-Order Quantity 750 units 900 units 720 units
Re-Order Period 3 to 5 months 3 to 6 months 2 to 4 months

31] Karthik Ltd provides you the following information —

(a) ROL: 64,000 units, ROQ: 40,000 units, Minimum Stock: 34,000 units, Maximum Stock: 94,000 units
(b) Average Lead-Time in the past has been 2.5 days.
(c) The difference between maximum and minimum lead times is 3 days.
Determine the Usage Rates and Lead Times (maximum & minimum).

ABC Analysis
32] A factory uses 4,000 varieties of inventory. In terms of inventory holding and inventory usage, the following
information is compiled:
No. of varieties of % % value of inventory % of inventory usage (in
inventory holding (average) end-product)
3,875 96.875 20 5
110 2.750 30 10
15 0.375 50 85
4,000 100.000 100 100
Classify the items of inventory as per ABC analysis with reasons.

Inventory Turnover Ratio

33] The following data are available in respect of material X for year ended 31st March 2021.
Opening stock Rs 90,000
Purchases during the year Rs2,70,000
Closing stock Rs1,10,000
Calculate: Inventory turnover ratio; and the number of days for which the average inventory is held.

34] From the following data the year ended 31st December, calculate the inventory turnover ratio of the two
items and put forward your comments on them.
Material A Material B
Opening stock 1/1/2021 Rs. 10,000 Rs. 9,000
Purchase during the year 52,000 27,000
Closing stock 31/12/2021 6,000 11,000

DETERMINING COST OF MATERIAL PURCHASES

35] The books of excellent chemicals limited reveal the following data regarding imported chemicals used in the
manufacture of their product during 2020-21
Chemicals Quantity imported kg. Rate (in U.S.$./kg) Exchange Rate

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Costing Chap 4. 15 Materials
P 3,000 3.00 1 U.S.$= Rs48.00
Q 4,500 2.40
R 5,000 4.00
Import duty paid was 25% of invoice value for chemicals P & Q and 40% for chemical R. Insurance was paid @
2.5% on invoice value and a sum of Rs. 75,000 was incurred towards freight and clearing charges. Stores
overhead applied were 5% on the total purchase cost of materials.
During the year, 80% of the materials imported were issued to production. Assuming 4% allowance is provided
to cover loss,
Ascertain (i) total cost of materials and (ii) value of closing stock of each type of chemicals.
What is the cost of each material charged to production?
Also prepare a statement showing (a) the quantity of material issued, (b) storage loss, and (c) closing stock of
each type of chemicals.

36] A manufacturer of surat purchased three chemicals A,B,C from Bombay. The invoice gave the following
information:
Chemical A 3,000 Kg. @ Rs.4.20/Kg Rs 12,600
Chemical B 5,000 Kg. @ Rs.3.80/Kg 19,000
Chemical C 2,000 Kg. @ Rs.4.75/Kg 9,500
Sales Tax 2,055
Railway Freight 1,000
Total Cost 44,155
A normal Shortage of 200 Kg. in chemical A, of 280 Kg. in chemical B and of 100 Kg. in chemical C was noticed
due to breakages. At surat, the manufacturer paid Octroi Duty @ Rs 0.10/kg. He also paid cartage Rs22 for
Chemical A, Rs 63.12 for Chemical B and Rs 31.80 for chemical C. Calculate the stock rate that you would
suggest for pricing issue of chemicals assuming a provision of 5% towards further deterioration

37] The particulars relating to the import of sealing Ring made by AB & Co. during December, 2021 are given
below:
(a) Sealing Ring—1,000 pieces invoiced @ $2.00 C.I.F. Bombay port,
(b) Customs duty was paid @ 100% on Invoice Value (which was converted to Indian currency by adopting
an exchange rate of Rs47.20 per $ ),
(c) Clearing charges—Rs1,800 for the entire consignment, and
(d) Freight charges—Rs1,400 for transporting the consignment from Bombay Port to factory premises.
It was found on inspection that 100 pieces of the above materials were broken, and therefore, rejected. There
is no scrap value for the rejected part. No refund for the broken material would be admissible as per the
term of contract. The management decided to treat 60 pieces as normal loss and the rest 40 pieces as
abnormal loss. The entire of 900 pieces was issued to production.
Calculate:
(a) Total cost of material, and
(b) Unit cost of material issued to production.
Also state briefly how the value of 100 pieces rejected in inspection will be treated in costs.

38] The particulars relating to 1,200kg. of a certain raw material purchased by a company during June, were as
follow:
1.Lot prices quoted by supplier and accepted by the company for placing the purchased order:
Lot up to 1,000 Kg. @ Rs22/-per Kg. F.O.R
Between 1,000 to 1,500 kg. @ Rs20/-per Kg. Suppliers
Between 1,500 and 2,000 kg. @ Rs18/-per Kg. Factory
2.Trade discount 20%
3.Additional charge for containers @ Rs10/drum of 25 Kg.
4. Credit allowed on return of container (a) Rs8/drum.
5. Sales tax at 10% on raw materials and 5% on drums.
6. Total freight paid by the purchaser Rs240.
7. Insurance at 2.5% (on net invoice value) paid by the purchaser.
8. Stores overheads applied at 5% on total purchase cost of material.
The entire quantity was received and issued to production. The containers are returned in due course.
Draw up a suitable statement to show: (a) total cost of material purchased; and (b) Unit cost of
materials issued to production.

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 Costing Chap 4. 16 Materials

DETERMINING COST OF MATERIAL ISSUES

39] From the following information, prepare Store Ledger using First In First Out [FIFO], Last In First Out
[LIFO] and Weighted Average Method of pricing the issues
December 1st: Balance in hand 1000 units @ Rs1 each.
December 15th: Received 3000 units costing Rs3,300
January 12th: Received 2000 units costing Rs2400
January 30th: Issued 2000 units
February 17th: Issued 3400 units.

40] The following is the summary of the receipts and issues of material in a factory during December
2021. Prepare Store Ledger according to First In First Out Method.
December 2021
1. Opening balance 500 units @ Rs25 per unit
3. Issue 70 units
4. Issue 100 units
8. Issue 80 units
13. Received from supplier 200 units @ Rs24.50 per unit
14. Returned to store 15 units @ Rs24 per unit
16. Issue 180 units.
20. Received from supplier 240 units @ Rs24.75 per unit
24. Issue 304 units.
25. Received from supplier 320 units @ Rs24.50 per unit
26. Issue 112 units
27. Returned to store 12 units @ Rs24.50 per unit
28. Received from supplier 100 units @ Rs25 per unit
It was revealed that on 15th there was a shortage of five units and another on 27th of 8 units.

41] The Store Ledger Account for Material X in a manufacturing concern reveals the following data for the
quarter ended on 30th September
Date Particulars Receipts Issue
Quantity Price Rs. Quantity Value Rs.
July 1 Balance b/d 1, 600 2.00
July 9 Receipts 3, 000 2.20
July 13 Issue 1, 200 2,556
Aug. 5 Issue 900 1,917
Aug. 17 Receipts 3, 600 2.40
Aug. 24 Issue 1, 800 4,122
Sept. 11 Receipts 2, 500 2.50
Sept. 27 Issue 2,100 4,971
Sept. 29 Issue 700 1,656
Physical verification on September 30th revealed an actual stock of 3,800 units. You are required to, [a]
Indicate the method of pricing employed above.
[b] Complete the above account by making entries you would consider necessary including
adjustments, if any, and giving explanations for such adjustments.

42] ABC Ltd. provides you the following information. Calculate the cost of goods sold and ending inventory applying
the Last In First Out method of pricing raw materials under the Perpetual Inventory and Periodic
Inventory Control System.
Date Particulars Units Per Unit Cost Rs
January 1 Opening Stock 200 10
January 10 Purchases 400 12
January 12 Withdrawals 500 ---
January 16 Purchases 300 11

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 Costing Chap 4. 17 Materials
January 19 Issues 200 ---
January 30 Receipts 100 15

43] From the following details, prepare Store Ledger under Simple Average Method of pricing the issues.
January 2021
1st: Received 500 units @ Rs20 per unit
10th: Received 300 units @ Rs24 per unit
15th: Issued 700 units
20th: Received 400 units @ Rs28 per unit
25th: Issue 300 units
27th: Received 500 units @ Rs22 per unit
31st: Issued 200 units.

Challengers
44] IPL Limited uses a small casting in one of its finished products. The castings are purchased from a foundry. IPL
Limited purchases 54,000 castings per year at a cost of Rs 800 per casting.
The castings are used evenly throughout the year in the production process on a 360-day-per-year basis. The
company estimates that it costs. Rs 9,000 to place a single purchase order and about Rs 300 to carry one
casting in inventory for a year. The high carrying costs result from the need to keep the castings in carefully
controlled temperature and humidity conditions, and from the high cost of insurance.
Delivery from the foundry generally takes 6 days, but it can take as much as 10 days. The days of delivery time
and percentage of their occurrence are shown in the following tabulation:
Delivery time (days) : 6 7 8 9 10
Percentage of occurrence : 75 10 5 5 5
Required:
(i) Compute the economic order quantity (EOQ).
(ii) Assume the company is willing to assume a 15% risk of being out of stock. What would be the safety stock?
The re-order point?
(iii) Assume the company is willing to assume a 5% risk of being out of stock. What would be the safety stock?
The re-order point?
(iv) Assume 5% stock-out risk. What would be the total cost of ordering and carrying inventory for one year?
(v) Refer to the original data. Assume that using process re-engineering the company reduces its cost of placing
a purchase order to only Rs 600. In addition, company estimates that when the waste and inefficiency
caused by inventories are considered, the true cost of carrying a unit in stock is Rs720 per year.
(a) Compute the new EOQ.
(b) How frequently would the company be placing an order, as compared to the old purchasing policy?

Sums for Extra Practice

45] Calculate the Economic Order Quantity from the following information. Also state the number of orders to
be placed in a year.
Consumption of materials per annum:40,000 kg; Order placing cost per order:Rs 50; Cost per kg. of raw
materials: Rs 8; Storage costs : 8% on average inventory

46] The average annual consumption of a material is 18,250 units at a price of Rs36.50 per unit. The storage
cost is 20% on an average inventory and the cost of placing an order is Rs50. How much quantity is to be
purchased at a time?

47] Anil company buys its annual requirement of 36,000 units in two installments. Each unit costs Rs6 and the
ordering cost is Rs25. The inventory carrying cost is estimated at 20% of unit value. Find the total annual cost
of the existing inventory policy. How much money can be saved by using E.O.Q?

48] The annual demand for an item is 3,200 units. The units cost is Rs6 and inventory carrying charges is 25%
p.a. If the cost of one procurement is Rs150, determine
(a)E.O.Q (b) No. of orders per year (c) Time between two consecutive orders.

49] A company manufactures a special product which requires a component ‘Alpha’. The following
particulars are collected for the year 2021. Annual demand of Alpha - 8,000 units; Cost of placing an order-
Rs 200 per order; Cost per unit of Alpha-Rs400; Carrying cost % p.a.20%. The company has been offered a

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Costing Chap 4. 18 Materials
quantity discount of 4% on the purchase of ‘Alpha’ provided the order size is 4,000 components at a time.
Required:
(a) Compute the economic order quantity.
(b) Advise whether the quantity discount offer can be accepted.

50] PQR Limited produces a product which has a monthly demand of 52,000 units. The product requires a
Component X which is purchased at Rs15 per unit. For every finished product, 2 units of Component X are
required. The ordering cost is Rs350 per order and the carrying cost is 12% p.a.

51] Your factory buys and used a component for production at Rs10 per piece. Annual requirement is 2,000
numbers. Carrying cost of inventory is 10% p.a. and ordering cost is Rs40 per order. The purchase manager
argues that as the ordering cost is very high, it is advantageous to place a single order for the entire annual
requirement. He also says that if we order 2,000 pieces at a time we can get a 3% discount from the supplier.
Evaluate this proposal and makes your recommendations.

52] XYZ company buys in lots of 500 boxes which is a 3 month supply. The cost per box is Rs300 and the
ordering cost is Rs150. The inventory carrying cost is estimated at 20% of unit value.
What is the total annual cost of the existing inventory policy? How much money could be saved by
employing the economic order quantity?

53] Following information in an inventory problem is available:

Annual demand - 36,600 units; Unit price Rs3.6; Ordering cost Rs4; Storage cost Rs.2 p.u.p.a.; Interest rate 10%
p.a.
Lead time-1/2 month; Calculate EOQ, Reorder level and total annual inventory cost. How much does the
EOQ & total inventory cost vary if the unit price is changed to Rs5?

54] G Ltd. produces a product which has a quarterly demand of 10,000 units. The product required a
component X which is purchased at Rs 20. For every finished product, two units of component is required. The
ordering cost is Rs120 per order and the holding cost is 10% p.a. Calculate Economic order quantity. If the
minimum lot size to be supplied is 20,000 units. What is the extra cost, the company has to incur?

55] From the following particulars with respect to a particular item of materials of a manufacturing company,
calculate the best quantity to order:
Ordering quantities(tonne) Price per ton
Rs
Less than 250 6.00
250 but less than 800 5.90
800 but less than 2,000 5.80
2,000 but less than 4,000 5.70
4,000 and above 5.60
The annual demand for the material is 4,000 tonnes. Stock holding costs are 20% of material cost p.a. The
delivery cost per order is Rs6.00.

56] The components A and B are used as follows:

Normal usage .... 300 units per week each
Maximum usage .... 450 units per week each ;Minimum usage .... 150 units per week each
Reorder Quantity .... A 2,400 units; B 3,600 units. ;Reorder period .... A 4 to 6 weeks, B 2 to 4 weeks.
Calculate for each component:
a) Re-order Level b) Minimum Level c) Maximum Level d) Average Stock Level.

57] Two components A and B are used as follows:

Normal usage =50 per week each ;Re-order quantity =A- 300; B-500
Maximum usage =75 per week each;Minimum usage =25 per week each
Re-order period: A - 4 to 6 weeks; B - 2 to 4 weeks
Calculate for each component
(a) Re-order level; (b) Minimum level; (c) Maximum level; (d) Average stock level.

58] From the details given below, calculate:

(i) Re-ordering level; (ii) Maximum level; (iii)Minimum level ; (iv) Danger level

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Costing Chap 4. 19 Materials
Re-ordering quantity is to be calculated on the basis of following information:
(a) Cost of placing a purchase order is Rs20
(b) Number of units to be purchased during the year is 25,000
(c) Purchase price per unit inclusive of transportation cost is Rs50
(d) Annual cost of storage per units is Rs5
(e) Details of lead time:
Average 12 days, Maximum 16 days, Minimum 8 days. For emergency purchases 4 days
(f) Rate of consumption: Average: 25 units per day, Maximum: 40 units per days

59] P Ltd. uses three types of materials A, B and C for production of ‘X’, the final product. The relevant
monthly date for the components are as given below:

X Y Z
Normal usage (in units) 200 150 180
Minimum usage (in units 100 100 90
Maximum usage (in units) 300 250 270
Re-order Quantity (in units) 750 900 720
Re-order period (in months) 2 to 3 3 to 4 2 to 3
Calculate for each component:
a) Re-order Level
b) Minimum Level
c) Maximum Level
d) Average Stock Level

60] Compute the Inventory turnover ratio from the following:

Opening Stock - Rs2,10,000
Closing Stock - Rs1,60,000
Material Consumed - Rs7,80,000

61] From the following data for the year ended 31st Dec, 2012, calculate the inventory turnover ratio of the
two items, and put forward your comments on them.
Material A Material B
Opening stock on 1-1-2021 40,000 90,000
Purchase during the year 2021 5,20,000 3,70,000
Closing on 31-12-2021 60,000 40,000

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